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-2.Assuming that the purchased parts became a part of the cost of goods sold in 2017, what is the impact on 2017 net income?
a-3.What is the impact on 2018 net income?
a-4.What is the impact on net income over the two accounting periods?

(Do not round intermediate calculations. In case of negative impact on income, answer should be entered with a minus sign.)

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	a-2. Impact on 2017 income a-3. Impact on 2018 income a-4. Impact on net income over 2017 and 2018

Answer 1

Answer:

a2)                             Impact of 2017 Income:
Sales (31000*4.9)	$1,51,900
Foreign Exchange Gain(31000*(5-4.9))	$3,100
Loss on Forward Contract((31000*(4.975-5.1))*0.9803)	($3,798.66)
Total	$1,51,201

a3)                                Impact of 2018 Income:
Foreign Exchange Gain(31000*(5.15-5))	$4,650
Loss on Forward Contract(-31000*(5.15-4.975)+3798.66)	($1,626.34)
Total	$3,024

a4)        Impact of Net Income over both periods:

=   $151,201+$3,024 = $ 154,225 (= to cash (31000*4.975))