Icebreaker Company (a U.S.-based company) purchases materials from a foreign supplier on December 1, 2020, with payment of 18,000 dinars to be made on March 1, 2021. The materials are consumed immediately and recognized as cost of goods sold at the date of purchase. On December 1, 2020, Icebreaker enters into a forward contract to purchase 18,000 dinars on March 1, 2021. Relevant exchange rates for the dinar on various dates are as follows:   Date Spot Rate Forward Rate (to March 1, 2021) December 1, 2020 $ 3.60   $ 3.675   December 31, 2020   3.70     3.800   March 1, 2021   3.85     N/A       a-1. Assuming that Icebreaker designates the forward contract as a cash flow hedge of a foreign currency payable, prepare journal entries for the import purchase and foreign currency forward contract in U.S. dollars.  a-2. What is the impact on 2020 net income? a-3. What is the impact on 2021 net income? a-4. What is the impact on net income over the two accounting periods? b-1. Assuming that Icebreaker designates the forward contract as a fair value hedge of a foreign currency payable, prepare journal entries for the import purchase and foreign currency forward contract in U.S. dollars.  b-2. What is the impact on net income in 2020 and in 2021? b-3. What is the impact on net income over the two accounting periods? b-2. What is the impact on net income in 2020 and in 2021? b-3. What is the impact on net income over the two accounting periods?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Icebreaker Company (a U.S.-based company) purchases materials from a foreign supplier on December 1, 2020, with payment of 18,000 dinars to be made on March 1, 2021. The materials are consumed immediately and recognized as cost of goods sold at the date of purchase. On December 1, 2020, Icebreaker enters into a forward contract to purchase 18,000 dinars on March 1, 2021.

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

 

Date Spot Rate Forward Rate
(to March 1, 2021)
December 1, 2020 $ 3.60   $ 3.675  
December 31, 2020   3.70     3.800  
March 1, 2021   3.85     N/A  
 

 

  1. a-1. Assuming that Icebreaker designates the forward contract as a cash flow hedge of a foreign currency payable, prepare journal entries for the import purchase and foreign currency forward contract in U.S. dollars. 

  2. a-2. What is the impact on 2020 net income?

  3. a-3. What is the impact on 2021 net income?

  4. a-4. What is the impact on net income over the two accounting periods?

  5. b-1. Assuming that Icebreaker designates the forward contract as a fair value hedge of a foreign currency payable, prepare journal entries for the import purchase and foreign currency forward contract in U.S. dollars. 

  6. b-2. What is the impact on net income in 2020 and in 2021?

  7. b-3. What is the impact on net income over the two accounting periods?

b-2. What is the impact on net income in 2020 and in 2021?
b-3. What is the impact on net income over the two accounting periods?

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