Reference no: EM132686743

On June 1, Alexander Corporation sold goods to a foreign customer at a price of 1,140,000 pesos and will receive payment in three months on September 1. On June 1, Alexander acquired an option to sell 1,140,000 pesos in three months at a strike price of $0.054.

Relevant exchange rates and option premiums for the peso are as follows:

Date          Spot Rate        Put Option Premium for September 1
(strike price $0.054)

June 1          $0.054                 $0.0023

June 30            0.060                 0.0019

September 1      0.053                   N/A

Alexander must close its books and prepare its second-quarter financial statements on June 30.

Problem 1: Assuming that Alexander designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for these transactions in U.S. dollars.

Problem 1.2: What is the impact on net income over the two accounting periods?

Problem 2: Assuming that Alexander designates the foreign currency option as a fair value hedge of a foreign currency receivable, prepare journal entries for these transactions in U.S. dollars.

Problem 2.1: What is the impact on net income over the two accounting periods?