Question
Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,000,000 marks on March 15, 2016.
Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,000,000 marks on March 15, 2016. To hedge this forecasted transaction, the company acquires a three-month call option to purchase 1,000,000 marks on December 15, 2015. Leickner selects a strike price of $0.80 per mark, paying a premium of $0.004 per unit, when the spot rate is $0.80. The spot rate increases to $0.805 at December 31, 2015, causing the fair value of the option to increase to $8,000. By March 15, 2016, when the raw materials are purchased, the spot rate has climbed to $0.82, resulting in a fair value for the option of $20,000. |
a. | Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials, assuming that December 31 is Leickners year-end and that the raw materials are included in the cost of goods sold in 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
1. Record purchase of foreign currency option as an asset. 12/15/15 2. Record entry for order placed with foreign supplier. 12/15/15 3. Record the entry to recognize the increase in the value of the foreign currency option. 12/31/15 4. Record entry to recognize the decrease in the time value of the option as an expense. 12/31/15 5. Record the entry to recognize the increase in the value of the foreign currency option. 3/15/16 6. Record gain or loss on the foreign currency option. 3/15/16 7. Record the sale. 3/15/16 8. Record the receipt of marks. 3/15/16 9. Record entry to transfer the amount accumulated in AOCI. 3/15/16
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