Question

Company of Anaheim, California, purchases materials from a foreign supplier on December 1, 2017, with payment of 31,000 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 31,000 korunas on March 1, 2018. Relevant exchange rates for the koruna on various dates are as follows:

Date	Spot Rate			Forward Rate (to March 1, 2018)
December 1, 2017	$	4.90		$	4.975
December 31, 2017		5.00			5.100
March 1, 2018		5.15			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.

1. a-1. Assuming that Brandlin designates the forward contract as a cash flow hedge of a foreign currency payable and recognizes any premium or discount using the straight-line method, prepare journal entries for these transactions in U.S. dollars.

2. a-2. Assuming that the purchased parts became a part of the cost of goods sold in 2017, what is the impact on 2017 net income?

3. a-3. What is the impact on 2018 net income?

4. a-4. What is the impact on net income over the two accounting periods?

Answer 1

Answer:

As per the given Question

CASH FLOW HEDGE

No. Credit Date General Journal 12-01-17 Accounts Recievable(K)(31,000*4.90) | Sales Debit $ 151,900 $ 151,900 No journal entry required for entering into hedge position 3.100 31-12-17 Accounts receivable(K) foreign excange gain 31000*(4.9-5.00) $ 3,100 3,799 31-12-17 AOCI Forward contract (31000*(-4.975+5.10))*0.9803 $ 3,799 $ 3,100 51 31-12-17 Loss on forward contract AOCI 3,100 6 $ 775 31-12-17 AOCI Premium Revenue (31000* 4.975-4.90)*1/3 $ 775 $ 4,650 7 01-03-18 | Accounts receivable(K) foreign excange gain 31000*(5.15-5.00) $ 4,650 8 $ 1,626 01-03-18 AOCI Forward contract (31000*(-4.975 +5.15)-3799 $ 1,626 9 01-03-18 Loss on forward contract AOCI S 4 ,650 $ 4,650 10 $ 1,550 01-03-18 AOCI Premium Revenue 2325*2/3 $ 1,550 1 159,650 11 01-03-18 Foreign currency Accounts receivable (31000*5.15) $ 159,650 12 01-03-18 Cash(31000*4.975) Forward contract Foreign currency $ $ 154,225 5,425 $ 159,650 $ Impact of 2017 income Sales Foreign Exchange gain Loss on forward cntract Premium Revenue Total 151,900 3,100 (3,100) 775 152,675 $ $ Impact of 2018 income Foreign Exchange gain Loss on forward cntract Premium Revenue Total $ $ $ $ 4,650 14,650)|| 1,550 1,550 Impact on net income over both periods 2017 $ 2018 $ $ 152,675 1,550 154,225

FAIR VALUE HEDGE

Debit Credit Date General Journal 12-01-17| Accounts Recievable(K)(31,000*4.90) Sales 151,900 151,900 No journal entry required for entering into hedge position 3 3,100 31-12-17 Accounts receivable(K) foreign excange gain 31000*(4.9-5.00) 3,100 4 3,799 31-12-17 Loss on forward contract Forward contract (31000*(-4.975+5.10)) *0.9803 3,799 5 4,650 01-03-18 Accounts receivable(K) foreign excange gain 31000*(5.15-5.00) 4,650 1,626 61 01-03-18 Loss on forward contract Forward contract (31000*(-4.975+5.15)-3799 1,626 7 159,650 01-03-18 Foreign currency Accounts receivable (31000*5.15) 159,650 8 01-03-18 Cash(31000* 4.975) Forward contract Foreign currency 154,225 5,425 159,650 Impact of 2017 income Sales Foreign Exchange gain Loss on forward cntract Total 151,900 3,100 (3,799) 151,201 Impact of 2018 income Foreign Exchange gain Loss on forward cntract Total 4,650 (1,626) 3,024 Impact on net income over both periods 2017 $ 2018$ 151,201 3,024 154,225

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