Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Hedge AccountingRazan Company, a distinguished exporter of specialty olive oil based in Spain, recently finalizeda sale. This transaction involved the transfer of 5 0 ,

Hedge AccountingRazan Company, a distinguished exporter of specialty olive oil based in Spain, recently finalizeda sale. This transaction involved the transfer of 50,000 cases of premium olive oil to Abdul SattarCo, an esteemed importer situated in the United Kingdom. The negotiated price for each case wasset at 5, resulting in a total sales revenue of 250,000 for Razan Company. To providecomprehensive context, the prevailing exchange rates relevant to this transaction are provided asfollows:Spot rate1=Forward rate Put option premium(strike price 1.17)March 1,20X11.211.160.04July 31,20X1(Yearend for Razan Co.)1.191.140.05September 30,20X21.111.110.06The below table provides the changes in fair values of the option:OptionDate Spot rate1=Put option premium(strike price 1.17)FairvalueChange in fairvalueMarch 1,20X11.210.0410,000 July 31,20X1(Year endfor Razan Co.)1.190.0812,500+2,500September 30,20X21.110.10-0--12,500The below table provides the changes in fair values of the forward contract:Forward contactDate Spot rate1=ForwardrateFairvalueChange in fairvalueMarch 1,20X11.211.160 July 31,20X1(Year end for RazanCo.)1.191.144,655+4,655September 30,20X21.111.1112,500+7,8451. Assume the olive oil was delivered on March 1,20X1, and cash was received on September 30,20X2. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entriesto account for this export sales in the books of Razan Company.2. Assume the olive oil was delivered on March 1,20X1, and cash was received on September 30,20X2. On March 1, Razan Company entered into a seven-month forward contract to sell 250,000.The forward contract is properly designated as a fair value hedge of a foreign currency. Preparejournal entries to account for the export sales and foreign currency forward contract in the booksof Razan Company.3. Assume the olive oil was delivered on March 1,20X1, and cash was received on September 30,20X2. On March 1, Razan Company entered into a seven-month forward contract to sell 250,000.The forward contract is properly designated as a cash flow hedge of a foreign currency. Preparejournal entries to account for the export sales and foreign currency forward contract in the booksof Razan Company.4. Assume the olive oil was delivered on March 1,20X1, and cash was received on September 30,20X2. On March 1, Razan Company purchased a seven-month put option for 250,000. The optionwas properly designated as a cash flow hedge of a foreign currency receivable. Prepare journalentries to account for the export sales and foreign currency option in the books of Razan Company.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Accounting A User Perspective

Authors: Suadagaran, Shahrokh M, Smith Lawrence Murphy

5th Edition

1531018661, 9781531018665

More Books

Students also viewed these Accounting questions

Question

Review major psychological issues of childhood.

Answered: 1 week ago