Question

Brandiin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 23,000 korunas to be received on March 1, 2018. Brandlin enters into a forward contract on December 1, 2017, to sell 23,000 korunas on March 1, 2018. Relevant exchange rates for the koruna on various dates are as follows: Date December 1, 2017 December 31, 2017 March 1, 2018 Spot Rate $ 4.10 4.20 4.35 Forward Rate (to March 1, 2018) $4.175 4.300 N/A Brandin's incremental borrowing rate is 9 percent. The present value factor for two months at an annual interest rate of 9 percent (0.75 percent per month is 0.9852. Brandiin must close its books and prepare financial statements at December 31 -1. Assuming that Brandiin designates the forward contract as a cash flow hedge of a foreign currency receivable and recognizes any premium or discount using the straight-line method, prepare Journal entries for these transactions in US dollars. -2. What is the impact on 2017 net income? -3. What is the impact on 2018 net income? -4. What is the impact on net income over the two accounting periods? b-1. Assuming that Brandlin designates the forward contract as a fair value hedge of a foreign currency receivable, prepare Journal entries for these transactions in US dollars. -2. What is the impact on 2017 net income? - What is the impact on 2018 net income? 14. What is the impact on net income over the two accounting periods?

Answer 1

	Answer to A1: Cash flow Hedge
Date	Account Title & Explanation	Debit ($)	Credit ($)
12/01/2017	Accounts receivables (230000 x 4.10)	94300
	Sales		94300
	NO ENTRY FOR THE FORWARD CONTRACT
12/31/2017	Accounts Receivables (23000 x (4.20-4.10)	2300
	Foreign Exchange Gain		2300
	AOCI	2832.45
	Forward Contract [(23000 x (4.3-4.175)]		2832.45
	Loss on forward Contract	2300
	AOCI		2300
	AOCI	575
	Premium revenue [23000 x (4.175 - 4.10)]		575
03/01/2018	Accounts receivable	3450
	Foreign Exchange gain [(23000 x (4.35-4.20)]		3450
	AOCI	1192.55
	Forward Contract		1192.55
	Loss on Forward Contract	3450
	AOCI		3450
	AOCI	1150
	Premium revenue (1725 / 3 x 2)		1150
	Foreign Currency (23000 x 4.35)	100050
	Accounts receivable		100050
	Cash	96025
	Forward contract	4025
	Foreign Currency		100050

Answer to A2 to A4
Impact on net income	Impact on
	2017	2018	Both Income
Sales	94300
Foreign Exchange gain	2300	3450
Loss on forward contract	-2300	-3450
Premium revenue	575	1150
TOTAL	94875	1150	96025
Impact on 2017 net income = $94875
Impact on 2018 net income = $1150
Impact on both years' net income = $94875 + $1150 = $96025

	Answer to B1: Fair Value Hedge
Date	Account Title & Explanation	Debit ($)	Credit ($)
12/01/2017	Accounts receivables (230000 x 4.10)	94300
	Sales		94300
	NO ENTRY FOR THE FORWARD CONTRACT
12/31/2017	Accounts Receivables (23000 x (4.20-4.10)	2300
	Foreign Exchange Gain		2300
	Loss on forward contract [(23000 x (4.3-4.175)]	2832.45
	Forward Contract		2832.45
03/01/2018	Accounts receivable	3450
	Foreign Exchange gain [(23000 x (4.35-4.20)]		3450
	Loss on forward contract [(23000 x (4.35-4.175)]	1192.55
	Forward Contract		1192.55
	Foreign Currency (23000 x 4.35)	100050
	Accounts receivable		100050
	Cash	96025
	Forward contract	4025
	Foreign Currency		100050

Answer to B2 to B4
Impact on net income	Impact on
	2017	2018	Both Income
Sales	94300
Foreign Exchange gain	2300	3450
Loss on forward contract	-2832.45	-1192.55
TOTAL	93767.55	2257.45	96025
Impact on 2017 net income = $93767.55
Impact on 2018 net income = $2257.45
Impact on both years' net income = $93767.55 + $2257.45 = $96025
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