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Felix Toy Company (Felix) is a U.S.-based company that sells toys through its online store in the United States. Felix regularly purchases inventory from a supplier located in Xiamen, China, and makes payment in Chinese yuan. The following spot exchange rates, forward exchange rates, and call option premia for Chinese yuan exist during the period August to October. Problem Spot Rate Date August 1 September 30 October 31 $0.148 U.S. Dollar (USD) per Chinese Yuan (CNY) Forward Rate to October 31 Call Option Premium for October 31 (strike price $0.143) $0.0081 0.151 0.0123 0.154 (spot) N/A $0.143 0.149 0.154 Part 1 On August 1, Felix imports inventory from its Chinese supplier at a price of 1 million Chinese yuan. It receives the inventory on August 1, but it does not pay for it until October 31. On August 1, Felix purchases a three-month call option on 1 million Chinese yuan with a strike price of $0.143. 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. The inventory is sold in November. Assume that the option is designated as a fair value hedge of the foreign currency liability. Prepare all the necessary journal entries. Part 2 On August 1, Felix imports inventory from its Chinese supplier at a price of 1 million Chinese yuan. It receives the inventory on August 1, but it does not pay for it until October 31. On August 1, Felix enters into a forward contract to purchases 1 million Chinese yuan on October 31. The forward points on the forward contract are excluded in assessing hedge effectiveness and are amortized to net income using a straight-line method on a monthly basis. The inventory is sold in November. Assume that the forward contract is designated as a cash flow hedge of the foreign currency liability. Prepare all the necessary journal entries. Felix Toy Company (Felix) is a U.S.-based company that sells toys through its online store in the United States. Felix regularly purchases inventory from a supplier located in Xiamen, China, and makes payment in Chinese yuan. The following spot exchange rates, forward exchange rates, and call option premia for Chinese yuan exist during the period August to October. Problem Spot Rate Date August 1 September 30 October 31 $0.148 U.S. Dollar (USD) per Chinese Yuan (CNY) Forward Rate to October 31 Call Option Premium for October 31 (strike price $0.143) $0.0081 0.151 0.0123 0.154 (spot) N/A $0.143 0.149 0.154 Part 1 On August 1, Felix imports inventory from its Chinese supplier at a price of 1 million Chinese yuan. It receives the inventory on August 1, but it does not pay for it until October 31. On August 1, Felix purchases a three-month call option on 1 million Chinese yuan with a strike price of $0.143. 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. The inventory is sold in November. Assume that the option is designated as a fair value hedge of the foreign currency liability. Prepare all the necessary journal entries. Part 2 On August 1, Felix imports inventory from its Chinese supplier at a price of 1 million Chinese yuan. It receives the inventory on August 1, but it does not pay for it until October 31. On August 1, Felix enters into a forward contract to purchases 1 million Chinese yuan on October 31. The forward points on the forward contract are excluded in assessing hedge effectiveness and are amortized to net income using a straight-line method on a monthly basis. The inventory is sold in November. Assume that the forward contract is designated as a cash flow hedge of the foreign currency liability. Prepare all the necessary journal entries