Question

Icebreaker Company (a U.S.-based company) sells parts to a foreign customer on December 1, 2020, with payment of 28,000 dinars to be received on March 1, 2021. Icebreaker enters into a forward contract on December 1, 2020, to sell 28,000 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 $ 4.60 $ 4.675 December 31, 2020 4.70 4.800 March 1, 2021 4.85 N/A Icebreaker must close its books and prepare financial statements at December 31. b-1. Assuming that Icebreaker designates the forward contract as a fair value hedge of a foreign currency receivable, prepare journal entries for the sale and foreign currency forward contract in U.S. dollars. b-2. What is the impact on 2020 net income? b-3. What is the impact on 2021 net income? b-4. What is the impact on net income over the two accounting periods?

Icebreaker must close its books and prepare financial statements at December 31.

Answer 1

of dollars PS 8.4.87 and value of forward Q; Ill - bxcaker company ca, us based Comparty? Sels Pasts to foreign-es ? Sol: The zee - breaker company in the hedging Selected by ticar .could be entering into a torwood contradd for three months company had entered Ponto forward contract to a sell 28.000 dinars $4.675 f3c49190us Calculation of Cancellation of for - wood contract to be done for compution of foreign exchang 1058. 31 - per Value of sport price op contract is $4.8 cancel forward contrac by seversing earries Position by buying at $ 4.8 Loss on cancellation contract

as on December 3) - 31 - would be [ $4.675 4.8.3 *08.000 = $ 3,500 Effective tos& for Dee - 3) would DO be § 3500 Entry wil be pot Alo $ 3500 To Forgin Forgin exchange loss $ 8500 (Being lass Pnc assed for ficandal Year 2020). Assume that again entezing to a forward contract to Sell on Del - 31 for maɣch @ 4.80 => forward contrad cancellation by buying at a Spot , [ 4.80 (4.85) x 28,000 $ $1,400 Younal Entry Do $ 1400 Profit and loss Alc $ 1400 To foreign exchange loss The effect ay for fr 2020 loss § 700 34 for FY 2021 108S $ 1400 48 wet loss will be 8 4900 apportioned over two years.