Question

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 33,000 korunas to be received on March 1, 2018. Brandlin enters into a forward contract on December 1, 2017, to sell 33,000 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 $ 5.10 $ 5.175 December 31, 2017 5.20 5.300 March 1, 2018 5.35 N/A Brandlin's incremental borrowing rate is 18 percent. The present value factor for two months at an annual interest rate of 18 percent (1.5 percent per month) is 0.9707. 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 receivable and recognizes any premium or discount using the straight-line method, prepare journal entries for these transactions in U.S. dollars. a-2. 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? 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. b-2. What is the impact on 2017 net income? b-3. What is the impact on 2018 net income? b-4. What is the impact on net income over the two accounting periods?

Answer 1

Part A-1

No.	Date	General Journal	Debit	Credit
1	12/1/17	Accounts receivable (K)	168300
		Sales (33000*5.10)		168300
		(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)	3300
		Foreign exchange gain (33000*(5.10-5.00))		3300
		(Record the entry for changes in the exchange rate.)
4		Accumulated other comprehensive income	4004
		Forward contract (33000*(5.175-5.300))*0.9707		4004
		(Record the change in the fair value of the forward contract.)
5		Loss on forward contract	3300
		Accumulated other comprehensive income		3300
		(Record the gain or loss on the forward contract.)
6		Accumulated other comprehensive income	825
		Premium revenue (33000*(5.175-5.100))*1/3		825
		(Record the allocation of the premium or discount.)
7	3/1/18	Accounts receivable (K)	4950
		Foreign exchange gain (33000*(5.35 -5.20))		4950
		(Record the entry for changes in the exchange rate.)
8		Accumulated other comprehensive income	1771
		Forward contract (33000*(5.35-5.175))-4004		1771
		(Record the entry to adjust the carrying value of the forward contract to its current fair value.)
9		Loss on forward contract	4950
		Accumulated other comprehensive income		4950
		(Record the gain or loss on the forward contract.)
10		Accumulated other comprehensive income	1650
		Premium revenue (33000*(5.175-5.1000))*2/3		1650
		(Record the allocation of the premium or discount.)
11		Foreign currency (K)	176550
		Accounts receivable (K) (33000*5.35)		176550
		(Record the receipt of korunas from the foreign customer.)
12		Cash (33000*5.175)	170775
		Forward contract	5775
		Foreign currency (K)		176550
		(Record settlement of the forward contract.)

Part A 2

Impact on 2017 net income:

Sales Revenue	168300
Foreign Exchange Gain	3300
Loss on Forward Contract	(3300)
Premium Revenue	825
Total	$169125

Part A 3

Impact on 2017 net income:

Foreign Exchange Gain	4950
Loss on Forward Contract	(4950)
Premium Revenue	1650
Total	$1650

Part A 4

Impact on net income over both periods = net cash inflow = $169125 + $1650 = $170775

Part B1

No.	Date	General journal	Debit	Credit
1	12/1/17	Accounts receivable (K)	168300
		Sales (33000*5.10)		168300
		(To record sales revenue and a foreign currency account receivable)
2.		No entry for the forward contract.
		(to record the forward contract.)
3	12/31/17	Accounts receivable (K)	3300
		Foreign exchange gain (33000*(5.10-5.00))		3300
		(to record entry for changes in the exchange rate)
4.		Loss on Forward Contract (33000*(5.175-5.300))*0.9707	4004
		Forward Contract		4004
		(To record the change in fair value of the forward contract as a liability and recognize a loss on forward contract)
5		No entry
		(Record the gain or loss on the forward contract.)
6		No entry
		(Record the allocation of the premium or discount.)
7	3/1/18	Accounts receivable (K)	4950
		Foreign exchange gain (33000*(5.35 -5.20))		4950
		(to record the revaluation of the foreign currency account receivable and recognize a foreign exchange gain
8		Loss on Forward Contract	1771
		Forward contract (33000*(5.35-5.175))-4004		1771
		(Record the entry to adjust the carrying value of the forward contract to its current fair value.)
9		No entry
		(Record the gain or loss on the forward contract.)
10		No entry
		(Record the allocation of the premium or discount.)
11		Foreign currency (K)	176550
		Accounts receivable (K) (33000*5.35)		176550
		(Record the receipt of korunas from the foreign customer.)
12		Cash (33000*5.175)	170775
		Forward contract	5775
		Foreign currency (K)		176550
		(Record settlement of the forward contract.)

Part B-2

Impact on 2017 net income:

Sales Revenue	168300
Foreign Exchange Gain	3300
Loss on Forward Contract	(4004)
Total	$167596

Part B 3

Impact on 2017 net income:

Foreign Exchange Gain	4950
Loss on Forward Contract	(1771)
Total	$3179

Part B 4

Impact on net income over both periods = net cash inflow = $167596+3179 = $170775