On November 30, 2020, Walter Corporation (a U.S.-based company) forecasts the sale of equipment to a foreign customer at a price of 500,000 crowns. The equipment is expected to be delivered on January 31, 2021, with payment received upon delivery. Also on November 30, 2020, Walter pays $3,000 for an option to sell 500,000 crowns on January 31, 2021, at a strike price of $0.52. Walter properly designates its foreign currency option as a cash flow hedge of a forecasted foreign currency transaction. The time value of the option is excluded in assessing hedge effectiveness, and the change in time value is recognized in net income over the life of the option. The following U.S. dollar–crown exchange rates apply:

Walter delivers the equipment to the foreign customer on January 31, 2021, and immediately receives 500,000 crowns.

a. Prepare all journal entries, including December 31 adjusting entries, to record the foreign currency option and export sale.

b. What is the impact on net income in 2020?

c. What is the impact on net income in 2021?

Transcribed Image Text:

Put Option Premlum for January 31, 2021 (strike price $0.52) Date Spot Rate November 30, 2020 $0.53 $0.006 December 31, 2020 0.50 0.024 January 31, 2021 0.49 N/A