Please answer the following case: Case 7-1 Zorba Company Zorba Company, a U.

Please answer the following case:

Case 7-1

 Zorba Company

 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:

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.

 Required

1. Assume the olive oil was received on December 1, Year 1, and payment was made on January 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 January 31, Year 2. On December 1, Zorba Company entered into a two-month forward contract to purchase 50,000 crowns. The forward contract is 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.

 3. The olive oil was ordered on December 1, Year 1. It was received and paid for on January 31, Year 2. On December 1, Zorba Company entered into a two-month forward contract to purchase 50,000 crowns. The forward contract is properly designated as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured through reference to changes in the forward rate. Prepare journal entries to account for the foreign currency forward contract, firm commitment, and import purchase.

4. The olive oil was received on December 1, Year 1, and payment was made on January 31, Year 2. On December 1, Zorba Company purchased a two-month call option for 50,000 crowns. The option was properly designated as a cash flow hedge of a foreign currency payable. Prepare journal entries to account for the import purchase and foreign currency option.

 5. The olive oil was ordered on December 1, Year 1. It was received and paid for on January 31, Year 2. On December 1, Zorba Company purchased a two-month call option for 50,000 crowns. The option was properly designated as a fair value hedge of a foreign currency firm commitment. The fair value of the firm commitment is measured through reference to changes in the spot rate. Prepare journal entries to account for the foreign currency option, firm commitment, and import purchase.