Question

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 200,000 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your present value interest factor to four decimal places. Round your answers to the nearest dollar amount.)

Answer 1

Answer

. Option Fair Value Hedge of a Foreign Currency Firm Commitment

                                    Firm Commitment               Option            Foreign Currency Option     

                  Spot                                  Change in      Premium                                    Change in

Date          Rate       Fair Value         Fair Value      for 10/31          Fair Value                  Fair Value

9/15           $1.00      $0                       -                       $.035                 $ 7,000         -

9/30           $1.05      $ (9,901)           –$ 9,901¹        $.070                 $14,000                  +$7,000

10/31         $1.10      $(20,000)           –$10,099         $.100                 $20,000                  +$6,000

¹ $210,000 – $200,000 = $(10,000) x .9901 = $(9,901), where .9901 is the present value factor for one month at an annual interest rate of 12% (1% per month) calculated as 1/1.01.

9/15           Foreign Currency Option                                                               $7,000

                        Cash                                                                                                                      $7,000

9/30           Foreign Currency Option                                                               $7,000

                        Gain on Foreign Currency Option                                                                        $7,000

                  Loss on Firm Commitment                                                           $9,901

                        Firm Commitment                                                                                                $9,901

10/31         Foreign Currency Option                                                               $6,000

                        Gain on Foreign Currency Option                                                                        $6,000

                  Loss on Firm Commitment                                                         $10,099

                        Firm Commitment                                                                                                $10,099

                  Foreign Currency (euro)                                                            $220,000

                        Cash                                                                                                                      $200,000

                        Foreign Currency Option                                                                                      20,000

                  Inventory                                                                                   $220,000

                        Foreign Currency (euro)                                                                                       $220,000

                 

                  Firm Commitment                                                                       $20,000

                        Adjustment to Net Income                                                                                         $20,000

                 

                  (This last entry is not made until the period when the inventory affects net income through cost of goods sold.)

insufficient info given but i know the entire question. i think it is correct.