ANALYSIS CASE—CASH FLOW HEDGE
On February 1, 2017, Linber Company
Linber’s financial statements reported the following amounts related to this cash flow hedge (credit balances in parentheses):
Income Statement | First Quarter 2017 | Second Quarter 2017 | |
Premium expense | $4,000 | $ 2,000 | |
Cost of goods sold | –0– | 103,000 | |
Adjustment to net income | –0– | 3,000 | |
Balance Sheet | 3/31/17 | 5/1/17 | |
Forward contract (liability) | $(1,980)* | $ –0– | |
AOCI (credit) | (2,020) | –0– | |
Change in cash | –0– | (106,000) |
*$2,000 × 0.9901 = $1,980, where 0.9901 is the present value factor for one month at an annual interest rate of 12 percent calculated as 1/1.01.
Required
- 1. On February 1, 2017, what was the U.S. dollar per euro forward rate to May 1, 2017?
- 2. On March 31, 2017, what was the U.S. dollar per euro forward rate to May 1, 2017?
- 3. Was Linber better off or worse off as a result of having entered into this cash flow hedge of a forecasted transaction? By what amount?
- 4. What does the total premium expense of $6,000 reflect?
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