Williams Corporation imports, from a number of German manufacturers, large machining equipment used in the tooling industry. On June 1, the company received delivery of a piece of machinery with a cost of 400,000 euros when the spot rate was 1 euro = $1.370. The balance of the invoice is due 60 days after delivery.

On June 15, the company became concerned that the dollar would weaken relative to the euro and proceeded to purchase an option to buy euros on July 31 at a strike price of 1 euro equals $1.375. The hedge was designated as a fair value hedge. At the time of the purchase, the out-of-the-money option had a value of $1,400 and a value of $2,600 at June 30.

Euro spot rates are as follows: June 15........ 1 euro = $1.373 June 30........ 1 euro = $1.381 July 31......... 1 euro = $1.385

Williams prepared quarterly financial statements on June 30 and settled the option on July 31 for $4,000. The foreign currency was remitted to the vendor.

Required: 1. Prepare in general journal entry form all of the entries required to account for the purchase and the hedge on June 1, June 15, June 30, and July 31. 2. Indicate the effect on income without the hedge and the effect on income with the hedge.