Amaretta Company (a U S based company) ordered merchandise from a foreign supplier on November 20 at a price of 1,060,000 rupees when the spot rate was $0 050 per rupee Delivery and payment were scheduled for December 20 On November 20, Amaretta acquired a call option on 1,060,000 rupees at a strike price of $0 050, paying a premium of $0 001 per rupee The company 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 options time value is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income The merchandise arrives, and Amaretta makes payment according to schedule Amaretta sells the merchandise by December 31, when it closes its books Assuming a spot rate of $0 053 per rupee on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory Assuming a spot rate of $0 048 per rupee on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory REQUIREMENT A Assuming a spot rate of $0 053 per rupee on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory JOURNAL ENTRIES PLEASE 11 20 Record the purchase of the foreign currency option 11 20 Record entry for order placed with foreign supplier 12 20 Record the firm commitment at its fair value 12 20 Record the entry to adjust the fair value on the foreign currency option 12 20 Record the entry for foreign currency acquired at the spot rate 12 20 Record receipt of goods and payment in rupees 12 31 Record the entry to transfer the carrying value of inventory to cost of goods sold 12 31 Record the entry to close the firm commitment account to net income REQUIREMENT B Assuming a spot rate of $0 048 per rupee on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory JOURNAL ENTRIES PLEASE 11 20 Record the purchase of the foreign currency option 11 20 Record entry for order placed with foreign supplier 12 20 Record the firm commitment at its fair value 12 20 Record gain or loss on the foreign currency option 12 20 Record the entry to recognize the change in the time value of the foreign currency option 12 20 Record entry for foreign currency acquired at spot rate 12 20 Record receipt of goods and payment in rupees 12 31 Record the entry to transfer the carrying value of inventory to cost of goods sold 12 31 Record entry to close the firm commitment 12 31 Record the entry to close the firm commitment account

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 07, 2024

Amaretta Company (a U.S.-based company) ordered merchandise from a foreign supplier on November 20 at a price of 1,060,000 rupees when the spot rate was

Amaretta Company (a U.S.-based company) ordered merchandise from a foreign supplier on November 20 at a price of 1,060,000 rupees when the spot rate was $0.050 per rupee. Delivery and payment were scheduled for December 20. On November 20, Amaretta acquired a call option on 1,060,000 rupees at a strike price of $0.050, paying a premium of $0.001 per rupee. The company 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 options time value is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income. The merchandise arrives, and Amaretta makes payment according to schedule. Amaretta sells the merchandise by December 31, when it closes its books.

Assuming a spot rate of $0.053 per rupee on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory.
Assuming a spot rate of $0.048 per rupee on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory.

REQUIREMENT A

Assuming a spot rate of $0.053 per rupee on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory.

JOURNAL ENTRIES PLEASE

11/20 - Record the purchase of the foreign currency option.
11/20 - Record entry for order placed with foreign supplier.
12/20 - Record the firm commitment at its fair value .
12/20 - Record the entry to adjust the fair value on the foreign currency option.
12/20 - Record the entry for foreign currency acquired at the spot rate.
12/20 - Record receipt of goods and payment in rupees.
12/31 - Record the entry to transfer the carrying value of inventory to cost of goods sold.
12/31 - Record the entry to close the firm commitment account to net income.

REQUIREMENT B

Assuming a spot rate of $0.048 per rupee on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory.

JOURNAL ENTRIES PLEASE

11/20 - Record the purchase of the foreign currency option.
11/20 - Record entry for order placed with foreign supplier.
12/20 - Record the firm commitment at its fair value.
12/20 - Record gain or loss on the foreign currency option.
12/20 - Record the entry to recognize the change in the time value of the foreign currency option.
12/20 - Record entry for foreign currency acquired at spot rate.
12/20 - Record receipt of goods and payment in rupees.
12/31 - Record the entry to transfer the carrying value of inventory to cost of goods sold.
12/31 - Record entry to close the firm commitment.
12/31 - Record the entry to close the firm commitment account.