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Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,700 cases of wine at a price of 270 euros per case. The total purchase price is 459,000 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 $1.35)
September 15	$	1.35		$	1.41		$	0.050
September 30		1.40			1.44			0.085
October 31		1.45			1.45			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.

D. 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 459,000 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.

1. record the purchase of wine from the french supplier 7. record the entry for changes in the exchange rate

2. record purchase of foreign currency option as an asset 8. record entry to adjust the fair value of the option

3. record the entry for changes in the exchange rate 9. record the gain or loss on the option

4.record entry to adjust for the fair value of the option 10. record option expense

5.record the gain or loss on the option 11. record settlement of forward contract

6.record option expense 12. record payment made to foreign supplier

E. 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 459,000 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.

1. record purchase of foreign currency option as an asset 5. record gain or loss on firm commitment

2. record gain or loss on foreign currency option 6. record settlement of forward contract

3. record gain or loss on firm commitment 7. record the receipt of goods and payment made

4. record gain or loss on foreign currency option 8. record entry to close the firm commitment

ACCOUNT TITLES

no journal entry required

accounts payable (euro)

accounts receivable (euro)

AOCI

adjustment to net income

cash

discount expense

equipment

firm commitment

foreign currency (euro)

foreign currency option

foreign exchange gain

foreign exchange loss

forward contract

gain on firm commitment

gain on foreign contract

gain on foreign currency option

gain on forward contract

interest expense

inventory

loss on firm commitment

loss on foreign contract

loss on foreign currency option

loss on forward contract

option expense

sales

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