3 Brandlin Company of Anaheim, California, sells parts to a foreign customer on

Question

3 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: 10 poirts Forvard Rate Date Decesber 1, 2017 Decenber 31, 2017 March 1, 2018 Spot Rate (to March 1, s 2.775 2.900 N/A 2.70 2.95 Brandlin's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent ( Puferenicespercent per month) is 09803 Brandlin must close its books and prepare financial statements at December 31. a-1. Assuming that Brandlin designates the forward contract as a cosh 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 curency receivable, prepare journal entries for these transections in US. 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?

Explanation / Answer

a) Cash Flow Hedge Date Accounts Debit Credit Dec. 1 2015 Accounts Receivable (K) (16,000 x $2.70] $43,200 Sales $43,200 No Entry Forward contract Dec. 31 2015 Accounts Receivable (K) $1,600 Foreign Exchange Gain (16000 x ($2.80 -$2.70) $1,600 Accumulated Other Comprehensive Income (AOCI) $1,960.6 Forward Contract $1,960.6 (16000 x (2.900-2.775) = 2000 x .9803 Loss on Forward Contract $1,600 AOCI $1,600 AOCI $400 Premium Revenue $400 (16000 x (2.775-2.700) = 2000 x 1/3 months Mar. 1 2016 Accounts Receivable (K) $2,400 Foreign Exchange Gain (16000 x ($2.95 -$2.80) $2,400 Accumulated Other Comprehensive Income (AOCI) $839.4 Forward Contract $839.4 (16000 x (2.95-2.775) = 2800 -1960.6 Loss on Forward Contract $2,400 AOCI $2,400 AOCI $800 Premium Revenue $800 (16000 x (2.775-2.700) = 2000 x 2/3 months Foreign Currency (K) (16,000 x $2.95] $47,200 Accounts Receivable (K) $47,200 Cash (16000 x 2.775) $44,400 Forward Contract $2,800 Foreign Currency (K) $47,200 b. Fair Value Hedge Date Accounts Debit Credit Dec. 1 2015 Accounts Receivable (K) (16,000 x $2.70] $43,200 Sales $43,200 No Entry Forward contract Dec. 31 2015 Accounts Receivable (K) $1,600 Foreign Exchange Gain (16000 x ($2.80 -$2.70) $1,600 Accumulated Other Comprehensive Income (AOCI) $1,960.6 Forward Contract $1,960.6 (16000 x (2.900-2.775) = 2000 x .9803 Mar. 1 2016 Accounts Receivable (K) $2,400 Foreign Exchange Gain (16000 x ($2.95 -$2.80) $2,400 Loss on Forward Contract $839.4 Forward Contract $839.4 (16000 x (2.95-2.775) = 2800 -1960.6 Foreign Currency (K) (16,000 x $2.95] $47,200 Accounts Receivable (K) $47,200 Cash (16000 x 2.775) $44,400 Forward Contract $2,800 Foreign Currency (K) $47,200 2) Impact on 2017 net income Sales $43,200 Foreign Exchange Gain $1,600 Loss on Forward Contract -1960.6 Total $42,839.4 3) Impact on 2018 net income Sales $2,400 Loss on Forward Contract -839.4 Total $1,560.6 4) Impact on net income over the two accounting period = $42,839.4+$1560.6 $44,400

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