What is the solution to this problem?
Vino Veritas Company, a U.S.âbased importer of wines and spirits, placed an order with a French supplier for 1,500 cases of wine at a price of 250 euros per case. The total purchase price is 375,000 euros. Relevant exchange rates for the euro are as follows:
Date Spot Rate Forward Rate to
October 31, 2015 Call Option Premium
for October 31, 2015
(strike price $1.25) September 15, 2015 $ 1.25 $ 1.31 $ 0.040 September 30, 2013 1.30 1.34 0.075 October 31, 2015 1.35 1.35 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.
a.
Assume that the wine arrived on September 15, 2015, and the company made payment on October 31, 2015. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
b.
Assume that the wine arrived on September 15, 2015, and the company made payment on October 31, 2015. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 375,000 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your present value interest factor to four decimal places. Round your answers to 2 decimal places.)
c.
Vino Veritas ordered the wine on September 15, 2015. The wine arrived and the company paid for it on October 31, 2015. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 375,000 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your present value interest factor to four decimal places. Round your answers to 2 decimal places.)
d.
The wine arrived on September 15, 2015, and the company made payment on October 31, 2015. On September 15, Vino Veritas purchased a 45-day call option for 375,000 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your present value interest factor to four decimal places.)
e.
The company ordered the wine on September 15, 2015. It arrived on October 31, 2015, and the company made payment on that date. On September 15, Vino Veritas purchased a 45-day call option for 375,000 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your present value interest factor to four decimal places. Round your answers to the nearest dollar amount.)
What is the solution to this problem?
Vino Veritas Company, a U.S.âbased importer of wines and spirits, placed an order with a French supplier for 1,500 cases of wine at a price of 250 euros per case. The total purchase price is 375,000 euros. Relevant exchange rates for the euro are as follows:
| Date | Spot Rate | Forward Rate to October 31, 2015 | Call Option Premium for October 31, 2015 (strike price $1.25) | ||||||
| September 15, 2015 | $ | 1.25 | $ | 1.31 | $ | 0.040 | |||
| September 30, 2013 | 1.30 | 1.34 | 0.075 | ||||||
| October 31, 2015 | 1.35 | 1.35 | 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. |
| a. | Assume that the wine arrived on September 15, 2015, and the company made payment on October 31, 2015. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) |
| b. | Assume that the wine arrived on September 15, 2015, and the company made payment on October 31, 2015. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 375,000 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your present value interest factor to four decimal places. Round your answers to 2 decimal places.) |
| c. | Vino Veritas ordered the wine on September 15, 2015. The wine arrived and the company paid for it on October 31, 2015. On September 15, Vino Veritas entered into a 45-day forward contract to purchase 375,000 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your present value interest factor to four decimal places. Round your answers to 2 decimal places.) |
| d. | The wine arrived on September 15, 2015, and the company made payment on October 31, 2015. On September 15, Vino Veritas purchased a 45-day call option for 375,000 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your present value interest factor to four decimal places.) |
| e. | The company ordered the wine on September 15, 2015. It arrived on October 31, 2015, and the company made payment on that date. On September 15, Vino Veritas purchased a 45-day call option for 375,000 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your present value interest factor to four decimal places. Round your answers to the nearest dollar amount.) |
Related questions
Problem 15-15 Sales-type lease; bargain purchase option exercisable before lease term ends; lessor and lessee [LO15-3, 15-5, 15-6, 15-7, 15-8]
| Mid-South Auto Leasing leases vehicles to consumers. The attraction to customers is that the company can offer competitive prices due to volume buying and requires an interest rate implicit in the lease that is one percent below alternate methods of financing. On September 30, 2013, the company leased a delivery truck to a local florist, Anything Grows. |
| The lease agreement specified quarterly payments of $5,500 beginning September 30, 2013, the inception of the lease, and each quarter (December 31, March 31, and June 30) through June 30, 2016 (three-year lease term). The florist had the option to purchase the truck on September 29, 2015, for $11,000 when it was expected to have a residual value of $18,000. The estimated useful life of the truck is four years. Mid-South Auto Leasingâs quarterly interest rate for determining payments was 3% (approximately 12% annually). Mid-South paid $41,000 for the truck. Both companies use straight-line depreciation. Anything Growsâ incremental interest rate is 12%. |
| Hint: A lease term ends for accounting purposes when an option becomes exercisable if itâs expected to be exercised (i.e., a BPO). (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) |
| Required: | |
| 1. | Calculate the amount of dealerâs profit that Mid-South would recognize in this sales-type lease. (Be careful to note that, although payments occur on the last calendar day of each quarter, since the first payment was at the inception of the lease, payments represent an annuity due.) |
| 2. | Prepare the appropriate entries for Anything Grows and Mid-South on September 30, 2013. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) |
| 3. | Prepare an amortization schedule(s) describing the pattern of interest expense for Anything Grows and interest revenue for Mid-South Auto Leasing over the lease term. (Enter your answers in whole dollars.) |
| 4. | Prepare the appropriate entries for Anything Grows and Mid-South Auto Leasing on December 31, 2013.(If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) |
| 5. | Prepare the appropriate entries for Anything Grows and Mid-South on September 29, 2015, assuming the bargain purchase option was exercised on that date. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) |
