Question

ALEXANDER Inc. CASE:

On December 1, Y1, Alexander Inc., a US based importer of olive oil placed an order for 500 cases of olive oil at a price of 100 Euros per case. The pertinent exchange rates are given below.

DATE              SPOT              FORWAR RATE                         CALL OPTION PREMIUM FOR

                        RATE           (to January 31, Y2)                        1/31/Y2 (Strike price of $1)

12/1/Y1           $1.00                       $1.08                                                       $0.04

12/31/Y2         $1.12                       $1.20                                                       $0.12

1/31/Y2           $1.15                       $1.15                                                       $0.15

Alexander Inc. has effective borrowing rate of 12% (1% per month). The company’s fiscal year ends on December 31. Present value factor at 1% per month is 0.9901.

The olive oil was ordered on December 1, Y1. It was received and paid for on December 31, Y2. On December 1, Y1, Alexander Inc. purchased a two-month call option for 50,000 Euros. The option was properly designated as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured through reference to change in the spot rate. Prepare journal entries to account for foreign currency option, firm commitment, and import purchase.

Answer 1

page:01 Answer prepare journal entries to account fez faciego Currency option, five commitment, and import purchases spot rate : on ist dec : $1.00 3184 january: $1.12 particular 50000 6000 Date LE Amount (o) Amount Ol-Dec purchases ale da 50000 To accountpayable Al (500x (100X1)] (Being olive oil purchased on cedit) 31-Dec. Polign currency Transaction loss Alc de To Account payable Alcl 500 x(100 x (1.12-1) 6000 (ecing loss adjusted in the year end) 31-jan Toreign Currency bansaction Ale da Account payable Alc dat 56000 To bank Alc K Being payment done in full) 1500 57 500