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: The only options to choose from on the drop-down include: AOCI- Cash flow hedge gain, Cash, No entry-credit, No entry-debit, OCI-Cash flow hedge gain, Option contract (asset), sales

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