On June 1 Alexander Corporation sold goods to a forcign cust

On June 1, Alexander Corporation sold goods to a forcign customer at a price of 1,000,000 pesos. It will receive payment in three months on September 1. On June I, Alexander acquire an option to sell 1,000,000 pesos in three months at a strike price of $0.062. Relevant exchang rates and option premiums for the peso are as follows: Date June 1 June 30 September1 Spot Rate $0.062 0.066 0.061 Put Option Premium for September 1 (strike price $0.062) 0.0025 0.0018 N/A Alexander must close its books and prepare its second-quarter financial statements on June 30 Assuming that Alexander designates the foreign currency option as a cash flow a. hedge a foreign currency receivable, prepare journal entries for these transactions in U.S a foreign currency receivable, prepare journal entries for these transactions in U.S. dollars. What is the impact on net income over the two accounting periods? b. Assuming that Alexander designates the foreign currency option as a fair value h dollars. What is the impact on net income over the two accounting periods?

Solution

Part 1 Date Particulars Debit Credit 1.06 Acc. Receivable $ 62,000.00 Sales $ 62,000.00 (To record sales) 1.06 Foreign Currency Option $    2,500.00 Cash $    2,500.00 (to record payment) 30.06 Acc. Receivable $    4,000.00 Foreign Exchange Gain $    4,000.00 (to record gain of foreign exchange) 30.06 AOCI $        700.00 Foreign Currency Option $        700.00 ( to record foreign currency option) 30.06 Loss on Foreign Curernt Option $    4,000.00 AOCI $    4,000.00 ( to record loss on foreign currency option) 30.06 Option Expenses $        700.00 AOCI $        700.00 (to record expenses of options) 1.09 Foreing Exchange Loss $    5,000.00 Accounts Payable $    5,000.00 1.09 AOCI $        800.00 Foreign Currency Option $        800.00 ( to record foreign currency option) 1.09 AOCI $    5,000.00 Gain on FC Option $    5,000.00 (to record gain on FC Option) 1.09 Option Expenses $    1,800.00 AOCI $    1,800.00 (to record time value of option( 1.09 Foreign Currency $ 61,000.00 Accounts Receivable $ 61,000.00 (to record FC realizable) 1.09 Cash $ 62,000.00 Foreign Currency $ 61,000.00 Foreign Currency Option $    1,000.00 (to record actual cash realizable) Impact on Net Income: Sales $ 62,000.00 FC Option Exercise $ (2,500.00) Impact on Net Income $ 59,500.00 Part 2 Date Particulars Debit Credit 1.06 Acc. Receivable $ 62,000.00 Sales $ 62,000.00 (To record sales) 1.06 Foreign Currency Option $    2,500.00 Cash $    2,500.00 (to record payment) 30.06 Acc. Receivable $    4,000.00 Foreign Exchange Gain $    4,000.00 (to record gain of foreign exchange) 30.06 Loss on Foreign Curernt Option $        700.00 Foreign Currency Option $        700.00 ( to record foreign currency option) 1.09 Foreing Exchange Loss $    5,000.00 Accounts Payable $    5,000.00 1.09 Loss on Foreign Currency Option $        800.00 Foreign Currency Option $        800.00 ( to record foreign currency option) 1.09 Foreign Currency $ 61,000.00 Accounts Receivable $ 61,000.00 (to record FC realizable) 1.09 Cash $ 62,000.00 Foreign Currency $ 61,000.00 Foreign Currency Option $    1,000.00 (to record actual cash realizable) Impact on Net Income: Sales $ 62,000.00 FC Gain $    4,000.00 FC Loss $ (5,000.00) Loss on FC Option $ (1,000.00) Impact of Net Income $ 60,000.00