Icebreaker Company (a U.S.-based company) purchases materials from a foreign supplier on December 1, 2023, with payment of 16,000 dinars to be made on March 1, 2024. The materials are consumed immediately and recognized as cost of goods sold at the date of purchase. On December 1, 2023, Icebreaker enters into a forward contract to purchase 16,000 dinars on March 1, 2024. Relevant exchange rates for the dinar on various dates are as follows:

Date	Spot Rate	Forward Rate (to March 1, 2024)
December 1, 2023	$ 2.70	$ 2.775
December 31, 2023	2.80	2.900
March 1, 2024	2.95	N/A

a. Assuming that Icebreaker designates the forward contract as a cash flow hedge of a foreign currency payable, prepare journal entries for the import purchase and foreign currency forward contract in U.S. dollars.

b. Assuming that Icebreaker designates the forward contract as a fair value hedge of a foreign currency payable, prepare journal entries for the import purchase and foreign currency forward contract in U.S. dollars.

Hint: This is import purchase, and we have AP (not AR). FWD is to buy Dinars, and has positive values of $2800= (2.95-2.775)*16,000 on 3/1/2024.

Purchasing cost (COGS or Inventory) is $43,200=2.7*16k, and eventually paid $44,400=2.775*16k. Hence, the premium expense is $1,200, which should be allocated in 2023 and 2024, respectively. There is one month in 2023 and 2 months in 2024. So under CF hedge, on financial statement date, entry 4, the expense (i.e., Dr. FX G/L) is $ 400=1200*1/3; on settlement date, entry 4, the expense (i.e., Dr. FX G/L) is $ 800=1200*2/3.

under Fair value hedge, on financial statement date, entry 1 is to update AP, and entry 2 to update FWD to fair value. entry 1 and 2 together has FX Gain of $400, but in 2023 we should record FX loss (i.e., premium expense) of 400, so entry 4 (entry 3 is N/A) we Dr. FX G/L 800, Cr. OCI 800). Then in 2024, with entry 1, 2&4 together, we have FX G/L (i.e., loss as it is on Dr.) of $400.

under Fair value hedge, on settlement date, entry 1 is to update AP, and entry 2 to update FWD to fair value. entry 1 and 2 together has FX loss of $1600, but in 2024 we should record FX loss (i.e., premium expense) of 800, so entry 4 (entry 3 is N/A) we Dr. OCI 800, Cr. FX G/L 800. Then in 2024, with entry 1, 2 and 4 together, we have FX G/L (i.e., loss as it is on Dr.) of $800.

Under both methods, in 2024, COGS is $43,200, and FX loss is $400, the impact on NI is a decrease of $43,600=43,200+400; in 2024, FX loss is $800. Therefore, in 2 years, the impact on NI is a decrease of $44,400 =43,600+800.