Question

Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 2,200 cases of wine at a price of 260 euros per case. The total purchase price is 572,000 euros. Relevant exchange rates for the euro are as follows:

Date	Spot Rate			Forward Rate to October 31			Call Option Premium for October 31 (strike price $1.65)
September 15	$	1.65		$	1.71		$	0.035
September 30		1.70			1.74			0.070
October 31		1.75			1.75			0.100

Vino Veritas Company has an incremental borrowing rate of 12 percent (1 percent per month) and closes the books and prepares financial statements at September 30.

1. Assume that the wine arrived on September 15, and the company made payment on October 31. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase.

2. Assume that the wine arrived on September 15, and the company made payment on October 31. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 572,000 euros. It properly designated the forward contract as a fair value hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency forward contract.

3. Vino Veritas ordered the wine on September 15. The wine arrived and the company paid for it on October 31. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 572,000 euros. The company properly designated the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate. Prepare journal entries to account for the foreign currency forward contract, firm commitment, and import purchase.

4. The wine arrived on September 15, and the company made payment on October 31. On September 15, Vino Veritas purchased a 45-day call option for 572,000 euros. It properly designated the option as a cash flow hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency option.

5. The company ordered the wine on September 15. It arrived on October 31, and the company made payment on that date. On September 15, Vino Veritas purchased a 45-day call option for 572,000 euros. It properly designated the option as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the spot rate. Prepare journal entries to account for the foreign currency option, firm commitment, and import purchase.

NOTE: If no entry is required for a transaction/field , enter "no journal entry required"

Required A:

Assume that the wine arrived on September 15, and the company made payment on October 31. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase.

Journal Entries for A

Record the purchase of wine from french supplier. (9/15)

Record the entry for changes in the exchange rate. (9/30)

Record the entry for changes in the exchange rate. (10/31)

Record purchases of foreign currency. (10/31)

Record payment made to french supplier. (10/31)

Required B: Assume that the wine arrived on September 15, and the company made payment on October 31. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 200,000 euros. It properly designated the forward contract as a fair value hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency forward contract.

Journal Entries for B:

Record purchase of wine from french supplier. (9/15)

Record entry for the forward contract entered into. (9/15)

Record the entry for changes in the exchange rate. (9/30)

Record gain or loss on forward contract. (9/30)

Record the entry for changes in the exchange rate. (10/31)

Record gain or loss on forward contract. (10/31)

Record purchase of foreign currency. (10/31)

Record payment made to french supplier. (10/31)

Required C: Vino Veritas ordered the wine on September 15. The wine arrived and the company paid for it on October 31. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 200,000 euros. The company properly designated the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate. Prepare journal entries to account for the foreign currency forward contract, firm commitment, and import purchase.

Journal Entries for C:

Record entry placed for purchase of wine

Record entry for the forward contract entered into

Record gain or loss on forward contract

Record gain or loss on firm commitment

Record gain or loss on forward contract

Record gain or loss on firm commitment

Record settlement of forward contract

Record the receipt of goods and payment made

Record entry to close the firm commitment.

Required D: The wine arrived on September 15, and the company made payment on October 31. On September 15, Vino Veritas purchased a 45-day call option for 200,000 euros. It properly designated the option as a cash flow hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency option.

Journal Entries for D:

Record purchase of wine from french supplier.

Record purchase of foreign currency option as an asset

Record the entry for changes in the exchange rate

Record entry to adjust the fair value of the option

Record the gain or loss on the option

Record option expense

Record the entry for changes in the exchange rate

Record entry to adjust the fair value of the option

Record the gain or loss on the option

Record option expense

Record settlement of forward contract

Record payment made to foreign supplier

Required E :The company ordered the wine on September 15. It arrived on October 31, and the company made payment on that date. On September 15, Vino Veritas purchased a 45-day call option for 200,000 euros. It properly designated the option as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the spot rate. Prepare journal entries to account for the foreign currency option, firm commitment, and import purchase.

Journal Entries for E:

Record purchase of foreign currency option as an asset

Record gain or loss on foreign currency option

Record gain or loss on firm commitment

Record gain or loss on foreign currency option

Record gain or loss on firm commitment

Record settlement of forward contract

Record the receipt of goods and payment made

Record entry to close the firm commitment.

Answer 1

Note : Since only requirement 1 is asked by you by mentioning it's format thus I am answering the answer of requirement 1

Journal entry

Date	general journal	debit	credit
September 15	inventory Creditor (french supplier) (To wine purchased amounting to €572000 to be recorded at spot rate of $1.65)	943800	943800

Working Note :-

It is to be noted that at the time of purchase of goods mentioned in foreign currency we have to convert those foreign currency into local currency by using the spot rate as on the date of purchase.

Thus , US$ amount to be recorded = 572000x1.65 = $943800.