Question

Zorba Company Zorba Company, a U.S.-based importer of specialty olive oil, placed an order wit a foreign supplier for 500 cases of olive oil at a price of 100 crowns per case. Th total purchase price is 50,000 crowns. Relevant exchange rates are as follows: Spot Rate Forward Rate (to January 31, Year 2) Call Option Premium for January 31, Year 2 (strike price $1.00) Date December 1, Year 1..... December 31, Year 1.... January 31, Year 2...... $1.00 1.10 1.15 $1.08 1.17 1.15 $0.04 0.12 0.15 Zorba Company has an incremental borrowing rate of 12 percent (1 percent per month) and closes the books and prepares financial statements on December 31.

Answer 1

1) The total crowns of olive oil 50,000:

Total no. of crowns = 500*100 = 50,000 crowns

Purchase cost of 50,000 crowns at the spot rate of $1 is 50,000

Purchase cost of 50,000 crowns = 50,000 *$1 =50,000

date	Particulars	debit ($)	Credit ($)
1. Dec year1	Inventory	50,000
	Accounts payable		50,000
	(Ro record the purchase of 500 cases and crownsPayable at the spot rate of $1)

2)

Date	Particulars	Debit ($)	Credit ($)
31 Dec Year 1	Foreign exchange loss (50000*0.1)	5000
	Accounts payable		5000
	(To adjust the value of dollars payable to the new the spot rate of $0.1 and record a foreign exchange loss resulting from appreciation in dollars)

3)

Date	Particulars	Debit ($)	Credit ($)
31 Jan year 2	Foreign exchange loss (50000*0.05)	2500
	Accounts payable		2500
	(To adjust the value of dollars payable to the new spot rate of $1.15 and record a foreign exchange loss resulting from appreciation in dollars)

4)

An increase in the foreign exchange rate on the 31st January year 2 from $1.15 to $1.15 results in no foreign exchange loss. Therefore, there will be no journal entry.

5)

Date	Particulars	Debit ($)	Credit ($)
31 Jan year 2	Accounts payable (50000*1.15)	57.500
	Cash		57500
	(To record the payment to settle the balance amount in accounts payable)