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Make journal entries to account for the import purchase

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Reference no: EM132771940

Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,900 cases of wine at a price of 290 euros per case. The total purchase price is 551,000 euros.

Relevant exchange rates for the euro are as follows:

Date                         Spot Rate            Forward Rate to October 31          Call Option Premium for October 31 (strike price $1.45)
September 15            $ 1.45                   $ 1.51                                    $ 0.060
September 30          1.50                       1.54                                           0.095
October 31           1.55                            1.55                                        0.100

Vino Veritas Company has an incremental borrowing rate of 12 percent (1 percent per month) and closes the books and prepares financial statements at September 30.

Problem a. Assume that the wine arrived on September 15, and the company made payment on October 31. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 551,000 euros. It properly designated the forward contract as a fair value hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency forward contract.

 

Reference no: EM132771940

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