Question

Spitz Company ordered merchandise from a foreign supplier on November 20 at a price of 104,000 forints when the spot rate was $0.54 per forint. Delivery and payment were scheduled for December 20. On November 20, Spitz acquired a call option on 104,000 forints at a strike price of $0.54, paying a premium of $0.02 per forint. It designates 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. The merchandise arrives and Spitz makes payment according to schedule. Spitz sells the merchandise by December 31, when it closes its books.

Assuming a spot rate of $0.57 per forint on December 20, prepntry are all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory.

Entry 1. Record the foreign currency option.E

Entry 2. Record entry for order placed with foreign supplier.

Entry 3. Record gain or loss on the firm commitment.

Entry 4. Record gain or loss on the foreign currency option.

Entry 5. Record the entry for foreign currency acquired at the spot rate.

Entry 6. Record receipt of goods and payment made.

Entry 7. Record the entry for cost of goods sold.

Entry 8. Record entry to close the firm commitment.

Answer 1

Journal Entry
Date	Account Titles and explanation	Debit	Credit
20-Nov	Foreign Currency option	$2,080.00
	Cash		$2,080.00
	To Record Option Premium Paid
	Entry-2( No Journal Entry for order Placed)
20-Dec	Loss on Firm Comittment	$3,120.00
	Firm Comittment		$3,120.00
	To Record Loss on Firm Comittment
	Foreign Currency Option	$1,040.00
	Gain on Foreign Currrency Option		$1,040.00
	To Record Gain on Foreign Currency option
	Foreign Currency	$59,280.00
	Cash		$56,160.00
	Foreign Currency Option		$3,120.00
	To Record Cash Received
	Merchandised Inventory Dr.	$59,280.00
	Foreign Currency		$59,280.00
	To Record inventory and payment made
				Working note:
1) Premium paid: 104000*0.02=2080
2) Loss on Firm Comittment=(0.57-0.54)104000=3120
3)Gain on Foreign Currency Option=(0.57-0.54)104000-2080=1040
4) Cash Received in December (0.57X104000)=59280
5)Amount Credited to Foreign Currency Option (59280-56160)=$3120