Question

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 28,000 korunas to be received on March 1, 2018. Brandlin enters into a forward contract on December 1, 2017, to sell 28,000 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	$	4.60		$	4.675
December 31, 2017		4.70			4.800
March 1, 2018		4.85			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.

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.

• 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.

Answer 1

b. Fair Value Hedge
Date	Accounts	Debit	Credit
1 - Record the sales and foreign currency account receivable
Dec. 1 2017	Accounts Receivable (K) (28,000 x $4.7]	128800
	Sales		128800
2 - Record the forward contract.
	No Entry Forward contract
3 - Record the entry for changes in the exchange rate
Dec. 31 2018	Accounts Receivable (K)	2800
	Foreign Exchange Gain (28000 x ($4.7 -$4.6)	2800
4) Record the change in the fair value of the forward contract.
	Loss on Forward Contract	3431.05
	Forward Contract		3431.05
	(28000 x (4.8 - 4.675 ) = 3500 x .9803
6) Record the allocation of the premium or discount.	No entry
7) Record the entry for changes in the exchange rate.	No entry
8) Record the entry to adjust the carrying value of the forward contract to its current fair value.
	Accounts Receivable  ((28000 x (4.8 - 4.7 )	4200
	Foreign Exchange Gain		4200
9) Record the gain or loss on the forward contract.
	Loss on Forward Contract	1468.95
	Forward Contract		1468.95
	(28000 x (4.85-4.675) = 4900 - 3431.05
10) Record the allocation of the premium or discount	No entry
11) Record the receipt of korunas from the foreign customer.
	Foreign Currency (K) (28,000 x $4.85]	135800
	Accounts Receivable (K)		135800
12)  Record the settlement of the forward contract.
	Cash (28000 x 4.675)	130900
	Forward Contract	4900
	Foreign Currency (K)		135800