Question

34. On June 1, Cairns Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs and will make payment in three months on September 1. On June 1, Cairns acquired an

Answer 1

a.        Cash Flow Hedge

Date          Fair Value      Intrinsic Value        Time Value       Change in Time Value

6/1             $2,000             $0                             $2,000                           -

6/30           $7,000             $6,000                      $1,000                -$1,000*

9/1             $20,000           $20,000                    $0                       -$1,000**

6/1             Inventory [$.852 x 1,000,000]                                                  852,000

                        Accounts Payable (francs)                                                                    852,000

                  Foreign Currency Option                                                              2,000

                        Cash [1,000,000 x $0.002]                                                                        2,000

6/30           Foreign Exchange Loss                                                                 6,000

                        Accounts Payable (francs)                                                                        6,000

                    [($.858 – $.852) x 1,000,000]

                  Foreign Currency Option                                                              5,000

                        AOCI                                                                                                        5,000

                    [$7,000 – $2,000]

                  AOCI                                                                                            6,000

                        Gain on Foreign Currency Option                                                            6,000

                  Option Expense                                                                            1,000*

                        AOCI                                                                                                        1,000

9/1             Foreign Exchange Loss                                                               14,000

                        Accounts Payable (francs)                                                                      14,000

                    [($.872 – $.858) x 1,000,000]

                       

                  Foreign Currency Option                                                            13,000

                        AOCI                                                                                                      13,000

                    [$20,000 – $7,000]

                  AOCI                                                                                          14,000

                        Gain on Foreign Currency Option                                                          14,000

                 

                  Option Expense                                                                            1,000**

                        AOCI                                                                                                        1,000

                  Foreign Currency (francs)                                                         872,000

                        Cash                                                                                                      852,000

                        Foreign Currency Option                                                                        20,000

                  Accounts Payable (francs)                                                        872,000

                        Foreign Currency (francs)                                                                     872,000

Overall impact on net income:                                                  

Option Expense                                                            ($2,000)

b.         Fair Value Hedge

6/1             Inventory [$.852 x 1,000,000]                                                  852,000

                        Accounts Payable (francs)                                                                    852,000

                  Foreign Currency Option                                                              2,000

                        Cash [1,000,000 x $0.002]                                                                        2,000

6/30           Foreign Exchange Loss                                                                 6,000

                        Accounts Payable (francs)                                                                        6,000

                    [($.858 – $.852) x 1,000,000]

                  Foreign Currency Option                                                              5,000

                        Gain on Foreign Currency Option                                                            5,000

                    [$7,000 – $2,000]

9/1             Foreign Exchange Loss                                                               14,000

                        Accounts Payable (francs)                                                                      14,000

                    [($.872 – $.858) x 1,000,000]

                       

                  Foreign Currency Option                                                            13,000

                        Gain on Foreign Currency Option                                                          13,000

                    [$20,000 – $7,000]

                  Foreign Currency (francs)                                                         872,000

                        Cash                                                                                                      852,000

                        Foreign Currency Option                                                                        20,000

                 

                  Accounts Payable (francs)                                                        872,000

                        Foreign Currency (francs)                                                                     872,000

Overall impact on net income:                                                 

         Foreign Exchange Loss                                         ($20,000)

         Gain on Foreign Currency Option                            18,000

         Impact on net income                                              ($2,000)