- Case Study II
Zorba Company, a U.S. based importer of specialty olive oil, placed an order with a foreign supplier for 500 cases of olive oil at a price of 100 crowns per case. The total purchase price is 50,000 crowns. Relevant exchange rates are as follows:
Date Spot Rate Forward Rate
to March 31, y2 Call Option Premium
for March 31, y2
strike price, $1.00
December 1, y1 1.00 1.08 .04
December 31, y1 1.05 1.12 .12
March 31, y2 1.20 1.20 .15
Zorba Company has an incremental borrowing rate of 12 percent (1 percent per month) and closes the books and prepares financial statements on December 31.
Follow the requirements for the written assignments except using the table above with the dates and rates. Be sure to use the correct number of months until March 31 in your tables and journal entries.
Explain your process and why you are doing each step and journal entry. Use only what you need – there may be more information in the table than you need. (That is a similar situation to a real world example – there is always more information than you need and you need to know what to use and how to do it.) Remember that you would not explain journal entries to the CEO or Board – prepare a presentation that would explain what you are doing to that level of management.
Prepare journal entries for each of the situations below. In addition, prepare a memo or report to the CEO, CFO or Board explaining what you did and what you recommend. You can use charts, explanations, analyses, etc. Use your own words to explain it as though you are presenting the information.
#1. Assume the olive oil was received on December 1, year 1, and payment was made on March 31, year 2. There was no attempt to hedge the exposure to foreign exchange risk. Prepare journal entries to account for this import purchase.
#2. Assume the olive oil was received on December 1, year 1, and payment was made on March 31, year 2. On December 1, Zorba Company entered into a foreign currency forward contract properly designated as a fair value hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency forward contract.
For Case Study II students should view each problem as if it were a presentation to a company CEO, CFO, or board. In addition to computational accuracy, critical thinking, professionalism, communication, and presentation weigh heavily in the evaluation of the assignment. There are a number of ways that the case study might be presented to a CEO, CFO or board – explanations, analysis, charts, etc. are some examples. Remember – do not copy the publisher’s solutions manual. This must be in your own words and you must support your work with analysis.
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