Based on past experience, Maas Corporation (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,500,000 francs on March 15, 2024. To hedge this forecasted transaction, on December 15, 2023, the company acquires a call option to purchase 1,500,000 francs in three months. Maas selects a strike price of $0.74 per franc when the spot rate is $0.74 and pays a premium of $0.004 per franc. The spot rate increases to $0.746 at December 31, 2023, causing the fair value of the option to increase to $14,000. By March 15, 2024, when the raw materials are purchased, the spot rate has climbed to $0.75, resulting in a fair value for the option of $15,000. The raw materials are used in assembling finished products, which are sold by December 31, 2024, when Maas prepares its annual financial statements. Required: a. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. b. What is the overall impact on net income over the two accounting periods? c. What is the net cash outflow to acquire the raw materials?
Based on past experience, Maas Corporation (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,500,000 francs on March 15, 2024. To hedge this forecasted transaction, on December 15, 2023, the company acquires a call option to purchase 1,500,000 francs in three months. Maas selects a strike price of $0.74 per franc when the spot rate is $0.74 and pays a premium of $0.004 per franc. The spot rate increases to $0.746 at December 31, 2023, causing the fair value of the option to increase to $14,000. By March 15, 2024, when the raw materials are purchased, the spot rate has climbed to $0.75, resulting in a fair value for the option of $15,000. The raw materials are used in assembling finished products, which are sold by December 31, 2024, when Maas prepares its annual financial statements. Required: a. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. b. What is the overall impact on net income over the two accounting periods? c. What is the net cash outflow to acquire the raw materials?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Based on past experience, Maas Corporation (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a
cost of 1,500,000 francs on March 15, 2024. To hedge this forecasted transaction, on December 15, 2023, the company acquires a call
option to purchase 1,500,000 francs in three months. Maas selects a strike price of $0.74 per franc when the spot rate is $0.74 and
pays a premium of $0.004 per franc. The spot rate increases to $0.746 at December 31, 2023, causing the fair value of the option to
increase to $14,000. By March 15, 2024, when the raw materials are purchased, the spot rate has climbed to $0.75, resulting in a fair
value for the option of $15,000. The raw materials are used in assembling finished products, which are sold by December 31, 2024,
when Maas prepares its annual financial statements.
Required:
a. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials.
b. What is the overall impact on net income over the two accounting periods?
c. What is the net cash outflow to acquire the raw materials?
Complete this question by entering your answers in the tabs below.
Req A
Req B and C
b. What is the overall impact on net income over the two accounting periods?
Note: Negative amounts should be entered with a minus sign.
c. What is the net cash outflow to acquire the raw materials?
Impact on Net
Income
b. Impact on net income in 2023
$
(1,000) (
b. Impact on net income in 2024
$
1,123,000
c. Net cash outflow
$
1,116,000
< Req A
Req B and C >
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