Shandra Corporation (a U.S-based company) expects to order goods from a foreign supplier at a price of 107,000 pounds, with delivery and payment to be made on June 15. On April 15, when the spot rate is $1.27 per pound, Shandra purchases a two month call option on 107,000 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 $1.27 per pound and costs $1,070. 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 $1.320 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?
Shandra Corporation (a U.S-based company) expects to order goods from a foreign supplier at a price of 107,000 pounds, with delivery and payment to be made on June 15. On April 15, when the spot rate is $1.27 per pound, Shandra purchases a two month call option on 107,000 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 $1.27 per pound and costs $1,070. 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 $1.320 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 107,000 pounds,
with delivery and payment to be made on June 15. On April 15, when the spot rate is $1.27 per pound, Shandra purchases a
two-month call option on 107,000 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 $1.27 per pound and costs $1,070. 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 $1.320 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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