6. On October 1, 2018, Eagle Company forecasts the purchase of inventory from a
ID: 2591450 • Letter: 6
Question
6. On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds. On October 1, 2018, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2018, the option has a fair value of $1,600. The following spot exchange rates apply:
Date
Spot Rate
October 1, 2018
$2.00
December 31, 2018
$1.97
February 1, 2019
$2.01
(a.) What journal entry should Eagle prepare on October 1, 2018?
Date
Spot Rate
October 1, 2018
$2.00
December 31, 2018
$1.97
February 1, 2019
$2.01
Explanation / Answer
date title& explanation Debit Credit
October 1, 2018 foreign currency option Dr 1800
Cr cash 1800
eagle pays 3month call option
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