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Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,000 cases of Oktoberfest-style beer from a German supplier for 50,000 euros. Relevant U.S. dollar
Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,000 cases of Oktoberfest-style beer from a German supplier for 50,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows: Forward Rate to October 15 Date Call Option Premium for October 15 (strike price $1.10) $0.05 0.06 N/A Spot Rate $1.10 1.15 August 15 September 30 October 15 $1.16 1.19 1.18 (spot) 1.18 The company closes its books and prepares third-quarter financial statements on September 30. d. Assume that the company ordered the beer on August 15. The beer arrived and the company paid for it on October 15. On August 15, the company purchased a two-month call option on 50,000 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
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