On June 1, Parker-Mae Corporation (a U.S.-based company) received an order to sell goods to a foreign customer at a price of 130,000 francs. Parker-Mae will ship the goods and receive payment in three months, on September 1. On June 1, Parker-Mae purchased an option to sell 130,000 francs in three months at a strike price of $0.96. The company designated the option as a fair value hedge of a foreign currency firm commitment. The option's time value is excluded in assessing hedge effectiveness, and the change in time value is recognized in net income. The fair value of the firm commitment is measured by referring to changes in the spot rate (discounting to present value is ignored). Relevant exchange rates and option premiums for the franc are as follows: Date Spot Rate Put Option Premium for September 1 (strike price $0.96) June 1 0.96 $ 0.020 June 30 0.90 0.072 September 1 0.85 N/A Parker-Mae Corporation must close its books and prepare its second-quarter financial statements on June 30. 1. Prepare journal entries for the foreign currency option, foreign currency firm commitment, and export sale. 2. What is the impact on net income in each of the two accounting periods? 3. What is the amount of net cash inflow resulting from the sale of goods to the foreign customer? Please explain as detailed as possible, Thanks
On June 1, Parker-Mae Corporation (a U.S.-based company) received an order to sell goods to a foreign customer at a price of 130,000 francs. Parker-Mae will ship the goods and receive payment in three months, on September 1. On June 1, Parker-Mae purchased an option to sell 130,000 francs in three months at a strike price of $0.96. The company designated the option as a fair value hedge of a foreign currency firm commitment. The option's time value is excluded in assessing hedge effectiveness, and the change in time value is recognized in net income. The fair value of the firm commitment is measured by referring to changes in the spot rate (discounting to present value is ignored). Relevant exchange rates and option premiums for the franc are as follows: Date Spot Rate Put Option Premium for September 1 (strike price $0.96) June 1 0.96 $ 0.020 June 30 0.90 0.072 September 1 0.85 N/A Parker-Mae Corporation must close its books and prepare its second-quarter financial statements on June 30. 1. Prepare journal entries for the foreign currency option, foreign currency firm commitment, and export sale. 2. What is the impact on net income in each of the two accounting periods? 3. What is the amount of net cash inflow resulting from the sale of goods to the foreign customer? Please explain as detailed as possible, Thanks
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:On June 1, Parker-Mae Corporation (a U.S.-based company) received an order to sell goods to a foreign
customer at a price of 130,000 francs. Parker-Mae will ship the goods and receive payment in three
months, on September 1. On June 1, Parker-Mae purchased an option to sell 130,000 francs in three
months at a strike price of $0.96. The company designated the option as a fair value hedge of a foreign
currency firm commitment. The option's time value is excluded in assessing hedge effectiveness, and the
change in time value is recognized in net income. The fair value of the firm commitment is measured by
referring to changes in the spot rate (discounting to present value is ignored). Relevant exchange rates
and option premiums for the franc are as follows:
Date
Spot Rate
Put Option Premium
for September 1
(strike price $0.96)
June 1
0.96
$
0.020
June 30
0.90
0.072
September 1
0.85
N/A
Parker-Mae Corporation must close its books and prepare its second-quarter financial statements on June
30.
1. Prepare journal entries for the foreign currency option, foreign currency firm commitment, and export
sale.
2. What is the impact on net income in each of the two accounting periods?
3. What is the amount of net cash inflow resulting from the sale of goods to the foreign customer?
Please explain as detailed as possible, Thanks
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