Question

Problem 9-33 (LO 9-7)

On June 1, Alexander Corporation sold goods to a foreign customer at a price of 1,200,000 pesos and will receive payment in three months on September 1. On June 1, Alexander acquired an option to sell 1,200,000 pesos in three months at a strike price of $0.078. Relevant exchange rates and option premiums for the peso are as follows:

Date	Spot Rate			Put Option Premium for September 1 (strike price $0.078)
June 1	$	0.078		$	0.0026
June 30		0.084			0.0021
September 1		0.077			N/A

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

1. a-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.
2. a-2. What is the impact on net income over the two accounting periods?
3. b-1. 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.
4. b-2. What is the impact on net income over the two accounting periods?

Answer 1

b-1 Valye Journd Entries for ta. . - hege Desit cradit J310 1310 P 32 All To foreign customa Al (0.062 -0.0.62) 1310,000 (fair value hedge in ple A) 1310 Derivate contract Casset). 1310 To P Q2 AI (Being fair name hedge of dobivate confiat to Pedd A/CT b-2 . The impact on net income on forward. contract as on June=NIZ and the impact in and accounting perial = 1310 Scanned with CamScan