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On October 1, 2013, Eagle Company Forecasts the Purchase of Inventory

question 19

Multiple Choice

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: $\begin{array}{|l|c|}\hline \text { Date } & \text { Spot Rate } \\\hline \text { October 1,2013 } & \$ 2.00 \\\hline \text { December 31,2013 } & \$ 1.97 \\\hline \text { February 1,2014 } & \$ 2.01 \\\hline\end{array}$ What journal entry should Eagle prepare on October 1, 2013? $\begin{array} { | l | c | r | r | } \hline \text { A) } & \text { Cash } & 1,800 & \\\hline & \text { Foreign Currency Option } & & 1,800 \\\hline \text { B) } & \text { Forward Contract } & 1,800 & \\\hline & \text { Cash } & & 1,800 \\\hline \text { C) } & \text { Foreign Currency Option } & 1,800 & \\\hline & \text { Gain on Foreign Currency } & & 1,800 \\\hline \text { D) } & \text { Loss on Foreign Currency } & 1,800 & \\\hline & \text { Cash } & & 1,800 \\\hline \text { E) } & \text { Foreign Currency Option } & 1,800 & \\\hline & \text { Cash } & & 1,800 \\\hline\end{array}$

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