Question

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 25,000 korunas to be received on March 1, 2018. Brandlin enters into a forward contract on December 1, 2017, to sell 25,000 korunas on March 1, 2018. Relevant exchange rates for the koruna on various dates are as follows: Date December 1, 2017 December 31, 2017 March 1, 2018 Spot Rate $ 4.30 4.40 4.55 Forward Rate (to March 1, 2018) $ 4.375 4.500 N/A Brandlin's incremental borrowing rate is 18 percent. The present value factor for two months at an annual interest rate of 18 percent (1.5 percent per month) is 0.9707. Brandlin must close its books and prepare financial statements at December 31. a-1. Assuming that Brandlin designates the forward contract as a cash flow hedge of a foreign currency receivable and recognizes any premium or discount using the straight-line method, prepare journal entries for these transactions in U.S. dollars. a-2. What is the impact on 2017 net income? a-3. What is the impact on 2018 net income? a-4. What is the impact on net income over the two accounting periods? b-1. Assuming that Brandlin designates the forward contract as a fair value hedge of a foreign currency receivable, prepare journal entries for these transactions in U.S. dollars. b-2. What is the impact on 2017 net income? b-3. What is the impact on 2018 net income? b-4. What is the impact on net income over the two accounting periods?

Answer 1

ANSWER

CASH FLOW HEDGE

No. Debit Date General Journal 1 12-01-17 Accounts Recievablek (25,000*4.30) Sales $ Credit 107,500 $ 107,500 2 No journal entry required for entering into hedge position $ 3 31-12-17 Accounts receivable(K) foreign excange gain 25000*(4.4-4.3) 2,500 $ 2,500 4 $ 3,033.44 31-12-17 AOCI Forward contract (25000*(-4.375+4.5))*0.9707 $ 3,033.44 $ 2,500 5| 31-12-17 Loss on forward contract AOCI $ 2,500 $ 625 6 31-12-17 | AOCI Premium Revenue 125000*14.375-4.30) 1/3 $ 625 7 $ 3,750 01-03-18 Accounts receivable(K) foreign excange gain 25000*(4.55-4.40) $ 3,750 $ 1,341.56 8 01-03-18 AOCI Forward contract (25000*(-4.375+4.55)-4375-3033.44 $ 1,341.56 $ 3,750 9 01-03-18 Lass on forward contract AOCI $ 3,750 S 1,250 101 01-03-18 | AOCI Premium Revenue 1875*2/3 $ 1,250 $ 113,750 11 01-03-18 Foreign currency Accounts receivable |(25000*4.55) $ 113,750 12 01-03-18 Cash(25000*4.375) Forward contract Foreign currency $ $ 109,375 4,375 $ 113,750 la-2 S Impact of 2017 income Sales Foreign Exchange gain Loss on forward cntract Premium Revenue Total S S 107,500 2,500 (2,500) 625 108,125 S S a-3 3,750 Impact of 2018 income Foreign Exchange gain Loss on forward cntract Premium Revenue Total (3,750) $ $ $ S 1,250 1,250 a-4 Impact on net income over both periods 2017 $ 2018/ $ $ 108,125 1,250 109,375

FAIR VALUE HEDGE

No. Date General Journal 12-01-17 Accounts Recievable(K)(25,000*4.30) Sales Debit $ Credit 107,500 $ 107,500 2 No journal entry required for entering into hedge position 3 $ 2,500 31-12-17 Accounts receivable(K) foreign excange gain 25000*(4.4-4.3) $ 2,500 4 $ 3,033.44 31-12-17 Loss on forward contract Forward contract (25000*(4.375-4.500)*.9707 $ 3,033.44 5 $ 3,750 01-03-18 Accounts receivable(K) foreign excange gain 25000*(4.55-4.40) $ 3,750 6 $ 1,341.56 01-03-18 Loss on forward contract Forward contract $ 1,341.56 7 113,750 01-03-18 Foreign currency Accounts receivable (25000*4.55) $ 113,750 8 01-03-18 Cash(28000*4.675) Forward contract Foreign currency $ $ 109,375 4,375 $ 113,750 b-2 Impact of 2017 income Sales Foreign Exchange gain Loss on forward cntract Total $ $ $ $ 107,500 2,500 (3,033) 106,967 b-3 Impact of 2018 income Foreign Exchange gain Loss on forward cntract Total $ $ $ 3,750 (1,342) 2,408 la-4 Impact on net income over both periods 2017 $ 2018$ $ 106,967 2,408 109,375

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