Call Options Hedging Foreign Currency Debt

Taking advantage of lower interest rates in the United Kingdom, Carlton Inc., a U.S. firm, borrowed 2,000,000 on July 1, 2020, to be repaid in one year. When the transaction occurred, the exchange rate was $1.30/. To hedge against possible appreciation of the British pound, Carlton paid a premium of $0.014/ for July 2021 call options on 2,000,000, with a strike price of $1.29/. On December 31, 2020, when Carltons books are closed, the exchange rate is $1.35/, and the calls are selling for $0.069/. On June 30, 2021, Carlton sells the calls for $0.12/. The exchange rate at that time is $1.41/.

Required

Prepare Carltons journal entries made on July 1, 2020, December 31, 2020, and June 30, 2021, to recognize the calls value changes and the exchange rate adjustments on the debt. Ignore interest on and repayment of the debtcash, exchange gain, exchange loss, gain on options, loss on options, investment on options, loan payable

Description Debit Date Credit 7/1/20 0 0 0 To record purchase of call options 12/31/20 0 0 0 0 To record gain or loss on foreign currency call options 0 0 To mark the loan payable to market. 6/30/21 0 0 0 To record gain or loss on foreign currency call options. 0 0 0 0 To mark the loan payable to market. 0 0 0 0 To record the sale of put options. Description Debit Date Credit 7/1/20 0 0 0 To record purchase of call options 12/31/20 0 0 0 0 To record gain or loss on foreign currency call options 0 0 To mark the loan payable to market. 6/30/21 0 0 0 To record gain or loss on foreign currency call options. 0 0 0 0 To mark the loan payable to market. 0 0 0 0 To record the sale of put options