Question

Spitz Company ordered merchandise from a foreign supplier on November 20 at a price of 109,000 forints when the spot rate was $0.59 per forint. Delivery and payment were scheduled for December 20. On November 20, Spitz acquired a call option on 109,000 forints at a strike price of $0.59, paying a premium of $0.01 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.

1. Assuming a spot rate of $0.62 per forint on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory.

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

Answer 1

ANSWER

Req a

date	general jounral	debit	credit
Nov-20	Foreign currency option	1,090
	cash		1,090
	109,000 *0.01
Nov-20	no journal entry required
Dec-20	Loss on firm commitment	3,270
	firm commitment		3,270
	(0.62 -0.59)*109,000
Dec-20	foreign currency option	1,090
	gain on foreign currency option		1,090
Dec-20	foreing currency(forint)	32,700
	cash		29,430
	foreign currency option		3,270
Dec-20	Merchandise inventory	32,700
	foreing currency(forint)		32,700
Dec-31	cost of goods sold	32,700
	merchandise inventory		32,700
Dec-20	firm commitment	3,270
	adjustment to net income		3,270

Req b
date	general jounral	debit	credit
Nov-20	Foreign currency option	1,090
	cash		1,090
	109,000 *0.01
Nov-20	no journal entry required
Dec-20	Firm commitment	2,180
	gain on firm commitment		2,180
	(0.57 -0.59)*109,000
Dec-20	loss on foreign currency option	2,180
	foreign currency option		2,180
Dec-20	foreing currency(forint)	62,130
	cash		62,130
Dec-20	Merchandise inventory	62,130
	foreing currency(forint)		62,130
Dec-31	cost of goods sold	62,130
	merchandise inventory		62,130
Dec-20	firm commitment	2,180
	adjustment to net income		2,180

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