Use the same facts as in Problem 31 except that Brandlin Company purchases materials from a foreign supplier on December 1, 2017, with payment of 16,000 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 16,000 korunas on March 1, 2018.
- a. Assuming that Brandlin designates the forward contract as a cash flow hedge of a foreign currency payable and recognizes any premium or discount using the straight-line method, prepare
journal entries for these transactions in U.S. dollars. What is the impact on 2017 net income? What is the impact on 2018 net income? What is the impact on net income over the two accounting periods? - b. Assuming that Brandlin designates the forward contract as a fair value hedge of a foreign currency payable, prepare journal entries for these transactions in U.S. dollars. What is the impact on net income in 2017 and in 2018? What is the impact on net income over the two accounting periods?
a.
Prepare journal entries for transaction of forward contract as a cash flow hedge of foreign currency payable and what is the impact on net income as 2017 and 2018. What is the impact on overall net income of two accounting period?
Explanation of Solution
Pass the journal entries and identify impact on net income:
Date | Particulars | Post Ref. | Debit($) | Credit($) |
12/1/17 | Parts (COGS –Cost of goods sold) | 43,200 | ||
Account Payable | 43,200 | |||
( To record Purchase as part on spot rate) | ||||
( No formal entry for forward contract because it an executor contract) | ||||
12/3/17 | Foreign exchange loss | 1,600 | ||
Account Payable | 1,600 | |||
(To relevant the foreign currency account payable and recognized exchange loss) | ||||
12/3/17 | Forward contact | 1960.6 | ||
AOCI ( Accumulated other comprehensive Income) | 1960.6 | |||
( To record change in fair value of the forward contract as a liability ) | ||||
12/31/17 | AOCI ( Accumulated other comprehensive Income) | 1,600 | ||
Gain on forward contract | 1,600 | |||
(To record a gain on forward contract option to affect the loss) | ||||
12/31/17 | Discount as expense | 400 | ||
AOCI ( Accumulated other comprehensive Income) | 400 | |||
(To allocate the premium on forward contract as revenue over the life of contract) |
Table: (1)
Impact on net income of 2017:
Particular | Amount($) | Amount($) |
Part Expense | (43,200) | |
Foreign exchange loss | (1,600) | |
Gain on forward contract | 1,600 | |
Discount as Expense | - | (400) |
Total | (43,600) |
Table: (2)
Journal entries in year 2018: (Cash flow hedge):
Date | Particulars | Post Ref. | Debit($) | Credit($) |
03/01/18 | Foreign exchange loss | 2,400 | ||
Account Payable | 2,400 | |||
( To revalue at spot rate as on 3/1/2108 | ||||
12/03/17 | Forward contact | 839.4 | ||
AOCI ( Accumulated other comprehensive Income) | 839.4 | |||
( To adjust the carrying value change of the forward contract at fair value on 3/1/2018) | ||||
12/31/17 | AOCI ( Accumulated other comprehensive Income) | 2,400 | ||
Gain on forward contract | 2,400 | |||
(To record a gain on forward contract to affect the loss on foreign exchange) | ||||
12/31/17 | Discount Expense | 800 | ||
AOCI ( Accumulated other comprehensive Income) | 800 | |||
To allocate the Discount as Expenses over the life of contract) | ||||
Account Payable | 47,200 | |||
Foreign currency (k) | 47,200 | |||
( To record the settlement of forward contract ) | ||||
Cash | 44,400 | |||
Forward contract | 2,800 | |||
Foreign currency | 47,200 | |||
( To record the settlement of forward contract ) |
Table: (3)
Impact on net income for year 2018:
Particular | Amount($) | Amount($) |
Foreign exchange loss | (2,400) | |
Gain on foreign exchange | 2,400 | |
Net gain/(loss) | 0 | |
Discount as expenses | - | (800) |
No Impact on income | (800) |
Table: (4)
Working note:
Net income over the two accounting period:
Particular | Amount($) |
Loss in 2017 | (1,600) |
Loss in 2018 | 2,400 |
Discount,2018 | 1,200 |
Net loss | 5,200 |
Table: (5)
b.
Prepare journal entries for forward contract as a fair value hedge of foreign currency payable and what is the impact on net income as 2017 and 2018. What is the impact on overall net income of two accounting period?
Explanation of Solution
Pass the journal entries and impact on net income:
Journal entries (fair value hedge) in 2017
Date | Particulars | Post Ref. | Debit($) | Credit($) |
12/01/17 | Parts (COGS –Cost of goods sold) | 43,200 | ||
Account Payable | 43,200 | |||
( To record Purchase as part on spot rate) | ||||
12/31/17 | Foreign exchange loss | 1,600 | ||
Account Payable | 1,600 | |||
(To relevant the foreign currency account payable and recognized loss on foreign exchange) | ||||
Forward contact | 1960.6 | |||
Gain on forward contract | 1960.6 | |||
( To record the forward contract as an assets) |
Table: (6)
Impact on net income of 2017:
Particular | Amount($) | Amount($) |
Parts Purchase | (43,200) | |
Foreign exchange loss | (1,600) | |
Gain on forward contract | 1,960.6 | |
Net gain/(loss) | - | 360.6 |
Impact on net income | 42,839.4 |
Table: (7)
Journal entries in 2018:
Date | Particulars | Post Ref. | Debit($) | Credit($) |
3/1/18 | Foreign exchange loss | 2,400 | ||
Account Payable | 2,400 | |||
( To revalue at spot rate as on 3/1/2108) | ||||
12/3/17 | Forward contact | 839.4 | ||
Gain on forward contact | 839.4 | |||
( To adjust the carrying value change of forward contact at fair value) | ||||
12/31/17 | Account Payable | 47,200 | ||
Foreign currency | 47,200 | |||
( To record the Payment to supplier of COGS ) | ||||
Foreign currency | 47,200 | |||
Cash | 44,400 | |||
Forward contract | 2,800 | |||
( To record the settlement of forward contract ) |
Table: (8)
Impact on net income for year 2018:
Particular | Amount($) |
Foreign exchange loss | (2,400) |
Gain on foreign exchange | 839.4 |
Impact on net income (loss) | (1,560.6) |
Table: (9)
Overall impact on net income during two accounting period:
Particular | Amount($) |
2017 Income loss/gain | 360.6 |
2018 Gain/(Loss) | (1,560.6) |
Net impact loss | (1,200) |
Table: (10)
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Chapter 9 Solutions
EBK ADVANCED ACCOUNTING
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