Prepare journal entries to account for the import purchase

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Reference no: EM133360379

Question: Pacifico Company, a U.S.-based importer of beer and wine, purchased 2,000 cases of Oktoberfest-style beer from a German supplier for 600,000 euros. Relevant U.S. dollar exchange rates for the euro are as follows:

Date Spot Rate Foward Rate to Oct 15 Call Option Premium for Oct 15 (strike price 1.50)

Aug 15 $1.50 $1.56 $ 0.05

Sept 30 $1.55 $1.59 $ 0.06

Oct 15 $1.58 $1.58 (spot) N/A

b. Assume that the beer arrived on August 15, and the company made payment on October 15. On August 15, the company entered into a two-month forward contract to purchase 600,000 euros. The company designated the forward contract as a cash flow hedge of a foreign currency payable. Forward points are excluded in assessing hedge effectiveness and amortized to net income using a straight-line method on a monthly basis. Prepare journal entries to account for the import purchase and foreign currency forward contract.

Reference no: EM133360379

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