Reference no: EM132494928
Question - On June 1, 2015, Alex Company sells goods to a foreign customer at a price of 1,600,000 euros. It will receive payment in three months on Sep 1, 2015. Relevant exchange rates and option premium for the euros are as follows:
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Date
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Spot Rate
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Forward Rate (to Sep. 1, 2015)
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Option Premium (strike price $1.10)
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June 1
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1.12
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1.12
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0.033
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June 30
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1.08
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1.10
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0.059
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Sep 1
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1.03
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N/A
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N/A
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Alex Company must close its books and prepare its second-quarter financial statements on June 30. The following A and B are independent situations.
Required -
A. On June 1, Alex enters into a forward contract to sell 1,600,000 euros on Sep. 1, 2015. Alex's incremental borrowing rate is 12% annually. Alex designates the forward contract as a fair value hedge of a foreign currency receivable. Prepare journal entries for these transactions in U.S. dollars.
B. On June 1, Alex acquired an option to sell 1,600,000 euros in three months at a strike price of $1.10. Alex 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.
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