Question

• Record purchase of foreign currency option as an asset.
• Record entry for order placed with foreign supplier.
• Record the entry to recognize the increase in the value of the foreign currency option.
• Record entry to recognize the decrease in the time value of the option as an expense.
• Record the entry to recognize the increase in the value of the foreign currency option.
• Record gain or loss on the foreign currency option.
• Record the sale.
• Record the receipt of marks.
• Record entry to transfer the amount accumulated in AOCI.

Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,200,000 marks on March 15, 2018. To hedge this forecasted transaction, the company acquires a three-month call option to purchase 1,200,000 marks on December 15, 2017. Leickner selects a strike price of $0.71 per mark, paying a premium of $0.001 per unit, when the spot rate is $0.71. The spot rate increases to $0.717 at December 31, 2017, causing the fair value of the option to increase to $9,000. By March 15, 2018, when the raw materials are purchased, the spot rate has climbed to $0.73, resulting in a fair value for the option of $24,000. a. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials, assuming that December 31 is Leickner's year-end and that the raw materials are included in the cost of goods sold in 2018. b. What is the overall impact on net income over the two accounting periods? c. What is the net cash outflow to acquire the raw materials? b. Impact on net income in 2017 Impact on net income in 2018 Net cash outflow C.

Answer 1

a)
Date	Account titles and Explanation	Debit	Credit
15 Dec 2017	Foreign Currency Option	$1,200.00
	Cash [1200000 marks x $.001]		$1,200.00
	No journal entry related to the forecasted transaction
31 Dec 2017	Foreign Currency Option	$7,800.00
	AOCI ($9,000 - $1200)		$7,800.00
	Option Expense	$600.00
	AOCIA		$600.00
	To recognize the decrease in the time value of the option as expense
	[($.717 – $.71) x 1,200,000 ] - $7800
15 Mar 2018	Foreign Currency Option	$15,000.00
	AOCI ($24,000 - $9,000)		$15,000.00
	Option Expense	$600.00
	AOCIA		$600.00
	To recognize the decrease in the time value of the option as expense
	[($.73 – $.717) x 1,200,000] - $15000
	Foreign Currency (marks) (1200000 x .73)	$876,000.00
	Foreign Currency Options		$24,000.00
	Cash		$852,000.00
	To record exercise of the foreign currencyoption at the strike price of $.73 and closeout the foreign currency option account
	Parts Inventory	$876,000.00
	Foreign Currency (marks)		$876,000.00
	To record the purchase of parts and paymentof 1.2 million marks to the supplier.
	AOCI	$24,000.00
	Adjustment to Net Income		$24,000.00
	To transfer the amount accumulated in AOCIas an adjustment to net income in the periodin which the forecasted transaction occurs
b)	Impact on net income
	2017
	Option Expenses		-$600.00
	2018
	Cost of Goods Sold	-$876,000.00
	Option Expenses -2016	-$600.00
	Adjustment to Net Income	$24,000.00	-$852,600.00
c)	Net cash outflow for parts = $852,000 + $1200	$853,200.00