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Zorba Company, A us based importer of specialty olive oil, placed an order with a foreign supplier for 500 cases of olive oilat a price of 100 crowns ...

Question:

Zorba Company, A us based importer of specialty olive oil, placed an order with a foreign supplier for 500 cases of olive oilat a price of 100 crowns per case. The total purchase price is 50,000 crowns. Relevant exchange rates are as follows: Call Option Premium Forward Rate for January 31, Yr 2 Date Spot Rate to Jan. 31 yr 2 strike price $1.00 Dec. 1 Year 1 $1.00 $1.08 $0.04 Dec. 31 Year 1 $1.10 $1.12 $0.12 Jan. 31 Year 2 $1.15 $1.15 $0.15 Zorba Co. has an incremental borrowing rate of 12% (1% per month) and closes the books and prepares financial statements on Dec. 31. 1. Assume the Olive oil was received on Dec 1, Year 1 and payment was made on Jan 31 Year 2. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase 2. Assume the olive oil was received on Dec 1 Year 1 and payment was made on October January 31, Year 2. On Dec. 1, Zorba Co entered into a two month forward contract to purchase 50,000 crowns. The forward contract is properly designated as a fair value hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and forign currency forward contract. NOTE: This question is NOT our property; we are only suggesting solution of this question.

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