Based on past experience, Maas Corp. (a U.S. -based company) expects to purchase rawmaterials from a foreign supplier at a cost of 1,000,000 francs on March 15, 2021. To hedge thisforecasted transaction, on December 15, 2020, the company acquires a call option to purchase1,000,000 francs in three months. Maas selects a strike price of $0.59 per franc when the spot rateis $0.59 and pays a premium of $0.001 per franc. The spot rate increases to $0.598 at December31, 2020, causing the fair value of the option to increase to $8,500. By March 15, 2021, when theraw materials are purchased, the spot rate has climbed to $0.60, resulting in a fair value for theoption of $10,000. The raw materials are used in assembling finished products, which are sold byDecember 31, 2021, when Maas prepares its annual financial statements. Prepare all journalentries for the option hedge of a forecasted transaction and for the purchase of raw materials.What is the overall impact on net income over the two accounting periods? What is the net cashoutflow to acquire the raw materials?

The rate at which one country’s currency can be converted into another country’s currency referred…

Answered: Based on past experience, Maas Corp. (a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 2,000 cases of wine at a price of 300 euros per case. The total purchase price is 600,000 euros. Relevant exchange rates for the euro are as follows: Date Spot Rate Forward Rateto October 31 Call Option Premiumfor October 31(strike price $1.50) September 15 $ 1.50 $ 1.56 $ 0.035 September 30 1.55 1.59 0.070 October 31 1.60 1.60 0.100 Vino Veritas Company has an incremental borrowing rate of 12 percent (1 percent per month) and closes the books and prepares financial statements at September 30. The wine arrived on September 15, and the company made payment on October 31. On September 15, Vino Veritas purchased a 45-day call option for 600,000 euros. It properly designated the option as a cash flow hedge of a foreign currency payable. Prepare journal entries…
Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 107,000 pounds, with delivery and payment to be made on June 15. On April 15, when the spot rate is $1.27 per pound, Shandra purchases a two-month call option on 107,000 pounds and designates this option as a cash flow hedge of a forecasted foreign currency transaction. The time value of the option is excluded in assessing hedge effectiveness; the change in time value is recognized in net income over the life of the option. The option has a strike price of $1.27 per pound and costs $1,070. The goods are received and paid for on June 15. Shandra sells the imported goods in the local market immediately. The spot rate for pounds is $1.320 on June 15, Required: a-1. Prepare all journal entries for Shandra Corporation related to this transaction and hedge. a-2. What amount should Shandra Corporation report in net income as cost of goods sold for the quarter ending June 30? b. What amount…
On October 1, 2024, Wildhorse Corporation ordered some equipment from a supplier for 322,000 euros. Delivery and payment are to occur on November 15, 2024. The spot rates on October 1 and November 15, 2024, are $1.20 and $1.30, respectively. (a) - Your answer is partially correct. Assume that Wildhorse entered into a forward contract on October 1, 2024, to hedge the firm commitment. The forward rates for euros for November 15 delivery were October 1 November 15 $1.23 $1.30 Furthermore, assume the equipment was purchased and paid for on November 15. Prepare all journal entries needed to record and settle the hedge and to record the purchase of the equipment. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter O for the amounts. List all debit entries before credit entries.)
Assume that Smith Corp. will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.68, a 90-day expiration date, and a premium of $.03. A put option exists on British pounds with an exercise price of $1.69, a 90-day expiration date, and a premium of $.03. Smith Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be $1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium. Group of answer choices $338,000 $342,000 $332,000 $344,000
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Torres Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 106,000 pounds, with delivery and payment to be made on September 20. On July 20, Torres purchased a two-month call option on 106,000 pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The option has a strike price of $1.35 per pound and costs $1,060. The spot rate for pounds is $1.35 on June 20 and $1.40 on September 20. What amount will Torres Corporation report as an option expense in net income for the quarter ended September 30? Multiple Choice $530. $5,300. $2,300. $1,060.
An investment manager based in Germany hedges a portfolio of UK gilts with a 3-month forward contract. The current spot rate is GBP0.833/EUR and the 90-day forward rate is GBP0.856/EUR. At the end of 3 months, the gilts have risen in value by -2.50% (in GBP terms), and the spot rate is now GBP0.82/EUR. What was the true cost of the forward contract? a. 11.044% annualised. b. 17287% annualised. c. 7287% annualised. d. 14.787% annualised.
A U.S. investor purchases a 30-day Euro-commercial paper with a par value of 10,000,000 Brazilian reals for a price of 9,970,000 Brazilian reals. If the real is worth $0.28, the spot rate is anticipated to be $0.288900 per real at the end of maturity, and Investor holds the Euro- commercial paper until then, assuming a 360 day year, the effective yield is: Please show work
On October 1, 2020, Mertag Company (a U.S.-based company) receives an order from a customer in Poland to deliver goods on January 31, 2021, for a price of 1,004,000 Polish zlotys (PLN). Mertag enters into a forward contract on October 1, 2020, to sell PLN 1,004,000 in four months (on January 31, 2021). U.S. dollar–Polish zloty exchange rates are as follows: Date Spot Rate Forward Rate(to January 31, 2021) October 1, 2020 $ 0.27 $ 0.31 December 31, 2020 0.30 0.34 January 31, 2021 0.32 N/A Mertag designates the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate, and, therefore, forward points are included in assessing hedge effectiveness. Mertag must close its books and prepare financial statements on December 31. Discounting to present value can be ignored. Prepare journal entries for the foreign currency forward contract,…

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