On June 1, 2015, Alex Company sells goods to a foreign customer at a price of 800,000 euros. It will receive payment in three months on Sep 1, 2015.

  1. On June 1, 2015, Alex Company sells goods to a foreign customer at a price of 800,000 euros. It will receive payment in three months on Sep 1, 2015. Relevant exchange rates and option premium for the euros are as follows:Forward Rate       Option Premium Date          Spot Rate          (to Sep. 1, 2015)     (strike price $1.10) June 1          1.09                     1.08                         0.034June 30        1.05                     1.07                         0.064Sep 1           1.02                      N/A                           N/A

Alex Company must close its books and prepare its second-quarter financial statements on June 30. The following A and B are independent situations.

 A. On June 1, Alex enters into a forward contract to sell 800,000 euros on Sep. 1, 2015. Alex’s incremental borrowing rate is 12% annually. Alex designates the forward contract as a fair value hedge of a foreign currency receivable. Prepare journal entries for these transactions in U.S. dollars. (24 points)

 B. On June 1, Alex acquired an option to sell 800,000 euros in three months at a strike price of $1.10 with a maturity date of Sep. 1, 2015. Alex designates the foreign currency option as a cash flow hedge of a foreign currency receivable. Prepare journal entries for these transactions in U.S. dollars. (28 points)

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