Question

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2015, with payment of 27,000 korunas to be received on March 1, 2016. Brandlin enters into a forward contract on December 1, 2015, to sell 27,000 korunas on March 1, 2016. Relevant exchange rates for the koruna on various dates are as follows:

Date	Spot Rate		Forward Rate (to March 1, 2016)
December 1, 2015	$	3.80	$	3.875
December 31, 2015		3.90		4.000
March 1, 2016		4.05		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.

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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

     

a-2.	What is the impact on 2015 net income? (Do not round intermediate calculations.)

    

a-3.	What is the impact on 2016 net income? (Do not round intermediate calculations.)

        

a-4.	What is the impact on net income over the two accounting periods? (Do not round intermediate calculations.)

        

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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

       

b-2.	What is the impact on 2015 net income? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

    

b-3.	What is the impact on 2016 net income? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

      

b-4.	What is the impact on net income over the two accounting periods? (Do not round intermediate calculations.)

        

Answer 1

Brandlin Company sells part to a Foreign customer
on dec 1 2015 = 27000 Korunas
to be received n Mar 1 , 2016
same time Dec 1 2015 , company entered Forward contract
Date	Spot rate	Forward rate
		( to Mar 1 2016)
Dec 1 2015$	3.8	3.875
Dec 31 2015$	3.9	4
Macr 1 2016	4.05	NA
Borrowing interesr rare 12%
Present value for 2 Months ay annual Interest rate 12% ( 0.9803)
Now cash flow Hedge reserve
Dec 1 2015	Details	Debit$	Credit$
	Account Receivable (k) 27000*$3.80	1,02,600
	Sales		1,02,600
Dec 1 2015	No JE relates to Forward contract
Dec 31 2015	Account Receivable (k) 27000*$0.1	2,700
	Foreign Excnagne gain & loss		2,700
Change in Exchange rate
Dec 1 2015$	3.8
Dec 31 2015$	3.9
Gain on Exchange	0.1
In case of forward contract
	Loss on Contract	2,700
	AOCI		2,700
	* Accumulated Other Comprehensive income
Now change in Forward contract rate
	Forward rate
Dec 1 2015$	3.875
Dec 31 2015$	4
Change in rate	0.125
Kouran = 27000* 0.125 * PV discount factor (0.9803)
	Accumulated Other Comprehensive income (AOCI)	3,309
	Forward contract		3,309
	27000* 0.125 *0.9803
Now change in Spot and forward rate
Dec 1 2015$
Spot rate$	3.8
Forward rate$	3.875
Premium rate	0.075
	Accumulated Other Comprehensive income (AOCI)	675
	Revenue premium		675
Kouran = 27000* 0.075 *1/3

Macr 1 2016			Debit$	Credit$
	Macr 1 2016	Account Receivable (k) 27000*$0.15	4,050
		Foreign Excnagne gain & loss		4,050
	Change in Exchange rate
	Dec 31 2015$	3.9
	Macr 1 2016	4.05
	Gain on Exchange	0.15
		Accumulated Other Comprehensive income (AOCI)	66
		Forward contract		66
	Forward rate
	Dec 1 2015$	3.875
	Dec 31 2015$	4
	Change in rate	0.125
	Kouran = 27000* 0.125=3375		3,375
	Less earlier recognised as above		3,309
	Balance to accounted		66
		Loss on Contract	4,050
		AOCI		4,050
		* Accumulated Other Comprehensive income
		Accumulated Other Comprehensive income (AOCI)	1,350
		Revenue premium		1,350
	Kouran = 27000* 0.075 *2/3

	Debit$	Credit$
Foreign Currency	109350
Account receivable		109350
27000* $4.05
Cash =27000*$3.875	104625
Forward contract	4725
Foreign Currency		109350
( Forward contract settlement

a2 ans	Impact on 2015 Financial statement ( net Income )
			Amnt$
		Sale	1,02,600
		Add - Foreign exchnage gain	2,700
		Loss on Forward contract	-2,700
		Premium Revenue	675
		Total Impact on Net Income	1,03,275
a3 ans	Impact on 2016 Financial statement ( net Income )
			Amnt$
		Add - Foreign exchnage gain	4,050
		Loss on Forward contract	-4,050
		Premium Revenue	66
		Total Impact on Net Income	66
a4 ans	Total Net Impact in 2015 and 2016		Amnt$
	Year 2015	Total Impact on Net Income	1,03,275
	Year 2016	Total Impact on Net Income	66
	Total Net Impact in 2015 and 2016		1,03,341

Ans b1

Fair value Hedge reserve
Dec 1 2015	Details	Debit$	Credit$
	Account Receivable (k) 27000*$3.80	1,02,600
	Sales		1,02,600
In case of forward contract
Now change in Forward contract rate
	Forward rate
Dec 1 2015$	3.875
Dec 31 2015$	4
Change in rate	0.125
Kouran = 27000* 0.125 * PV discount factor (0.9803)
	Loss on Forward contract	3,309
	Forward contract		3,309
	27000* 0.125 *0.9803

Dec 31 2015	Account Receivable (k) 27000*$0.1	2,700
	Foreign Excnagne gain & loss
Change in Exchange rate
Dec 1 2015$	3.8
Dec 31 2015$	3.9
Gain on Exchange	0.1

Impact on 2015 Financial statement ( net Income )
		Amnt$
	Sale	1,02,600
	Add - Foreign exchnage gain	2,700
	Loss on Forward contract	-3,309
	Total Impact on Net Income	1,01,991

Macr 1 2016			Debit$	Credit$
	Macr 1 2016	Account Receivable (k) 27000*$0.15	4,050
		Foreign Excnagne gain & loss		4,050
	Change in Exchange rate
	Dec 31 2015$	3.9
	Macr 1 2016	4.05
	Gain on Exchange	0.15
		Loss on Forward contract	66
		Forward contract		66
	Forward rate
	Dec 1 2015$	3.875
	Dec 31 2015$	4
	Change in rate	0.125
	Kouran = 27000* 0.125=3375		3,375
	Less earlier recognised as above		3,309
	Balance to accounted		66