Brandlin Company of Anaheim California sells parts to a fore

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2015, with payment of 29,000 korunas to be received on March 1, 2016. Brandlin enters into a forward contract on December 1, 2015, to sell 29,000 korunas on March 1, 2016. Relevant exchange rates for the koruna on various dates are as follows:

Brandlin’s incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803. Brandlin must close its books and prepare financial statements at December 31.

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. (If no entry is required for a transaction/event, select \"No journal entry required\" in the first account field. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

What is the impact on 2015 net income? (Do not round intermediate calculations.)

What is the impact on 2016 net income? (Do not round intermediate calculations.)

What is the impact on net income over the two accounting periods? (Do not round intermediate calculations.)

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. (If no entry is required for a transaction/event, select \"No journal entry required\" in the first account field. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

What is the impact on 2015 net income? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

What is the impact on 2016 net income? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

What is the impact on net income over the two accounting periods? (Do not round intermediate calculations.)

This is how the question is in the textbook. The forward rate in March isn\'t needed to solve this.  

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2015, with payment of 29,000 korunas to be received on March 1, 2016. Brandlin enters into a forward contract on December 1, 2015, to sell 29,000 korunas on March 1, 2016. Relevant exchange rates for the koruna on various dates are as follows:

Solution

a) Cash Flow Hedge Date Accounts Debit Credit Dec. 1 2015 Accounts Receivable (K) (29,000 x $4] $116,000 Sales $116,000 No Entry Forward contract Dec. 31 2015 Accounts Receivable (K) $2,900 Foreign Exchange Gain (29000 x ($4.10 -$4.00) $2,900 Accumulated Other Comprehensive Income (AOCI) $3,553.59 Forward Contract $3,553.59 (29000 x (4.2 - 4.075 ) = 3625 x .9803 Loss on Forward Contract $2,900 AOCI $2,900 AOCI $725 Premium Revenue $725 (29000 x (4.075-4) = 2175 x 1/3 month Mar. 1 2016 Accounts Receivable (K) $4,350 Foreign Exchange Gain (29000 x ($4.25 -$4.10) $4,350 Accumulated Other Comprehensive Income (AOCI) $1,521.41 Forward Contract $1,521.41 (29000 x (4.25-4.075) = 5075 - 3553.59 Loss on Forward Contract $4,350 AOCI $4,350 AOCI $1,450 Premium Revenue $1,450 (29000 x (4.075-4) = 2175 x 2/3 month Foreign Currency (K) (29,000 x $4.25] $123,250 Accounts Receivable (K) $123,250 Cash (29000 x 4.075) $118,175 Forward Contract $5,075 Foreign Currency (K) $123,250 a-2. What is the impact on 2015 net income? Sales $116,000 Foreign Exchange Gain $2,900 Loss on Forward Contract -2900 Premium Revenue $725 Loss $116,725 a-3. What is the impact on 2016 net income? Foreign Exchange Gain $4,350 Loss on Forward Contract -4350 Premium Revenue $1,450 Loss $1,450 a-4. What is the impact on net income over the two accounting periods? Impact on net income over both periods: $116,725 + $1,450 = $(118,175); equal to cash inflow $118,175