Question

Icebreaker Company (a U.S.-based company) sells parts to a foreign customer on December 1, 2020, with payment of 29,000 dinars to be received on March 1, 2021. Icebreaker enters into a forward contract on December 1, 2020, to sell 29,000 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	Spot Rate			Forward Rate (to March 1, 2021)
December 1, 2020	$	4.70		$	4.775
December 31, 2020		4.80			4.900
March 1, 2021		4.95			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 29,000 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 29,000 dinars on March 1, 2021.

1. b-1. Assuming that Icebreaker designates the forward contract as a fair value hedge of a foreign currency payable, prepare journal entries for the import purchase and foreign currency forward contract in U.S. dollars.

2. b-2. What is the impact on net income in 2020 and in 2021?

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

Answer 1

Solution P.No. Accolding to given - Icebreaker Company (a u.s. - based Company) Sells parts to a Customer on foreign Dec 2020... entered - The Ice-breaker Company in the hedging Selected by Ice would be entering into a forward Contract for three months. Company had forward Contract to sell 29,000 dinars $ 4.775. >> fictitious Calculation of Cancellation of forward Contract to be done for Compution of foreign in to a exchange lows. On 31 Dec - valen of Sport Price of dollars is $ 4.8 and value forened Contract is $4.9. Cancel forward Contract by reversing earlier position by buying at $4.9 lose on Cancellation Contract by as on December 31- would be

P. 2 [4.145- 4.93 x 99,000 $ 3,625 Effective loss for Dec - 31 would be $3,695 DY 매 $3,625 Entry will be P&L ale To foreign exchange lows $ 3.625 (Being loss incumed for financial year goso) » Assume that again entering to a forward Contract to sell on Dec - 31 for march @ 4.90 : forward Contract Cancellation by buying at a spet (4.90 -4.95) X29,000 $ 1,450 -

P.3 Journal entry » Profit & Loss Ale $ 1,450 foriegh exchange loss TO $14.50 The effect b-a: The impact on 2020 lose $ 795 b-3 : The impact on 2021 lou $ 1,450 b-u :- The net lose will be $5,075 appottioned over 2 years pleas, Give me thum sup.