The company ordered the wine on September 15. It arrived on October 31, and the company made payment on that date. On September 15, Vino Veritas purchased a 45-day call option for 600,000 euros. It properly 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. Prepare journal entries to account for the foreign currency option, firm commitment, and import purchase.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 2,000 cases of wine at a price of 300 euros per case. The total purchase price is 600,000 euros. Relevant exchange rates for the euro are as follows:

 

Date

Spot Rate

Forward Rate
to October 31

Call Option Premium
for October 31
(strike price $1.50)

September 15

$

1.50

 

$

1.56

 

$

0.035

 

September 30

 

1.55

 

 

1.59

 

 

0.070

 

October 31

 

1.60

 

 

1.60

 

 

0.100

 

 

 

Vino Veritas Company has an incremental borrowing rate of 12 percent (1 percent per month) and closes the books and prepares financial statements at September 30.

 

  1. The company ordered the wine on September 15. It arrived on October 31, and the company made payment on that date. On September 15, Vino Veritas purchased a 45-day call option for 600,000 euros. It properly 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. Prepare journal entries to account for the foreign currency option, firm commitment, and import purchase.

 

 

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