Based on past experience, Leickner Company expects to purchase raw materials fro

Question

Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,200,000 marks on March 15, 2018. To hedge this forecasted transaction, the company acquires a three-month call option to purchase 1,200,000 marks on December 15, 2017. Leickner selects a strike price of $0.68 per mark, paying a premium of $0.005 per unit, when the spot rate is $0.68. The spot rate increases to $0.686 at December 31, 2017, causing the fair value of the option to increase to $10,000. By March 15, 2018, when the raw materials are purchased, the spot rate has climbed to $0.70, resulting in a fair value for the option of $24,000.

Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials, assuming that December 31 is Leickner's year-end and that the raw materials are included in the cost of goods sold in 2018.

What is the overall impact on net income over the two accounting periods?

What is the net cash outflow to acquire the raw materials?

Explanation / Answer

Part 1

Part 2

Impact on

Net Income

2017

Option expense (overall impact on net income over the first accounting period)....... $ (1,200)

2018

Cost of goods sold (1200000*0.70)......... (840,000)

Option expense (6000-1200)........................ (4800)

Adjustment to net income............................ 24,000

Overall impact on net income over the second accounting period............................................................ $(820,800)

overall impact on net income over the two accounting periods........................................................... $(822,000)

Part 3

Net cash outflow for parts: $585,000 = ($5,000 + $580,000)

No. date account titles and explanation debit credit 1. 12/15/2017 Foreign currency option 6000 Cash (1200000*0.005) 6000 2. 12/15/2017 No journal entry required 3. 12/31/2017 Foreign currency option 4000 Accumulated other comprehensive income (10000-6000) 4000 4. 12/31/2017 option expense 1200 Accumulated other comprehensive income (1200000*(0.686-0.68))-6000 1200

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.