Question

Eximco Corporation (based in Champaign, Illinois) has a number of transactions with companies in the country of Mongagua, where the currency is the mong. On November 30, 2017, Eximco sold equipment at a price of 500,000 mongs to a Mongaguan customer tha will make payment on January 31, 2018. In addition, on November 30, 2017, Eximco purchased raw materials from a Mongaguan supplier at a price of 300,000 mongs; it will make payment on January 31, 2018. To hedge its net exposure in mongs, Eximco entered into a two-month forward contract on November 30, 2017, to deliver 200,000 mongs to the foreign currency broker in exchange for $104,000. Eximco properly designates its forward contract as a fair value hedge of a foreign currency receivable. The following rates for the mong apply: Date November 30, 2017 December 31, 2017 January 31, 2018 Spot Rate $ 0.53 0.50 8.49 Forward Rate (to January 31, 2018) $ 0.52 8.48 N/A Eximco's incremental borrowing rate is 12 percent. The present value factor for one month at an annual interest rate of 12 percent (1 percent per month) is 0.9901. a. Prepare all journal entries, including December 31 adjusting entries, to record these transactions and the forward contract. b. What is the impact on net income in 2017? c. What is the impact on net income in 2018?

Answer 1

a.

Compute the journal entries as follows:

On Nov 30:

Accounts receivable Dr 265000

To Sales 265000

( 500000 * 0.53)

Inventory Dr 159000

To Accounts payable   159000

(300000 * 0.53)

On Dec 31:

Date	Accounts	Debit	Credit
31-Dec	Foreign exchange loss (500000 * ( 0.50 - 0.53)	15000
	Accounts receivable		15000
31-Dec	Accounts payable (300000 * (0.53 - 0.50)	9000
	Foreign exchange gain		9000
31-Dec	Forward contract (104000 - ( 200000 * 0.48) * 0.9901	7921
	Gain on contract		7921

On Jan 31:

Date	Accounts	Debit	Credit
31-Jan	Foreign exchange loss (500000 * ( 0.49 - 0.50)	5000
	Accounts receivable		5000
31-Jan	Accounts payable (300000 * ( 0.50 - 0.49)	3000
	Foreign exchange gain		3000
31-Jan	Loss on contract ( 7921 - (104000 - ( 200000*0.49)	1921
	Forward contract		1921
31-Jan	Foreign currency (500000*0.49)	245000
	Accounts receivable		245000
31-Jan	Accounts payable (300000*0.49)	147000
	Foreign currency		147000
31-Jan	Cash (200000 * 0.52)	104000
	Foreign currency (200000 * 0.49)		98000
	Forward contract		6000

b.

Compute net income in 2017 as follows:

Net income = Sales revenue - net loss on foreign exchange + gain on forward contract

Net income = 265000 - 6000 + 7921

Net income = 266921

c.

Compute net income in 2018 as follows:

Net income = Net loss on foreign exchange - Loss on forward contract

Net income = -2000 - 1921

Net income = -3921