Question

On 11/1/2017, a company forecasted the sales of inventory to foreign customer for 800,000 FCU. It was estimated that the inventory would be delivered and paid on 3/20/2018. Also, on 11/1/2017 , the company purchased a put option to sell 800,000 FCU at a strike price of $0.842 expiring end of 2018. An option premium of $5,000 was paid.

	1-Nov	31-Dec	20-Mar
Spot Rates	$0.820	$0.835	$0.830
FV of Option	$5,000	$4,200

Required: Prepare the journal entries required on the dates listed:

1. Assuming that on 3/20/2018 the option was exercised, and the inventory delivered and paid

2. Assuming that the spot rate on 3/20/2018 is $0.845?

Answer 1

Date	Particulars	Debit ($)	Credit ($)
20.03.2018	Financial Asset(Put Option)	5000
	To Bank		5000
	(Being Put option premium paid)
31.12.2017	P/L	800		5000-4200
	To Financial Asset(Put Option)		800
	(Being option value remeasured)
Answer 1
20.03.2018	Bank	664000		800000FCU*0.83
	To sales		664000
	(Being sales recognised using spot exchange rate)
20.03.2018	Bank	9600		800000FCU(0.842-0.83)
	To Financial Asset(Put Option)		4200
	To Exchange gain on Put option(P/L)		5400
	(Being gain recognised on exercise of Put option)
Answer 2
20.03.2018	Bank	676000		800000FCU*0.845
	To sales		676000
	(Being sales recognised using spot exchange rate)
20.03.2018	Loss on Put Option (P/L)	4200
	To Financial Asset(Put Option)		4200
	(Being loss recognised on lapse of Put option)