Brandlin Company of Anahelm, Callfornla, sells parts to a foreign customer on De
ID: 2547160 • Letter: B
Question
Brandlin Company of Anahelm, Callfornla, sells parts to a foreign customer on December 1, 2017, with payment of 26,000 korunas to be recelved on March 1, 2018. Brandlin enters into a forward contract on December 1, 2017, to sell 26,000 korunas on March 1, 2018 Relevant exchange rates for the koruna on various dates are as follows: Forward Rate (to March 1, 2018) 4.475 4.600 Spo December 1, 2017 December 31, 2017 Harch 1, 2018 s 4.40 4.50 4.65 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 hèdge 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? Complete this question by entering your answers in the tabs belowExplanation / Answer
a) Cash Flow Hedge Date Accounts Debit Credit Dec. 1 2017 Accounts Receivable (K) (26,000 x $4.40] $114,400 Sales $114,400 No Entry Forward contract Dec. 31 2017 Accounts Receivable (K) $2,600 Foreign Exchange Gain (26000 x ($4.50 -$4.40) $2,600 Accumulated Other Comprehensive Income (AOCI) $3,170.38 Forward Contract $3,170.38 (26000 x (4.475 - 4.600 ) = 3250 x .9755 Loss on Forward Contract $2,600 AOCI $2,600 AOCI $650 Premium Revenue $650 (26000 x (4.475-4.400) = 1950 x 1/3 months Mar. 1 2018 Accounts Receivable (K) $3,900 Foreign Exchange Gain (26000 x ($4.65 -$4.50) $3,900 Accumulated Other Comprehensive Income (AOCI) $1,379.63 Forward Contract $1,379.63 (26000 x (4.65-4.475) = 4550 - 3170.38 Loss on Forward Contract $3,900 AOCI $3,900 AOCI $1,300 Premium Revenue $1,300 (26000 x (4.475-4.400) = 1950 x 2/3 months Foreign Currency (K) (26,000 x $4.65] $120,900 Accounts Receivable (K) $120,900 Cash (26000 x 4.475) $116,350 Forward Contract $4,550 Foreign Currency (K) $120,900 a-2. What is the impact on 2017 net income? Sales $114,400 Foreign Exchange Gain $2,600 Loss on Forward Contract -2600 Premium Revenue $650 Loss $115,050 a-3. What is the impact on 2018 net income? Foreign Exchange Gain $3,900 Loss on Forward Contract -3900 Premium Revenue $1,300 Loss $1,300 a-4. What is the impact on net income over the two accounting periods? Impact on net income over both periods: $115,050 + $1,300 = $(116,350); equal to cash inflow $116,350