cebreaker Company (a U.S.-based company) purchases materials from a foreign supplier on December 1, 2020, with payment of 23,000 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 23,000 dinars on March 1, 2021. Relevant
cebreaker Company (a U.S.-based company) purchases materials from a foreign supplier on December 1, 2020, with payment of 23,000 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 23,000 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 | $ | 4.10 | $ | 4.175 | ||
| December 31, 2020 | 4.20 | 4.300 | ||||
| March 1, 2021 | 4.35 | N/A |
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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?
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b-3. What is the impact on net income over the two accounting periods?
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