Question

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2015, with payment of 29,000 korunas to be received on March 1, 2016. Brandlin enters into a forward contract on December 1, 2015, to sell 29,000 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	$	4.00	$	4.075
December 31, 2015		4.10		4.200
March 1, 2016		4.25		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.) This is how the question is in the textbook. The forward rate in March isn't needed to solve this.

Answer 1

a) Cash Flow Hedge
Date	Accounts	Debit	Credit
Dec. 1 2015	Accounts Receivable (K) (29,000 x $4]	$116,000
	Sales		$116,000
	No Entry Forward contract
Dec. 31 2015	Accounts Receivable (K)	$2,900
	Foreign Exchange Gain (29000 x ($4.10 -$4.00)		$2,900
	Accumulated Other Comprehensive Income (AOCI)	$3,553.59
	Forward Contract		$3,553.59
	(29000 x (4.2 - 4.075 ) = 3625 x .9803
	Loss on Forward Contract	$2,900
	AOCI		$2,900
	AOCI	$725
	Premium Revenue		$725
	(29000 x (4.075-4) = 2175 x 1/3 month
Mar. 1 2016	Accounts Receivable (K)	$4,350
	Foreign Exchange Gain (29000 x ($4.25 -$4.10)		$4,350
	Accumulated Other Comprehensive Income (AOCI)	$1,521.41
	Forward Contract		$1,521.41
	(29000 x (4.25-4.075) = 5075 - 3553.59
	Loss on Forward Contract	$4,350
	AOCI		$4,350
	AOCI	$1,450
	Premium Revenue		$1,450
	(29000 x (4.075-4) = 2175 x 2/3 month
	Foreign Currency (K) (29,000 x $4.25]	$123,250
	Accounts Receivable (K)		$123,250
	Cash (29000 x 4.075)	$118,175
	Forward Contract	$5,075
	Foreign Currency (K)		$123,250
a-2. What is the impact on 2015 net income?
Sales	$116,000
Foreign Exchange Gain	$2,900
Loss on Forward Contract	-2900
Premium Revenue	$725
Loss	$116,725
a-3. What is the impact on 2016 net income?
Foreign Exchange Gain	$4,350
Loss on Forward Contract	-4350
Premium Revenue	$1,450
Loss	$1,450
a-4. What is the impact on net income over the two accounting periods?
Impact on net income over both periods:
$116,725 + $1,450 = $(118,175); equal to cash inflow	$118,175