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 960,000 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) 960,000 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 $28,800. 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		$28,800		-		$28,800
Mar. 31, 2022	1.25		65,280	$36,480	$48,000	$48,000	17,280	$(11,520)
Jun. 30, 2022	1.21	$1,161,600	86,400	21,120	86,400	38,400	-	(17,280)

a Derived from an option pricing model such as the Black-Scholes model b ( 960,000 $1.30:1) ( 960,000 $1.25:1) c ( 960,000 $1.30:1) ( 960,000 $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	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	(Option recorded at fair value)
31-Mar-22	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	(to recognize the change in the fair value of the option)
30-Jun-22	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		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	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	(Option recorded at fair value)
31-Mar-22	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	(to recognize the change in the fair value of the option)
30-Jun-22	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	(to recognize the change in the fair value of the option)
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	(to record the net settlement of the option contract)
30-Jun-22	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		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	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	(Option recorded at fair value)
31-Mar-22	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	(to recognize the change in the fair value of the option)
30-Jun-22	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	(to recognize the change in the fair value of the option)
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	(to record the net settlement of the option contract)
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		Answer
	AOCI - Cash flow hedge gainCashNo entry - creditNo entry - debitOCI - Cash flow hedge gainOption contract (asset)Sales		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