On November 1, 2008, Nova Corporation of the United States buys inventory from Q
ID: 2584041 • Letter: O
Question
On November 1, 2008, Nova Corporation of the United States buys inventory from Queen Ltd. Of Canada for 90,000 Canadian dollars to be paid on January 31, 2009. Also on November 1, 2008, Nova paid $.052 per Canadian dollar for an option with a strike price of $.80. The following spot rates and option premiums apply:
Nova chooses to designate the option as a cash flow hedge of the foreign currency denominated sale.
Required: Record all journal entries associated with these transactions and be sure to date the entries.
Spot Option Premium 11/1/2008 $.80 $.052 12/31/2008 $.86 $.095 1/31/2009 $.91 $.11Explanation / Answer
Journal entries:
On 11/1/2008: To record option premium or purchase price of call option.
Call option Dr $4,680 ($0.052*90,000)
Cash Cr $4,680
On 12/31/2008: To record increase in intrinsic value of call option.
Call option Dr $5,400 (0.06*90,000)
Unrealized holding gain or loss- Income Cr $5,400
On 1/31/2009: To record increase in intrinsic value of call option.
Call option Dr $4,500 (0.05*90,000)
Unrealized holding gain or loss- Income Cr $4,500
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