Use the same facts as in Problem 31 except that Brandlin Company purchases parts from a foreign supplier on December 1, 2011, with payment of 20,000 korunas to be made on March 1, 2012. On December 1, 2011, Brandlin enters into a forward contract to purchase 20,000 korunas on March 1, 2012.
a. Assuming that Brandlin designates the forward contract as a cash flow hedge of a foreign currency payable and recognizes any premium or discount using the straight-line method, prepare journal entries for these transactions in U.S. dollars. What is the impact on 2011 net income? What is the impact on 2012 net income? What is the impact on net income over the two accounting periods?
b. Assuming that Brandlin designates the forward contract as a fair value hedge of a foreign currency payable, prepare journal entries for these transactions in U.S. dollars. What is the impact on net income in 2011 and in 2012? What is the impact on net income over the two accounting periods?
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