Chapter Homework Navigation Finish attempt... E7-49.Rand.04 Question 5 Partially correct Mark 0.18 out of 1.00 Flag question eBook Print Option contract designated as a cash flow hedge of a forecasted foreign-currency-denominated sales transaction, strengthening $US On January 5, 2022, our company receives a nonbinding purchase order for sale of merchandise to a customer in Slovakia, with delivery of the merchandise scheduled for June 30, 2022. The customer preliminarily agreed to pay 960,000 for the merchandise, and payment is due from the customer upon delivery. On January 5, 2022, our company also purchases an option that gives our company the right to sell (i.e., put) 960,000 on any date until June 30, 2022 (i.e., it is an "American-style" option) for $1.30:1 (i.e., the spot rate on January 5, 2022). On January 5, 2022, the fair value of the option (i.e., the option premium) is $28,800. In addition, our company elected to immediately include in the determination of net income all of the change in option value attributable to factors excluded from the assessment of hedge effectiveness (i.e., the non-intrinsic-value components, like time value). The relevant exchange rates and related balances for the period from January 5, 2022, to June 30, 2022, are as follows: Option Contract Sale Date Jan. 5, 2022 Mar. 31, 2022 Jun. 30, 2022 65,280 $36,480 $48,000 $1,161,600 86,400 21,120 86,400 Spot Rate Fair Change in Intrinsic Change in ($US= 1) Transaction Value (a) Fair Value Value (b,c) Intrinsic Value 1.30 $28,800 1.25 1.21 Other Sources Change in $48,000 of Value (d) Other Value $28,800 17,280 38,400 $(11,520) (17,280) a Derived from an option pricing model such as the Black-Scholes model b ( 960,000 $1.30: 1) - ( 960,000 $1.25:1) c ( 960,000 * $1.30: 1) - ( 960,000 x $1.21:1) d Fair value - intrinsic value (i.e., equals the residual fair value derived from all sources except for intrinsic value [e.g., time value]) a. Prepare the journal entries to record all the adjustments required for the forecasted sale and option contract on January 5, 2022, March 31, 2022, and June 30, 2022. Note: If no journal entry is required, select No entry - debit and No entry - credit as your Account answers and leave the Debit and Credit amounts blank (zero). Hedged Transaction Date 5-Jan-22 Account No entry - debit No entry - credit (Option recorded at fair value) 31-Mar-22 No entry debit No entry-credit (to recognize the change in the fair value of the option) 30-Jun-22 Cash Sales (to record sale of inventory at the spot rate) Debit Credit 0 0 0 0 0 0 1,616,600 0x 1,161,600 CF Hedge: Entries assuming all of excluded option value change runs through income Date 5-Jan-22 Account AOCI - Cash flow hedge gain Cash (Option recorded at fair value) 31-Mar-22 AOCI - Cash flow hedge gain Cash Sales (to recognize the change in the fair value of the option) AOCI - Cash flow hedge gain 30-Jun-22 Cash Sales > > > > >_> > > Debit Credit 0 0 DD 0x 0 0x 0 0x 0 0x 0 0x 0 0x 0 0x CF Hedge: Entries assuming all of excluded option value change runs through income Date 5-Jan-22 Account AOCI - Cash flow hedge gain Cash > > > (Option recorded at fair value) 31-Mar-22 AOCI - Cash flow hedge gain Cash Sales (to recognize the change in the fair value of the option) 30-Jun-22 AOCI - Cash flow hedge gain Cash Sales (to recognize the change in the fair value of the option) Cash No entry-credit (to record the net settlement of the option contract) 30-Jun-22 Cash No entry - debit (to record the reclassification of the cash flow hedge gains) Debit Credit 0 0 0x 0 0x 0 0x 0 0x 0 0x 0 0x 0 0x 0 0x 0 0x 17,280 0 0x 17,280 x CF Hedge: Entries assuming excluded option value amortized through income Date Account 5-Jan-22 AOCI - Cash flow hedge gain Option contract (asset) (Option recorded at fair value) Debit Credit 0x 0 0x 31-Mar-22 Option contract (asset) 0 0x OCI - Cash flow hedge gain 0 0x AOCI - Cash flow hedge gain 0 0x (to recognize the change in the fair value of the option) 30-Jun-22 0 0x AOCI - Cash flow hedge gain 0 0x Option contract (asset) 0 0x (to recognize the change in the fair value of the option) Option contract (asset) OCI-Cash flow hedge gain (to record the net settlement of the option contract) Option contract (asset) > > 0 0x 0 0x 0 0x AOCI - Cash flow hedge gain 0 0x (to record the reclassification of the cash flow hedge gains) No entry-debil (to record the reclassification of the cash flow hedge gains) CF Hedge: Entries assuming excluded option value amortized through income Account Date 5-Jan-22 AOCI - Cash flow hedge gain 17,280 Debit Credit 0 0 DD 0x Option contract (asset) (Option recorded at fair value) 31-Mar-22 Option contract (asset) 30-Jun-22 OCI - Cash flow hedge gain AOCI - Cash flow hedge gain (to recognize the change in the fair value of the option) AOCI - Cash flow hedge gain Option contract (asset) (to recognize the change in the fair value of the option) Option contract (asset) OCI - Cash flow hedge gain (to record the net settlement of the option contract) Option contract (asset) > > > > > 0 0x 0 0x 0 0x 0 0x 0 0x 0 0x 0 0x 0 0x 0 0x AOCI - Cash flow hedge gain 0 0x (to record the reclassification of the cash flow hedge gains) b. What amount of sales was recognized in the quarter ending March 31, 2022? What amount of sales was recognized in the quarter ending June 30, 2022? Note: Use negative signs with your answers, when appropriate. Sales recognized in Q1 2022: $ Sales recognized in Q2 2022: 0 x 0 x Total across both quarters $ 0 x Check