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:

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

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.

1

Record the sales and foreign currency account receivable.

2

Record the forward contract.

3

Record the entry for changes in the exchange rate.

4

Record the change in the fair value of the forward contract.

5

Record the gain or loss on the forward contract.

6

Record the allocation of the premium or discount.

7

Record the entry for changes in the exchange rate.

8

Record the entry to adjust the carrying value of the forward contract to its current fair value.

9

Record the gain or loss on the forward contract.

10

Record the allocation of the premium or discount.

11

Record the receipt of korunas from the foreign customer.

12

Record the settlement of the forward contract.

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?

Answer 1

Part 1

No.	Date	General Journal	Debit	Credit
1	12/1/17	Accounts receivable (K)	54400
		Sales (16000*3.40)		54400
		(Record the purchase of materials)
2		No journal entry required
		No journal entry required
		(Record the forward contract.)
3	12/31/17	Accounts receivable (K)	1600
		Foreign exchange gain (16000*(3.50-3.40))		1600
		(Record the entry for changes in the exchange rate.)
4		AOCI	1961
		Forward contract (16000*(3.475-3.6000))*0.9803		1961
		(Record the change in the fair value of the forward contract.)
5		Loss on forward contract	1600
		AOCI		1600
		(Record the gain or loss on the forward contract.)
6		AOCI	400
		Premium revenue (16000*(3.475-3.400))*1/3		400
		(Record the allocation of the premium or discount.)
7	3/1/18	Accounts receivable (K)	2400
		Foreign exchange gain (16000*(3.65-3.50))		2400
		(Record the entry for changes in the exchange rate.)
8		AOCI	839
		Forward contract (16000*(3.65-3.475))-1961		839
		(Record the entry to adjust the carrying value of the forward contract to its current fair value.)
9		Loss on forward contract	2400
		AOCI		2400
		(Record the gain or loss on the forward contract.)
10		AOCI	800
		Premium revenue (16000*(3.475-3.400))*2/3		800
		(Record the allocation of the premium or discount.)
11		Foreign currency (K)	58400
		Accounts receivable (K) (16000*3.65)		58400
		(Record the receipt of korunas from the foreign customer.)
12		Cash (16000*3.475)	55600
		Forward contract	2800
		Foreign currency (K)		58400
		(Record settlement of the forward contract.)

Part B-2

Impact on 2017 income:

Sales	54400
Foreign Exchange Gain	1600
Loss on Forward Contract	(1961)
Total	54039

Part B-3

Impact on 2018 income:

Foreign Exchange Gain	2400
Loss on Forward Contract	(839)
Total	1561

Part B-4

Impact on net income over both periods: $54039 + $1561 = $55600; equal to cash inflow