Question

Brandlin Company of Anaheim, California, purchases materials from a foreign supplier on December 1, 2017, with payment of 16,000 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 16,000 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	$	2.70		$	2.775
December 31, 2017		2.80			2.900
March 1, 2018		2.95			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.
   

   Journal entry worksheet K 6 1 2 3 4 5 7 12 Record the purchase of materials. Note: Enter debits before credits. Date Debit General Journal Credit 12/01/2017 Record entry View general journal Clear entry

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?
   

5. b-1. Assuming that Brandlin designates the forward contract as a fair value hedge of a foreign currency payable, prepare journal entries for these transactions in U.S. dollars.
   

6. b-2. Assuming that the purchased parts became a part of the cost of goods sold in 2017, what is the impact on net income in 2017 and in 2018?

7. b-3. What is the impact on net income over the two accounting periods?
   

Answer 1

a) Cash Flow Hedge
Date	Accounts	Debit	Credit
Dec. 1 2015	Accounts Receivable (K) (16,000 x $2.70]	43200
	Sales		43200
	No Entry Forward contract
Dec. 31 2015	Accounts Receivable (K)	1600
	Foreign Exchange Gain (16000 x ($2.80 -$2.70)		1600
	Accumulated Other Comprehensive Income (AOCI)	1960.6
	Forward Contract		1960.6
	(16000 x (2.900-2.775) = 2000 x .9803
	Loss on Forward Contract	1600
	AOCI		1600
	AOCI	400
	Premium Revenue		400
	(16000 x (2.775-2.700) = 2000 x 1/3 months
Mar. 1 2016	Accounts Receivable (K)	2400
	Foreign Exchange Gain (16000 x ($2.95 -$2.80)		2400
	Accumulated Other Comprehensive Income (AOCI)	839.4
	Forward Contract		839.4
	(16000 x (2.95-2.775) = 2800 -1960.6
	Loss on Forward Contract	2400
	AOCI		2400
	AOCI	800
	Premium Revenue		800
	(16000 x (2.775-2.700) = 2000 x 2/3 months
	Foreign Currency (K) (16,000 x $2.95]	47200
	Accounts Receivable (K)		47200
	Cash (16000 x 2.775)	44400
	Forward Contract	2800
	Foreign Currency (K)		47200
b. Fair Value Hedge
Date	Accounts	Debit	Credit
Dec. 1 2015	Accounts Receivable (K) (16,000 x $2.70]	43200
	Sales		43200
	No Entry Forward contract
Dec. 31 2015	Accounts Receivable (K)	1600
	Foreign Exchange Gain (16000 x ($2.80 -$2.70)		1600
	Accumulated Other Comprehensive Income (AOCI)	1960.6
	Forward Contract		1960.6
	(16000 x (2.900-2.775) = 2000 x .9803
Mar. 1 2016	Accounts Receivable (K)	2400
	Foreign Exchange Gain (16000 x ($2.95 -$2.80)		2400
	Loss on Forward Contract	839.4
	Forward Contract		839.4
	(16000 x (2.95-2.775) = 2800 -1960.6
	Foreign Currency (K) (16,000 x $2.95]	47200
	Accounts Receivable (K)		47200
	Cash (16000 x 2.775)	44400
	Forward Contract	2800
	Foreign Currency (K)		47200
2)
Impact on 2017 net income
Sales	43200
Foreign Exchange Gain	1600
Loss on Forward Contract	-1960.6
Total	42839.4
3)
Impact on 2018 net income
Sales	2400
Loss on Forward Contract	-839.4
Total	1560.6
4)
Impact on net income over the two accounting period = $42,839.4+$1560.6	44400