On 6/1/17, an American firm purchased inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/17.Also on 6/1/17, the American firm acquired an option for $1,500 to purchase 100,000 Canadian dollars for delivery on 8/1/17.The strike price for the option was $0.685.The exchange rates were as follows: ?

$$\begin{array} { l r r }
& \text { Spot } & \text { Option value } \
\hline 6 / 1 / 17 & 1 \mathrm { CD } = \$ 0.68 & \$ 1,500 \
6 / 30 / 17 & 1 \mathrm { CD } = \$ 0.70 & \$ 2,500 \
8 / 1 / 17 & 1 \mathrm { CD } = \$ 0.73 & \$ 4,500
\end{array}$$ The entry to settle the option will include:

Question

On 6/1/17, an American firm purchased inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/17.Also on 6/1/17, the American firm acquired an option for $1,500 to purchase 100,000 Canadian dollars for delivery on 8/1/17.The strike price for the option was $0.685.The exchange rates were as follows: ?

$$\begin{array} { l r r } 
& \text { Spot } & \text { Option value } \
\hline 6 / 1 / 17 & 1 \mathrm { CD } = \$ 0.68 & \$ 1,500 \
6 / 30 / 17 & 1 \mathrm { CD } = \$ 0.70 & \$ 2,500 \
8 / 1 / 17 & 1 \mathrm { CD } = \$ 0.73 & \$ 4,500
\end{array}$$ The entry to settle the option will include:

Quizplus · Accepted Answer

To settle the option, the American firm will exercise the option and buy 100,000 Canadian dollars for $68,500 ($0.685 x 100,000). So, the entry to settle the option will include a debit to Foreign Currency of $68,500 (not $73,000) to record the purchase of Canadian dollars. There is no credit to cash as the American firm already had the cash available to exercise the option. Choice A and D are incorrect as they suggest a credit to Investment in Option, which is not needed to settle the option.

On 6/1/17, an American Firm Purchased Inventory Costing 100,000 Canadian