Option contract designated as a cash flow hedge of a forecasted foreign-currency-denominated sales transaction, strengthening $US On January 5, 2019, 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, 2019. The customer preliminarily agreed to pay 750,000 for the merchandise, and payment is due from the customer upon delivery. On January 5, 2019, our company also purchases an option that gives our company the right to sell (i.e., put) 750,000 on any date until June 30, 2019 (i.e., it is an "American-style" option) for $1.30:1 (i.e., the spot rate on January 5, 2019). On January 5, 2019, the fair value of the option (i.e., the option premium) is $22,500. In addition, our company elected to immediately include in the determination 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 exchange rates and related balances for the period from January 5, 2019, to June 30, 2019, are as follows: Option Contract Change Change in Other Change in Fair Intrinsic Intrinsic Sources in Other Value Value Value of Value Value $22.500 Spot Rate Sale Fair (SUS-C1) Transaction Value 1.30 $22,500 1.25 51,000 $28,500 $37.500 $37.500 Date Jan. S, 2019 Mar. 31, 2019 13,500 $(9.000) (13,500) Jun. 30, 2019 1.21 $907,500 67,500 16,500 67.500 30,000 a Derived from an option pricing model such as the Black-Scholes model b (750,000 x $1.30:1)-(750,000 $1.25:1) * (750,000 x $1.30:1) - (750,000 $1.21:1) d Fair value - intrinsic value (i.e., equals the residual fair value derived from all sources except for intrinsic value) a. Prepare the journal entries to record all the adjustments required for the forecasted sale and option contract on January 5, 2019, March 31, 2019, and June 30, 2019. Note: If no entry is required, select "No entry" as your answers under Description and leave the debit and credit answers blank (zero). Hedged Transaction Date Description Debit Credit 1/5/19 + 0 0 + 0 0 3/31/19 + 0 0 0 0 6/30/19 0 0 0 0 CF Hedge Note: Entries assume all of excluded option value change runs through income. Date Description Debit Credit 1/5/19 + 0 0 + 0 0 3/31/19 0 0 0 0 To recognize change in fair value. # 0 0 0 0 To recognize change in other sources + 0 0 + 0 0 To recognize change in fair value. + 0 0 0 0 To recognize change in other sources. + 0 0 + 0 0 To record net settlement. 0 0 + 0 0 To record reclassification. c. What amount of sales was recognized in the quarter ending March 31, 2019? $0 What amount of sales was recognized in the quarter ending June 30, 2019? $0 What is the total amount of sales recognized across the quarters ending March 31 and June 30, 2019? $0 6/30/19 Option contract designated as a cash flow hedge of a forecasted foreign-currency-denominated sales transaction, strengthening $US On January 5, 2019, 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, 2019. The customer preliminarily agreed to pay 750,000 for the merchandise, and payment is due from the customer upon delivery. On January 5, 2019, our company also purchases an option that gives our company the right to sell (i.e., put) 750,000 on any date until June 30, 2019 (i.e., it is an "American-style" option) for $1.30:1 (i.e., the spot rate on January 5, 2019). On January 5, 2019, the fair value of the option (i.e., the option premium) is $22,500. In addition, our company elected to immediately include in the determination 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 exchange rates and related balances for the period from January 5, 2019, to June 30, 2019, are as follows: Option Contract Change Change in Other Change in Fair Intrinsic Intrinsic Sources in Other Value Value Value of Value Value $22.500 Spot Rate Sale Fair (SUS-C1) Transaction Value 1.30 $22,500 1.25 51,000 $28,500 $37.500 $37.500 Date Jan. S, 2019 Mar. 31, 2019 13,500 $(9.000) (13,500) Jun. 30, 2019 1.21 $907,500 67,500 16,500 67.500 30,000 a Derived from an option pricing model such as the Black-Scholes model b (750,000 x $1.30:1)-(750,000 $1.25:1) * (750,000 x $1.30:1) - (750,000 $1.21:1) d Fair value - intrinsic value (i.e., equals the residual fair value derived from all sources except for intrinsic value) a. Prepare the journal entries to record all the adjustments required for the forecasted sale and option contract on January 5, 2019, March 31, 2019, and June 30, 2019. Note: If no entry is required, select "No entry" as your answers under Description and leave the debit and credit answers blank (zero). Hedged Transaction Date Description Debit Credit 1/5/19 + 0 0 + 0 0 3/31/19 + 0 0 0 0 6/30/19 0 0 0 0 CF Hedge Note: Entries assume all of excluded option value change runs through income. Date Description Debit Credit 1/5/19 + 0 0 + 0 0 3/31/19 0 0 0 0 To recognize change in fair value. # 0 0 0 0 To recognize change in other sources + 0 0 + 0 0 To recognize change in fair value. + 0 0 0 0 To recognize change in other sources. + 0 0 + 0 0 To record net settlement. 0 0 + 0 0 To record reclassification. c. What amount of sales was recognized in the quarter ending March 31, 2019? $0 What amount of sales was recognized in the quarter ending June 30, 2019? $0 What is the total amount of sales recognized across the quarters ending March 31 and June 30, 2019? $0 6/30/19