Car ID Inc. is a U.S.-based distributor of auto supplies for several domestic and foreign car companies.
Question:
Car ID Inc. is a U.S.-based distributor of auto supplies for several domestic and foreign car companies. On November 1, Year 1, Car ID sold and shipped auto parts to a customer in Switzerland for a price of 500,000 Swiss francs (CHF). Payment is to be received on January 30, Year 2. On the date of sale, Car ID also entered into a three-month forward contract to sell CHF 500,000. The forward contract is properly designated as a cash flow hedge of a foreign currency receivable. Car ID’s incremental borrowing rate is 12%. The present value factor for one month at an incremental borrowing rate of 12% is .99010. Relevant exchange rates are as follows:
Spot Forward Rate
Date Rate (to January 30, Year 2)
November 1, Year 1. . . . . . . . . . . . . . $0.500 $0.495
December 31, Year 1. . . . . . . . . . . . . . 0.520 0.516
January 30, Year 2. . . . . . . . . . . . . . . . 0.490 0.490
- Prepare all necessary journal entries to account for the sale and foreign currency forward contract. Assume that Car ID Inc. closes the books and prepares financial statements on December 31, Year 1.
Where appropriate, round to 2 decimal points.
- Based upon your work in No. 2 above, what is the impact on net income for each year, and in total, due to the foreign currency aspects of this transaction?
Expert Answer:
To account for the sale and foreign currency forward contract we need to prepare the necessary journ... View the full answer
