On October 1, 2007, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2008, at a price of 100,000 British pounds. On October 1, 2007, 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, 2007, the option has a fair value of $1,600. The following spot exchange rates apply:

October 1,2007 $2.00

December 31,2007 $1.97

February 1, 2008 $2.01

Q.What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2008 from these transactions?

Question 2

Record the following transactions on the books of Essex Corp., which uses a perpetual inventory system.

On July 1, Essex Corp. sold merchandise on account to Cambridge Inc. for $49,300, terms 2/10, n/30. The cost of the merchandise sold was $27,700.

On July 8, Cambridge returned merchandise worth $8,000 to Essex. Its original cost was $4,620. The merchandise was restored to inventory.

On July 9, Cambridge paid for the merchandise.

Assume now that Cambridge did not pay on July 9, as indicated above. At the end of August, Essex added one month’s interest to Cambridge’s account for the overdue receivable. Essex charges 24% per year on overdue accounts.

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