Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,200,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 1,200,000 francs in three months. Maas selects a strike price of $0.60 per franc when the spot rate is $0.60 and pays a premium of $0.002 per franc. The spot rate increases to $0.606 at December 31, 2020, causing the fair value of the option to increase to $9,000. By March 15, 2021, 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. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements.

1. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials.
2. What is the overall impact on net income over the two accounting periods?
3. What is the net cash outflow to acquire the raw materials?

REQUIREMENT A

Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials.

JOURNAL ENTRIES PLEASE!

1. 12/15/2020 - Record purchase of foreign currency option as an asset.
2. 12/15/2020 - Record entry for order placed with foreign supplier.
3. 12/31/2020 - Record the entry to recognize the increase in the value of the foreign currency option.
4. 12/31/2020 - Record entry to recognize the decrease in the time value of the option as an increase in cost of goods sold.
5. 3/15/2021 - Record the entry to recognize the increase in the value of the foreign currency option.
6. 3/15/2021 - Record entry to recognize the decrease in the time value of the option as an increase in cost of goods sold.
7. 3/15/2021 - Record the exercise of foreign currency option.
8. 3/15/2021 - Record the purchase of inventory.
9. 3/15/2021 - Record entry to transfer the amount accumulated in AOCI
10. 3/15/2021 - Record entry to transfer the cost of the raw materials to cost of goods sold.

REQUIREMENT B

b. What is the overall impact on net income over the two accounting periods:

Impact on net income in 2020 ?

Impact on net income in 2021?

REQUIREMENT C

c. What is the net cash outflow to acquire the raw materials?