Question

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 16,000 korunas to be received on March 1, 2018. Brandlin enters into a forward contract on December 1, 2017, to sell 16,000 korunas on March 1, 2018. Relevant exchange rates for the koruna on various dates are as follows:

Date

Spot Rate

Forward Rate
(to March 1, 2018)

December 1, 2017

$

3.40

$

3.475

December 31, 2017

3.50

3.600

March 1, 2018

3.65

N/A

Brandlin's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803. Brandlin must close its books and prepare financial statements at December 31.

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.

1

Record the sales and foreign currency account receivable.

2

Record the forward contract.

3

Record the entry for changes in the exchange rate.

4

Record the change in the fair value of the forward contract.

5

Record the gain or loss on the forward contract.

6

Record the allocation of the premium or discount.

7

Record the entry for changes in the exchange rate.

8

Record the entry to adjust the carrying value of the forward contract to its current fair value.

9

Record the gain or loss on the forward contract.

10

Record the allocation of the premium or discount.

11

Record the receipt of korunas from the foreign customer.

12

Record the settlement of the forward contract.


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

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Answer #1

ANSWER

No.

Date

General Journal

Debit

Credit

1

12/1/17

Accounts receivable (K)

54400

Sales (16000*3.40)

54400

(Record the purchase of materials)

2

No journal entry required

No journal entry required

(Record the forward contract.)

3

12/31/17

Accounts receivable (K)

1600

Foreign exchange gain (16000*(3.50-3.40))

1600

(Record the entry for changes in the exchange rate.)

4

AOCI

1961

Forward contract (16000*(3.475-3.6000))*0.9803

1961

(Record the change in the fair value of the forward contract.)

5

Loss on forward contract

1600

AOCI

1600

(Record the gain or loss on the forward contract.)

6

AOCI

400

Premium revenue (16000*(3.475-3.400))*1/3

400

(Record the allocation of the premium or discount.)

7

3/1/18

Accounts receivable (K)

2400

Foreign exchange gain (16000*(3.65-3.50))

2400

(Record the entry for changes in the exchange rate.)

8

AOCI

839

Forward contract (16000*(3.65-3.475))-1961

839

(Record the entry to adjust the carrying value of the forward contract to its current fair value.)

9

Loss on forward contract

2400

AOCI

2400

(Record the gain or loss on the forward contract.)

10

AOCI

800

Premium revenue (16000*(3.475-3.400))*2/3

800

(Record the allocation of the premium or discount.)

11

Foreign currency (K)

58400

Accounts receivable (K) (16000*3.65)

58400

(Record the receipt of korunas from the foreign customer.)

12

Cash (16000*3.475)

55600

Forward contract

2800

Foreign currency (K)

58400

(Record settlement of the forward contract.)

Part B-2

Impact on 2017 income:

Sales

54400

Foreign Exchange Gain

1600

Loss on Forward Contract

(1961)

Total

54039

Part B-3

Impact on 2018 income:

Foreign Exchange Gain

2400

Loss on Forward Contract

(839)

Total

1561

Part B-4

Impact on net income over both periods: $54039 + $1561 = $55600; equal to cash inflow

_____________________________________________

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