Question

31. Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 16,000 korunas to be received on March 1, 2018. Brandlin enters into a forward

Answer 1

a. Cash Flow Hedge

Date Debit Credit 12/1/17 43,200.00 Journal Entry Accounts Receivable (K) Sales Revenue To record sales revenue and a foreign currency account receivable. 43,200.00 No entry for the forward contract. 12/31/17 1.600.00 1.600.00 Accounts Receivable (K) Foreign Exchange Gain To revalue the foreign currency account receivable and recognize a foreign exchange gain. AOCI 1.960.60 1.960.60 Forward Contract To record the change in fair value of the forward contract as a liability. 1,600.00 1.600.00 Loss on Forward Contract AOCI To record a loss on forward contract to offset the foreign exchange gain. AOCI 400.00 400.00 Premium Revenue To allocate the forward contract premium as revenue over the life of the contract. Impact on 2017 net income: Sales Revenue Foreign Exchange Gain Loss on Forward Contract $43,200.00 1.600.00 (1.600.00)

Premium Revenue 400.00 $43.600.00 Total Date Credit Debit 2,400.00 3/1/18 Journal Entry Accounts Receivable (K) Foreign Exchange Gain To revalue the foreign currency account receivable and recognize a foreign exchange gain. 2,400.00 839.40 839.40 AOCI Forward Contract To adjust the carrying value of the forward contract to its current fair value. 2,400.00 2.400.00 Loss on Forward Contract AOCI To record a loss on forward contract to offset the foreign exchange gain. 800.00 800.00 AOCI Premium Revenue To allocate the forward contract premium as revenue over the life of the contract. 47,200.00 47,200.00 Foreign Currency (K) Accounts Receivable (K) To record the receipt of korunas from the foreign customer. Cash 44,400.00 Forward Contract 2.800.00 Foreign Currency (K) 47,200.00

To record settlement of the forward contract. Impact on 2018 net income: Foreign Exchange Gain Loss on Forward Contract Premium Revenue Total $2,400.00 (2,400.00) 800.00 $800.00 Impact on net income over both periods, which is equal to net cash inflow: $43.600.00+ $800.00 = $44.400.00

b. Fair Value Hedge

Credit Date 12/1/17 Debit 43,200.00 Journal Entry Accounts Receivable (K) Sales Revenue To record sales revenue and a foreign currency account receivable. 43,200.00 No entry for the forward contract. 12/31/17 1.600.00 1,600.00 Accounts Receivable (K) Foreign Exchange Gain To revalue the foreign currency account receivable and recognize a foreign exchange gain. 1.960.60 1.960.60 Loss on Forward Contract Forward Contract To record the change in fair value of the forward contract as a liability and recognize a loss on forward contract.

Impact on 2017 net income: Sales Revenue Foreign Exchange Gain Loss on Forward Contract Total $43,200.00 1,600.00 (1.960.60 $42.839.40 Date Debit Credit 3/1/18 2.400.00 Journal Entry Accounts Receivable (K) Foreign Exchange Gain To revalue the foreign currency account receivable and recognize a foreign exchange gain. 2.400.00 839.40 839.40 Loss on Forward Contract Forward Contract To adjust the carrying value of the forward contract to its current fair value and recognize a loss on forward contract. Foreign Currency (K) 47,200.00 Accounts Receivable (K) To record the receipt of korunas from the foreign customer. 47,200.00 2.800.00 Cash 44,400.00 Forward Contract Foreign Currency (K) To record settlement of the forward contract. 47,200.00 Impact on 2018 net income: Foreign Exchange Gain Loss on Forward Contract Total $2.400.00 (839.40 $1.560.60

Impact on net income over both periods, which is equal to net cash inflow:

$42,839.40 + $1,560.60 = $44,400.00