In: Finance
Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,800 cases of wine at a price of 290 euros per case. The total purchase price is 522,000 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 $1.45) |
||||||
September 15 | $ | 1.45 | $ | 1.51 | $ | 0.045 | |||
September 30 | 1.50 | 1.54 | 0.080 | ||||||
October 31 | 1.55 | 1.55 | 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.
Assume that the wine arrived on September 15, and the company made payment on October 31. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase.
Assume that the wine arrived on September 15, and the company made payment on October 31. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 522,000 euros. It properly designated the forward contract as a fair value hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency forward contract.
Vino Veritas ordered the wine on September 15. The wine arrived and the company paid for it on October 31. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 522,000 euros. The company properly designated the forward contract 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 forward rate. Prepare journal entries to account for the foreign currency forward contract, firm commitment, and import purchase.
The wine arrived on September 15, and the company made payment on October 31. On September 15, Vino Veritas purchased a 45-day call option for 522,000 euros. It properly designated the option as a cash flow hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency option.
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 522,000 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.
Expert Answer
Was this answer helpful?
1
0
592 answers
Part a)
The journal entries are as follows:
Date | Account Titles | Debit | Credit |
Sep. 15 | Inventory | $522,000 | |
Accounts Payable (Euro) | $522,000 | ||
Sep. 30 | Foreign Exchange Loss | $26,100 | |
Accounts Payable (Euro) | (522,000*(1.50-1.45) | $26,100 | |
Oct. 31 | Foreign Exchange Loss | $26,100 | |
Accounts Payable (Euro) | $26,100 | ||
Foreign Currency (Euro) | $574,200 | ||
Cash | $574,200 | ||
Accounts Payable (Euro) | $574,200 | ||
Foreign Currency (Euro) | $574,200 |
Part b)
The journal entries are as follows:
Date | Account Titles | Debit | Credit |
Sep. 15 | Inventory | $522,000 | |
Accounts Payable (Euro) | $522,000 | ||
No Journal Entry for Forward Contract | |||
Sep. 30 | Foreign Exchange Loss | $26,100 | |
Accounts Payable (Euro) | $26,100 | ||
Forward Contract | $15,534.72 | ||
Gain on Forward Contract [(522,000 *1.54 - 522,000 *1.51)*.992] | $15,534.72 | ||
Oct. 31 | Foreign Exchange Loss | $26,100 | |
Accounts Payable (Euro) | $26,100 | ||
Forward Contract | $5,345.28 | ||
Gain on Forward Contract [(522,000 *1.55 – 522,000 *1.51) - 15,534.72] | $5,345.28 | ||
Foreign Currency (Euro) | $574,200 | ||
Cash | $553,320 | ||
Forward Contract | $20,880 | ||
Accounts Payable (Euro) | $574,200 | ||
Foreign Currency (Euro) | $574,200 |
Part c)
The journal entries are given as below:
Date | Account Titles | Debit | Credit |
Sep. 15 | No Journal Entry for Forward Contract | ||
Sep. 30 | Forward Contract | $15,534.72 | |
Gain on Forward Contract [(522,000 *1.54 - 522,000 *1.51)*.992] | $15,534.72 | ||
Loss on Firm Commitment | $15,534.72 | ||
Firm Commitment | $15,534.72 | ||
Oct. 31 | Forward Contract | $5,345.28 | |
Gain on Forward Contract [(522,000 *1.55 – 522,000 *1.51) - 15,534.72] | $5,345.28 | ||
Loss on Firm Commitment | $5,345.28 | ||
Firm Commitment | $5,345.28 | ||
Foreign Currency (Euro) | $574,200 | ||
Cash | $553,320 | ||
Forward Contract | $20,880 | ||
Inventory | $574,200 | ||
Foreign Currency (Euro) | $574,200 | ||
Firm Commitment | $20,880 | ||
Adjustment to Net Income | $20,880 |
Part d)
The journal entries are given below:
Date | Account Titles | Debit | Credit |
Sep. 15 | Inventory | $522,000 | |
Accounts Payable (Euro) | $522,000 | ||
Foreign Currency Option (522,000 *0.045) | $23,490 | ||
Cash | $23,490 | ||
Sep. 30 | Foreign Exchange Loss | $23,490 | |
Accounts Payable (Euro) | $23,490 | ||
Foreign Currency Option (522,000 *0.080 - 522,000 *0.045) | $18,270 | ||
Accumulated Other Comprehensive Income | $18,270 | ||
Accumulated Other Comprehensive Income | $23,490 | ||
Gain on Foreign Currency Option | $23,490 | ||
Option Expense | $5,220 | ||
Accumulated Other Comprehensive Income | $5,220 | ||
Oct. 31 | Foreign Exchange Loss | $23,490 | |
Accounts Payable (Euro) | $23,490 | ||
Foreign Currency Option (522,000 *.10 – 522,000 *.080) | $10,440 | ||
Accumulated Other Comprehensive Income | $10,440 | ||
Accumulated Other Comprehensive Income | $23,490 | ||
Gain on Foreign Currency Option | $23,490 | ||
Option Expense | $18,270 | ||
Accumulated Other Comprehensive Income | $18,270 | ||
Foreign Currency (Euro) | $574,200 | ||
Cash | $522,000 | ||
Foreign Currency Option | $52,200 | ||
Accounts Payable (Euro) | $574,200 | ||
Foreign Currency (Euro) | $574,200 |
Note: I have answered first 4 parts of the question as per Chegg policy, kindly post separate question for answer of remaining parts.
Please give me a Thumbs up ?.Thanks!!
CommentPost a question
Answers from our experts for your tough homework questions
Part e)
The journal entries are given as below:
Date | Account Titles | Debit | Credit |
Sep. 15 | Foreign Currency Option Premium (Euro) (€522,000*$.045) | $23,490 | |
Cash | $23,490 | ||
Sep. 30 | loss on firm commitment ( ,$522,000*($1.50-$1.45)) | $26,100 | |
Firm commitment | $26,10 | ||
foreign currency option premium(522,000*(.080-.045) | $18,270 | ||
Gain on foreign currency option | $18,270 | ||
Oct. 31 | Foreign Currency Option Premium (522,000*(.1-.080)) | $10,440 | |
Gain on Foreign Currency Option | $10,440 | ||
Loss on Firm Commitment[522,000*(1.55-1.50)] | $26,100 | ||
Firm Commitment | $26,100 | ||
Foreign Currency (Euro)[522,000*(1.55)] | $809,100 | ||
Cash | $756,900 | ||
Foreign currency option premium[$23,490+$18,270+$10,440] | $52,200 | ||
Inventory | $809,100 | ||
Foreign Currency (Euro) | $809,100 | ||
Firm Commitment | $52,200 | ||
Adjustment to Net Income. | $52,200 |
Note: Part 5 of the question answered here.