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Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,400 cases of Oktoberfest-style beer from a German supplier for 336,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows: Forward Rate to Call Option Premium for October 15 (strike Date August 15 September 30 October 15 Spot Rate $ 1.20 1.25 1.28 price $1.20) $ 0.05 0.06 N/A October 15 $ 1.26 1.29 1.28 (spot) The company closes its books and prepares third-quarter financial statements on September 30. c. Assume that the company ordered the beer on August 15. The beer arrived and the company paid for it on October 15. On August 15, the company entered into a two-month forward contract to purchase 336,000 euros. The company designated 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. Forward points are not excluded in assessing hedge effectiveness. Prepare journal entries to account for the foreign currency forward contract, foreign currency firm commitment, and import purchase. No 1 Date General Journal Debit Credit 08/15 No Journal Entry Required 2 09/30 Forward Contract Foreign Exchange Gain or Loss 10,080 10,080 3 09/30 Foreign Exchange Gain or Loss Firm Commitment 10,080 10,080 4 10/15 Foreign Exchange Gain or Loss 3,360 Forward Contract 3,360 10/15 Firm Commitment 6,720 × Foreign Exchange Gain or Loss 6,720 6 10/15 Foreign Currency (euro) Cash Forward Contract 430,080 423,360 6,720 7 10/15 Inventory 430,080 Foreign Currency (euro) 430,080 8 10/15 Cost of Goods Sold Inventory 430,080 430,080 9 10/15 Firm Commitment 430,080 Cost of Goods Sold 26,880

Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,400 cases of Oktoberfest-style beer from a German supplier for 336,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows: Forward Rate to Call Option Premium for October 15 (strike Date August 15 September 30 October 15 Spot Rate $ 1.20 1.25 1.28 price $1.20) $ 0.05 0.06 N/A October 15 $ 1.26 1.29 1.28 (spot) The company closes its books and prepares third-quarter financial statements on September 30. c. Assume that the company ordered the beer on August 15. The beer arrived and the company paid for it on October 15. On August 15, the company entered into a two-month forward contract to purchase 336,000 euros. The company designated 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. Forward points are not excluded in assessing hedge effectiveness. Prepare journal entries to account for the foreign currency forward contract, foreign currency firm commitment, and import purchase. No 1 Date General Journal Debit Credit 08/15 No Journal Entry Required 2 09/30 Forward Contract Foreign Exchange Gain or Loss 10,080 10,080 3 09/30 Foreign Exchange Gain or Loss Firm Commitment 10,080 10,080 4 10/15 Foreign Exchange Gain or Loss 3,360 Forward Contract 3,360 10/15 Firm Commitment 6,720 × Foreign Exchange Gain or Loss 6,720 6 10/15 Foreign Currency (euro) Cash Forward Contract 430,080 423,360 6,720 7 10/15 Inventory 430,080 Foreign Currency (euro) 430,080 8 10/15 Cost of Goods Sold Inventory 430,080 430,080 9 10/15 Firm Commitment 430,080 Cost of Goods Sold 26,880

FINANCIAL ACCOUNTING
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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Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,400 cases of Oktoberfest-style beer from a German supplier for 336,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows: Forward Rate to Call Option Premium for October 15 (strike Date August 15 September 30 October 15 Spot Rate $ 1.20 1.25 1.28 price $1.20) $ 0.05 0.06 N/A October 15 $ 1.26 1.29 1.28 (spot) The company closes its books and prepares third-quarter financial statements on September 30. c. Assume that the company ordered the beer on August 15. The beer arrived and the company paid for it on October 15. On August 15, the company entered into a two-month forward contract to purchase 336,000 euros. The company designated 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. Forward points are not excluded in assessing hedge effectiveness. Prepare journal entries to account for the foreign currency forward contract, foreign currency firm commitment, and import purchase. No 1 Date General Journal Debit Credit 08/15 No Journal Entry Required 2 09/30 Forward Contract Foreign Exchange Gain or Loss 10,080 10,080 3 09/30 Foreign Exchange Gain or Loss Firm Commitment 10,080 10,080 4 10/15 Foreign Exchange Gain or Loss 3,360 Forward Contract 3,360 10/15 Firm Commitment 6,720 × Foreign Exchange Gain or Loss 6,720 6 10/15 Foreign Currency (euro) Cash Forward Contract 430,080 423,360 6,720 7 10/15 Inventory 430,080 Foreign Currency (euro) 430,080 8 10/15 Cost of Goods Sold Inventory 430,080 430,080 9 10/15 Firm Commitment 430,080 Cost of Goods Sold 26,880
Transcribed Image Text:Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,400 cases of Oktoberfest-style beer from a German supplier for 336,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows: Forward Rate to Call Option Premium for October 15 (strike Date August 15 September 30 October 15 Spot Rate $ 1.20 1.25 1.28 price $1.20) $ 0.05 0.06 N/A October 15 $ 1.26 1.29 1.28 (spot) The company closes its books and prepares third-quarter financial statements on September 30. c. Assume that the company ordered the beer on August 15. The beer arrived and the company paid for it on October 15. On August 15, the company entered into a two-month forward contract to purchase 336,000 euros. The company designated 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. Forward points are not excluded in assessing hedge effectiveness. Prepare journal entries to account for the foreign currency forward contract, foreign currency firm commitment, and import purchase. No 1 Date General Journal Debit Credit 08/15 No Journal Entry Required 2 09/30 Forward Contract Foreign Exchange Gain or Loss 10,080 10,080 3 09/30 Foreign Exchange Gain or Loss Firm Commitment 10,080 10,080 4 10/15 Foreign Exchange Gain or Loss 3,360 Forward Contract 3,360 10/15 Firm Commitment 6,720 × Foreign Exchange Gain or Loss 6,720 6 10/15 Foreign Currency (euro) Cash Forward Contract 430,080 423,360 6,720 7 10/15 Inventory 430,080 Foreign Currency (euro) 430,080 8 10/15 Cost of Goods Sold Inventory 430,080 430,080 9 10/15 Firm Commitment 430,080 Cost of Goods Sold 26,880
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