Option contract designated as a cash flow hedge of a forecasted foreign$-$currency$-$denominated

sales transaction, strengthening $US

On January $5,2022,$ our company receives a nonbinding purchase order for sale of merchandise to a

customer in Slovakia, with delivery of the merchandise scheduled for June $30,2022.$ The customer

preliminarily agreed to pay

$$

$600,000$ for the merchandise, and payment is due from the customer upon

delivery. On January $5,2022,$ our company also purchases an option that gives our company the right

to sell $($i$.$e$.,$ put$)$

$$

$600,000$ on any date until June $30,2022($i$.$e$.,$ it is an $$American$-$style$$ option$)$ for

$$1\mathrm{.}30$:

$$

$1($i$.$e$.,$ the spot rate on January $5,2022).$ On January $5,2022,$ the fair value of the option $($i$.$e$.,$ the

option premium$)$ is $$18,000.$ 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 $($i$.$e$.,$ the non$-$intrinsic$-$value components, like time value$).$ The relevant ex$-$

change rates and related balances for the period from January $5,2022,$ to June $30,2022,$ are as follows:

Date

Spot Rate

$($$US $=1)$

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. $5,2022$

$....$

$1\mathrm{.}30$

$$18,000$

$$

$$18,000$

d

Mar. $31,2022...$

$1\mathrm{.}25$

$40,800$

$$22,800$

$$30,000$

b

$$30,000$

$10,800$

$ $(7,200)$

Jun. $30,2022$

$...$

$1\mathrm{.}21$

$$726,000$

$54,000$

$13,200$

$54,000$

c

$24,000$

$$

$(10,800)$

a

Derived from an option pricing model such as the Black$$Scholes model

b

$($

$$

$600,000\backslash$times $$1\mathrm{.}30$:

$$

$1)($

$$

$600,000\backslash$times $$1\mathrm{.}25$:

$$

$1)$

c

$($

$$

$600,000\backslash$times $$1\mathrm{.}30$:

$$

$1)($

$$

$600,000\backslash$times $$1\mathrm{.}21$:

$$

$1)$

d

Fair value $$ intrinsic value $($i$.$e$.,$ equals the residual fair value derived from all sources except for intrinsic value $[$e$.$g$.,$ time value$])$

a$.$

Prepare the journal entries to record all the adjustments required for the forecasted sale and

option contract on January $5,2022,$ March $31,2022,$ and June $30,2022.$

b$.$

What amount of sales was recognized in the quarter ending March $31,2022?$ What amount

of sales was recognized in the quarter ending June $30,2022?$ Explain these amounts. What is

the total amount of sales recognized across the quarters ending March $31$ and June $30,2022?$

Reconcile this total to your answer to part

b

$.$