On October 1, 2018, Eagle Company forecasts the purchase of inventory from a Bri

Question

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?

Explanation / Answer

Journal entry

October 1 2018, foreign currency option debit $1800

Cash credit $1800

( Being inventory hedge by buying call Orion @$1800)

Thanks!

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