On October 1, 2020, Pilgrim Foods, a U

Essay

On October 1, 2020, Pilgrim Foods, a U.S. company, issued a purchase order to a Danish company for kr1,000,000 in merchandise, to be delivered in 4 months. Pilgrim will pay the supplier in Danish krone. On October 1, the spot rate was $0.165/kr and the 4-month forward rate was $0.168/kr. Pilgrim invests in call options on kr1,000,000 at a strike price of $0.165/kr, costing $0.005/kr. Pilgrim designates the intrinsic value of the calls as a fair value hedge of a firm commitment. On December 31, 2020, Pilgrim's year-end, the spot rate is $0.171/kr, the 1-month forward rate is $0.173/kr and the options sell for $0.009/kr. On February 1, 2021, the spot rate is $0.175/kr. Pilgrim takes delivery of the merchandise, sells the options at their intrinsic value of $0.010/kr, and pays the Danish supplier by buying kr1,000,000 in the spot market.
Required
Prepare entries to record the above events, including the December 31, 2020 adjusting entries. Pilgrim records all income effects of inventory and related hedges in cost of goods sold.