Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,500 cases of Oktoberfest-style beer from a German supplier for 390,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows:   Date Spot Rate Forward Rate to October 15 Call Option Premium for October 15 (strike price $1.30) August 15 $ 1.30   $ 1.36   $ 0.05   September 30   1.35     1.39     0.06   October 15   1.38     1.38 (spot)   N/A       The company closes its books and prepares third-quarter financial statements on September 30.

FINANCIAL ACCOUNTING
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Author:Libby
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Chapter1: Financial Statements And Business Decisions
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Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,500 cases of Oktoberfest-style beer from a German supplier for 390,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows:

 

Date Spot Rate Forward Rate
to October 15
Call Option Premium
for October 15
(strike price $1.30)
August 15 $ 1.30   $ 1.36   $ 0.05  
September 30   1.35     1.39     0.06  
October 15   1.38     1.38 (spot)   N/A  
 

 

The company closes its books and prepares third-quarter financial statements on September 30.

 

  1. Assume that the beer arrived on August 15, and the company made payment on October 15. On August 15, the company entered into a two-month forward contract to purchase 390,000 euros. The company designated the forward contract as a cash flow hedge of a foreign currency payable. Forward points are excluded in assessing hedge effectiveness and amortized to net income using a straight-line method on a monthly basis. Prepare journal entries to account for the import purchase and foreign currency forward contract. (there are 11 entries)

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 Record the foreign exchange loss for the third quarter.

 

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Follow-up Question

Assume that the beer arrived on August 15, and the company made payment on October 15. On August 15, the company entered into a two-month forward contract to purchase 276,000 euros. The company designated the forward contract as a cash flow hedge of a foreign currency payable. Forward points are excluded in assessing hedge effectiveness and amortized to net income using a straight-line method on a monthly basis. Prepare journal entries to account for the import purchase and foreign currency forward contract. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations.)   Record the foreign exchange loss for the third quarter.

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