A U.S. company expects to sell €1,000,000 in merchandise to an Italian customer in 4 months. To protect against a strengthening U.S. dollar, on June 1 the company pays $15,000 for September put options on €1,000,000, with a strike price of $1.23/€. The current spot rate is $1.22/€. The intrinsic value of the options is designated as a cash flow hedge of the forecasted sale, and changes in time value are reported in income. Income effects of the sale and the hedge are reported in the company's sales revenue. On June 30, the company's year-end, the spot rate is $1.20/€ and the options are worth $33,000. On September 30, the company delivers the merchandise, receives payment in euros, and uses the options to convert euros to U.S. dollars. The September 30 spot rate is $1.19/€, and the options are worth their intrinsic value.
Required
Prepare the journal entries for the above transactions, including June 30 adjusting entries.

Question

Quizplus · Accepted Answer

The Answer of A U.S. company expects to sell €1,000,000 in merchandise to an Italian customer in 4 months. To protect against a strengthening U.S. dollar, on June 1 the company pays $15,000 for September put options on €1,000,000, with a strike price of $1.23/€. The current spot rate is $1.22/€. The intrinsic value of the options is designated as a cash flow hedge of the forecasted sale, and changes in time value are reported in income. Income effects of the sale and the hedge are reported in the company's sales revenue. On June 30, the company's year-end, the spot rate is $1.20/€ and the options are worth $33,000. On September 30, the company delivers the merchandise, receives payment in euros, and uses the options to convert euros to U.S. dollars. The September 30 spot rate is $1.19/€, and the options are worth their intrinsic value.
Required
Prepare the journal entries for the above transactions, including June 30 adjusting entries.

A US Company Expects to Sell €1,000,000 in Merchandise to an an Italian