Question

Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,800 cases of wine at a price of 290 euros per case. The total purchase price is 522,000 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		$	0.045
September 30		1.50			1.54			0.080
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.

1. Assume that the wine arrived on September 15, and the company made payment on October 31. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase.

2. 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 522,000 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.

3. Vino Veritas ordered the wine on September 15. The wine arrived and the company paid for it on October 31. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 522,000 euros. The company properly designated the forward contract as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the forward rate. Prepare journal entries to account for the foreign currency forward contract, firm commitment, and import purchase.

4. The wine arrived on September 15, and the company made payment on October 31. On September 15, Vino Veritas purchased a 45-day call option for 522,000 euros. It properly designated the option as a cash flow hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency option.

5. The company ordered the wine on September 15. It arrived on October 31, and the company made payment on that date. On September 15, Vino Veritas purchased a 45-day call option for 522,000 euros. It properly designated the option as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured by referring to changes in the spot rate. Prepare journal entries to account for the foreign currency option, firm commitment, and import purchase.

Answer 1

The journal entries are as follows:

Date	Account Titles	Debit	Credit
Sep. 15	Inventory	$522,000
	Accounts Payable (Euro)		$522,000
Sep. 30	Foreign Exchange Loss	$26,100
	Accounts Payable (Euro)	(522,000*(1.50-1.45)	$26,100
Oct. 31	Foreign Exchange Loss	$26,100
	Accounts Payable (Euro)		$26,100
	Foreign Currency (Euro)	$574,200
	Cash		$574,200
	Accounts Payable (Euro)	$574,200
	Foreign Currency (Euro)		$574,200

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