Question

Icebreaker Company (a U.S.-based company) sells parts to a foreign customer on December 1, 2020, with payment of 32,000 dinars to be received on March 1, 2021. Icebreaker enters into a forward contract on December 1, 2020, to sell 32,000 dinars on March 1, 2021. The forward points on the forward contract are excluded in assessing hedge effectiveness and are amortized to net income using a straight-line method on a monthly basis. Relevant exchange rates for the dinar on various dates are as follows: Date December 1, 2020 December 31, 2020 March 1, 2021 Spot Rate $ 5.00 5.10 5.25 Forward Rate (to March 1, 2021) $ 5.075 5.200 N/A Icebreaker must close its books and prepare financial statements at December 31. Company purchases materials from a foreign supplier on December 1, 2020, with payment of 32,000 dinars to be made on March 1, 2021. The materials are consumed immediately and recognized as cost of goods sold at the date of purchase. On December 1, 2020, Brandlin enters into a forward contract to purchase 32,000 dinars on March 1, 2021. a-1. Assuming that Icebreaker designates the forward contract as a cash flow hedge of a foreign currency payable, prepare journal entries for the import purchase and foreign currency forward contract in U.S. dollars. a-2. What is the impact on 2020 net income? a-3. What is the impact on 2021 net income? a-4. What is the impact on net income over the two accounting periods?

please answer req b2/b3

Answer 1

Answer: ist Of 2020. sell on dec 31st for march 9h the given question, 4cebreaker company sells parts to a foreign customer on docember 15t of 2020. The payment of 34,000 dinars should be recreved on march The value of spot rate on 31st of december Of $5.00 and the value of forward contract 15 $5.2. cancel forward contract by reversing earkeer position by buying at $5.2 1055 on cancellation by on 3187 december. [ $5.075 - $ 5.2 ] X 32000 = [- $ 0.125 ] x38000 $ 4000 Effective loss for 3184 december would be $4000 Entry will be pøl account Dr $ 4000 TO foreign exchange LOSS $ 400 ( Being uss fheurred for finanual year 2030) Assume that again entering to a forward contract to

5.8 =) forward contract cancellation by buying at a spot . (5.2 - 5.25 ) X 39000 $ 1,600 AI) Jouinal entry =) profit f LOSS ACD $ 1600 TO foreign exchange loss $ 1600 A2 The impact on 2020 loss $800 A3) The impact on 2021 LOSS $1600 Au) The net loss Will be $5,600 appartions over 2 yeans. .