Question

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2011, with payment of 20,000 korunas to be received on March 1, 2012.Brandlin enters into a forward contract on December 1, 2011, to sell 20,000 korunas on March 1, 2012. Relevant exchange rates for the koruna on various dates are asfollows:
Date

Spot Rate

Forward Rate
(to March 1, 2012)
December 1, 2011

$ 2.00

$2.075

December 31, 2011
2.10
2.200

March 1, 2012
2.25
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.

Assuming that Brandlin designates the forward contract as a cash flow hedge of a foreign currency receivable and recognizes any premium or discount using thestraight-line method.

(a-1)
Prepare journal entries for these transactions in U.S. dollars

Answer 1

1. WHAT IS THE AMOUNT OF THE DISCOUNT ON THESE BONDS AT ISSUANCE
Face value is $180,000
Sale value is $170,862
so bond discount = $9,138

2. HOW MUCH TOTAL BOND INTEREST EXPENSE WILL BE RECOGNIZED OVER THE LIFE OF THESE BONDS?
Total inflow $170,862
Total outflow over the life of the bonds = ($180,000 x 8% x 3 yrs) + $180,000 = 223,200
Total bond interest is the difference, so = $52,338.

Another way of arriving at this is as follows:
Total interest over the life = $180,000 x 8% x 3 yrs = $43,200
plus the bond discount $9,138 = $52,338