On June 1, AlexanderCorporation sold goods to a foreign customer at a price of1,110,000 pesos and will receive payment in three months onSeptember 1. On June 1, Alexander acquired an option to sell1,110,000 pesos in three months at a strike price of $0.055.Relevant exchange rates and option premiums for the peso are asfollows:
| Date | Spot Rate | Put Option Premium
for September 1
(strike price $0.055) |
| June 1 | $ | 0.055 | | $ | 0.0021 | |
| June 30 | | 0.059 | | | 0.0017 | |
| September 1 | | 0.054 | | | N/A | |
|
Alexander must closeits books and prepare its second-quarter financial statements onJune 30.
a-1.Assuming that Alexander designates the foreign currency option as acash flow hedge of a foreign currency receivable, prepare journalentries for these transactions in U.S. dollars.
Record the sale of merchandise.
2
Record the foreign currency option.
3
Record the entry for changes in the exchange rate.
4
Record the change in the fair value of the option.
5
Record the gain or loss on the option.
6
Record the option expense.
7
Record the entry for changes in the exchange rate.
8
Record the change in the fair value of the option.
9
Record the gain or loss on the option.
10
Record the option expense.
11
Record receipt of pesos.
12
Record the exercise of the option.
a-2.What is the impact on net income over the two accountingperiods?
b-1.Assuming that Alexander designates the foreign currency option as afair value hedge of a foreign currency receivable, prepare journalentries for these transactions in U.S. dollars.
Record the sale of merchandise.
2
Record the foreign currency option.
3
Record the entry for changes in the exchange rate.
4
Record the change in the fair value of the option.
5
Record the gain or loss on the option.
6
Record the option expense.
7
Record the entry for changes in the exchange rate.
8
Record the change in the fair value of the option.
9
Record the gain or loss on the option.
10
Record the option expense.
11
Record receipt of pesos.
12
Record the exercise of the option.
b-2.What is the impact on net income over the two accountingperiods?
