**Problem 9-19 (Algo) (LO 9-9)**Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 132,000 pounds, with delivery and payment to be made on June 15. On April 15, when the spot rate is $1.47 per pound, Shandra purchases a two-month call option on 132,000 pounds and designates this option as a cash flow hedge of a forecasted foreign currency transaction. The time value of the option is excluded in assessing hedge effectiveness; the change in time value is recognized in net income over the life of the option. The option has a strike price of $1.47 per pound and costs $1,320. The goods are received and paid for on June 15. Shandra sells the imported goods in the local market immediately. The spot rate for pounds is $1.520 on June 15.**Required:****a-1.** Prepare all journal entries for Shandra Corporation related to this transaction and hedge.**a-2.** What amount should Shandra Corporation report in net income as cost of goods sold for the quarter ending June 30?**b.** What amount should Shandra Corporation report in net income as foreign exchange gain or loss for the quarter ending June 30?

Name: **Problem 9-19 (Algo) (LO 9-9)**Shandra Corporation (a U.S.-based com
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Description: **Problem 9-19 (Algo) (LO 9-9)**Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 132,000 pounds, with delivery and payment to be made on June 15. On April 15, when the spot rate is $1.47 per pou

Cash flow hedge accounting utilizes financial instruments to mitigate risks linked to forthcoming cash flows. Firms employ derivatives such as forwards, options, or swaps to safeguard against fluctuations in cash flows from projected transactions. Fluctuations in the fair value of these instruments counterbalance the impact of the hedged item, enabling companies to reflect the effective portion of the hedge in equity. This strategy curtails income volatility attributable to market shifts until the hedged transaction affects the income statement.The journal entries for Shandra Corporation related to this transaction and hedge are as follows:Date Account Titles & Explanations Debit ($) Credit ($) April 15 Foreign Currency Option Premium Expense$1,320 Cash$1,320 (To record the expense for purchasing a foreign currency option)June 15 Inventory (132,000 pounds @ $1.47 per pound)$194,040Foreign Currency Exchange Loss [( $1.520-$1.47)*132,000]$6,600 Accounts Payable (132,000*$1.520)$200,640(To record the foreign currency exchange loss as an expense and a reduction in cash)June 15 Cash $200,640 Accounts Payable$200,640(To record the reduction in cash and a reduction in accounts payable)June 30 Cost of Goods Sold$194,040 Inventory$194,040(To record the reduction in inventory and an increase in the cost of goods sold)On April 15, Shandra Corporation purchased a two-month call option for 132,000 pounds and paid $1,320 as the option premium. This is recorded as an expense and a reduction in cash.On June 15, Shandra Corporation received the goods from the foreign supplier and paid 132,000 pounds at the strike price of $1.47 per pound. This transaction reflects an augmentation in inventory alongside a corresponding rise in accounts payable. Shandra Corporation also sells the option at its fair value of $200,640 and recognizes a foreign currency exchange loss of $6,600. This is the difference between the fair value of the option and the cost of the option, adjusted for the change in time value. Foreign currency exchange losses are recorded as an expense and a reduction in cash.On June 15, Shandra Corporation paid the accounts payable in cash. This is recorded as a reduction in cash and a reduction in accounts payable.On June 30, Shandra Corporation sold the imported goods in the local market. This is recorded as a reduction in inventory and an increase in the cost of goods sold.Computation of Cost of Goods Sold (COGS) in Net Income:The COGS represents the cost directly associated with producing the goods sold during a specific period. In this scenario, the goods were purchased for 132,000 pounds at a rate of $1.47 per pound.The cost of goods sold for the quarter ending June 30 is $194,040.Computation of net income fluctuation due to foreign exchange gains or losses:This calculation determines the gain or loss due to fluctuations in the exchange rate between the date the option was exercised and the spot rate on the transaction date.The spot rate on June 15 was $1.520 per pound, while the strike price of the option was $1.47 per pound. The difference between the spot rate and the strike price is $1.520 per pound. As 132,000 pounds were involved, the foreign exchange gain was calculated by multiplying the difference by the number of pounds, resulting in a gain of $6,600. It reflects the gain realized due to the favorable movement in the exchange rate between the date of the option and the transaction date.Therefore, the journal entries are as follows:Date Account Titles & Explanations Debit ($) Credit ($) April 15 Foreign Currency Option Premium Expense$1,320 Cash$1,320 (To record the expense for purchasing a foreign currency option)June 15 Inventory $194,040Foreign Currency Exchange Loss$6,600 Accounts Payable $200,640(To record the foreign currency exchange loss as an expense and a reduction in cash)June 15 Cash $200,640 Accounts Payable$200,640(To record the reduction in cash and a reduction in accounts payable)June 30 Cost of Goods Sold$194,040 Inventory$194,040(To record the reduction in inventory and an increase in the cost of goods sold)a) The cost of goods sold for the quarter ending June 30 is $194,040, calculated in Step 3.b) The Foreign Exchange Gain for the quarter ending June 30 was $6,600, calculated in Step 4.

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Required: a-1. Prepare all journal entries for Shandra Corporation related to this transaction and hedge. a-2. What amount should Shandra Corporation report in net income as cost of goods sold for the quarter ending June 30? b. What amount should Shandra Corporation report in net income as foreign exchange gain or loss for the quarter ending June 30?

Required: a-1. Prepare all journal entries for Shandra Corporation related to this transaction and hedge. a-2. What amount should Shandra Corporation report in net income as cost of goods sold for the quarter ending June 30? b. What amount should Shandra Corporation report in net income as foreign exchange gain or loss for the quarter ending June 30?

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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Concept explainers

Financial Transaction Analysis

The transaction analysis is done with the help of the accounting equation. The basic accounting equation is alternatively known as the balance sheet equation is based on the double-entry system which says that for each transaction happening in a business, at least two accounts should be affected I.e. both the debit side and the credit side should be equal. The Accounting Equation is

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**Problem 9-19 (Algo) (LO 9-9)**

Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 132,000 pounds, with delivery and payment to be made on June 15. On April 15, when the spot rate is $1.47 per pound, Shandra purchases a two-month call option on 132,000 pounds and designates this option as a cash flow hedge of a forecasted foreign currency transaction. The time value of the option is excluded in assessing hedge effectiveness; the change in time value is recognized in net income over the life of the option. The option has a strike price of $1.47 per pound and costs $1,320. The goods are received and paid for on June 15. Shandra sells the imported goods in the local market immediately. The spot rate for pounds is $1.520 on June 15.

**Required:**

**a-1.** Prepare all journal entries for Shandra Corporation related to this transaction and hedge.

**a-2.** What amount should Shandra Corporation report in net income as cost of goods sold for the quarter ending June 30?

**b.** What amount should Shandra Corporation report in net income as foreign exchange gain or loss for the quarter ending June 30?

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