Question
International Accounting Question: Zorba Company, a U.S.-based importer of specialty olive oil, placed an order with a foreign supplier for 500 cases of olive oil
International Accounting Question: Zorba Company, a U.S.-based importer of specialty olive oil, placed an order with a foreign supplier for 500 cases of olive oil at a price of 100 crowns per case. The total purchase price is 50,000 crowns. Relevant exchange rates are as follows:
Date | Spot Rate | Forward Rate (to January 31, Year 2) | Call Option Premium for January 31, Year 2 (strike price $1.00) |
December 1st yr 1 | $1.00 | $1.08 | $0.04 |
December 31st yr1 | $1.10 | $1.17 | $0.17 |
January 31st yr2 | $1.15 | $1.15 | $0.15 |
Zorba Company has an incremental borrowing rate of 12 percent (1 percent per month) and closes the books and prepares financial statements on December 31.
Required: The olive oil was received on December 1, Year 1, and payment was made on January 31, Year 2. On December 1, Zorba Company purchased a two-month call option for 50,000 crowns. The option was properly designated as a cash flow hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency option.
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