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Prepare all journal entries for option hedge of a forecasted

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Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,700,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 1,700,000 francs in three months. Maas selects a strike price of $0.76 per franc when the spot rate is $0.76 and pays a premium of $0.001 per franc. The spot rate increases to $0.763 at December 31, 2020, causing the fair value of the option to increase to $6,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.78, resulting in a fair value for the option of $34,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements.

Problem 1: Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials.

Problem 2: What is the overall impact on net income over the two accounting periods?

Problem 3: What is the net cash outflow to acquire the raw materials?

Reference no: EM132959729

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