Spitz Company ordered merchandise from a foreign supplier on November 20 at a pr

Question

Spitz Company ordered merchandise from a foreign supplier on November 20 at a price of 111,000 forints when the spot rate was $0.20 per forint. Delivery and payment were scheduled for December 20. On November 20, Spitz acquired a call option on 111.000 forints at a strike price of $0.20, paying a premium of $0.01 per forint. It designates the option as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the spot rate. The merchandise arrives and Spitz makes payment according to schedule. Spitz sells the merchandise by December 31, when it closes its books. oints Assuming a spot rate of $0.23 per forint on December 20, prepare all journal entries to account for the foreign currency option. foreign currency firm commitment, and purchase of inventory. eBook b. Assuming a spot rate of $018 per forint on December 20, prepare all journal entries to account for the foreign currency option, foreign currency firm commitment, and purchase of inventory Print Complete this question by entering your answers in the tabs below References Required AReqjured B

Explanation / Answer

Solution a:

Solution b:

Journal Entries - Spitz Company Date Particulars Debit Credit 20-Nov Foreign Currency Option Dr $1,110.00        To Cash $1,110.00 (Being call option purchased) 20-Dec Cash A/c Dr (111000*0.03) $3,330.00        To Foreign Currency Option $1,110.00        To Gain on settlement of call option - Income $2,220.00 (Being settlement of call option) 20-Dec Merchandise Inventory Dr (111000*$0.23) $25,530.00        To Cash $25,530.00 (Being inventory purchased from foreign supplier)

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