Question

Brandlin Company of Anaheim, California, purchases materials from a foreign supplier on December 1, 2017 with payment of 17.000 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 17.000 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 $ 3.5e 3.60 3.75 Forward Rate (to March 1, 2018) 53.575 3.700 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 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 US dollars. 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? a-3. What is the impact on 2018 net income? a-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 payable, prepare journal entries for these transactions in U.S. dollars. 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? b-3. What is the impact on net income over the two accounting periods?

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Answer 1

a-2: Because cost of goods sold is a cost of doing business, it is a business expense. AS COGS increases it reduces the company net income or profit. That may result in paying less tax because your business has less income, but it also means the business doesn't make as much as Monet overall, so it pays to keep COGS efficiently managed to increase profits. a-3. Foreign currency monetary items should be reported using the closing rate at each balance sheet date The gain or loss so computed should be recognized in the statement of profit or loss for the period and the premium or discount on forward exchange contract is ignored and not recognized separately. IN recording such contract at each balance sheet date the value of the contract is marked to its current market value and the gain or loss on the contract is recognized. Forward contract rate. [17000 NA). Nil Less : Spot rate [ 17000x 3.75 ). (63750) Loss on entering in to forward contract. (63750) a-4 All foreign currency transactions should be recorded by applying the exchange rate on the date of transactions.Exchange difference on statement of the account should also be transferred to profit and loss account. IMPACT OF NET INCOME OVER TWO ACCOUNTING PERIODSJAN 1 TO DEC 31] Forward contract rate. [ 17000x 3.7] = 47175 62900 - (62900x3/12)= 62909-15725. Less: spot rate [ 17000x 3.5). =(59500) =(12325) Loss Jan 1st to march 31st Forward contract rate (17000xna). = nil Less : spot rate [ 60765x3.75). = (63750) Loss. = ( 63750)