3. On December 1, 2022, Mojito Co. sold inventory to a customer in a foreign country. Mojito agreed to accept 150,000 local currency units (lcu) in full payment for this inventory. Payment was to be made on February 1, 2023. On December 1, 2022, Mojito purchases an option at a premium of $.025 to sell 150,000 LCU at a strike price of $.32 on February 1, 2023. The spot rates and option premiums on various dates were as follows: Date Rate Description Exchange Rate 12-1-22 Spot rate $.32 = 1 lcu Option premium $.025 12-31-22 Spot rate $.29 = 1 lcu Option premium $.045 2-1-23 Spot rate $.27 = 1 lcu Required: Assume that this hedge is designated as a cash flow hedge. Prepare the journal entries relating to the transaction and the option.
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Pacifico Company, a U.S.-based importer of beer and wine, purchased 2,000 cases of Oktoberfest-style beer from a German supplier for 620,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows: Date: August 15, Spot Rate: $ 1.55, Forward Rate to October 15: $ 1.61, Call Option Premium for October 15 (strike price $1.55): $ 0.05 Date: September 30, Spot Rate: 1.60, Forward Rate to October 15: 1.64, Call Option Premium for October 15 (strike price $1.55): 0.06 Date: October 15, Spot Rate: 1.63, Forward Rate to October 15: 1.63 (spot), Call Option Premium for October 15 (strike price $1.55): 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 620,000 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 620,000 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 620,000 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.
Akash M.
On September 1, Year 1, Keefer Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. The machine was shipped and payment was received on March 1, Year 2. On September 1, Year 1, Keefer Company purchased a put option giving it the right to sell 100,000 Canadian dollars on March 1, Year 2, at a price of $75,000. Keefer Company properly designates the option as a fair value hedge of the Canadian-dollar firm commitment. The option cost $1,700 and had a fair value of $2,800 on December 31, Year 1. The fair value of the firm commitment is measured through reference to changes in the spot rate. The following spot exchange rates apply: Date U.S. Dollar per Canadian Dollar September 1, Year 1 . . . . . . .$0.75 December 31, Year 1 . . . . . .0.73 March 1, Year 2 . . . . . . . . . .0.71 Keefer Company's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803 What was the net impact on Keefer Company's Year 2 income as a result of this fair value hedge of a firm commitment? a. $0. b. An $839.40 decrease in income. c. A $74,160.60 increase in income. d. A $76,200.00 increase in income. 8. What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk? a. $0. b. A $1,000 increase in cash flow. c. A $1,700 decrease in cash flow. d. A $2,300 increase in cash flow.
Texts: Exercise A-8 (Static) Derivatives; cash flow hedge; futures contract; forecasted purchase [LOA–2] Snackums, Incorporated, purchases wheat for use in its food manufacturing process. Snackums operates in a highly competitive industry and is rarely able to increase its sales price. On January 1, 2024, Snackums estimates that it only has enough wheat inventory to meet its manufacturing needs for the first half of 2024, and forecasts the purchase of 20,000 bushels of wheat on June 30, 2024, from its supplier, Trigo Farms. Because Snackums is concerned that the price of wheat will increase during the coming months, it enters into four June wheat futures contracts on January 1, 2024, to purchase wheat. Each futures contract is based on the purchase of 5,000 bushels of wheat at $6.73 per bushel on June 30, 2024, and will settle in cash at maturity. (For purposes of this problem, the daily margin accounts with the clearinghouse are ignored.) The company must report changes in the fair value of its hedging instruments each quarter. The fair value of the futures contract at inception is zero. Snackums designates the futures contract as a hedge of the variability of cash flows attributed to changes in the spot price of wheat for its forecasted purchase of wheat. Since the critical terms of the forward contract and the forecasted purchase are exactly the same, Snackums concludes that the hedging relationship is expected to be 100% effective. The spot and forward prices per bushel of wheat and the fair value of the forward contract are as follows: The spot and forward prices per bushel of wheat and the fair value of the forward contract are as follows: Date Spot Price (per bushel) Futures Price (per bushel) January 1, 2024 $6.68 $6.73 March 31, 2024 $6.72 $6.77 June 30, 2024 $6.90 n/a Required: Calculate the net cash settlement at June 30, 2024. Prepare the journal entries for the period January 1 to June 30, 2024, to record the forecasted purchase transaction, necessary adjustment for changes in the fair value of the futures contract, and settlement of the contract. Assume that Snackums purchases the wheat inventory from Trigo Farms on June 30, 2024, as anticipated. During the third quarter, Snackums uses all of the wheat it purchases in production and sells the related inventory. What entry would Snackums make during the quarter ended September 30, 2024, related to the hedged transaction?
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