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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.

  1. 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.

  2. Record the sale of merchandise.

  3. 2

    Record the foreign currency option.

  4. 3

    Record the entry for changes in the exchange rate.

  5. 4

    Record the change in the fair value of the option.

  6. 5

    Record the gain or loss on the option.

  7. 6

    Record the option expense.

  8. 7

    Record the entry for changes in the exchange rate.

  9. 8

    Record the change in the fair value of the option.

  10. 9

    Record the gain or loss on the option.

  11. 10

    Record the option expense.

  12. 11

    Record receipt of pesos.

  13. 12

    Record the exercise of the option.

  14. a-2. What is the impact on net income over the two accounting periods?

  15. 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.

  16. Record the sale of merchandise.

  17. 2

    Record the foreign currency option.

  18. 3

    Record the entry for changes in the exchange rate.

  19. 4

    Record the change in the fair value of the option.

  20. 5

    Record the gain or loss on the option.

  21. 6

    Record the option expense.

  22. 7

    Record the entry for changes in the exchange rate.

  23. 8

    Record the change in the fair value of the option.

  24. 9

    Record the gain or loss on the option.

  25. 10

    Record the option expense.

  26. 11

    Record receipt of pesos.

  27. 12

    Record the exercise of the option.

  28. 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 7 months ago
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