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Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,100 cases of Oktoberfest-style beer from a German supplier for 231,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows: Date August 15 September 30 October 15 Spot Rate $1.05 1.10 1.13 Call Option Premium Forward Rate for October 15 to October 15 (strike price $1.05) $1.11 $ 0.05 1.14 0.06 1.13 (spot) N/A The company closes its books and prepares third-quarter financial statements on September 30. a. Assume that the beer arrived on August 15, and the company made payment on October 15. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase. b. Assume that the beer arrived on August 15, and the company made payment on October 15. On August 15, the company entered into a two-month forward contract to purchase 231,000 euros. The company designated the forward contract as a cash flow hedge of a foreign currency payable. Forward points are excluded in assessing hedge effectiveness and amortized to net income using a straight-line method on a monthly basis. Prepare journal entries to account for the import purchase and foreign currency forward contract. c. 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 entered into a two-month forward contract to purchase 231,000 euros. The company designated the forward contract 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 forward rate. Forward points are not excluded in assessing hedge effectiveness. Prepare journal entries to account for the foreign currency forward contract, foreign currency firm commitment, and import purchase. 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 231,000 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. e. Assume that, on August 15, the company forecasted the purchase of beer on October 15. On August 15, the company acquired a two-month call option on 231,000 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. 1 Record entry placed for purchase of Beer. 2 Record gain or loss on forward contract. 3 Record gain or loss on firm commitment. 4 Record the gain or loss on the forward contract. 5 Record the forward contract fair value hedge of a firm commitment. 6 Record purchase of foreign currency for settling accounts payable. 7 Record the purchase of inventory. 7 Record the purchase of inventory. 8 Record the transfer of inventory to cost of goods sold. 9 Record entry to close the firm commitment. 1 Record the purchase of 1,100 cases of Oktoberfest-style beer from a German supplier. 2 Record the entry to adjust the value of the euros receivable to the new spot rate. 3 Record the entry to adjust the value of the euros receivable to the new spot rate. 4 Record purchase of foreign currency for settling the accounts payable. 5 Record payment made to the German supplier. 6 Record the transfer of inventory to cost of goods sold. Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,100 cases of Oktoberfest-style beer from a German supplier for 231,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows: Date August 15 September 30 October 15 Spot Rate $1.05 1.10 1.13 Call Option Premium Forward Rate for October 15 to October 15 (strike price $1.05) $1.11 $ 0.05 1.14 0.06 1.13 (spot) N/A The company closes its books and prepares third-quarter financial statements on September 30. a. Assume that the beer arrived on August 15, and the company made payment on October 15. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase. b. Assume that the beer arrived on August 15, and the company made payment on October 15. On August 15, the company entered into a two-month forward contract to purchase 231,000 euros. The company designated the forward contract as a cash flow hedge of a foreign currency payable. Forward points are excluded in assessing hedge effectiveness and amortized to net income using a straight-line method on a monthly basis. Prepare journal entries to account for the import purchase and foreign currency forward contract. c. 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 entered into a two-month forward contract to purchase 231,000 euros. The company designated the forward contract 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 forward rate. Forward points are not excluded in assessing hedge effectiveness. Prepare journal entries to account for the foreign currency forward contract, foreign currency firm commitment, and import purchase. 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 231,000 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. e. Assume that, on August 15, the company forecasted the purchase of beer on October 15. On August 15, the company acquired a two-month call option on 231,000 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. 1 Record entry placed for purchase of Beer. 2 Record gain or loss on forward contract. 3 Record gain or loss on firm commitment. 4 Record the gain or loss on the forward contract. 5 Record the forward contract fair value hedge of a firm commitment. 6 Record purchase of foreign currency for settling accounts payable. 7 Record the purchase of inventory. 7 Record the purchase of inventory. 8 Record the transfer of inventory to cost of goods sold. 9 Record entry to close the firm commitment. 1 Record the purchase of 1,100 cases of Oktoberfest-style beer from a German supplier. 2 Record the entry to adjust the value of the euros receivable to the new spot rate. 3 Record the entry to adjust the value of the euros receivable to the new spot rate. 4 Record purchase of foreign currency for settling the accounts payable. 5 Record payment made to the German supplier. 6 Record the transfer of inventory to cost of goods sold