On November 1, 2023, Cheng Company (a U.S.-based company) forecasts the purchase of goods from a foreign supplier for 170,000 yuan. Cheng expects to receive the goods on April 30, 2024, and make immediate payment. On November 1, 2023, Cheng enters into a six-month forward contract to buy 170,000 yuan. The company properly designates the forward contract as a cash flow hedge of a forecasted foreign currency transaction. Forward points are excluded in assessing hedge effectiveness and are amortized to net income using a straight-line method on a monthly basis over the life of the contract. The following U.S. dollar-Yuan exchange rates apply: Date November 1, 2023 December 31, 2023 April 30, 2024 Spot Rate $ 0.28 0.27 0.25 Forward Rate (to April 30, 2024) $ 0.265 0.240 N/A As expected, Cheng receives goods from the foreign supplier on April 30, 2024, and pays 170,000 yuan immediately. Cheng sells the imported goods in the local market in May 2024. Required: a. Prepare all journal entries, including December 31 adjusting entries, to record the foreign currency forward contract and import purchase. b. What is the impact on net income in 2023? c. What is the impact on net income in 2024?
On November 1, 2023, Cheng Company (a U.S.-based company) forecasts the purchase of goods from a foreign supplier for 170,000 yuan. Cheng expects to receive the goods on April 30, 2024, and make immediate payment. On November 1, 2023, Cheng enters into a six-month forward contract to buy 170,000 yuan. The company properly designates the forward contract as a cash flow hedge of a forecasted foreign currency transaction. Forward points are excluded in assessing hedge effectiveness and are amortized to net income using a straight-line method on a monthly basis over the life of the contract. The following U.S. dollar-Yuan exchange rates apply: Date November 1, 2023 December 31, 2023 April 30, 2024 Spot Rate $ 0.28 0.27 0.25 Forward Rate (to April 30, 2024) $ 0.265 0.240 N/A As expected, Cheng receives goods from the foreign supplier on April 30, 2024, and pays 170,000 yuan immediately. Cheng sells the imported goods in the local market in May 2024. Required: a. Prepare all journal entries, including December 31 adjusting entries, to record the foreign currency forward contract and import purchase. b. What is the impact on net income in 2023? c. What is the impact on net income in 2024?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:On November 1, 2023, Cheng Company (a U.S.-based company) forecasts the purchase of goods from a foreign supplier for
170,000 yuan. Cheng expects to receive the goods on April 30, 2024, and make immediate payment. On November 1, 2023,
Cheng enters into a six-month forward contract to buy 170,000 yuan. The company properly designates the forward contract
as a cash flow hedge of a forecasted foreign currency transaction. Forward points are excluded in assessing hedge
effectiveness and are amortized to net income using a straight-line method on a monthly basis over the life of the contract.
The following U.S. dollar-Yuan exchange rates apply.
Date
November 1, 2023
December 31, 2023
April 30, 2024
Spot Rate
$ 0.28
0.27
0.25
Forward Rate (to
April 30, 2024)
$ 0.265
0.240
N/A
As expected, Cheng receives goods from the foreign supplier on April 30, 2024, and pays 170,000 yuan immediately. Cheng
sells the imported goods in the local market in May 2024.
Required:
a. Prepare all journal entries, including December 31 adjusting entries, to record the foreign currency forward contract and
import purchase.
b. What is the impact on net income in 2023?
c. What is the impact on net income in 2024?
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