Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at...

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Accounting

Based on past experience, Leickner Company expects to purchaseraw materials from a foreign supplier at a cost of 1,900,000 markson March 15, 2018. To hedge this forecasted transaction, thecompany acquires a three-month call option to purchase 1,900,000marks on December 15, 2017. Leickner selects a strike price of$0.78 per mark, paying a premium of $0.002 per unit, when the spotrate is $0.78. The spot rate increases to $0.787 at December 31,2017, causing the fair value of the option to increase to $16,000.By March 15, 2018, when the raw materials are purchased, the spotrate has climbed to $0.80, resulting in a fair value for the optionof $38,000. Prepare all journal entries for the option hedge of aforecasted transaction and for the purchase of raw materials,assuming that December 31 is Leickner's year-end and that the rawmaterials are included in the cost of goods sold in 2018. What isthe overall impact on net income over the two accounting periods?What is the net cash outflow to acquire the raw materials?

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Answer Date Account title Debit Credit 15Dec15 Foreign currency option 3800 Cash 3800 19 million marks 002 To record the purchase of foreign currency option 15Dec15 No entry No entry for order placed with foreign supplier 31Dec15 Foreign currency option 12200 AOCI 12200 To recognize the increase in the See Answer

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