Question
Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,900,000 marks on March 15, 2016.
Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,900,000 marks on March 15, 2016. To hedge this forecasted transaction, the company acquires a three-month call option to purchase 1,900,000 marks on December 15, 2015. Leickner selects a strike price of $0.67 per mark, paying a premium of $0.004 per unit, when the spot rate is $0.67. The spot rate increases to $0.675 at December 31, 2015, causing the fair value of the option to increase to $16,000. By March 15, 2016, when the raw materials are purchased, the spot rate has climbed to $0.69, resulting in a fair value for the option of $38,000. |
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.) |
b. | What is the overall impact on net income over the two accounting periods?(In case of negative impact on net income, answer should be entered with a minus sign.) |
c. | What is the net cash outflow to acquire the raw materials? |
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