Prepare journal entries for the foreign currency option, foreign currency firm commitment, and export sale. What is the impact on net income in each of the two accounting periods? What is the amount of net cash inflow resulting from the sale of goods to the foreign customer?
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On June 1, Parker-Mae Corporation (a U.S.-based company) received an order to sell goods to a foreign customer at a price of 165,000 francs. Parker-Mae will ship the goods and receive payment in three months, on September 1. On June 1, Parker-Mae purchased an option to sell 165,000 francs in three months at a strike price of $1.04. The company designated the option as a fair value hedge of a foreign currency firm commitment. The option's time value is excluded in assessing hedge effectiveness, and the change in time value is recognized in net income. The fair value of the firm commitment is measured by referring to changes in the spot rate (discounting to present value is ignored). Relevant exchange rates and option premiums for the franc are as follows:
| Date | Spot Rate | Put Option Premium for September 1 (strike price $1.04) |
||||
| June 1 | 1.04 | 0.020 | ||||
| June 30 | 0.98 | 0.072 | ||||
| September 1 | 0.93 | N/A | ||||
Parker-Mae Corporation must close its books and prepare its second-quarter financial statements on June 30.
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Prepare
journal entries for the foreign currency option, foreign currency firm commitment, and export sale. -
What is the impact on net income in each of the two accounting periods?
-
What is the amount of net
cash inflow resulting from the sale of goods to the foreign customer?
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- On June 1, Parker-Mae Corporation (a U.S.-based company) received an order to sell goods to a foreign customer at a price of 100,000 francs. Parker-Mae will ship the goods and receive payment in three months, on September 1. On June 1, Parker-Mae purchased an option to sell 100,000 francs in three months at a strike price of $1.00. The company designated the option as a fair value hedge of a foreign currency firm commitment. The option's time value is excluded in assessing hedge effectiveness, and the change in time value is recognized in net income. The fair value of the firm commitment is measured by referring to changes in the spot rate (discounting to present value is ignored). Relevant exchange rates and option premiums for the franc are as follows: Date June 1 June 30 September 1 Spot Rate $1.00 0.94 0.90 Put Option Premium for September 1 (strike price $1.00) $ 0.020 0.072 N/A Parker-Mae Corporation must close its books and prepare its second-quarter financial statements on June…Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 119,000 pounds, with delivery and payment to be made on June 15. On April 15, when the spot rate is $1.46 per pound, Shandra purchases a two-month call option on 119,000 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 $1.46 per pound and costs $1,190. 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 $1.510 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…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…
- Shandra Corporation (a U.S. -based company) expects to order goods from a foreign supplier at a price of 117,000 pounds, with delivery and payment to be made on June 15. On April 15, when the spot rate is $1.31 per pound, Shandra purchases a two-month call option on 117,000 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 $1.31 per pound and costs $1, 170. 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 $1.360 on June 15. 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…On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,070,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,070,000 pesos in three months at a strike price of $0.070. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Put Option Premium for Date June 1 June 30 September 1 Spot Rate $ 0.070 0.069 0.068 September 1 (strike) price $0.070) $ 0.0033 0.0026 N/A Maxwell must close its books and prepare its second-quarter financial statements on June 30. Required: a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. a-2. What is the impact on net…Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 121,000 pounds, with delivery and payment to be made on April 20. On February 20, when the spot rate is $1.41 per pound, Shandra purchases a two-month call option on 121,000 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 $1.41 per pound and costs $1,210. The goods are received and paid for on April 20. Shandra sells the imported goods in the local market by May 31. The spot rate for pounds is $1.46 on April 20. What amount will Shandra Corporation report as foreign exchange gain or loss in net income for the quarter ended June 30?
- On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,080,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,080,000 pesos in three months at a strike price of $0.106. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Date Spot Rate Put Option Premiumfor September 1(strike price $0.106) June 1 $ 0.106 $ 0.0069 June 30 0.105 0.0044 September 1 0.104 N/A Maxwell must close its books and prepare its second-quarter financial statements on June 30. a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars.…On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,140,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,140,000 pesos in three months at a strike price of $0.080. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Date Spot Rate Put Option Premiumfor September 1(strike price $0.080) June 1 $ 0.080 $ 0.0043 June 30 0.079 0.0031 September 1 0.078 N/A Maxwell must close its books and prepare its second-quarter financial statements on June 30. a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. a-2.…On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,110,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,110,000 pesos in three months at a strike price of $0.076. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Date June 1 June 30 September 1 Maxwell must close its books and prepare its second-quarter financial statements on June 30. a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. a-2. What is the impact on net income over the two accounting periods? b-1. Assuming that Maxwell designates the foreign currency option as a fair value…
- On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,100,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,100,000 pesos in three months at a strike price of $0.074. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Date Spot Rate Put Option Premium for September 1 (strike price $0.074) June 1 $ 0.074 $ 0.0037 June 30 0.073 0.0028 September 1 0.072 N/A Maxwell must close its books and prepare its second-quarter financial statements on June 30. Required: a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. a-2. What is the…On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,170,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,170,000 pesos in three months at a strike price of $0.082. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Put Option Premium Spot Date for September 1 Rate (strike price $0.082) June 1 S 0.082 June 30 0.081 September 1 0.080 $ 0.0045 0.0032 N/A Maxwell must close its books and prepare its second-quarter financial statements on June 30. a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. a-2. What is the impact on net income over…Spitz Company ordered merchandise from a foreign supplier on November 20 at a price of 100,000 forints when the spot rate was $0.50 per forint. Delivery and payment were scheduled for December 20. On November 20, Spitz acquired a call option on 100,000 forints at a strike price of $0.50, paying a premium of $0.01 per forint. It designates 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. The merchandise arrives and Spitz makes payment according to schedule. Spitz sells the merchandise by December 31, when it closes its books.a. Assuming a spot rate of $0.53 per forint on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory.b. Assuming a spot rate of $0.48 per forint on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm…