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	Particular	Post Ref.	Debit($)	Credit($)
11/1/17	Account Receivable		21,000
	Sales			21,000
	( To record sale and account receivable at spot rate
	( No formal entry for forward contract because it is an executor contract)
12/3/17	Foreign exchange loss		2,000
	Account Receivable			2,000
	(To relevant the foreign currency account receivable and recognized foreign currency loss working note -1)
12/3/17	Forward contact		2,883
	AOCI ( Accumulated other comprehensive Income)			2,883
	( To record change in fair value of the forward contract as an asserts(Working note-2))
	AOCI ( Accumulated other comprehensive Income)		2,000
	Gain on forward contract			2,000
	(To record gain on forward contract option to affect the loss)
	Discount as expenses		338.76
	AOCI ( Accumulated other comprehensive Income)			338.76
	(To allocate the discount an forward contract as expense occur the life of the contract (working note-3))

Table: (1)

Working note:

Computation of foreign exchange loss spot rate:

Given:

$\begin{array}{c}12/31/17=\$0.19\\ 11/01/17=\$0.21\end{array}$

Thus,

$\begin{array}{c}\text{Foreign exchange loss spot rate}=\left(\$0.21-\$0.19\right)\times 100,000\text{FCUS}\\ \text{=}\text{\$2000}\end{array}$

Forward contract:

Given:

$\begin{array}{l}12/31/17=\$0.20\\ 11/01/17=\$0.17\end{array}$

Thus,

$\begin{array}{c}\text{Forward}\text{contract}=\left(\$0.20-\$0.17\right)\times 100,000\text{FCUS}\\ \text{=}\text{\$3000}\end{array}$

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

Computation of discount expense:

$\begin{array}{c}\text{Discount}\text{expense}=\$21000\times \left[1-3\sqrt{\frac{0.20}{0.21}}\right]\\ =\$338.76\end{array}$

The journal entries in 2018:

Date	Particular	Post Ref.	Debit($)	Credit($)
4/30/2018	Loss on foreign exchange		1,000
	Account Receivable			1,000
	( To relevant at spot rate as an 4/30/2018)
	( No formal entry for forward contract because it is an executor contract)
12/3/17	Forward contact		883
	AOCI ( Accumulated other comprehensive Income)			883
	(To adjust the carrying value of forward contact at fair value on 4/30/2018) working note-1
	AOCI ( Accumulated other comprehensive Income)		1,000
	Gain on forward contract			1,000
	(To record gain on forward contract  to affect the loss) working note-2
	Discount as expenses		661.24
	AOCI ( Accumulated other comprehensive Income)			661.24
	(To allocate the discount as  expense occur the life of the contract (working note-3))
	Foreign currency		18,000
	Account Receivable			18,000
	( To record the receipt of account receivable from customer)
	Cash		20,000
	Forward contract			2,000
	Foreign currency			18,000
	( To record the settlement of forward contract)

Table: (2)

Working note:

Forward contract:

$\begin{array}{c}\text{Forward}\text{contract}=\left[\$0.20-\$0.18\right]\times 100,000\text{FCUS}\\ =\$2000\end{array}$

Thus,

$\text{Amount recognized in =}\text{2017}$

Computation of gain on forward contract:

$\text{Spot rate on }30/4/18=\$0.18$

and

$\text{Spot rate on }31/12/18=\$0.19$

Thus,

$\begin{array}{c}\text{Gain}=\left[\$0.19-\$0.18\right]\times 100,000\text{FCUS}\\ =\$1000\end{array}$

Computation of discount as expense :

$\text{Forward rate on November},1,2017=\$0.20$

$\text{Spot rate on November},1,2017=\$0.21$

Thus,

$\text{Discount recognised in }2017=\$338.76$

Discount in 2018:

$\begin{array}{c}\text{Discount}=\left[\$0.20-\$0.21\right]\times 100,000\text{FCUS-\$338}\text{.76}\\ =\$661.24\end{array}$

b.

To determine

Identify the impact on net income in 2017.

Explanation of Solution

Impact on net income in 2017:

Particular	Amount($)	Amount($)
Sale Revenue		210,000
Foreign exchange loss	(2,000)
Gain on forward contract	2,000	0
Discount as expenses		338.76
Total gain		20661.24

Table: (3)

c.

To determine

Identify the impact on net income in 2018.

Explanation of Solution

Impact on net income in 2018:

Particular	Amount($)	Amount($)
Foreign exchange loss	(1,000)
Gain on forward exchange	1,000
Net gain/(loss)		0
Discount as an expenses		(661.24)
Net/Total impact		(661.24)

Table: (4)