Soft Bound Version for Advanced Accounting 13th Edition
Soft Bound Version for Advanced Accounting 13th Edition
13th Edition
ISBN: 9781260110579
Author: Hoyle
Publisher: McGraw Hill Education
Question
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Chapter 9, Problem 31P

a.

To determine

Prepare journal entries for transaction of forward contract as a cash flow hedge of foreign currency receivable and recognize any premium or discount using straight line method and identify the impact on net income as 2017 and 2018 and identify the impact on overall net income of two accounting period.

a.

Expert Solution
Check Mark

Explanation of Solution

The following entries need to be passed in year 2017 (cash flow hedge):

DateParticularsPost Ref.Debit($)Credit($)
     
12/01/17Account Receivable43,200
 Sales 43,200
     
 ( To record sale and account receivable at spot rate $2.7×16000korunas(k)   
     
( No formal entry for forward contract because it an executor contract) 
     
 12/3/17Account Receivable 1,600
 Foreign exchange gain 1,600
   
 

(To relevant the foreign currency account receivable and recognized foreign exchange gain)

($2.8$2.7)×16000k

 
   
12/3/17AOCI ( Accumulated other comprehensive Income) 1960.6
 Forward contact 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 
   
 12/31/17Loss on forward contract 1,600
 AOCI ( Accumulated other comprehensive Income) 1,600
   
 (To record loss on forward contract option to affect the gain) 
   
 12/31/17AOCI ( Accumulated other comprehensive Income) 400
 Premium Revenue 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 2017:

Particular  Amount($) Amount($)
   
Sale Revenue 43,200
 Foreign exchange gain1,600
Loss on forward contract(1,600)
Premium Revenue-400
Total43,600

Table: (2)

Journal entries in 2018:

DateParticularPost Ref.Debit($)Credit($)
     
3/1/18Account Receivable (k)2,400
 Foreign exchange gain 2,400
     
 ( To revalue at spot rate as on 3/1/2108   
     
12/3/17AOCI ( Accumulated other comprehensive Income) 839.4
 Forward contact 839.4
   
 

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

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

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

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

($2.95$2.8)×16,000k=$2,400

 
   
 12/31/17AOCI ( Accumulated other comprehensive Income) 800
 Premium Revenue 800
     

To allocate the premium os as revenue over the life of contract)

[($2.775$2.7)×16,000k]$400=$800

Foreign currency (k)47,200
Account Receivable47,200
( To record the receipt from customer) ($2.95×16,000k)
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 gain2,400
Loss on foreign exchange(2,400)
Net gain/(loss)0
Premium Revenue-800
Impact on income800

Table: (4)

Working note:

Net income over the two accounting period:

Particulars  Amount($)
  
Gain 20171,600
Gain 20182,400
Premium (2.7752.7)×16,0001,200
Net gain5,200

Table: (5)

b.

To determine

Prepare journal entries for transaction of forward contract as a fair value hedge of foreign currency receivable and recognize any premium or discount using straight line method and identify the impact on net income as 2017 and 2018 and identify the impact on overall net income of two accounting period.

b.

Expert Solution
Check Mark

Explanation of Solution

The journal entries for transaction of forward contract as a fair value hedge of foreign currency receivable and recognize any premium or discount using straight line method:

DateParticularsPost Ref.Debit($)Credit($)
     
12/1/18Account Receivable43,200
 Sales 43,200
     
 ( To record sales and account receivable at spot rate)   
     
12/31/17Account Receivable 1,600
 Foreign Exchange gain 1,600
   
 ( To relevant the foreign currency account receivable and recognize a foreign exchange gain) 
   
 12/31/17Loss on forward contract 1960.6
 Forward contract 1960.6
   
 (To record forward contract to liability) 

Table: (6)

Impact on net income of 2017:

Particular  Amount($) Amount($)
   
Sales 43,200
 Foreign exchange gain1,600
Loss on forward contract(1,960.6)
Net gain/(loss)-(360.6)
Impact on net income43,839.4

Table: (7)

Journal entries in 2018:

DateParticularsPost Ref.Debit($)Credit($)
     
3/1/18Account Receivable2,400
 Foreign exchange gain 2,400
     
 ( To revalue at spot rate as on 3/1/2108   
     
12/03/17Loss on forward contact 839.4
 Forward contact 839.4
   
 ( To adjust the carrying value change at fair value) 
   
 12/31/17Foreign currency 47,200
 Account Receivable 47,200
   
 ( To record the receipt from customer) 
Cash44,400
Forward contract2,800
Foreign currency47,200
 ( To record the settlement of forward contract )   

Table: (8)

Impact on net income for year 2018:

Particular  Amount($)
  
Foreign exchange gain2,400
Loss on foreign exchange(839.4)
Impact on net income1,560.6

Table: (9)

Working note:

Net income over the two accounting period:

Particular  Amount($)
  
2017 Income loss(360.6)
2018 Gain1,560.6
Net impact gain1,200

Table: (10)

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Chapter 9 Solutions

Soft Bound Version for Advanced Accounting 13th Edition

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