ACC 407 International Accounting Derivatives Part 2 A nteza Lecture Exercises Derivatives Part 2 Exercise 2.1 The Budvar Company (US based company) purchases parts from a foreign supplier on December 1, Year 1, with payment of 20,000 crowns to be made on March 1, Year 2. Budvar enters into a forward contract on December 1, Y1 to purchase 20,000 crowns on March 1, Year 2. The parts purchased on December 1, Y1 and become a part of cost of goods sold on March 15, Y2 Relevant exchange rates for the crown on various dates are as follows: Date Spot Rate Forward Rate (to March 1. Year 2) December 1, Year 1 $1.00 $1.04 December 31, Year 1 1.05 1.1 March 1. Year 2 1.12 Budvar's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803. Budvar must close its books and prepare financial statements at December 31. Required: 1. Prepare schedule of changes in changes in payable and fair value of the forward contract. Date Spot Rate Accounts Payable US $ Change in payable US$ payable Forward rate to 01/03/Y2 Forward Contract Fair Value Change in Fair Value 2. Assuming that Budvar designates the forward contract as a cash flow hedge of a foreign currency payabl prepare journal entries for these transactions in US dollars. What is the impact on Year 1 income? What is the impact on Year 2 income? What is the impact on net income over the two accounting periods? 3. Assuming that Budvar designates the forward contract as a fair value hedge of a foreign currency payat prepare journal entries for these transactions in US dollars. What is the impact on Year 1 income? What is the impact on Year 2 income? What is the impact on net income over the two accounting periods? ACC 407 International Accounting Derivatives Part 2 A nteza Lecture Exercises Derivatives Part 2 Exercise 2.1 The Budvar Company (US based company) purchases parts from a foreign supplier on December 1, Year 1, with payment of 20,000 crowns to be made on March 1, Year 2. Budvar enters into a forward contract on December 1, Y1 to purchase 20,000 crowns on March 1, Year 2. The parts purchased on December 1, Y1 and become a part of cost of goods sold on March 15, Y2 Relevant exchange rates for the crown on various dates are as follows: Date Spot Rate Forward Rate (to March 1. Year 2) December 1, Year 1 $1.00 $1.04 December 31, Year 1 1.05 1.1 March 1. Year 2 1.12 Budvar's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803. Budvar must close its books and prepare financial statements at December 31. Required: 1. Prepare schedule of changes in changes in payable and fair value of the forward contract. Date Spot Rate Accounts Payable US $ Change in payable US$ payable Forward rate to 01/03/Y2 Forward Contract Fair Value Change in Fair Value 2. Assuming that Budvar designates the forward contract as a cash flow hedge of a foreign currency payabl prepare journal entries for these transactions in US dollars. What is the impact on Year 1 income? What is the impact on Year 2 income? What is the impact on net income over the two accounting periods? 3. Assuming that Budvar designates the forward contract as a fair value hedge of a foreign currency payat prepare journal entries for these transactions in US dollars. What is the impact on Year 1 income? What is the impact on Year 2 income? What is the impact on net income over the two accounting periods