Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 2,000,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 2,000,000 francs in three months. Maas selects a strike price of $0.79 per franc when the spot rate is $0.79 and pays a premium of $0.003 per franc. The spot rate increases to $0.794 at December 31, 2020, causing the fair value of the option to increase to $13,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.81, resulting in a fair value for the option of $40,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. **Journal Entry Preparation for Option Hedge and Purchase of Raw Materials**This educational module provides guidance on preparing journal entries for hedging foreign currency transactions and purchasing raw materials. Follow these steps to ensure accurate financial records.**Instructions:**1. **Record the Purchase of a Foreign Currency Option** - Classify this transaction as an asset acquisition.2. **Register the Order with a Foreign Supplier** - Ensure this entry reflects the commitment to purchase.3. **Acknowledging the Increase in Option Value** - Record entries reflecting any increase in the value of the foreign currency option.4. **Recognizing Decrease in Time Value of Option** - Record the decrease as an increase in the cost of goods sold, adjusting for any loss in the option's time value.5. **Re-evaluate the Increase in Option Value** - Continually monitor and record any further increments in the value of the currency option.6. **Adjust for Decrease in Time Value Again** - Similar to previous steps, ensure the impact on the cost of goods sold is noted for any time value depreciation.**Note:**If no entry is required for a transaction or event, select "No journal entry required" in the first account field. Utilize the "View transaction list" button for comprehensive oversight of all entries.This setup is designed to assist in the precise documentation of financial activities associated with foreign currency transactions and hedging mechanisms. **Journal Entry Preparation for Foreign Currency Option Hedge and Raw Material Purchase**This educational exercise involves preparing journal entries related to the option hedge of a forecasted transaction and the purchase of raw materials. If no journal entry is needed for a specific transaction or event, the entry field should be marked with "No journal entry required."### Transactions:1. **Record Increase in Foreign Currency Option Value:** - Entry required to recognize any increase in value.2. **Time Value Decrease Entry:** - Recognize a decrease in the time value of the option as an increased cost of goods sold.3. **Exercise of Foreign Currency Option:** - Record the actual exercise transaction.4. **Purchase of Inventory:** - Log the transaction related to inventory acquisition.5. **Transfer to Accumulated Other Comprehensive Income (AOCI):** - Record transferring amounts accumulated in AOCI.6. **Transfer Raw Material Cost:** - Move cost of raw materials to the cost of goods sold account.Further transactions or adjustments, as noted, should be addressed in respective journal entries. This framework assists in tracking and managing financial transactions in a business efficiently.

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10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q