Pacifico Company, a U$.$S$.-$based importer of beer and wine, purchased $2,100$ cases of Oktoberfest$-$style beer from a German supplier for $525,000$ euros. Relevant U$.$S$.$ dollar exchange rates for the euro are as follows:

Date Spot Rate Forward Rate to October $15$ Call Option Premium for October $15($strike price $$1\mathrm{.}60)$

August $15$ $ $1\mathrm{.}60$ $ $1\mathrm{.}66$ $ $0\mathrm{.}05$

September $301\mathrm{.}651\mathrm{.}690\mathrm{.}06$

October $151\mathrm{.}681\mathrm{.}68($spot$)$ N$/$A

The company closes its books and prepares third$-$quarter financial statements on September $30.$

Required:

d$.$ Assume that the company ordered the beer on August $15.$ The beer arrived and the company paid for it on October $15.$ On August $15,$ the company purchased a two$-$month call option on $525,000$ euros. The company designated the option as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the spot rate. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Prepare journal entries to account for the foreign currency option, foreign currency firm commitment, and import purchase.

Journal entry worksheet

Record purchase of foreign currency for settling the accounts payable.

Note: Enter debits before credits. Journal entry worksheet

Record purchase of inventory from the German supplier.

Note: Enter debits before credits. Journal entry worksheet

$1$

$2$

$3$

$4$

$5$

$6$

$7$

$8$

$9$

Record the transfer of inventory to cost of goods sold.

Note: Enter debits before credits. Journal entry worksheet

$1$

$2$

$3$

$4$

$5$

$6$

$7$

$8$

$9$

Record the adjustment of cost of goods sold to the extent of firm commitment.

Note: Enter debits before credits.

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