On October 1, 2008, Fairchange Corporation ordered some equipment from a supplier for 300,000 euros. Delivery and payment are to occur on November 15, 2008. The spot rates on October 1 and November 15, 2008, are $1.20 and $1.30, respectively.

A. Assume that Fairchange purchased an option for $4,000 on October 1, 2008, to hedge 300,000 euros. The call option has an exercise price of $1.24. The values of the option on various dates are as follows:
October 1.... $ 4,000
November 15... $ 18,000
Furthermore, assume the equipment was purchased and paid for on November 15.
Prepare all journal entries needed to record and settle the hedge and to record the purchase of the equipment.
B. If the option was not acquired, record the journal entry to purchase the equipment.

  • CreatedMarch 13, 2015
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