Exercise $1($LO $3,6)$ Hedging a foreign currency liability with an option desig$-$

nated as a fair value hedge. Williams Corporation imports, from a number of German

manufacturers, large machining equipment used in the tooling industry. On June $1,$ the com$-$

pany received delivery of a piece of machinery with a cost of $450,000$ euros when the spot rate

was $1$ euro equals $$1\mathrm{.}370.$ Williams had already paid $50,000$ euros, when the spot rate was $1$

euro equals $$1\mathrm{.}350,$ to the German company at the time of placing the order, and the balance

of the invoice was due in $60$ days after delivery. On June $15,$ the company became concerned

that the dollar would weaken relative to the euro and proceeded to purchase an option to buy

euros on July $31$ at a strike price of $1$ euro equals $$1\mathrm{.}375.$ The hedge was designated as a fair

value hedge. At the time of purchase, the out$-$of$-$the$-$money option had a value of $$1,400$ and a

value of $$2,600$ at June $30.$ Euro spot rates are as follows:

On July $31,$ the option was settled and the foreign currency was remitted to the German vendor.

Assuming that financial statements are prepared for June and July, identify all relevant

income statement and balance sheet accounts for the above transactions and determine the

appropriate monthly balances.