On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,100,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,100,000 pesos in three months at a strike price of $0.074. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Date Spot Rate Put Option Premium for September 1 (strike price $0.074) June 1 $ 0.074 $ 0.0037 June 30 0.073 0.0028 September 1 0.072 N/A Maxwell must close its books and prepare its second-quarter financial statements on June 30. Required: a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. a-2. What is the impact on net income over the two accounting periods? b-1. Assuming that Maxwell designates the foreign currency option as a fair value hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. b-2. What is the impact on net income over the two accounting periods?
On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,100,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,100,000 pesos in three months at a strike price of $0.074. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows:
| Date | Spot Rate | Put Option Premium for September 1 (strike price $0.074) |
|---|---|---|
| June 1 | $ 0.074 | $ 0.0037 |
| June 30 | 0.073 | 0.0028 |
| September 1 | 0.072 | N/A |
Maxwell must close its books and prepare its second-quarter financial statements on June 30.
Required:
a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare
a-2. What is the impact on net income over the two accounting periods?
b-1. Assuming that Maxwell designates the foreign currency option as a fair value hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars.
b-2. What is the impact on net income over the two accounting periods?
A. 1
| No | Date | General Journal | Debit | Credit |
|---|---|---|---|---|
| 1 | 06/01 | 81,400 | ||
| Sales | 81,400 | |||
| 2 | 06/01 | Foreign Currency Option | 4,070 | |
| Cash | 4,070 | |||
| 3 | 06/30 | Foreign Exchange Gain or Loss | 1,100 | |
| Accounts Receivable (P) | 1,100 | |||
| 4 | 06/30 | Other Comprehensive Income | ||
| Foreign Currency Option | ||||
| 5 | 06/30 | Other Comprehensive Income | ||
| Foreign Exchange Gain or Loss | ||||
| 6 | 06/30 | Foreign Exchange Gain or Loss | ||
| Other Comprehensive Income | ||||
| 7 | 09/01 | Foreign Exchange Gain or Loss | ||
| Accounts Receivable (P) | ||||
| 8 | 09/01 | Other Comprehensive Income | ||
| Foreign Currency Option | ||||
| 9 | 09/01 | Foreign Exchange Gain or Loss | ||
| 10 | 09/01 | Foreign Exchange Gain or Loss | ||
| Other Comprehensive Income | ||||
| 11 | 09/01 | Foreign Currency (P) | ||
| Accounts Receivable (P) | ||||
| 12 | 09/01 | Cash | ||
| Foreign Currency Option | ||||
| Foreign Currency (P) |
What is the impact on net income over the two accounting periods?
Note: Do not round intermediate calculations. Negative amount should be entered with a minus sign.
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| No | Date | General Journal | Debit | Credit |
|---|---|---|---|---|
What is the impact on net income over the two accounting periods?
Note: Do not round intermediate calculations. Negative amount should be entered with a minus sign.
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