Reference no: EM132713856

On May 1, 20X0, Samual Company, a U.S. corporation, purchased minerals from a Japanese company for 4,000,000 yen, payable in 3 months. Samual Company has a June 30th fiscal year end. The relevant exchange rates between the U.S. and Japanese currencies are given:

                              Spot rate                    Forward rate (at Aug. 1, 20X0)

May 1, 20X0           $0.696                       $0.696

June 30, 20X0             $0.718                        $0.704

August 1, 20X0             $0.688

The company's incremental borrowing rate provides a discount rate of 0.975 for three months.

Problem 1: Journalize the import purchase on May 1, 20X0.

Problem 2: If Samual does not attempt to hedge this transaction, what is the gain or loss that should be shown on the company's June 30, 20X0 F/S? (Express the answer as an adjusting journal entry)

Problem 3: Assume that on May1, 20X0 Samual Company enters a forward contract to buy 4,000,000 yen on August 1, 20X0. What is the fair value of the forward contract at year-end closing on June 30, 20X0?

Problem 4: If Samual Company had instead opted to hedge their foreign currency exchange risk through a foreign currency option purchased on May1, 20X0 at a premium of $0.004 per 10 yen, what gain or loss would be reported on the June 30, 20X0 financial statement if an option for similar risk was trading at $1,500?