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 800,000 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) 800,000 on any date until June 30, 2019 (i.e., it is an American-style option) for $1.31:1 (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 $24,000. 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, 2019, to June 30, 2019, are as follows:

			Option Contract
Date	Spot Rate ($US =1)	Sale Transaction	Fair Valuea	Change in Fair Value	Intrinsic Value	Change in Intrinsic Value	Other Sources of Value	Change in Other Value
Jan. 5, 2019	1.31		$24,000				$24,000d
Mar. 31, 2019	1.26		54,400	$30,400	$40,000b	$40,000	14,400	$(9,600)
Jun. 30, 2019	1.22	$976,000	72,000	17,600	72,000c	32,000		(14,400)

^a Derived from an option pricing model such as the BlackScholes model

^b (800,000 $1.31:1) (800,000 $1.26:1)

^c (800,000 $1.31:1) (800,000 $1.22:1)

^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	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
3/31/19	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
6/30/19	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer

CF Hedge Note: Entries assume all of excluded option value change runs through income.

Date	Description	Debit	Credit
1/5/19	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
3/31/19	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	To recognize change in fair value.
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	To recognize change in other sources.
6/30/19	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	To recognize change in fair value.
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	To recognize change in other sources.
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	To record net settlement.
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	AnswerAccounts payableAccounts receivableAOCI - Cash flow hedge gainCashCost of goods soldForward contract (asset)Forward contract (liability)Gain (loss) on AFS securityHedged firm commitment (asset)Hedged firm commitment (liability)Investment in AFS SecurityOCI - Cash flow hedge gainOCI - Cash flow hedge lossOption contract (asset)SalesNo entry	Answer	Answer
	To record reclassification.

c. What amount of sales was recognized in the quarter ending March 31, 2019?

$Answer

What amount of sales was recognized in the quarter ending June 30, 2019?

$Answer

What is the total amount of sales recognized across the quarters ending March 31 and June 30, 2019?

$Answer

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