(5 Marks) Question 1: Depreciation On 1 January 2017, machinery was purchased at a total cost of K 120 000. The estimated useful life of the machinery was 4 years with an estimated residual value of K 10000. The company followed straight-line depreciation. The entity's reporting period ends on 31 December. Required a. Calculate the annual depreciation using the straight line method.
b. Prepare journal entries and show machinery account for the period 2017 – 2020.​

Keenan Company (U.S.) and Velez Company (Canada)

The fair value of the foreign currency option at February 1 = $4,500.

Explanation:

a) Data and Calculations:

Value of merchandise sold to Velez Company = CAD 150,000

Collection date of the receivable = February 1, 2022

Strike price of foreign currency put option purchased by Keenan = US$0.97

Relevant exchange rates follow:

Date        Spot Rate   Option Premium

1-Dec-21       $0.97          $0.05

31-Dec-21    $0.95          $0.04

1-Feb-22      $0.94         $0.03

The fair value of the option is based on the the change that has occurred in the Spot Rates from December 1, 2021 to February = $0.03 ($0.97 - $0.94)

Therefore, the fair value = 150,000 * $0.03 = $4,500