Question

Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,200 cases of wine at a price of 230 euros per case. The total purchase price is 276,000 euros. Relevant exchange rates for the euro are as follows: Date September 15 September 30 October 31 Spot Rate $1.15 1.20 1.25 Forward Rate to October 31 $1.21 1.24 1.25 Call Option Premium for October 31 (strike price $1.15) $ 0.050 0.085 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. a. 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. b. 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 276,000 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. c. Vino Veritas ordered the wine on September 15. The wine arrived and the company paid for it on October 31. On September 15, itas entered into a 45-day forward contract to purchase 276,000 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. d. 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 276,000 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. e. 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 276,000 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.

Answer 1

AS PER HOMEWORKLIB POLICY I'VE ANSWERED 1ST FOUR PARTS OF THE QUESTION. KINDLY POST REMAINING PARTS SEPERATELY. THANK YOU!

Part a)

The journal entries are as follows:

Date	Account Titles	Debit	Credit
Sep. 15	Inventory	$276,000
	Accounts Payable (Euro)		$276,000
Sep. 30	Foreign Exchange Loss	$13,800
	Accounts Payable (Euro)	(276000*(1.20-1.15)	$13,800
Oct. 31	Foreign Exchange Loss	$13,800
	Accounts Payable (Euro)		$13,800
	Foreign Currency (Euro)	$303,600
	Cash		$303,600
	Accounts Payable (Euro)	$303,600
	Foreign Currency (Euro)		$303,600

_____

Part b)

The journal entries are as follows:

Date	Account Titles	Debit	Credit
Sep. 15	Inventory	$276,000
	Accounts Payable (Euro)		$276,000
	No Journal Entry for Forward Contract
Sep. 30	Foreign Exchange Loss	$13,800
	Accounts Payable (Euro)		$13,800
	Forward Contract	$8,213.76
	Gain on Forward Contract [(276,000 *1.24 - 276,000 *1.21)*.992]		$8,213.76
Oct. 31	Foreign Exchange Loss	$13,800
	Accounts Payable (Euro)		$13,800
	Forward Contract	$2,826.24
	Gain on Forward Contract [(276,000 *1.25 – 276,000 *1.21) - 8,213.76]		$2,826.24
	Foreign Currency (Euro)	$303,600
	Cash		$292,560
	Forward Contract		$11,040
	Accounts Payable (Euro)	$303,600
	Foreign Currency (Euro)		$303,600

_____

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	$8,213.76
	Gain on Forward Contract [(276,000 *1.24 - 276,000 *1.21)*.992]		$8,213.76
	Loss on Firm Commitment	$8,213.76
	Firm Commitment		$8,213.76
Oct. 31	Forward Contract	$2,826.24
	Gain on Forward Contract [(200,000*1.10 – 200,000*1.06) - 5,940.60]		$2,826.24
	Loss on Firm Commitment	$2,826.24
	Firm Commitment		$2,826.24
	Foreign Currency (Euro)	$303,600
	Cash		$292,560
	Forward Contract		$11,040
	Inventory	$303,600
	Foreign Currency (Euro)		$303,600
	Firm Commitment	$11,040
	Adjustment to Net Income		$11,040

_____

Part d)

The journal entries are given below:

Date	Account Titles	Debit	Credit
Sep. 15	Inventory	$276,000
	Accounts Payable (Euro)		$276,000
	Foreign Currency Option (276,000 *0.5)	$13,800
	Cash		$13,800
Sep. 30	Foreign Exchange Loss	$13,800
	Accounts Payable (Euro)		$13,800
	Foreign Currency Option (276,000 *.85 - 276,000 *.5)	$9,660
	Accumulated Other Comprehensive Income		$9,660
	Accumulated Other Comprehensive Income	$13,800
	Gain on Foreign Currency Option		$13,800
	Option Expense	$2,070
	Accumulated Other Comprehensive Income		$2,070
Oct. 31	Foreign Exchange Loss	$13,800
	Accounts Payable (Euro)		$13,800
	Foreign Currency Option (276,000 *1.00 – 276,000 *.85)	$4,140
	Accumulated Other Comprehensive Income		$4,140
	Accumulated Other Comprehensive Income	$13,800
	Gain on Foreign Currency Option		$13,800
	Option Expense	$9,660
	Accumulated Other Comprehensive Income		$9,660
	Foreign Currency (Euro)	$303,600
	Cash		$276,000
	Foreign Currency Option		$27,600
	Accounts Payable (Euro)	$303,600
	Foreign Currency (Euro)		$276,000

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