Question

On 11/1/14, Big Company purchased inventory from a French company. Payment of 200,000 euros is due on 1/30/15. On 11/1/14, Big also paid $1,800 cash to acquire a 90-day call option (to purchase) for 200,000 euros. 11/1/14 12/31/14 1/30/15 Spot rate $1.20 $1.22 $1.23 Fair value of call option $ 1,800 $4,400 $6,000 Prepare all journal entries for each of the above dates:

Answer 1

Date	Accounts Titles and Explanation	Debit ($)	Credit ($)
11/1/14	Purchases	240000 (200000*1.20)
	Accounts Payable		240000
11/1/14	Call option Asset Account	1800
	Cash Account		1800
12/31/14	Fair Value Gain Account	4000 [(200000*1.22)- 240000]
	Accounts Payable		4000
12/31/14	Call option Asset Account	2600 (4400 – 1800)
	Fair Value Gain Account		2600
1/30/15	Call option Asset Account	1600 (6000 – 4400)
	Fair Value Gain Account		1600
1/30/15	Cash	6000
	Call option Asset Account		6000
1/30/15	Fair Value Gain Account	2000 [(200000*1.23)- 244000]
	Accounts Payable		2000
1/30/15	Accounts Payable	246000
	Cash		246000

At the end of 1/30/15, Balance of Accounts payable account and Call option Asset account is nil. All gains on call option asset account and all losses on increment in accounts payable account is transferred to Fair Value Gain account. Balance of Fair Value Gain account as on 1/30/15 of $(1800) will be transferred to income summary account.