Question

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 13,000 korunas to be received on March 1, 2018. Brandlin enters into a forward contract on December 1, 2017, to sell 13,000 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	$	3.10		$	3.175
December 31, 2017		3.20			3.300
March 1, 2018		3.35			N/A

Brandlin's incremental borrowing rate is 18 percent. The present value factor for two months at an annual interest rate of 18 percent (1.5 percent per month) is 0.9707. Brandlin must close its books and prepare financial statements at December 31.

1. 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.

2. a-2. What is the impact on 2017 net income?

3. a-3. What is the impact on 2018 net income?

4. a-4. What is the impact on net income over the two accounting periods?

5. 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.

6. b-2. What is the impact on 2017 net income?

7. b-3. What is the impact on 2018 net income?

8. b-4. What is the impact on net income over the two accounting periods?

Answer 1

Based on the question above, the the Cash flow hedge can be answered as follows :-

12/01/17	Accounts Receivable A/c Dr.	40300
	To Sales A/c		40300
	(To record the accounts receivable on account of Credit sales)
	(13,000 kornuas * 3.10)
12/31/2017	Accounts Receivable A/c Dr.	1300
	To Foreign Exchange Gain A/c		1300
	(To record the gain on foreign exchange rates as of 12/31/2017)
	(13,000 korunas * (3.20 - 3.10))
	Accumulated Other Comprehensive Income A/c	1578
	To Forward Contract		1578
	(To record loss on account of the Forward Contract)
	(13,000 Korunas * (3.175 - 3.300)) * 0.9707
	Loss on Forward Contract	1300
	To Accumulated OCI		1300
	(To record the loss on account of foregin contract)
	Accumulated OCI A/c Dr.	325
	To Premium Income		325
	(To record the premium Income)
	(13,000 Korunas * (3.175 - 3.10)) * 1/3)
	Impact on 2017 Income
	Sales	40,300
	Foreign Exchange Gain	1,300
	Loss on forward contract	(1,300)
	Premium Income	325
	Total	40,625
03/01/18	Accounts Receivable A/c Dr.	1950
	To Foreign Exchange Gain A/c		1950
	(To record the gain on foreign exchange rates as of 03/01/2018)
	(13,000 kornuas * (3.35 - 3.20))
	Accumulated Other Comprehensive Income A/c	697
	To Forward Contract		697
	(To record loss on account of the Forward Contract)
	(13,000 Korunas * (3.35 - 3.175)) -1578
	Loss on Forward Contract	1950
	To Accumulated OCI		1950
	(To record the loss on account of foregin contract)
	Accumulated OCI A/c Dr.	650
	To Premium Income		650
	(To record premium income due to difference in Spot Rate and Forward Rate)
	Foreign Currency A/c Dr.	43,550
	To Accounts Receivable A/c		43,550
	(To record the value of the amount received in foreign currency)
	(13,000* 3.35)
	Cash A/c Dr.(13,000*3.175)	41,275
	Forward Contract A/c Dr.	2,275
	To Foreign Currency A/c		43,550
	(To record the receipt on account of Cash received)
	Impact on 2018 Income
	Foreign Exchange Gain	1,950
	Loss on forward contract	-1,950
	Premium Income	650
	Total	650
	Impact of Net Income over two periods
	2017	40,625
	2018	650
	TOTAL	41,275

The Fair Value hedge of the foreign currency would be journalized as follows :-

	Particulars	Debit	Credit
12/01/17	Accounts Receivable A/c Dr.	40,300
	To Sales A/c		40,300
	(To record the accounts receivable on account of Credit sales)
	(13,000 korunas * 3.10)
12/31/2017	Accounts Receivable A/c Dr.	1,300
	To Foreign Exchange gain		1,300
	(To record the realized gain as of 12/31/2017)
	(13,000 Korunas * (3.20 - 3.10))
	Loss on Forward Contract A/c Dr.	1,577
	To Forward Contrac A/c		1,577
	(To record the loss on Forward contract - Present Value)
	(13,000 Korunas * (3.175-3.300)) * 0.9707
	Effect of 2017 Net Income
	Sales	40,300
	Foreign Exchange Gain	1,300
	Loss on Forward contract	(1,577)
	Total	40,023
03/01/18	Accounts Receivable A/c Dr.	1950
	To Foreign Exchange gain		1950
	(To record the realized gain as of 03/01/2018)
	(13,000 Korunas * (3.35 - 3.20))
	Loss on Forward Contract A/c Dr.	698
	To Forward Contract A/c		698
	(To recognize the loss of changes in rates because of Forward contract)
	(13,000 Korunas * (3.175-3.35)) - 1577
	Cash received in Foreign Currency A/c Dr.	43,550
	To Accounts Receivable A/c		43,550
	(To record the cash received with respect to the Accounts Receivable)
	(13,000 Korunas * 3.35)
	Cash A/c Dr.(13,000*3.175)	41,275
	Forward Contract A/c Dr.	2,275
	To Foreign Currency A/c		43,550
	(To record the receipt on account of Cash received)
	Impact on 2018 Income
	Foreign Exchange Gain	1,950
	Loss on Forward Contract	698
	Net Effect	1252
	Impact of Net Income over two periods
	2017	40,023
	2018	1,252
	Total	41,275