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 $1.30:1 (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 $18,000. In addition, our company elected to immediately include in the determination of net income all of the change in option value attributable to factors excluded from the assessment of hedge effectiveness ( i.e., the non-intrinsic-value components, like time value). The relevant exchange rates and related balances for the period from January 5, 2022, to June 30, 2022, are as follows: Option Contract Spot Rate Sale Fair Change in Intrinsic Change in Other Sources Change in Date ($US = 1) Transaction Value (a) Fair Value Value (b,c) Intrinsic Value of Value (d) Other Value Jan. 5, 2022 1.30 $18,000 - $18,000 Mar. 31, 2022 1.25 40,800 $22,800 $30,000 $30,000 10,800 $(7,200) Jun. 30, 2022 1.21 $726,000 54,000 13,200 54,000 24,000 - (10,800) a Derived from an option pricing model such as the BlackScholes model b (600,000 $1.30:1) (600,000 $1.25:1) c (600,000 $1.30:1) (600,000 $1.21:1) 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. Note: If no journal entry is required, select No entry - debit and No entry - credit as your Account answers and leave the Debit and Credit amounts blank (zero). Hedged Transaction Date Account Debit Credit 5-Jan-22 Answer Answer (Option recorded at fair value) 31-Mar-22 Answer Answer (to recognize the change in the fair value of the option) 30-Jun-22 Answer Answer (to record sale of inventory at the spot rate) CF Hedge: Entries assuming all of excluded option value change runs through income Date Account Debit Credit 5-Jan-22 Answer Answer (Option recorded at fair value) 31-Mar-22 Answer Answer Answer (to recognize the change in the fair value of the option) 30-Jun-22 Answer Answer Answer (to recognize the change in the fair value of the option) Answer Answer (to record the net settlement of the option contract) 30-Jun-22 Answer Answer (to record the reclassification of the cash flow hedge gains) CF Hedge: Entries assuming excluded option value amortized through income Date Account Debit Credit 5-Jan-22 Answer Answer (Option recorded at fair value) 31-Mar-22 Answer Answer Answer (to recognize the change in the fair value of the option) 30-Jun-22 Answer Answer Answer (to recognize the change in the fair value of the option) Answer Answer (to record the net settlement of the option contract) Answer Answer (to record the reclassification of the cash flow hedge gains) 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? Note: Use negative signs with your answers, when appropriate. Sales recognized in Q1 2022: Answer Sales recognized in Q2 2022: Answer Total across both quarters Answer