Fundamentals of Advanced Accounting
Fundamentals of Advanced Accounting
7th Edition
ISBN: 9781259722639
Author: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
Publisher: McGraw-Hill Education
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Chapter 7, Problem 32P

a.

To determine

Prepare journal entries for transaction of forward contract as a cash flow hedge of foreign currency payable and what is the impact on net income as 2017 and 2018. What is the impact on overall net income of two accounting period?

a.

Expert Solution
Check Mark

Explanation of Solution

Pass the journal entries and identify impact on net income:

DateParticularsPost Ref.Debit($)Credit($)
     
12/1/17Parts (COGS –Cost of goods sold)43,200
 Account Payable 43,200
     
 ( To record Purchase as part on spot rate)   
     
( No formal entry for forward contract because it an executor contract) 
     
 12/3/17Foreign exchange loss 1,600
 Account Payable 1,600
   
 

(To relevant the foreign currency account payable and recognized exchange loss)

($2.8$2.7)×16000k

 
   
12/3/17Forward contact 1960.6
 AOCI ( Accumulated other comprehensive Income) 1960.6
   
 ( To record change in fair value of the forward contract as a liability )($2.9$2.775)×16,000k=$2,000=$2,000×0.9803=$1960.6 
   
 12/31/17AOCI ( Accumulated other comprehensive Income) 1,600
 Gain on forward contract 1,600
   
 (To record a gain on forward contract option to affect the loss) 
   
 12/31/17Discount as expense 400
 AOCI ( Accumulated other comprehensive Income) 400
     
 

(To allocate the premium on forward contract as revenue over the life of contract)

$43200[13(2.775)(2.7)]

   

Table: (1)

Impact on net income of 2017:

Particular  Amount($) Amount($)
   
Part Expense (43,200)
 Foreign exchange loss(1,600)
Gain on forward contract1,600
Discount as Expense-(400)
Total(43,600)

Table: (2)

Journal entries in year 2018: (Cash flow hedge):

DateParticularsPost Ref.Debit($)Credit($)
     
03/01/18Foreign exchange loss2,400
 Account Payable 2,400
     
 ( To revalue at spot rate as on 3/1/2108   
     
12/03/17Forward contact 839.4
 AOCI ( Accumulated other comprehensive Income) 839.4
   
 

( To adjust the carrying value change of the forward contract at fair value on 3/1/2018)

($2.95$2.775)×16,000k$2800$1960.6=839.4

 
   
 12/31/17AOCI ( Accumulated other comprehensive Income) 2,400
 Gain on forward contract 2,400
   
 

(To record a gain on forward contract to affect the loss on foreign exchange)

($2.95$2.8)×16,000k=$2,400

 
   
 12/31/17Discount Expense 800
 AOCI ( Accumulated other comprehensive Income) 800
     

To allocate the Discount as Expenses over the life of contract)

[($2.775$2.7)×16,000k]$400=$800

Account Payable47,200
Foreign currency (k)47,200
( To record the settlement of forward contract ) ($2.95×16,000k)=$2,800
Cash44,400
Forward contract2,800
Foreign currency47,200
 ( To record the settlement of forward contract ) ($2.775$2.95)×16,000k=$2,800   

Table: (3)

Impact on net income for year 2018:

Particular  Amount($) Amount($)
   
Foreign exchange loss(2,400)
Gain on foreign exchange2,400
Net gain/(loss)0
Discount as expenses-(800)
No Impact on income(800)

Table: (4)

Working note:

Net income over the two accounting period:

Particular  Amount($)
  
Loss in 2017(1,600)
Loss in 20182,400
Discount,2018(2.7752.7)×16,0001,200
Net loss5,200

Table: (5)

b.

To determine

Prepare journal entries for forward contract as a fair value hedge of foreign currency payable and what is the impact on net income as 2017 and 2018. What is the impact on overall net income of two accounting period?

b.

Expert Solution
Check Mark

Explanation of Solution

Pass the journal entries and impact on net income:

Journal entries (fair value hedge) in 2017

DateParticularsPost Ref.Debit($)Credit($)
     
12/01/17Parts (COGS –Cost of goods sold)43,200
 Account Payable 43,200
     
 ( To record Purchase as part on spot rate)   
     
 12/31/17Foreign exchange loss 1,600
 Account Payable 1,600
   
 

(To relevant the foreign currency account payable and recognized loss on foreign exchange)

($2.8$2.7)×16000k

 
   
 Forward contact 1960.6
Gain on forward contract1960.6
 ( To record the forward contract as an assets) 

Table: (6)

Impact on net income of 2017:

Particular  Amount($) Amount($)
   
Parts Purchase (43,200)
 Foreign exchange loss(1,600)
Gain on forward contract1,960.6
Net gain/(loss)-360.6
Impact on net income42,839.4

Table: (7)

Journal entries in 2018:

DateParticularsPost Ref.Debit($)Credit($)
     
3/1/18Foreign exchange loss2,400
 Account Payable 2,400
     
 ( To revalue at spot rate as on 3/1/2108)   
     
12/3/17Forward contact 839.4
 Gain on forward contact 839.4
   
 ( To adjust the carrying value change of forward contact at fair value) 
   
 12/31/17Account Payable 47,200
 Foreign currency 47,200
   
 ( To record the Payment to supplier of COGS ) 
Foreign currency47,200
Cash44,400
Forward contract2,800
 ( To record the settlement of forward contract )   

Table: (8)

Impact on net income for year 2018:

Particular  Amount($)
  
Foreign exchange loss(2,400)
Gain on foreign exchange839.4
Impact on net income (loss)(1,560.6)

Table: (9)

Overall impact on net income during two accounting period:

Particular  Amount($)
  
2017 Income loss/gain360.6
2018 Gain/(Loss)(1,560.6)
Net impact loss(1,200)

Table: (10)

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