Question
On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,340,000 pesos and will receive payment in
On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,340,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,340,000 pesos in three months at a strike price of $0.098. Relevant exchange rates and option premia for the peso are as follows:
| Date | Spot Rate | Put Option Premium for September 1 (strike price $0.098) | ||||
| June 1 | $ | 0.098 | $ | 0.0061 | ||
| June 30 | 0.097 | 0.0040 | ||||
| September 1 | 0.096 | N/A | ||||
Maxwell must close its books and prepare its second-quarter financial statements on June 30.
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b-1. Assuming that Maxwell designates the foreign currency option as a fair value hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars.
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b-2. What is the impact on net income over the two accounting periods due to fluctuations in the value of the foreign currency? [Looking for net effect on the Foreign Exchange Gain/Loss account.]
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