Prepare journal entries to account for the foreign currency option a
- Journal entries to account for the import purchase and foreign currency forward contract:
On August 15:
Record the foreign currency forward contract:
Dr. Derivative asset - forward contract 264,000 euros
Cr. Cash 264,000 euros
On October 15:
Record the import purchase:
Dr. Inventory 400,000 dollars
Cr. Accounts payable 400,000 dollars
Record the amortization of forward points to net income:
Dr. Amortization expense of 2,000 dollars
Cr. Derivative asset - forward contract 2,000 dollars
- Journal entries to account for the foreign currency forward contract, foreign currency firm commitment, and import purchase:
On August 15:
Record the foreign currency forward contract:
Dr. Derivative asset - forward contract 264,000 euros
Cr. Cash 264,000 euros
Record the foreign currency firm commitment:
Dr. Accounts payable 264,000 euros
Cr. Derivative liability - forward contract 264,000 euros
On October 15:
Record the import purchase:
Dr. Inventory 400,000 dollars
Cr. Accounts payable 400,000 dollars
Record the change in fair value of the foreign currency firm commitment:
Dr. Derivative liability - forward contract 6,000 dollars
Cr. Other comprehensive income of 6,000 dollars
Record the amortization of forward points to net income:
Dr. Amortization expense of 2,000 dollars
Cr. Derivative asset - forward contract 2,000 dollars
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