On November 1, 2017, Bernard Company (a U.S.-based company) sold merchandise to

Question

On November 1, 2017, Bernard Company (a U.S.-based company) sold merchandise to a foreign customer for 220,000 FCUs with payment to be received on April 30, 2018. At the date of sale, Bernard entered into a six-month forward contract to sell 220,000 FCUs. The company properly designates the forward contract as a cash flow hedge of a foreign currency receivable. The following exchange rates apply: Date November 1, 2017 December 31, 2017 April 30, 2018 Forward Rate (to April 30, 2018) $0.32 0.29 Spot Rate $ 0.33 0.31 0.30 N/A Bernard's incremental borrowing rate is 12 percent. The present value factor for four months at an annual interest rate of 12 percent (1 percent per month) is 0.9610 a. Prepare all journal entries, including December 31 adjusting entries, to record the sale and forward contract. b. What is the impact on net income in 2017? c. What is the impact on net income in 2018?

Explanation / Answer

Impact on Income

Date Account titles & explanation Debit($) Credit($) 01-11-17 Accounts Recievable 72600 Sales 72600 (Being sales Made of 220,000 FCU'S , so it will be converted on spot rate @$0.33) 01-11-17 No entry (No entry for entring into a forward contract) 31-12-17 Foreign Exchange Loss 4400    Accounts Recievable 4400 (Being Foreign Exchange Loss booked($0.31-$0.33)*220,000)) 31-12-17 AOCI 4400 Gain on forward Contract 4400 (To record gain on forward contract) 31-12-17 Forward Contract 6342.6 AOCI 6342.6 (to record forwad contract ((.32-.29)*220,000=6600*.9610)) 31-12-17 Discount Expense 733.33    AOCI 733.33 (TO RECORD DISCOUNT ((.33-.32)*220000*2/6) 30-04-18 Foreign Exchange Loss 2200    Accounts Recievable 2200 (Being Foreign Exchange Loss booked($0.30-$0.31)*220,000)) 30-04-18 AOCI 2200 Gain on forward Contract 2200 (To record gain on forward contract) 30-04-18 Forward Contract 1942.6 AOCI 1942.6 (to record forwad contract ((.32-.30)*220,000=6600*-(6342.60))) 30-04-18 Discount Expense 1466.67    AOCI 1466.67 (TO RECORD DISCOUNT (2200*4/6) 30-04-18 Foreign Currency 66000 Accounts Receivable 66000 ($220,000*$.30) 30-04-18 Cash 70400 Accounts Receivable 66000 Forward Contract 4400 (being Amount Receieved)

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