On June 1, Cairns Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs and will make payment in three months on September 1. On June 1, Cairns acquired an option to purchase 1,000,000 francs in three months at a strike price of $0.852. Relevant exchange rates and option premiums for the franc are as follows:

Date Spot Rate Call Option Premium

for September 1

(strike price $0.852) June 1 $ 0.852 $ 0.002

June 30 0.858 0.007

September 1 0.872 N/A

Cairns must close its books and prepare its second-quarter financial statements on June 30.

1. a-1. Assuming that Cairns designates the foreign currency option as a cash flow hedge of a foreign currency payable, prepare journal entries for these transactions in U.S. dollars.
2. a-2. What is the impact on net income over the two accounting periods?
3. b-1. Assuming that Cairns designates the foreign currency option as a fair value hedge of a foreign currency payable, prepare journal entries for these transactions in U.S. dollars.
4. b-2. What is the impact on net income over the two accounting periods?