Use the same facts as in Problem (31) except that Brandlin Company purchases parts from a foreign supplier on December 1, 2013, with payment of 20,000 korunas to be made on March 1, 2014. On December 1, 2013, Brandlin enters into a forward contract to purchase 20,000 korunas on March 1, 2014.
In problem 31
Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2013, with payment of 20,000 korunas to be received on March 1, 2014. Brandlin enters into a forward contract on December 1, 2013, to sell 20,000 korunas on March 1, 2014. Relevant exchange rates for the koruna on various dates are as follows:
Date___________________ Spot Rate ______ Forward Rate (to March 1, 2014)
December 1, 2013 ................$2.00 ............................. $2.075
December 31, 2013 ................2.10 ..............................2.200
March 1, 2014 ......................2.25 ................................N/A
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.
a. Assuming that Brandlin designates the forward contract as a cash flow hedge of a foreign currency payable and recognizes any premium or discount using the straight-line method, prepare journal entries for these transactions in U.S. dollars. What is the impact on 2013 net income? What is the impact on 2014 net income? What is the impact on net income over the two accounting periods?
b. Assuming that Brandlin designates the forward contract as a fair value hedge of a foreign currency payable, prepare journal entries for these transactions in U.S. dollars. What is the impact on net income in 2013 and in 2014? What is the impact on net income over the two accounting periods?