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
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.
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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.
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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.
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