On March 1, 2014, Amber Company sold goods to a foreign customer at a price of 50,000 foreign currency units. The customer will pay in three months. At the time of the sale, Amber paid $2,000 to acquire an option to sell 50,000 foreign

currency units in three months at the strike price of $0.39. On May 30, 2014, the customer sent in 50,000 foreign currency units. Quarterly financial reports are prepared on March 31. Ignore the time value of money. Relevant exchange rates are as follows:

Spot Rate
Mar 1, 2014 $0.39
Mar 31, 2014 $0.45
May 30, 2014 $0.36

Required:
Prepare the journal entries required for these transactions, if the foreign currency option is designated as a fair value hedge.
What will be an ideal response?

3/1/14 Accounts Receivable (fcu) 19,500
Sales [$.039 × 50,000] 19,500

Foreign Currency Option 2,000
Cash 2,000

3/31/14 Accounts Receivable (fcu) 3,000
Foreign Exchange Gain 3,000
[($.45 - $.39) × 50,000]

Loss on Foreign Currency Option 2,000
Foreign Currency Option 2,000
(The option has no value at this date.)

5/30/14 Cash (fcu) 18,000
Foreign Exchange Loss 4,500
Accounts Receivable (fcu) 22,500
[($.36 - $.45) × 50,000]

Foreign Currency Option 1,500
Gain on foreign currency option 1,500
[50,000 × ($0.39 - $0.36)] = 1,500

Cash 1,500
Foreign Currency Option 1,500

Cash 18,000
Cash (fcu) 18,000