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Corporation A sold parts to a German Customer on December 1 , year 1, with payment of 100,000 German Marks to be recieved on March 1, year 2. The following echange rates apply: Date: Spot Rate: Forward Rate( to march 1, year2) Dec. 1, year1 $0.24 $0.23 Dec. 31, year1 0.22 0.20 March 1, year 2 0.25 0.25 Company A’s incremental borrowing rate is 12 percent Required: A) Assuming no forward contract was enterd into, create all journal entries and post entries to T-accounts. What is the income to report in Year 1? What is the income to report in Year 2? B) Assuming a forward contract to sell 100,000 German Marks was entered into on December 1, Year 1, as a cash flow hedge of a forigen currency recievable, Create all journal entries, post entries to T-accounts. What is income in Year 1? What is income to report in Year 2?
Expert Answer
A.
On Dec.1 year 1
Debtor a/c Dr 24,000 ( 100,000*0.24)
To Sales a/c 24,000 ( 100,000*0.24)
(Being credit sales recored)
On Dec 31, year 1
Foreign exchange fluctuation a/c Dr 2000 [ 100,000*(0.24-0.22)]
To Debtors a/c. 2000 [100,000*(0.24-0.22)]
(Being Foreign exchange loss recorded and debtors reinstated)
Sales a/c Dr. 24,000
To Foreign exchange fluctuation a/c. 2000
To Profit & Loss a/c. 22,000
( Being balances transfered to Profi & loss a/c)
On 1st Mar Year 2
Cash/bank a/c Dr 25,000 (100,000*0.25)
To Debtors a/c Dr 22000
To Foreign exchange fluctuation a/c 3000
(Being debtors reinstated and fluctuation gain recored)
Foreign exchange fluctuation a/c Dr 3000
To Profit & Loss a/c. 3000
( Being balances transfered to Profit & loss a/c)
B. On 1st Dec Year 1
Debtors a/c Dr 24,000 (100,000*0.24)
To Loss on forward contract a/c 1000 [100,000*(0.24-0.23)]
To Forward contract a/c 23,000
(Being Debtors & forward contract recorded)
On 1st Mar year 2
Forward contract a/c Dr 23,000
Cash/bank a/c Dr 25,000 (100,000*0.25)
To Debtor a/c 24,000
To Cash/bank a/c 23,000
To Gain on forex fluctuation gain a/c 1000
(Being Forward contract executed and debtors realised)
