Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,900 cases of Oktoberfest style beer from a German supplier for 570,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows: Date Spot Rate Forward Rate to October 15 Call Option Premium for October 15 (strike price $1.50) August 15 S 1.50 $ 1.56 S 0.05 September 30 1.55 1.59 0.06 October 15 158 158 (spot) N/A The company closes its books and prepares third-quarter financial statements on September 30. 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 purchased a two-month c option on 570,000 euros. The company designated the option 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 spot rate. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option Prepare journal entries to account for the foreign currency option, foreign currency firm commitment, and import purchase
Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,900 cases of Oktoberfest style beer from a German supplier for 570,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows: Date Spot Rate Forward Rate to October 15 Call Option Premium for October 15 (strike price $1.50) August 15 S 1.50 $ 1.56 S 0.05 September 30 1.55 1.59 0.06 October 15 158 158 (spot) N/A The company closes its books and prepares third-quarter financial statements on September 30. 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 purchased a two-month c option on 570,000 euros. The company designated the option 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 spot rate. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option Prepare journal entries to account for the foreign currency option, foreign currency firm commitment, and import purchase
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 1,900 cases of Oktoberfest style beer from a German supplier for 570,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows: Date Spot Rate Forward Rate to October 15 Call Option Premium for October 15 (strike price $1.50) August 15 S 1.50 $ 1.56 S 0.05 September 30 1.55 1.59 0.06 October 15 158 158 (spot) N/A The company closes its books and prepares third-quarter financial statements on September 30.
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 purchased a two-month c option on 570,000 euros. The company designated the option 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 spot rate. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option Prepare journal entries to account for the foreign currency option, foreign currency firm commitment, and import purchase
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