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
First Meeting of creditors The Official Receiver must convene this meeting within 60 days of the receiving order, unless the court extends the time, by giving notice to each c

A____ is a loss to the business and a gain to the debtor

Q. A prior period adjustment that corrects income of a prior period requires that an entry be made to a. an income statement account. b. a current year revenue or expense account.

a) Company X is expected to maintain a constant 7% growth rate in their dividends, indefinitely. If the company has a dividend yield of 4%, what is the required return on their sha

1. Think about the transactions listed below. a. A company obtains a $10,000 loan from a bank. b. A company purchases $15,000 of inventory from its suppliers. They paid $5,000 toda

Suppose you are a financial manager of Yuen Cheong Manufacturng Company. Due to the rising demand of product X, Yuen Cheong Manufacturng Company decides to open a new production pl

Bakers Bagels LLC produces and sells 20 types of bagels by the dozen. Bagels are priced at $6.00 per dozen (or $0.50 each) and cost $.020 per unit to produce. The company is consid

What kinds of business ownership exist? Particular form of business ownership has significant implications for accounting purposes and so it's useful to be clear about the main

Q1. what are the roles and objective of FASB and IASB? Q2.what are the main reason for the joint project undertaken by the FASB and IASB? Q3.state some critics by individual and th

i need you to answer my cases