FIU foreign currency Income Statemet Worksheet

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Assignment 4
Related Material: Chapter 6 of the textbook
Problem 1 (total 100 points)
Panthers Corp., a U.S. importer of wine, placed an order with an Italian wine producer
for 1,000,000 bottles, at a price of Euro 15 per bottle. Relevant exchange rates are:
Date
1-Nov-21
31-Dec-21
31-Jan-22
Forward Rate (to
January 31, 2022)
Spot Rate
$
1.119
1.123
1.121
$
1.125
1.130
1.121
Call Option Premium
for January 31, 2022
(strike price $1.119)
0.005
0.007
0.002
Panthers has an incremental borrowing rate of 12 percent (1 percent per month) and
prepares the financial statements on December 31.
Required:
a) The wine was received on November 1, 2021, and payment was made on
January 31, 2022. On November 1, Panthers purchased a three-month call
option for Euro 15 million. The call option contract was properly designated as a
cash flow hedge of a foreign currency payable. Prepare the journal entries to
account for the import purchase and foreign currency option. (20 points)
b) The wine was ordered on November 1, 2021. It was received and paid for on
January 31, 2022. On November 1, Panthers purchased a three-month call
option for Euro 15 million. The option was properly designated as a fair value
hedge of a foreign currency firm commitment. The fair value of the firm
commitment is measured through reference to changes in the spot rate. Prepare
the journal entries to account for the foreign currency option, firm commitment,
and import purchase. (20 points)
c) How would you change your answer in a) and b) if spot rates on January 31,
2022 were Euro 1 = $ 1.115. (10 points)
d) The wine was ordered on November 1, 2021. It was received and paid for on
January 31, 2022. On November 1, Panthers entered into a three-month forward
contract to purchase Euro 15 million. The forward contract is properly designated
as a fair value hedge of a foreign currency commitment. The fair value of the firm
commitment is measured through reference to changes in the forward rate.
Prepare the journal entries to account for the foreign currency forward contract,
firm commitment, and import purchase. (20 points)
e) Assume that Panthers has a long-term relationship with an Italian wine producer
and can reliably forecast that it will need to buy Euro 15 million of the 2021
vintage in February 2022. On November 1, 2021 Panthers purchased a threemonth call option for Euro 15 million. The option was properly designated as a
cash flow hedge of a forecasted transaction. On February 15, 2022 Panthers
places the order and pays the Italian wine producer. Prepare the journal entries
to account for the foreign currency option and import purchase. (20 points)
f) Summarize the difference in income under the alternative scenarios. (10 points)

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Tags:
Income Statement

Foreign Currency

Cashflow Hedge

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