Question

On November 1, 2017, Bernard Company (a U.S.-based company) sold merchandise to a foreign customer for 150,000 FCUs with payment to be received on April 30, 2018. At the date of sale, Bernard entered into a six-month forward contract to sell 150,000 FCUs. The company properly designates the forward contract as a cash flow hedge of a foreign currency receivable. The following exchange rates apply:

Date	Spot Rate			Forward Rate (to April 30, 2018)
November 1, 2017	$	0.26		$	0.25
December 31, 2017		0.24			0.22
April 30, 2018		0.23			N/A

Bernard's incremental borrowing rate is 12 percent. The present value factor for four months at an annual interest rate of 12 percent (1 percent per month) is 0.9610.

1. Prepare all journal entries, including December 31 adjusting entries, to record the sale and forward contract.
2. What is the impact on net income in 2017?
3. What is the impact on net income in 2018?

Answer 1

Solution:

1)

No.	Date	General Journal	Debit	Credit
1	11/1/17	Accounts receivable (FCU)	$39,000
		Sales (150,000*0.26)		$39,000
		(Record the purchase of materials)
2		No journal entry required
		No journal entry required
		(Record the forward contract.)
3	12/31/17	Foreign exchange loss (150,000*(0.26-0.24))	$3,000
		Accounts receivable (FCU)		$3,000
		(Record the entry for changes in the exchange rate.)
4		Forward contract (150,000*(0.25-0.22))*0.9610	$4,324
		Accumulated Other Comprehensive Income (AOCI)		$4,324
		(Record the change in the fair value of the forward contract.)
5		Accumulated Other Comprehensive Income (AOCI) (150000*(0.25-0.23)	$3,000
		Gain on forward contract		$3,000
		(Record the gain or loss on the forward contract.)
6		Discount expense (150000*(0.26-0.25))*1/3	$500
		Accumulated Other Comprehensive Income (AOCI)		$500
		(Record the allocation of the premium or discount.)
7	3/1/18	Foreign exchange loss (150,000*(0.24-0.23))	$1,500
		Accounts receivable (FCU)		$1,500
		(Record the entry for changes in the exchange rate.)
8		Accumulated Other Comprehensive Income (AOCI) (150000*(0.26-0.24))-$4,324	$1,324
		Forward Contract		$1,324
		(Record the entry to adjust the carrying value of the forward contract to its current fair value.)
9		Accumulated Other Comprehensive Income (AOCI)	$1,500
		Gain on forward contract		$1,500
		(Record the gain or loss on the forward contract.)
10		Discount expense (150000*(0.26-0.25))*2/3	$1,000
		Accumulated Other Comprehensive Income (AOCI)		$1,000
		(Record the allocation of the premium or discount.)
11		Foreign currency (FCU)	$34,500
		Accounts receivable (FCU) (150,000*0.23)		$34,500
		(Record settlement of the forward contract.)
12		Cash (150,000*0.25)	$37,500
		Forward contract		$3000
		Foreign currency (FCU)		$34,500
		(Record the payment of korunas to the foreign supplier.)

b)

Sales	$39,000
Foreign exchange loss	($3,000)
Gain on forward contract	$3,000
Net gain (loss)	0
Discount expenses	($500)
Impact on net income	$38,500

3)

Foreign exchange loss	($1,500)
Gain on forward contract	$1,500
Net gain (loss)	0
Discount expenses	($1,000)
Impact on net income	($1,000)

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