The Budvar Company sells parts to a foreign customer on December 1, Year 1, with payment of
Question:
The Budvar Company sells parts to a foreign customer on December 1, Year 1, with payment of 20,000 crowns to be received on March 1, Year 2. Budvar enters into a forward contract on December 1, Year 1, to sell 20,000 crowns on March 1, Year 2. Relevant exchange rates for the crown on various dates are as follows:
Required:
a. Assuming that Budvar designates the forward contract as a cash flow hedge of a foreign currency receivable, prepare journal entries for these transactions in U.S. dollars. What is the impact on Year 1 net income? What is the impact on Year 2 net income? What is the impact on net income over the two accounting periods?
b. Assuming that Budvar designates the forward contract as a fair value hedge of a foreign currency receivable, prepare journal entries for these transactions in U.S. dollars. What is the impact on Year 1 net income? What is the impact on Year 2 net income? What is the impact on net income over the two accounting periods?
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