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On 7/1, a company forecasts the purchase of 10,000 units of inventory from a foreign vendor. The forecasted cost is estimated to be 150,000 FC.

On 7/1, a company forecasts the purchase of 10,000 units of inventory from a foreign vendor. The forecasted cost is estimated to be 150,000 FC. It is estimated inventory will be delivered 11/1. Also, on 7/1, the company purchased a call option to buy 150,000 FC at a strike price of $0.60 anytime during October. An option premium of $2000 was paid.

july 1 july 31 august 31 October 31

spot $0.58 0.61 0.63 0.635

Fair Value of Option 2000 2500 5100 5500

Required:

1. Record the journal entries needed by the company on July 1, August 31, and October 1. Round all entries to the nearest whole dollar (10 points)

2. Answer the following questions:

a. What is the net impact on the company's August 31 Stockholder equity related to this transaction? (1 point)

b. What is the accumulated net impact on the company's Stockholder equity related to this transaction at October 1? (1 point)

c. What would have been the net impact on the company's August 31 Stockholder equity related to this transaction if the company had not entered in the Option Contract? (1 point)

d. What would have been the accumulated net impact on the company's Stockholder equity related to this transaction at October 1 if the company had not entered in the Option Contract? (1 point)

e. Was the company better- or worst off with the derivative contract? (1 point)

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