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Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French...

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.

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

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    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.

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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.


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