What is the impact on net income, Financial Accounting

The Budvar Company purchases parts from a foreign customer on December 1, Year 1, with payment of 20,000 crowns 20,000 crowns to be made on March 1, Year 2.  Budvar enters into a forward contract on December 1, Year 1, to purchase 20,000 crowns on March 1, Year 2. The parts purchased on December 1, Year 1, become a part of the cost of goods sold on March 15, Year 2.

Relevant exchange rates for the crown on various dates are as follows:

Date

Spot Rate

Forward Rate

 

 

(to March 1, Year 2)

     

December 1, Year 1

$1.00

$1.04

December 31, Year 1

1.05

1.1

March 1, Year 2

1.12

 

 

udvar'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. Budvar must close its books and prepare financial statements at December 31.

Required:

a.       Assuming that Budvar designates the forward contract as a cash flow hedge of a foreign currency payable, prepare journal entries for these transactions in US dollars. What is the impact on Year 1 net income? What is the impact on Year 2 net income? What is the impact on net income over the two accounting periods?

b.      Assuming that Budvar designates the forward contract as a fair value hedge of a foreign currency payable, prepare journal entries for these transactions in US dollars. What is the impact on Year 1 net income? What is the impact on Year 2 net income? What is the impact on net income over the two accounting periods?

a) Forward Contract Cash Flow Hedge of Foreign Currency Receivable   
  Journal Entries:            
                 
  Date Particulars Debit  Credit
  Year 1              
  1-Dec Accounts receivable (crowns) [20,000 x $1.00]        20,000  
      Sales              20,000
                 
  31-Dec Accounts receivable (crowns) [20,000 x ($1.05-$1.00)]          1,000  
      Foreign exchange gain             1,000
                 
    Loss on forward contract              1,000  
      Accmt other comprehensive income           1,000
                 
    Accmt other comprehensive income            1,176  
      Forward Contract               1,176
    ([20,000 x ($1.10-$1.04) = $1,200 x .9803 = $1,176.36])    
                 
    Accmt other comprehensive income                267  
      Premium revenue                  267
    ([20,000 x ($1.04-$1.00) = $800 x 1/3 = $266.67])    
                 
  Impact on Year 1 Income:          
  Sales                  20,000  
  Foreign Exchange gain                1,000  
  Loss on forward contract              -1,000  
  premium revenue                      267  
                     20,267  
                 
  Year 2              
  1-Mar Accounts receivable (crowns) [20,000 x ($1.12-$1.05)]          1,400  
      Foreign exchange gain             1,400
                 
    Loss on forward contract              1,400  
      Accmt other comprehensive income           1,400
                 
    Accmt other comprehensive income                424  
      Forward contract                   424
    ([20,000 x ($1.12-$1.04) = $1,600 - 1,176.36])    
                 
    Accmt other comprehensive income                533  
      Premium revenue                  533
    ([20,000 x ($1.04-$1.00) = $800 x 2/3 = $266.67])    
                 
    Foreign currency (crown) [20,000 x $1.12]          22,400  
      Accounts receivable (crown)          22,400
                 
    Cash [20,000 x $1.04]            20,800  
    Forward contract                1,600  
      Foreign currency (crown)          22,400
                 
  Impact on Year 2 Income:          
  Foreign Exchange gain                1,400  
  Loss on forward contract              -1,400  
  premium revenue                      533  
                           533  
                 
  Impact on Net Income over both the periods:          20,800  
                 
b) Forward Contract Fair Value Hedge of Foreign Currency Receivable  
  Journal Entries:            
                 
  Date Particulars Debit  Credit
  Year 1              
  1-Dec Accounts receivable (crowns) [20,000 x $1.00]        20,000  
      Sales              20,000
                 
  31-Dec Accounts receivable (crowns) [20,000 x ($1.05-$1.00)]          1,000  
      Foreign exchange gain             1,000
                 
    Loss on forward contract              1,176  
      Forward contract                1,176
    ([20,000 x ($1.04-$1.10) = $1,200 x .9803 = $1,176.36])    
                 
  Impact on Year 1 Income:          
  Sales                  20,000  
  Foreign Exchange gain                1,000  
  Loss on forward contract              -1,176  
                     19,824  
                 
  Year 2              
  1-Mar Accounts receivable (crown) [20,000 x ($1.12-$1.05)]          1,400  
      Foreign exchange gain             1,400
                 
    Loss on forward contract                  424  
      Forward contract                   424
    ([20,000 x ($1.12-$1.04) = $1,600 - 1,176.36])    
                 
    Foreign currency (crown) [20,000 x $1.12]          22,400  
      Accounts receivable (crown)          22,400
                 
    Cash [20,000 x $1.04]            20,800  
    Forward contract                1,600  
      Foreign currency (crown)          22,400
                 
  Impact on Year 2 Income:          
  Foreign Exchange gain                1,400  
  Loss on forward contract                  -424  
                           976  
                 
  Impact on Net Income over both the periods:          20,800  

 

Posted Date: 8/9/2012 8:16:21 AM | Location : United States







Related Discussions:- What is the impact on net income, Assignment Help, Ask Question on What is the impact on net income, Get Answer, Expert's Help, What is the impact on net income Discussions

Write discussion on What is the impact on net income
Your posts are moderated
Related Questions
DISSOLUTIONS A partnership may be dissolved due to various reasons which include: Poor trading that has led to losses A partner dying or leaving the firm The time

Refer to the Consolidated Statements of Shareholders' Equity (pp. 62-63), Consolidated Statements of Cash Flow, including an abstract from Note 2, Cash Flow Information (pp. 61 and

Q. What do you mean by Operating Agreement? Operating Agreement - Agreement, generally a written document which sets out the rules by which a LIMITED LIABILITY COMPANY (LLC) is

Q. What is Auditors report explain? Special Report - Special report is a term used for Auditors' reports issued in connection with various types of financial presentations, inc

On January 1, 2011, Doty Co. redeemed its 15-year bonds of $2,500,000 par value for 102. They were originally issued on January 1, 1999 at 98 with a maturity date of January 1, 201

Illustrations of Dissolutions X, Y and Z have been trading as partners sharing profits and losses in the ratio of 2:2:1 on the 1st July 2005, they decided to dissolve the partn

State the Accounting as an information system We know that accounting can be seen as provision of a service to 'clients'. Another way of viewing accounting is as a part of busi

SURVIVORSHIP POLICY The partners may take out a survivorship policy to safeguard against future cashflow problems incase a partner dies or the business is dissolved. E.g. incas

1.) Assume a $1000 face value bond has a coupon rate of 8.5 percent, pays interest semi-annually, and has an eight-year life. If investors are willing to accept a 10.25 percent rat

XYZ Inc., an Ontario-based company on the cutting edge of technology, is analyzing the possibility of providing university-level courses for York University. This virtual universit