Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,200,000 marks on March 15, 2018. To hedge this forecasted transaction, the company acquires a three-month call option to purchase 1,200,000 marks on December 15, 2017. Leickner selects a strike price of $0.60 per mark, paying a premium of $0.002 per unit, when the spot rate is $0.60. The spot rate increases to $0.606 at December 31, 2017, causing the fair value of the option to increase to $9,000. By March 15, 2018, when the raw materials are purchased, the spot rate has climbed to $0.62, resulting in a fair value for the option of $24,000.

Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials, assuming that Dec. 31st is Leickner's year-end and that the raw materials are included in the cost of goods sold in 2018.

A. * account titles located at bottom

Task	Journal Entry	Debit	Credit
1
2
3
4
5
6
7
8
9

1. record purchase of foreign currency option as an asset

2. record entry for order placed with foreign supplier

3. record the entry to recognize the increase in the value of the foreign currency option

4. record entry to recognize the decrease in the time value of the option as an expense

5. record the entry to recognize the increase in the value of the foreign currency option

6. record gain or loss on the foreign currency option

7. record the sale

8. record the receipt of the marks

9. record entry to transfer the amount accumulated in AOCI

B. & C

b	impact on net income in 2017
	impact on net income in 2018
c	net cash outflow

ACCOUNT TITLES

no journal entry required

accounts payable (marks)

accounts receivable (marks)

AOCI

adjustment to net income

cash

discount expense

equipment

firm commitment

foreign currency (marks)

foreign currency option

foreign exchange gain

foreign exchange loss

forward contract

gain on firm commitment

gain on foreign contract

gain on foreign currency option

gain on forward contract

interest expense

loss on firm commitment

loss on foreign contract

loss on foreign currency option

loss on forward contract

option expense

parts inventory

sales