Pacifico Company, a U . S . - based importer of beer and wine, purchased 1 ,
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Question:
Pacifico Company, a USbased importer of beer and wine, purchased cases of Oktoberfeststyle beer from a German supplier for euros. Relevant US dollar exchange rates for the euro are as follows:
Date Spot Rate Forward Rate to October Call Option Premium for October strike price $
August $ $ $
September
October spot NA
The company closes its books and prepares thirdquarter financial statements on September c Assume that the company ordered the beer on August The beer arrived and the company paid for it on October On August the company purchased a twomonth call option on euros. The company designated the option as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the spot rate. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Prepare journal entries to account for the foreign currency option, foreign currency firm commitment, and import purchase.
Record the gain or loss on the foreign currency euro call option with a premium of $ per Euro at a strike price of $ and an exercise date of October
Record the gain or loss on the foreign currency euro call option with a premium of $
Record the transfer of exchange gain or loss to firm commitment.
Record the entry for changes in the fair value of Euro call option.
Record the transfer of exchange gain or loss to firm commitment.
Record purchase of foreign currency for settling the accounts payable.
Record purchase of inventory from the German supplier.
Record the transfer of inventory to cost of goods sold.
Record the adjustment of cost of goods sold to the extent of firm commitment.
d Assume that, on August the company forecasted the purchase of beer on October On August the company acquired a twomonth call option on euros. The company designated the option as a cash value hedge of a forecasted foreign currency transaction. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Prepare journal entries to account for the foreign currency option and import purchase.
Record the gain or loss on the foreign currency euro call option with a premium of $ per Euro at a strike price of $ and an exercise date of October
Record the gain or loss on the foreign currency euro call option with a premium of $
Record the transfer of gain or loss to the cost of goods sold.
Record the entry for changes in the fair value of Euro call option.
Record the transfer of gain or loss to the cost of goods sold.
Record purchase of foreign currency for settling the accounts payable.
Record purchase of inventory from the German supplier.
Record the transfer of inventory to cost of goods sold.
Record the adjustment of cost of goods sold to the extent of Other Comprehensive Income.
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