Question

On November 1, 2017, Bernard Company (a U.S.-based company) sold merchandise to a foreign customer for 170,000 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 170,000 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	$	0.28		$	0.27
December 31, 2017		0.26			0.24
April 30, 2018		0.25			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.

Prepare all journal entries, including December 31 adjusting entries, to record the sale and forward contract.

What is the impact on net income in 2017?

What is the impact on net income in 2018?

Part A

Prepare all journal entries, including December 31 adjusting entries, to record the sale and forward contract. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

b. What is the impact on net income in 2017?
c. What is the impact on net income in 2018?
(In case of negative impact on net income, answer should be entered with a minus sign. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Answer 1

Journal entries:-

On Nov 1,2017:-

Particulars Debit($) Credit($)

Accounts receivable 47600(170000*0.28)

Revenue 47600

The business will receive $45900(0.27*170000) as on 30th April,2018

On 31st Dec,2017:-

The spot rate has been changed to 0.26 from 0.28.There is a loss of 0.02.

Exchange loss = 0.02*170000 = $3400

Particulars Debit($) Credit($)

Foreign exchange loss 3400

Accounts Receivable 3400   

Even the forward rate has been changed from $0.27 to $0.24.Therefore, company records a gain of $0.03.

Foreign exchange gain = $0.03 * 170000 = $5100

Particulars Debit($) Credit($)

Foward contract 5100

Foreign exchange gain 5100   

The Effect of the gain is to offset the loss recorded above.

On 30th April,2018:-

Foreign Exchange loss = $0.01($0.26 - $ 0.25) * 170000 = -$1700

Particulars Debit($) Credit($)

Cash 42500

Foreign Exchange loss 1700

Accounts receivable 44200

The forward rate has been raised to 0.25 from 0.24.There is a loss of $0.01

Foreign exchange loss = $0.01*170000 = - $1700

Particulars Debit($) Credit($)

Foreign exchange loss 1700

Foward contract 1700

Summary of accounts receivable:-   

Particulars Sale Year end Settlement

FCU 170000 170000 170000

Rate 0.28 0.26 0.25

USD 47600 44200 42500

Gain / Loss -3400 -1700

Total loss = $3400 + $1700 = $5100

Summary of Forward contract:-

Particulars Sale Year end Settlement

FCU 170000 170000 170000

Rate 0.27 0.24 0.25

USD 45900 40800 42500

Gain / Loss 5100 -1700

Total gain = $5100 - $1700 = $3400

B.Impact on net income in 2017:-

The net income is increased by $1700($5100 - $3400)

C.Impact on net income in 2018:-

The net income is decreased by $3400($1700 + $1700)