What is the impact on net income, Financial Accounting

Assignment Help:

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  

 


Related Discussions:- What is the impact on net income

State the term - regulations, State the term - Regulations Financial acc...

State the term - Regulations Financial accounting reports, for numerous businesses, are subject to accounting regulations which try to make sure they are produced with standard

Expense recognition, Purchases office supplies on account costing $12,600 d...

Purchases office supplies on account costing $12,600 during July. It pays $5,500 for these purchases during July and the remainder during August. Office supplies on hand on July 1

Utility of Management accounting, Enumerate the scope and utility of manage...

Enumerate the scope and utility of management accounting.

Basis of npv and irr, Suppose that Oxford Inc. is interested in the two new...

Suppose that Oxford Inc. is interested in the two new products, AME and CGK. Because of its capital budget constraint, it can only launch one new product line. Eric just graduated

Khyber bank, how we write a literature review

how we write a literature review

Situational Decsisions, Presented below are four independent situations whi...

Presented below are four independent situations which you as a Manager Trainee employed with Your Company have been asked to evaluate. Evaluate each situation based on what each re

Determine income statement and balance sheet, Prepare an Excel spreads...

Prepare an Excel spreadsheet containing the following: - Construct the next five-year pro-forma statements (income statement and balance sheet). - Estimate annual F

Stock valuation, D1=$0.65, D2=$0.74, D3=$0.79, D4=$0.84.Dividen grow contin...

D1=$0.65, D2=$0.74, D3=$0.79, D4=$0.84.Dividen grow continually at rate of 3% per year stating from year 5 onward.assuming the required rate of return to this stock is 12%.what wil

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd