Big Arber Company ordered parts from a foreign supplier on November 20 at a price of 70,000 pijios when the spot rate was $0.29 per pijio. Delivery and payment were scheduled for December 20. On November 20, Big Arber acquired a call option on 70,000 pijios at a strike price of $0.29, paying a premium of $0.006 per pijio. It designates 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 parts arrive and Big Arber makes payment according to schedule. Big Arber does not close its books until December 31.
a. Assuming a spot rate of $0.30 per pijio on December 20, prepare all journal entries to account for the option and firm commitment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
1. Record the foreign currency option.
2. Record entry for order placed with foreign supplier.
3. Record gain or loss on the firm commitment.
4. Record gain or loss on the foreign currency option.
5. Record the entry for foreign currency acquired at the spot rate.
6. Record receipt of goods and payment made.
7. Record entry to close the firm commitment.
b. Assuming a spot rate of $0.27 per pijio on December 20, prepare all journal entries to account for the option and firm commitment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
1. Record the foreign currency option.
2. Record entry for order placed with foreign supplier.
3. Record gain or loss on the firm commitment.
4. Record gain or loss on the foreign currency option.
5. Record entry for foreign currency acquired at spot rate.
6. Record receipt of goods and payment made.
7. Record entry to close the firm commitment.