Answered: Pacifico Company, a U.S.-based importer…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,100 cases of Oktoberfest-style beer from a German supplier for 242,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows:

Date	Spot Rate	Forward Rate to October 15	Call Option Premium for October 15 (strike price $1.10)
August 15	$	1.10		$	1.16		$	0.05
September 30		1.15			1.19			0.06
October 15		1.18			1.18	(spot)		N/A

The company closes its books and prepares third-quarter financial statements on September 30

Assume that, on August 15, the company forecasted the purchase of beer on October 15. On August 15, the company acquired a two-month call option on 242,000 euros. The company designated the option as a cash value hedge of a forecasted foreign currency transaction. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Prepare journal entries to account for the foreign currency option and import purchase.

Record the gain or loss on the foreign currency euro call option with a premium of $0.050 per Euro at a strike price of $1.10 and an exercise date of October 15.
Record the gain or loss on the foreign currency euro call option with a premium of $0.060.
Record the transfer of gain or loss to the cost of goods sold.
Record the entry for changes in the fair value of Euro call option.
Record the transfer of gain or loss to the cost of goods sold.
Record purchase of foreign currency for settling the accounts payable.
Record purchase of inventory from the German supplier.
Record the transfer of inventory to cost of goods sold.
Record the adjustment of cost of goods sold to the extent of Other Comprehensive Income.