Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,800 cases of wine at a price of 290 euros per case. The total purchase price is 522,000 euros. Relevant exchange rates for the euro are as follows:

Date	Spot Rate			Forward Rate to October 31			Call Option Premium for October 31 (strike price $1.45)
September 15	$	1.45		$	1.51		$	0.045
September 30		1.50			1.54			0.080
October 31		1.55			1.55			0.100

Vino Veritas Company has an incremental borrowing rate of 12 percent (1 percent per month) and closes the books and prepares financial statements at September 30.

1. Assume that the wine arrived on September 15, and the company made payment on October 31. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase.

2. Assume that the wine arrived on September 15, and the company made payment on October 31. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 522,000 euros. It properly designated the forward contract as a fair value hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency forward contract.

3. Vino Veritas ordered the wine on September 15. The wine arrived and the company paid for it on October 31. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 522,000 euros. The company properly 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. Prepare journal entries to account for the foreign currency forward contract, firm commitment, and import purchase.

4. The wine arrived on September 15, and the company made payment on October 31. On September 15, Vino Veritas purchased a 45-day call option for 522,000 euros. It properly designated the option as a cash flow hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency option.

5. The company ordered the wine on September 15. It arrived on October 31, and the company made payment on that date. On September 15, Vino Veritas purchased a 45-day call option for 522,000 euros. It properly 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. Prepare journal entries to account for the foreign currency option, firm commitment, and import purchase.

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  Part a)

  The journal entries are as follows:

  Date	Account Titles	Debit	Credit
  Sep. 15	Inventory	$522,000
  	Accounts Payable (Euro)		$522,000
  Sep. 30	Foreign Exchange Loss	$26,100
  	Accounts Payable (Euro)	(522,000*(1.50-1.45)	$26,100
  Oct. 31	Foreign Exchange Loss	$26,100
  	Accounts Payable (Euro)		$26,100
  	Foreign Currency (Euro)	$574,200
  	Cash		$574,200
  	Accounts Payable (Euro)	$574,200
  	Foreign Currency (Euro)		$574,200

  Part b)

  The journal entries are as follows:

  Date	Account Titles	Debit	Credit
  Sep. 15	Inventory	$522,000
  	Accounts Payable (Euro)		$522,000
  	No Journal Entry for Forward Contract
  Sep. 30	Foreign Exchange Loss	$26,100
  	Accounts Payable (Euro)		$26,100
  	Forward Contract	$15,534.72
  	Gain on Forward Contract [(522,000 *1.54 - 522,000 *1.51)*.992]		$15,534.72
  Oct. 31	Foreign Exchange Loss	$26,100
  	Accounts Payable (Euro)		$26,100
  	Forward Contract	$5,345.28
  	Gain on Forward Contract [(522,000 *1.55 522,000 *1.51) - 15,534.72]		$5,345.28
  	Foreign Currency (Euro)	$574,200
  	Cash		$553,320
  	Forward Contract		$20,880
  	Accounts Payable (Euro)	$574,200
  	Foreign Currency (Euro)		$574,200

  Part c)

  The journal entries are given as below:

  Date	Account Titles	Debit	Credit
  Sep. 15	No Journal Entry for Forward Contract
  Sep. 30	Forward Contract	$15,534.72
  	Gain on Forward Contract [(522,000 *1.54 - 522,000 *1.51)*.992]		$15,534.72
  	Loss on Firm Commitment	$15,534.72
  	Firm Commitment		$15,534.72
  Oct. 31	Forward Contract	$5,345.28
  	Gain on Forward Contract [(522,000 *1.55 522,000 *1.51) - 15,534.72]		$5,345.28
  	Loss on Firm Commitment	$5,345.28
  	Firm Commitment		$5,345.28
  	Foreign Currency (Euro)	$574,200
  	Cash		$553,320
  	Forward Contract		$20,880
  	Inventory	$574,200
  	Foreign Currency (Euro)		$574,200
  	Firm Commitment	$20,880
  	Adjustment to Net Income		$20,880

  Part d)

  The journal entries are given below:

  Date	Account Titles	Debit	Credit
  Sep. 15	Inventory	$522,000
  	Accounts Payable (Euro)		$522,000
  	Foreign Currency Option (522,000 *0.045)	$23,490
  	Cash		$23,490
  Sep. 30	Foreign Exchange Loss	$23,490
  	Accounts Payable (Euro)		$23,490
  	Foreign Currency Option (522,000 *0.080 - 522,000 *0.045)	$18,270
  	Accumulated Other Comprehensive Income		$18,270
  	Accumulated Other Comprehensive Income	$23,490
  	Gain on Foreign Currency Option		$23,490
  	Option Expense	$5,220
  	Accumulated Other Comprehensive Income		$5,220
  Oct. 31	Foreign Exchange Loss	$23,490
  	Accounts Payable (Euro)		$23,490
  	Foreign Currency Option (522,000 *.10 522,000 *.080)	$10,440
  	Accumulated Other Comprehensive Income		$10,440
  	Accumulated Other Comprehensive Income	$23,490
  	Gain on Foreign Currency Option		$23,490
  	Option Expense	$18,270
  	Accumulated Other Comprehensive Income		$18,270
  	Foreign Currency (Euro)	$574,200
  	Cash		$522,000
  	Foreign Currency Option		$52,200
  	Accounts Payable (Euro)	$574,200
  	Foreign Currency (Euro)		$574,200

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