4 On June 1, Alexander Corporation sold goods to a foreign customer at a price o

Question

4 On June 1, Alexander Corporation sold goods to a foreign customer at a price of 1,600,000 pesos and will receive payment iIn three months on September 1. On June 1, Alexander acquired an option to sell 1,600,000 pesos in three months at a strike price of $0.073 Relevant exchange rates and option premiums for the peso are as follows: 1.25 points Put Optio for September 1 June 1 June 30 September 1 $0.073 0.079 0.071 $0.0024 0.0021 N/A eBook Print References 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 recelvable, 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? Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B Req B2 receivable, Assuming that Alexander designates the foreign currency option as a cash flow hedge of a foreign currency nransre inurnal ontrine for these trancartinne in II S

Explanation / Answer

A cash flow hedge may be designated for a highly probable forecasted transaction, a firm commitment (not recorded on the balance sheet), foreign currency cash flows of a recognized asset or liability, or a forecasted intercompany transaction.

Option Cost /Hedging Expense.

Acquired Put Option for 1600,000 Pesos @ 0.0024$ = $3,840

Time Period = 3 months

Journal Entries

June-1

Accounts Receivable A/c Dr $116,800

To Sales A/c $116,800

Hedging Reserve A/c Dr $3,840

To Bank A/c $3,840

June-30

The change in fair value of the hedging asset is (0.0024 - 0.0021) * 1,600,000 = $480

OCI A/c Dr $480

To Hedging Reserve A/c $480

Sep-1

Bank A/c Dr $113,600

OCI A/c Dr $ 3,200

To Accounts Receivable A/c $116,800

Bank A/c Dr $3,200

To Hedging Reserve A/c $3,200

OCI A/c Dr $120

To Hedging Reserve A/c $120

Impact on Net Income

Q2:Decrease in $480

Q3:Decrease in $160

But if it was not taken, there would be a decrease in the net income in Q3 by $3,200

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