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"On June 1, Hamilton Corporation purchased goods from a foreign supplier at a price of 1,000,000 markkas. It will make payment in three months on September 1. On June 1, Hamilton acquired an option to purchase 1,000,000 markkas in three months at a strike price of $0.085. Relevant exchange rates and option premiums for the markka are as follows:

Date Spot Rate Call Option Premium for September 1 (strike price $0.085)
June 1 $0.085 $0.002
June 30 $0.088 $0.004
Sept 1 $ 0.090 n/a

Hamilton must close its books and prepare its second-quarter financial statements on June 30.

Assuming that Hamilton designates the foreign currency option as a cash flow hedge of a foreign currency payable.
(a-1)Prepare journal entries for these transactions in U.S. dollars.
(a-2) What is the impact on net income over the two accounting periods?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M951656

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