60.1K

Verified Solution

Link Copied!

Panthers Corp., a U$.$S$.$ importer of wine, placed an order with an Italian wine producer

for $1,000,000$ bottles, at a price of Euro $15$ per bottle. Relevant exchange rates are:

Date Spot Rate Forward Rate $($to

January $31,2022)$

Call Option Premium

for January $31,2022$

$($strike price $$1\mathrm{.}119)$

$1-$Nov$-21$ $ $1\mathrm{.}119$ $ $1\mathrm{.}1250\mathrm{.}005$

$31-$Dec$-211\mathrm{.}1231\mathrm{.}1300\mathrm{.}007$

$31-$Jan$-221\mathrm{.}1211\mathrm{.}1210\mathrm{.}002$

Panthers has an incremental borrowing rate of $12$ percent $(1$ percent per month$)$ and

prepares the financial statements on December $31.$

Required:

a$)$ The wine was received on November $1,2021,$ and payment was made on

January $31,2022.$ On November $1,$ Panthers purchased a three$-$month call

option for Euro $15$ million. The call option contract was properly designated as a

cash flow hedge of a foreign currency payable. Prepare the journal entries to

account for the import purchase and foreign currency option. $(20$ points$)$

b$)$ The wine was ordered on November $1,2021.$ It was received and paid for on

January $31,2022.$ On November $1,$ Panthers purchased a three$-$month call

option for Euro $15$ million. The option was properly designated as a fair value

hedge of a foreign currency firm commitment. The fair value of the firm

commitment is measured through reference to changes in the spot rate. Prepare

the journal entries to account for the foreign currency option, firm commitment,

and import purchase. $(20$ points

Answer & Explanation Solved by verified expert

See Answer