Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 2,000,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 2,000,000 francs in three months. Maas selects a strike price of $0.79 per franc when the spot rate is $0.79 and pays a premium of $0.003 per franc. The spot rate increases to $0.794 at December 31, 2020, causing the fair value of the option to increase to $13,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.81, resulting in a fair value for the option of $40,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. Req AReq B and CPrepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. (If no entry is requirefor a transaction/event, select "No journal entry required" in the first account field.)View transaction list10>1Record purchase of foreign currency option as an asset.Record entry for order placed with foreign supplier.Record the entry to recognize the increase in the value ofthe foreign currency option.Record entry to recognize the decrease in the time valueof the option as an increase in cost of goods sold.4CreditRecord the entry to recognize the increase in the value ofthe foreign currency option.5Record entry to recognize the decrease in the time valueof the option as an increase in cost of goods sold. Req AReq B and CPrepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. (If no entry is requirefor a transaction/event, select "No journal entry required" in the first account field.)View transaction listRecord the entry to recognize the increase in the value of10>the foreign currency option.Record entry to recognize the decrease in the time valueof the option as an increase in cost of goods sold.67Record the exercise of foreign currency option.8Record the purchase of inventory.Credit9Record entry to transfer the amount accumulated inАОСІ.10 Record entry to transfer the cost of the raw materials tocost of goods sold.

Answered: Prepare all journal entries for the…

Business

Accounting

Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 14QA

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