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Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 106,000 pounds, with delivery and payment to be made on June 15. On April 15, when the spot rate is $1.35 per pound, Shandra purchases a two-month call option on 106,000 pounds and designates this option as a cash flow hedge of a forecasted foreign currency transaction. The time value of the option is excluded in assessing hedge effectiveness; the change in time value is recognized in net income over the life of the option. The option has a strike price of $1.35 per pound and costs $1,060. The goods are received and paid for on June 15. Shandra sells the imported goods in the local market immediately. The spot rate for pounds is $1.400 on June 15.

Required:

a-1. Prepare all journal entries for Shandra Corporation related to this transaction and hedge.

1

Record the purchase of a foreign currency option.

2

Record an entry to adjust the fair value of the option and recognize the change in fair value when the spot rate for pounds is $1.4.

3

Record the $1,060 cost of goods sold.

4

Record the exercise of the foreign currency option receipt of 106,000 pounds.

5

Record the purchase of inventory and payment of 106,000 pounds.

6

Record COGS when inventory is sold.

7

Record the closure of Accumulated Other Comprehensive Income (AOCI).

2. What amount should Shandra Corporation report in net income as cost of goods sold for the quarter ending June 30?