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

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 December 31,2018?
$\begin{array}{|l|l|r|r|}\hline \text { A) } & \text { Foreign Currency Option } & 200 & \\\hline & \text { Cash } & & 200 \\\hline \text { B) } & \text { Foreign Currency Option } & 200 & \\\hline & \text { Option Revenue } & & 200 \\\hline \text { C) } & \text { Foreign Currency Option } & 400 & \\\hline & \text { Option Revenue } & & 400 \\\hline \text { D) } & \text { Option Expense } & 200 \\\hline & \text { Foreign Currency Option } & & 200\\\hline \text { E) } & \text { Option Expense } & 400 \\\hline & \text { Foreign Currency Option } & & 400 \\\hline\end{array}$