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

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:

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.

a-1. Assuming that Brandlin designates the forward contract as a cash 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 currency receivable, prepare journal entries for these transactions in U.S. 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?

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

Explanation / Answer

    

Impact on 2017 Net Income = $400

Impact on 2018 Net Income = $2400

(Being Revenue recognised on Settlement)

Receivable Exposure 16000 korunas Journal Entries Date Particulars Debit($) Credit($) 31.12.2017 Other Comprehensive Income 400     Forward Contract Receivables 400 Being loss on hedging recognised(16000*(3.5-3.475)) 01.03.2018 Other Comprehensive Income 2400     Forward Contract Receivables 2400 Being loss on hedging recognised 01.03.2018 Forward Contract Receivables 2800 Cash 55600    Other Comprehensive Income 2800    Revenue 55600

Impact on 2017 Net Income = $400

Impact on 2018 Net Income = $2400

(Being Revenue recognised on Settlement)

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