Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a
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Leickner selects a strike price of $0.58 per mark, paying a premium of $0.005 per unit, when the spot rate is $0.58. The spot rate increases to $0.584 at December 31, 2011, causing the fair value of the option to increase to $8,000. By March 15, 2012, when the raw materials are purchased, the spot rate has climbed to $0.59, resulting in a fair value for the option of $10,000.
a. 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 2012.
b. What is the overall impact on net income over the two accounting periods?
c. What is the net cash outflow to acquire the raw materials?
Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
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Related Book For
Advanced Accounting
ISBN: 978-0077431808
10th edition
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
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