Question

Spitz Company ordered merchandise from a foreign supplier on November 20 at a price of 112,000 forints when the spot rate was $0.21 per forint. Delivery and payment were scheduled for December 20. On November 20, Spitz acquired a call option on 112,000 forints at a strike price of $0.21, paying a premium of $0.02 per forint. It designates 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 merchandise arrives and Spitz makes payment according to schedule. Spitz sells the merchandise by December 31, when it closes its books. a. Assuming a spot rate of $0.24 per forint on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory. b. Assuming a spot rate of $0.19 per forint on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory.

Answer 1

Answers @ Premium paid = 112,000 X 0.02 = 2240 loss.on firm commitment = (0.24 -0.21) 112,000 -00.03) 119,000 = 3360 Gain on foreign Cewency option = 0.24 -0.21) 12.000 – 2240 =(0.03) 119,000 -2240 = 3360-2240 = 1180 Cash received in December = 0.24 X 112,000 =26880 Amount credited-to foreign currency option = 26880 – 23520 . = 3360 26880-3360 - 23520

Journal ertring st Particulars Debit credit 2240 Nov 20 foreign currency option - BY Cash Alc- cy 2240 Dec 30 loss on firm committement ... Dr . 3360 3360 irm commitment anner 1120 encu 26880 farcign carency option -- DV Gain on foreign cum eney option foreign currency - cash foreign currency option parts inventory .. or foreign corency aner a 3520 3360 D6 ୧୦ 26880

from inum paid - 112,000 X 0.02 = 2240 gain on firm commitmunt = (0.21.-0.19) 112,000 = 2240 dossgain on foreign currency option = (0.23-0.19)112,000~2240 2240-2240 = 0 - No entry Dati Debit londt 2240 2240 2240 cash received in December = 0.19 X 112000 a = 21280 particulars Nonto foreign currency option or cash Ale er Deezo firm commitment ale - DV Il gain on firm commitment -foreign currency file -- BY C Cash ale parte inventory Abert BY foreign cumoney er 2240 21280 21280 2.1280 21280