On October 1, 2020, King Co. purchased equipment from a supplier in a foreign country. King agreed to pay 100,000 local currency units (lcu) in full payment for this equipment. Payment was to be made on February 1, 2021. On October 1, 2020, King entered into a forward exchange contract wherein 100,000 lcu would be purchased from a currency broker in four months. The spot rates and forward rates on various dates were as follows:

Date Spot Rate Forward Rate to 2/1/21

October 1, 2020 $0.40 = 1 lcu $0.38 = 1 lcu

November 1, 2020 $0.38 $0.36

December 1, 2020 $0.37 $0.35

December 31, 2020 $0.35 $0.33

February 1, 2021 $0.34

Required:

(A) Assume this hedge is designated as a cash flow hedge. Prepare the necessary journal entries relating to the transaction and the forward contract for 2020 and 2021 financial statements.

(B) Assume instead that the company purchased a foreign currency call option on 10/1/20 that gives them the option to buy 100,000 lcu at a strike price of $0.36 on 2/1/21. The price of the option is $1,400 on 10/1/20; $1,100 on 11/1/20; $1,250 on 12/1/20; and $1,000 on 12/31/20. The company designates the hedge as a fair value hedge. Prepare the necessary journal entries for 2020 and 2021 financial statements.

Answer rating: 100% (QA)

A Assume this hedge is designated as a cash flow hedge Prepare the necessary journal entries relating to the transaction and the forward contract for ... View the full answer