Question
Alexander Valley Corporation maintains its books in US dollars. In order to hedge the foreign exchange risk associated with the shipments Alexander Valley Corporation takes
Alexander Valley Corporation maintains its books in US dollars. In order to hedge the foreign exchange risk associated with the shipments Alexander Valley Corporation takes the following actions on March 1, 2021:
- Purchased a 10-month call option (expiration date of December 31, 2021) to buy 300,000 AUD (Australian money) at a strike price of $0.7326 US per AUD for $6,060.
Alexander Valley Corporation accounts for the call option as a cash flow hedge. Alexander Valley treats the time value on the option as an excluded component which under ASU 2017-12 is recognized in earnings using an amortization approach.
Prepare the journal entries to record the call option on each of the 4 dates in the table: (show calculations)
Note--ignore the forward rate column, that is for a different part of the question that I don't need help with
Relevant exchange rates are as follows: Call option premium Forward rate (to May 31, 2021) Spot rate (1 AUD for December 31, 2021 (strike price $0.7326) Date March 1, 2021 $0.7326 $0.7320 $0.0202 March 31, 2021 $0.7844 $0.7840 $0.0700 May 31, 2021 $0.7685 $0.7685 $0.0500 June 30, 2021 $0.7780 n/a $0.0575 Relevant exchange rates are as follows: Call option premium Forward rate (to May 31, 2021) Spot rate (1 AUD for December 31, 2021 (strike price $0.7326) Date March 1, 2021 $0.7326 $0.7320 $0.0202 March 31, 2021 $0.7844 $0.7840 $0.0700 May 31, 2021 $0.7685 $0.7685 $0.0500 June 30, 2021 $0.7780 n/a $0.0575Step by Step Solution
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