Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

On June 1 , Parker - Mae Corporation ( a U . S . - based company ) received an order to sell goods to

On June 1, Parker-Mae Corporation (a U.S.-based company) received an order to sell goods to a foreign customer at a price of 165,000 francs. Parker-Mae will ship the goods and receive payment in three months, on September 1. On June 1, Parker-Mae purchased an option to sell 165,000 francs in three months at a strike price of $1.04. The company designated the option as a fair value hedge of a foreign currency firm commitment. The option's time value is excluded in assessing hedge effectiveness, and the change in time value is recognized in net income. The fair value of the firm commitment is measured by referring to changes in the spot rate (discounting to present value is ignored). Relevant exchange rates and option premiums for the franc are as follows:
Date Spot Rate Put Option Premium for September 1(strike price $1.04)
June 1 $ 1.04 $ 0.020
June 300.980.072
September 10.93 N/A
Parker-Mae Corporation must close its books and prepare its second-quarter financial statements on June 30.
Required:
Prepare journal entries for the foreign currency option, foreign currency firm commitment, and export sale.
What is the impact on net income in each of the two accounting periods?
What is the amount of net cash inflow resulting from the sale of goods to the foreign customer?
1Record the purchase of the foreign currency option.
2Record entry for receipt of an order to sell merchandise to foreign customer.
3Record gain or loss on the firm commitment.
4Record gain or loss on the foreign currency option.
5Record gain or loss on the firm commitment.
6Record gain or loss on the foreign currency option.
7Record the sale.
8Record the exercise of the foreign currency option.
9Record entry to close the firm commitment.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introductory Accounting Finance And Auditing For Lawyers

Authors: Lawrence Cunningham

7th Edition

1634604105, 9781634604109

More Books

Students also viewed these Accounting questions

Question

Coaching and motivational behavior

Answered: 1 week ago

Question

BPR always involves automation. Group of answer choices True False

Answered: 1 week ago