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Option contract designated as a cash flow hedge of a forecasted foreign - currency - denominated sales transaction, strengthening $US On January 5 , 2
Option contract designated as a cash flow hedge of a forecasted foreigncurrencydenominated
sales transaction, strengthening $US
On January our company receives a nonbinding purchase order for sale of merchandise to a
customer in Slovakia, with delivery of the merchandise scheduled for June The customer
preliminarily agreed to pay
for the merchandise, and payment is due from the customer upon
delivery. On January our company also purchases an option that gives our company the right
to sell ie put
on any date until June ie it is an Americanstyle option for
$:
ie the spot rate on January On January the fair value of the option ie the
option premium is $ In addition, our company elected to immediately include in the determina
tion of net income all of the change in option value attributable to factors excluded from the assessment
of hedge effectiveness ie the nonintrinsicvalue components, like time value The relevant ex
change rates and related balances for the period from January to June are as follows:
Date
Spot Rate
$US
Sale
Transaction
Option Contract
Fair
Value
a
Change
in Fair
Value
Intrinsic
Value
Change in
Intrinsic
Value
Other
Sources
of Value
Change
in Other
Value
Jan.
$
$
d
Mar.
$
$
b
$
$
Jun.
$
c
a
Derived from an option pricing model such as the BlackScholes model
b
times $:
times $:
c
times $:
times $:
d
Fair value intrinsic value ie equals the residual fair value derived from all sources except for intrinsic value eg time value
a
Prepare the journal entries to record all the adjustments required for the forecasted sale and
option contract on January March and June
b
What amount of sales was recognized in the quarter ending March What amount
of sales was recognized in the quarter ending June Explain these amounts. What is
the total amount of sales recognized across the quarters ending March and June
Reconcile this total to your answer to part
b
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