Question

Brandlin Company of Anaheim, California, purchases materials from a foreign supplier on December 1, 2017, with payment of 10,000 korunas to be made on March 1, 2018. The materials are consumed immediately and recognized as cost of goods sold at the date of purchase. On December 1, 2017, Brandlin enters into a forward contract to purchase 10,000 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 $ 2.80 2.90 3.05 Forward Rate (to March 1, 2018) $ 2.875 3.000 N/A Brandlin's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803. Brandlin must close its books and prepare financial statements at December 31.

Answer 1

Part B1

No.	Date	General journal	Debit	Credit
1	12/1/17	Accounts Receivable (K) (10000*2.80)	28000
		Sales Revenue		28000
		(To record sales revenue and a foreign currency account receivable)
2.		No entry for the forward contract.
		(to record the forward contract.)
3	12/31/17	Accounts Receivable (K) (10000*(2.90-2.80))	1000
		Foreign Exchange Gain		1000
		(to record entry for changes in the exchange rate)
4.		Loss on Forward Contract (10000*(3.000-2.875)*0.9803)	1225
		Forward Contract		1225
		(To record the change in fair value of the forward contract as a liability and recognize a loss on forward contract)
5		No entry
		(Record the gain or loss on the forward contract.)
6		No entry
		(Record the allocation of the premium or discount.)
7	3/1/18	Accounts Receivable (K)	1500
		Foreign Exchange Gain (10000*(3.05-2.90))		1500
		(to record the revaluation of the foreign currency account receivable and recognize a foreign exchange gain
8		Loss on Forward Contract	525
		Forward contract (10000*(3.05-2.875))-1225		525
		(Record the entry to adjust the carrying value of the forward contract to its current fair value.)
9		No entry
		(Record the gain or loss on the forward contract.)
10		No entry
		(Record the allocation of the premium or discount.)
11		Foreign currency (K)	30500
		Accounts receivable (K) (10000*3.05)		30500
		(Record the receipt of korunas from the foreign customer.)
12		Cash (10000*2.875)	28750
		Forward contract	1750
		Foreign currency (K)		30500
		(Record settlement of the forward contract.)

Part B-2

Impact on 2017 net income:

Sales Revenue	28000
Foreign Exchange Gain	1000
Loss on Forward Contract	(1225)
Total	$27775

Part B 3

Impact on 2017 net income:

Foreign Exchange Gain	1500
Loss on Forward Contract	(525)
Total	$975