Call Options Hedging Foreign Currency Debt Taking advantage of lower interest rates in the United Kingdom, Carlton Inc., a U.S. firm, borrowed £2,000,000 on July 1, 2012, to be repaid in one year. When the transaction occurred, the exchange rate was $1.50/£. To hedge against possible appreciation of the British pound, Carlton paid a premium of $0.014/£ for July 2013 call options on £2,000,000, with a strike price of $1.49/£. Because the calls are hedging a foreign-currency-denominated obligation, hedge accounting does not apply and there is no need to designate all or part of the option premium as the hedge instrument. On December 31, 2012, when Carlton's books are closed, the exchange rate is $1.55/£, and the calls are selling for $0.069/£. On June 30, 2013, Carlton sells the calls for $0.I2/£. The exchange rate at that time is$1.61/£.
Required
Prepare Carlton's journal entries made on July 1, 2012, December 31, 2012, and June 30, 2013, to recognize the calls' value changes and the exchange rate adjustments on the debt. Ignore interest on and repayment of the debt.