On October 1, 2018, Eagle Company Forecasts the Purchase of Inventory

question 42

Short Answer

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds. On October 1, 2018, 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, 2018, the option has a fair value of $1,600. The following spot exchange rates apply:
$$\begin{array} { | l | c | } \hline \text { Date } & \text { Spot Rate } \\\hline \text { October 1,2018 } & \$ 2.00 \\\hline \text { December 31, 2018 } & \$ 1.97 \\\hline \text { February 1,2019 } & \$ 2.01 \\\hline\end{array}$$
-What journal entry should Eagle prepare on October 1,2018?
$$\begin{array} { | l | l | l | l | } \hline \text { A) } & \text { Cash } & 1,800 & \\\hline & \text { Foreipn Currency Option } & & 1,800 \\\hline \text { B) } & \text { Forward Contract } & 1,800 & \\\hline & \text { Cash } & & 1,800 \\\hline \text { C) } & \text { Foraipn Currency Option } & 1,800 & \\\hline & \text { Gain an Foreipn Currency } & & 1,800 \\\hline \text { D) } & \text { Loss an Foreipn Currency } & 1,800 & \\\hline & \text { Cash } & & 1,800 \\\hline \text { E) } & \text { Foreipn Curency Option } & 1,800 & \\\hline & \text { Cash } & & 1,800 \\\hline\end{array}$$

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