Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 10,000 korunas to be received on March 1, 2018. Brandlin enters into a forward contract on December 1, 2017, to sell 10,000 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 | $ | 2.80 | $ | 2.875 | ||
| December 31, 2017 | 2.90 | 3.000 | ||||
| March 1, 2018 | 3.05 | N/A | ||||
Brandlin’s incremental borrowing rate is 15 percent. The present value factor for two months at an annual interest rate of 15 percent (1.25 percent per month) is 0.9755. 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?
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