Reference no: EM132912752
Question - MNC Corp. purchased parts from a Brazilian customer on December 1, 2020, with payment of 400,000 Brazilian Real due to be made on March 31, 2021. The following exchange rates apply: (Strike price $.60)
|
Date
|
Spot Rate
|
To March 31, 2016 all Option Premium
|
|
December 1, 2020
|
$.60
|
$.020
|
|
December 31, 2020
|
$.62
|
$.035
|
|
March 31, 2021
|
$.65
|
$.050
|
MNC entered into a call option on December 1, 2020 to buy 400,000 Real on March 31, 2020 at a strike price of $.60 and designated this option as a cash flow hedge.
Required -
1. Provide the journal entries required on December 1, 2020 to record the purchase of parts from the Brazilian supplier and the purchase of the call option.
2. Provide the 4 journal entries required at December 31, 2020 to account for the foreign payable, as well as the call option
3. Provide the 4 journal entries required at March 31, 2020 to account for the foreign payable, as well as the call option.
4. Provide all journal entries required at March 31, 2020 to record the payment made to the Brazilian supplier and to close out the call option.
5. Explain how your answer would have been different if the Call Option had been designated as a Fair Value Hedge. Please provide the rationale for this difference in accounting treatment.