REFERENCE: Ref.09_10
On October 1,2007,Eagle Company forecasts the purchase of inventory from a British supplier on February 1,2008,at a price of 100,000 British pounds.On October 1,2007,Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound.The option is considered to be a cash flow hedge of a forecasted foreign currency transaction.On December 31,2007,the option has a fair value of $1,600.The following spot exchange rates apply:
-What is the amount of option expense for 2008 from these transactions?

Question

REFERENCE: Ref.09_10
On October 1,2007,Eagle Company forecasts the purchase of inventory from a British supplier on February 1,2008,at a price of 100,000 British pounds.On October 1,2007,Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound.The option is considered to be a cash flow hedge of a forecasted foreign currency transaction.On December 31,2007,the option has a fair value of $1,600.The following spot exchange rates apply: 
-What is the amount of option expense for 2008 from these transactions?

Quizplus · Accepted Answer

The option is considered to be a cash flow hedge of a forecasted foreign currency transaction, and the change in fair value of the option is recognized in other comprehensive income and included in the calculation of the foreign currency transaction gain or loss when the forecasted transaction occurs. Since the option expired unexercised, the $1,600 fair value on December 31, 2007 is recognized in other comprehensive income. Therefore, there is no option expense for 2008, and the answer is B, $1,600.

REFERENCE: Ref.09_10 on October 1,2007,Eagle Company Forecasts the Purchase of Inventory from Inventory