Question: Given its experience, Garnier Corporation expects that it will sell goods to a foreign customer at a price of 1 million lire on March 15, Year 2. To hedge this forecasted transaction, a three-month put option to sell 1 million lire is acquired on December 15, Year 1. Garnier selects a strike price of $0.15 per lire, paying a premium of $0.005 per unit, when the spot rate is $0.15. The spot rate decreases to $.14 at December 31, Year 1, causing the fair value of the option to increase to $12,000. By March 15, Year 2, when the goods are delivered and payment is received from the customer, the spot rate has fallen to $0.13, resulting in a fair value for the option of $20,000.
Required: Prepare all journal entries for the option hedge of a forecast transaction and for the export sale assuming that December 31 is Garnier Corporation's yearend. What is the overall impact on net income over the two accounting periods? What is the net cash inflow from this export sale?