Question:
On June 1, Alexander Corporation sold goods to a foreign customer at a price of 1,400,000 pesos and will receive payment in three months on September 1. On June 1, Alexander acquired an option to sell 1,400,000 pesos in three months at a strike price of $0.055.
Relevant exchange rates and option premiums for the peso are as follows:
Date Spot Rate Put Option Premium
for September 1
(strike price $0.055)
June 1 $ 0.055 $ 0.0021
June 30 0.059 0.0017
September 1 0.054 N/A
Alexander must close its books and prepare its second-quarter financial statements on June 30.
a-1. Assuming that Alexander designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for these transactions in U.S. dollars.
a-2. What is the impact on net income over the two accounting periods?
b-1. Assuming that Alexander designates the foreign currency option as a fair value hedge of a foreign currency receivable, prepare journal entries for these transactions in U.S. dollars.
b-2. What is the impact on net income over the two accounting periods?