Option contract designated as a cash flow hedge of a forecasted foreign$-$currency$-$denominated sales transaction, strengthening $US

On January $5,2022,$ our company receives a nonbinding purchase order for sale of merchandise to a customer in Slovakia, with delivery of the merchandise scheduled for June $30,2022.$ The customer preliminarily agreed to pay $600,000$ for the merchandise, and payment is due from the customer upon delivery. On January $5,2022,$ our company also purchases an option that gives our company the right to sell $($i$.$e$.,$ put$)600,000$ on any date until June $30,2022($i$.$e$.,$ it is an $$American$-$style$$ option$)$ for $$1\mathrm{.}30$:$1($i$.$e$.,$ the spot rate on January $5,2022).$ On January $5,2022,$ the fair value of the option $($i$.$e$.,$ the option premium$)$ is $$18,000.$ In addition, our company elected to immediately include in the determination of net income all of the change in option value attributable to factors excluded from the assessment of hedge effectiveness $($ i$.$e$.,$ the non$-$intrinsic$-$value components, like time value$).$ The relevant exchange rates and related balances for the period from January $5,2022,$ to June $30,2022,$ are as follows:

Option Contract

Spot Rate Sale Fair Change in Intrinsic Change in Other Sources Change in

Date $($$US $=1)$ Transaction Value $($a$)$ Fair Value Value $($b$,$c$)$ Intrinsic Value of Value $($d$)$ Other Value

Jan. $5,20221\mathrm{.}30$ $$18,000-$ $$18,000$

Mar. $31,20221\mathrm{.}2540,800$ $$22,800$ $$30,000$ $$30,00010,800$ $$(7,200)$

Jun. $30,20221\mathrm{.}21$ $$726,00054,00013,20054,00024,000-(10,800)$

a Derived from an option pricing model such as the Black$$Scholes model

b $(600,000\backslash$times $$1\mathrm{.}30$:$1)(600,000\backslash$times $$1\mathrm{.}25$:$1)$

c $(600,000\backslash$times $$1\mathrm{.}30$:$1)(600,000\backslash$times $$1\mathrm{.}21$:$1)$

d Fair value $$ intrinsic value $($i$.$e$.,$ equals the residual fair value derived from all sources except for intrinsic value $[$e$.$g$.,$ time value$])$

a$.$ Prepare the journal entries to record all the adjustments required for the forecasted sale and option contract on January $5,2022,$ March $31,2022,$ and June $30,2022.$

Note: If no journal entry is required, select No entry $-$ debit and No entry $-$ credit as your Account answers and leave the Debit and Credit amounts blank $($zero$).$

Hedged Transaction

Date Account Debit Credit

$5-$Jan$-22$

Option contract $($asset$)$

Answer

Cash

Answer

$($Option recorded at fair value$)$

$31-$Mar$-22$

No entry $-$ debit

Answer

No entry $-$ credit

Answer

$($to recognize the change in the fair value of the option$)$

$30-$Jun$-22$

Answer

Answer

$($to record sale of inventory at the spot rate$)$

CF Hedge: Entries assuming all of excluded option value change runs through income

Date Account Debit Credit

$5-$Jan$-22$

Answer

Answer

$($Option recorded at fair value$)$

$31-$Mar$-22$

Answer

Answer

Answer

$($to recognize the change in the fair value of the option$)$

$30-$Jun$-22$

Answer

Answer

Answer

$($to recognize the change in the fair value of the option$)$

Answer

Answer

$($to record the net settlement of the option contract$)$

$30-$Jun$-22$

Answer

Answer

$($to record the reclassification of the cash flow hedge gains$)$

CF Hedge: Entries assuming excluded option value amortized through income

Date Account Debit Credit

$5-$Jan$-22$

Answer

Answer

$($Option recorded at fair value$)$

$31-$Mar$-22$

Answer

Answer

Answer

$($to recognize the change in the fair value of the option$)$

$30-$Jun$-22$

Answer

Answer

Answer

$($to recognize the change in the fair value of the option$)$

Answer

Answer

$($to record the net settlement of the option contract$)$

Answer

Answer

$($to record the reclassification of the cash flow hedge gains$)$

b$.$ What amount of sales was recognized in the quarter ending March $31,2022?$ What amount of sales was recognized in the quarter ending June $30,2022?$

Note: Use negative signs with your answers, when appropriate.

Sales recognized in Q$12022$: Answer

Sales recognized in Q$22022$: Answer

Total across both quarters Answer