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Activity Forecasted Transaction and Options

On December 1, 2020 XYZ Corp estimates it will purchase $5,000 of inventory on March 1, 2021. To hedge this transaction, the company enters a 90-day forward contract on the same date to purchase $5,000 on March 1. The company records the inventory purchase and forward contract on March 1, 2021. It sells 60% of inventory on June 30, 2021 and the remaining 40% on September 30, 2021. The summary provides high-level information about the company's planned inventory purchase, the forward contract entered to hedge it, and the timing of related transactions.

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Santiago Buladaco
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146 views

Activity Forecasted Transaction and Options

On December 1, 2020 XYZ Corp estimates it will purchase $5,000 of inventory on March 1, 2021. To hedge this transaction, the company enters a 90-day forward contract on the same date to purchase $5,000 on March 1. The company records the inventory purchase and forward contract on March 1, 2021. It sells 60% of inventory on June 30, 2021 and the remaining 40% on September 30, 2021. The summary provides high-level information about the company's planned inventory purchase, the forward contract entered to hedge it, and the timing of related transactions.

Uploaded by

Santiago Buladaco
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Problem 1

On December 1, 2020, XYZ Corp. estimates that 10,000 units of inventory will be purchased from US
supplier on March 1, 2021 for $5,000. The transactions is probable and is to be denominated in US
Dollars. Sales of inventory is expected to occur within the year.

On the same date, the company entered into a 90-day forward contract to purchase $5,000 on March
1,2021. The exchange rates available on various dates are as follows:

12/01/2020 12/31/2020 03/1/2021

Spot rate P52 P52.45 P52.40

30-day forward rate 52.10 52.50 52.35

60-day forward rate 52.20 52.60 52.50

90-day forward rate 52.30 52.75 52.45

On March 1, 2021 the purchase transaction materialized. 60% of inventory items were sold on June 30,
2021 while the remaining 40% were sold on September 2021.

Required: Prepare the necessary journal entries to the record the foregoing assuming:

a. OCI G/L will be reclassified to P/L in the same period(s) which the hedged item affect P/L.
b. OCI G/L will be closed to the initial carrying amount of the hedged item.

Problem 2

On December 1, 2013 LG Company paid P 6,000 to purchase a 90-day put option for FC 400,000.

The options purpose is to hedge an exposed accounts receivable of P 400,000 from a sale of
merchandise. The Merchandise is to be shipped on December 1, 2013,payment for which is due on
March 1, 2014.

Relevant rates and market values at diffeerent dates are as follows:

12/01/2013 12/31/2013 03/01/2014

Spot rate (market price) P 1.20 P 1.12 P 1.13

Strike price ( exercise price) 1.21 1.20 1.20

Fair value of put option P 6,000 P 36,000 P 28,000

Required: Prepare all journal entries for the above information.

Problem 3
Problem On September 1, 2016, 2B Co. anticipated the purchase of merchandise from a foreign vendor
at a price of P $1,000. The purchase would probably occur on January 30, 2017. On the same date 2B Co.
purchased a 150-day call option to buy $1000 at an option price of P 20 by paying on option premium of
P 200. The forecasted purchase occurred on date anticipated. For the year ended December 31, 2017,
only 40% of purchased inventories from the vendor were sold to third person. Changes in the time value
of the option will be taken to profit or loss (ineffective portion).The following data are provided:
November 1,2016 December 31, 2016 January 30,2017
Selling spot rate P 20 P 24 P 21
Fair value of call option ? P 5,000 ?

Required: Prepare the necessary journal entries to the record the foregoing assuming:

a. OCI G/L will be reclassified to P/L in the same period(s) which the hedged item affect P/L.

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