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 give just the journal entries

PLEASE ANSWER SOON AS POSSIBLE

Answer 1

• Ice breaker company entered into a contract for 3 months
• Company has entered into a forward contract for selling of 32000 dinars for forward rate of 5.075
• On dec 31 spot rate was 5.1 and forward rate was 5.2.there would be a loss on cancellation

( 5.075-5.2)*32000

= -0.125*32000

= -4000$

Loss on dec 31 would be 4000$

Entry for this will be

P&l account dr 4000

To foreign exchange loss a/c 4000

( being loss incurred for financial yr 2020)

Assuming that again forward contract was made to sell on dec 31 to March @5.2 then  

Forward contract cancellation by buying at spot rate

(5.2-5.25) * 32000

=1600$

A-1

Profit and loss a/c dr 1600

To foreign exchange loss a/c 1600

A-2 impact on 2020 loss is 800

A-3 impact on 2021 loss is 1600

A-4 net loss will be 5600 for two accounting periods

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