please solve and explain

Complete foreign financial statement conversions.

Acme Corporation, a U.S.-based importer of beer and wine, purchased 1,000 cases of Oktoberfest-style beer from Coyote for 50,000 euros before purchasing the company. Relevant US 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 $1.10)

August 15

$1.10

$1.16

$0.05

September 30

1.15

1.19

0.06

October 15

1.18

1.18 (spot)

N/A

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

1. Assume that the beer arrived on August 15, and the company made payment on October 15. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase.

Journal Entries (Unhedged)

Debit

Credit

August 15

Inventory

55000

Accounts payable

55000

September 30

Accounts payable

2500

Foreign Exchange Loss

2500

October 15

Accounts payable

1500

Foreign Exchange Loss

1500

Date of

Accounts payable

59000

Sale

Cash

59000

2. Assume that the beer arrived on August 15, and the company made payment on October 15. On August 15, the company entered into a two-month forward contract to purchase 50,000 euros. The company designated the forward contract as a cash flow hedge of a foreign currency payable. Forward points are excluded in assessing hedge effectiveness and amortized to net income using a straight line method on a monthly basis. Prepare journal entries to account for the import purchase and foreign currency forward contract.

Journal Entries (Forward Contract)

Debit

Credit

August 15

inventory

55000

accounts payable

55000

September 30

Date

Spot Rate

Forward Rate to October 15

Call Option Premium for October 15 (strike price $1.10)

August 15

$1.10

$1.16

$0.05

September 30

1.15

1.19

0.06

October 15

1.18

1.18 (spot)

N/A

October 15

Date of

Sale