Chapter 9, Problem 35P

a.

To determine

Prepare journal entries for forward contract.

Explanation of Solution

The journal entries which need to be passed in books:

Date	Particulars	Post Ref.	Debit	Credit
11-1-15	Account Receivable		$ 53,000
	Sales			$ 53,000
	(To record Sale and Account Receivable at spot rate)
3-12-15	Foreign Exchange Loss		$ 3,000
	Account Receivable			$ 3,000
	(To record foreign exchange loss with respect to account receivable)
3-12-15	Forward Contract		$ 3,844
	AOCI			$ 3,844
	To record change in fair value of the forward contract)
	AOCI
	Gain on forward contract		$ 3,000
				$ 3,000
	(To record gain on forward contract to affect the loss)
	Discount as expenses		$ 333
	AOCI			$ 333
	(To record discount on forward contract as expense)

Table: (1)

Working note:

Computation of foreign exchange loss spot rate:

$\begin{array}{c}\text{Foreign exchange loss spot rate}=\left(\$0.53-\$0.50\right)\times 100,000\text{FCUS}\\ \text{=}\text{\$3000}\end{array}$

Forward contract:

$\begin{array}{c}\text{Forward}\text{contract}=\left(\$0.52-\$0.48\right)\times 100,000\text{FCUS}\\ \text{=}\text{\$4000}\end{array}$

Interest rate is $12\%$ at present value of 4 month

Computation of discount expense:

$\begin{array}{c}\text{Discount}\text{Expense}\text{=}\text{100,000}\text{×}\text{(\$0}\text{.53}\text{-}\text{\$0}\text{.52)}\text{×}\frac{\text{2}}{\text{6}}\\ \text{=}\text{100,000}\text{×}\text{\$0}\text{.01}\text{×}\frac{\text{1}}{\text{3}}\\ \text{=}\text{\$333}\text{.33}\end{array}$

The journal entries in 2016:

Date	Particulars	Ref Post	Debit	Credit
4-30-15	Loss on Foreign Exchange		$ 1,000.00
	Account receivable			$ 1,000
	(To record the loss due to spot rate on 4/30/2017)
	Forward contract		$ 844
	AOCI			$ 844
	(To adjust the carrying value of forward contract at fair value)
	AOCI		$ 1,000
	Gain on forward contract			$ 1,000
	(To record gain on forward contract)
	Discount as expense		$ 667
	AOCI			$ 667
	(To allocate discount as expense occur during the life of the contract)
	Foreign Currency		$ 49,000
	Account Receivable			$ 49,000
	(To record the receipt of account receivable from customer)
	Cash		$ 52,000
	Forward contract			$ 3,000
	Foreign currency			$ 49,000

Table: (2)

Working note:

Forward contract:

$\begin{array}{c}\text{Forward}\text{contract}=\left[\$0.53-\$0.49\right]\times 100,000\text{FCUS}\\ =\$4000\end{array}$

Computation of gain on forward contract:

  $\begin{array}{c}\text{Gain}=\left[\$0.50-\$0.49\right]\times 100,000\text{FCUS}\\ =\$1000\end{array}$

Computation of discount as expense :

$\text{Forward rate}\text{on}\text{November}\text{1,}\text{2015}=\$0.20$

Thus,

$\text{Discount recognised earlier}=\$333.33$

Discount in 2016:

$\begin{array}{c}\text{Discount}=\left[\$0.53-\$0.52\right]\times 100,000\text{FCUS-\$333}\text{.33}\\ =\$666.67\end{array}$

b.

To determine

Identify the impact on net income in 2015.

Explanation of Solution

Impact on net income in 2015:

Particulars	Amount	Amount
Sale revenue		$ 53,000
Foreign Exchange loss	($ 3,000)
Gain on forward contract	$ 3,000	$ 0
Discount as expenses		$ 333
Total Gain		$ 52,667

Table: (3)

c.

To determine

Identify the impact on net income in 2016.

Explanation of Solution

Impact on net income in 2016:

Particulars	Amount	Amount
Foreign  exchange loss	($ 1,000)
Gain on forward contract	$ 1,000
Net gain/ (loss)		$ 0
Discount as expenses		($ 667)
Net/Total impact		($ 667)

Table: (4)