On March 1 a company committed to acquire 10 000 units
On March 1, a company committed to acquire 10,000 units of inventory to be delivered on May 31. The purchase price is to be paid in foreign currency (FC) in the amount of 200,000 FC. Changes in the value of the commitment are measured as the difference between spot rates over time with appropriate discounting. Assume that the commitment’s negative values are $7,960 and $14,000 as of March 31 and May 31, respectively. Also assume that the inventory will be processed further during the month of June at a cost of $12.50 per unit and will be sold on July 10 to a customer for $90 per unit. On March 1, the company also forecasted the purchase of a piece of equipment to be delivered on May 31 with a cost of 200,000 FC. The equipment was placed into service at the beginning of July and has a useful life of 12 years and a salvage value of $74,000. On March 1, the company borrowed 200,000 FC from a foreign bank at an interest rate of 6.0% with interest and principal to be repaid on May 31.
Assume that on March 1 the company acquired three identical options to buy FC on May 31 with each option to be designated as a hedge for each of the three situations described above. Information relating to each option is as follows:
For each of the three hedged situations, prepare a schedule to show the impact on earnings for each of the first three calendar quarters of the year noting that all hedges are to be considered cash flow hedges.
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