Question

Brandlin Company of Anaheim, California, purchases materials from a foreign supplier on December 1, 2017, with payment of 31,000 korunas to be made on March 1, 2018. The materials are consumed immediately and recognized as cost of goods sold at the date of purchase. On December 1, 2017, Brandlin enters into a forward contract to purchase 31,000 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	$	4.90		$	4.975
December 31, 2017		5.00			5.100
March 1, 2018		5.15			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 payable and recognizes any premium or discount using the straight-line method, prepare journal entries for these transactions in U.S. dollars.

Assuming that Brandlin designates the forward contract as a cash flow hedge of a foreign currency payable 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 answers to 2 decimal places.)

1.

Record the purchase of materials.

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 settlement of the forward contract.

12

Record the payment of korunas to the foreign supplier.

Answer 1

Part A-1

No.	Date	General Journal	Debit	Credit
1	12/1/17	Accounts receivable (K)	151900
		Sales (31000*4.90)		151900
		(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)	3100
		Foreign exchange gain (31000*(5.00-4.90))		3100
		(Record the entry for changes in the exchange rate.)
4		AOCI	3797
		Forward contract (31000*(4.975-5.100))*0.9803		3797
		(Record the change in the fair value of the forward contract.)
5		Loss on forward contract	3100
		AOCI		3100
		(Record the gain or loss on the forward contract.)
6		AOCI	775
		Premium revenue (31000*(4.975-4.900))*1/3		775
		(Record the allocation of the premium or discount.)
7	3/1/18	Accounts receivable (K)	4650
		Foreign exchange gain (31000*(5.15 -5.00))		4650
		(Record the entry for changes in the exchange rate.)
8		AOCI	1628
		Forward contract (31000*(5.15-4.975))-3797		1628
		(Record the entry to adjust the carrying value of the forward contract to its current fair value.)
9		Loss on forward contract	4650
		AOCI		4650
		(Record the gain or loss on the forward contract.)
10		AOCI	1550
		Premium revenue (31000*(4.975-4.900))*2/3		1550
		(Record the allocation of the premium or discount.)
11		Foreign currency (K)	159650
		Accounts receivable (K) (31000*5.15)		159650
		(Record settlement of the forward contract.)
12		Cash (31000*4.975)	154225
		Forward contract	5425
		Foreign currency (K)		159650
		(Record the payment of korunas to the foreign supplier.)