On June 1, Cairns Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs
Fantastic news! We've Found the answer you've been seeking!
Question:
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.
- 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.
- a-2. What is the impact on net income over the two accounting periods?
- 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.
- b-2. What is the impact on net income over the two accounting periods?
Posted Date: