On November 1, 2015, Ambrose Company sold merchandise to a foreign customer for
ID: 2765989 • Letter: O
Question
On November 1, 2015, Ambrose Company sold merchandise to a foreign customer for 220,000 FCUs with payment to be received on April 30, 2016. At the date of sale, Ambrose entered into a six-month forward contract to sell 220,000 LCUs. It properly designates the forward contract as a cash flow hedge of a foreign currency receivable. The following exhange rates apply:
Ambrose's incremental borrowing rate is 12 percent. The present value factor for four months at an annual interest rate of 12 percent (1 percent per month) is 0.9610.
a. Prepare all journal entries, including Dec. 31 adjusting entries, to record the sale and forward contract. (Do not round intermediate calculations)
1. Record sale of merchandise to foreign customer
2. Record the forward contract
3. Record the entry for changes in the exchange rate
4. REcord the change in the fair value of the forward contract
5. Record entry to adjust the carrying value of the forward contract to its current fair value
6. Record the premium or discount expense
7. Record the entry for changes in the exchange rate
8. Record the change in the fair value of the forward contract
9. Record entry to adjust the carrying value of the forward contract to current fair value
10. Record the premium or discount expense
11. Record the receipt of FCUs
12. Record settlement of forward contract
b. What is the impact on net income in 2015?
c. What is the impact on net income in 2016?
Explanation / Answer
Solution:
a.
Accounts Receivable (FCU)
$138,600
Sales
$138,600
2.
There is no entry for the forward contract.
3.
Foreign Exchange Loss
$6,600
Accounts Receivable (FCU)
$6,600
4.
Accumulated other comprehensive income
$6,600
Gain on forward contract
$6,600
5.
Forward contract
$8,457
Accumulated other comprehensive income
$8,457
6.
Discount expense
$733.33
Accumulated other comprehensive income
$733.33
7.
Foreign exchange loss
$2,200
Accounts Receivable (FCU)
$2,200
8.
Accumulated other comprehensive income
$2,200
Gain on forward contract
$2,200
9.
Accumulated other comprehensive income
$1,857
Forward contract
$1,857
10.
Discount expense
$1,466.67
Accumulated other comprehensive income
$1,466.67
11.
Foreign currency
$129,800
Accounts receivable
$129,800
12.
Cash
$136,400
Foreign currency
$129,800
Forward contract
$6,600
b. Impact of net income for the year 2015
Sales
$138,600
Foreign exchange loss
(6,600)
Gain on forward contract
6,600
Net gain (loss)
0
Discount expense
(733.33)
Impact on net income
$137,866.67
c. Impact of net income for the year 2016
Foreign exchange loss
(2,200)
Gain on forward contract
2,200
Net gain (loss)
0
Discount expense
(1,466.67)
Impact on net income
($1,466.67)
Calculations:-
Account Receivable (FCU)
Forward rate to
Forward contract
Date
Spot rate
U.S. dollar value
Change in U.S. Dollar value
4/30/2016
Fair value
Change in fair value
11/1/2015
$0.63
$138,600.00
-
$0.62
$0.00
-
12/31/2015
$0.60
$132,000.00
($6,600.00)
$0.58
8457*
8457
4/30/2016
$0.59
$129,800.00
($2,200.00)
$0.59
6600*
-1857
*($0.62 - $0.58) x 220,000 x 0.961 = $8,457
**($0.62 - $0.59)*220,000 = $6,600
Discount expense = [220,000 x ($0.63 - $0.62) x 2/6]
Discount expense = $733.33
Accounts Receivable (FCU)
$138,600
Sales
$138,600
2.
There is no entry for the forward contract.
3.
Foreign Exchange Loss
$6,600
Accounts Receivable (FCU)
$6,600
4.
Accumulated other comprehensive income
$6,600
Gain on forward contract
$6,600
5.
Forward contract
$8,457
Accumulated other comprehensive income
$8,457
6.
Discount expense
$733.33
Accumulated other comprehensive income
$733.33
7.
Foreign exchange loss
$2,200
Accounts Receivable (FCU)
$2,200
8.
Accumulated other comprehensive income
$2,200
Gain on forward contract
$2,200
9.
Accumulated other comprehensive income
$1,857
Forward contract
$1,857
10.
Discount expense
$1,466.67
Accumulated other comprehensive income
$1,466.67
11.
Foreign currency
$129,800
Accounts receivable
$129,800
12.
Cash
$136,400
Foreign currency
$129,800
Forward contract
$6,600
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