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.