On June 1, Alexander Corporation sold goods to a foreign customer at a price of 1,110,000...

On June 1, Alexander Corporation 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, Alexander acquired an option to sell 1,110,000 pesos in three months at a strike price of $0.055. Relevant exchange rates and option premiums for the peso are as follows:

Date	Spot Rate		Put Option Premium for September 1 (strike price $0.055)
June 1	$	0.055	$	0.0021
June 30		0.059		0.0017
September 1		0.054		N/A

Alexander must close its books and prepare its second-quarter financial statements on June 30.

a-1. Assuming that Alexander designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for these transactions in U.S. dollars.
Record the sale of merchandise.
2

Record the foreign currency option.
3

Record the entry for changes in the exchange rate.
4

Record the change in the fair value of the option.
5

Record the gain or loss on the option.
6

Record the option expense.
7

Record the entry for changes in the exchange rate.
8

Record the change in the fair value of the option.
9

Record the gain or loss on the option.
10

Record the option expense.
11

Record receipt of pesos.
12

Record the exercise of the option.
a-2. What is the impact on net income over the two accounting periods?
b-1. Assuming that Alexander designates the foreign currency option as a fair value hedge of a foreign currency receivable, prepare journal entries for these transactions in U.S. dollars.
Record the sale of merchandise.
2

Record the foreign currency option.
3

Record the entry for changes in the exchange rate.
4

Record the change in the fair value of the option.
5

Record the gain or loss on the option.
6

Record the option expense.
7

Record the entry for changes in the exchange rate.
8

Record the change in the fair value of the option.
9

Record the gain or loss on the option.
10

Record the option expense.
11

Record receipt of pesos.
12

Record the exercise of the option.
b-2. What is the impact on net income over the two accounting periods?

Solutions

Expert Solution

	1st Jun
		Dr.	Cr.
1	Sale of merchandise
	Accounts Receivable a/c	11,10,000.00
	To Income a/c		11,10,000.00
	(Being sale recognised)

2	Record the Foreign currency Option
	Foreign Currency Option Expense A/c (1110000*0.0021)	2,331.00
	To Option Asset A/c		2,331.00
	(Being expense on option bought at 0.0021 recognised)
	Option Asset a/c	2,331.00
	To bank		2,331.00
	(Being premium paid for option bought at 0.0021)

	30th Jun

3	Record the changes in exchange rate
	Foreign Exchange A/c (1110000*0.004)	4,440.00
	To Accounts Receivable		4,440.00
	( Being change in echange rate recognised as on 30th Jun from 0.055 to 0.059)

4	Record the change in fair value option
	Fair Value Loss a/c (0.0004*1110000)	444.00
	To Option Asset A/c		444.00
	(Being option recorded at fair value and loss recognised)

ekkarill92 answered 1 week ago

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