Icebreaker Company (a U.S.-based company) sells parts to a foreign customer on December 1, 2020, with payment of 25,000 dinars to be received on March 1, 2021. Icebreaker enters into a forward contract on December 1, 2020, to sell 25,000 dinars on March 1, 2021. The forward points on the forward contract are excluded in assessing hedge effectiveness and are amortized to net income using a straight-line method on a monthly basis. Relevant exchange rates for the dinar on various dates are as follows:
| Date | Spot Rate | Forward Rate (to March 1, 2021) |
| December 1, 2020 | $ | 4.30 | | $ | 4.375 | |
| December 31, 2020 | | 4.40 | | | 4.500 | |
| March 1, 2021 | | 4.55 | | | N/A | |
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Icebreaker must close its books and prepare financial statements at December 31.
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a-1. Assuming that Icebreaker designates the forward contract as a cash flow hedge of a foreign currency receivable, prepare journal entries for the sale and foreign currency forward contract in U.S. dollars.
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a-2. What is the impact on 2020 net income?
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a-3. What is the impact on 2021 net income?
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a-4. What is the impact on net income over the two accounting periods?
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b-1. Assuming that Icebreaker designates the forward contract as a fair value hedge of a foreign currency receivable, prepare journal entries for the sale and foreign currency forward contract in U.S. dollars.
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b-2. What is the impact on 2020 net income?
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b-3. What is the impact on 2021 net income?
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b-4. What is the impact on net income over the two accounting periods?
REQ A1 12/1/2020 1. Record the sales and foreign currency account receivable 2. Record the forward contact 3. Record the entry to revalue for foreign currency account receivable 4. Record the change in the fair value of the forward contract 5. Record the foreign exchange gain or loss on the forward contract 6. Record the amortization of the forward contract premium or discount 03/1/2021 7. Record the entry to revalue the foreign currency account receivable 8. Record the entry to adjust the carrying value of the forward contract to its current fair value 9. Record the foreign exchange gain or loss on the forward contract 10. Record the amortization of the forward contract premium or discount 11. Record the receipt of dinars from the foreign customer 12. Record the settlement of the forward contract REQ B1 12/01/2020 1. Record the sales and foreign currency account receivable 2. Record the forward contact 3. Record the entry to revalue for foreign currency account receivable 4. Record the change in the fair value of the forward contract 5. Record the foreign exchange gain or loss on the forward contract 6. Record the amortization of the forward contract premium or discount 03/01/2021 7. Record the entry to revalue the foreign currency account receivable 8. Record the entry to adjust the carrying value of the forward contract to its current fair value 9. Record the foreign exchange gain or loss on the forward contract 10. Record the amortization of the forward contract premium or discount 11. Record the receipt of dinars from the foreign customer 12. Record the settlement of the forward contract REQ A1 12/1/2020 1. Record the sales and foreign currency account receivable 2. Record the forward contact 3. Record the entry to revalue for foreign currency account receivable 4. Record the change in the fair value of the forward contract 5. Record the foreign exchange gain or loss on the forward contract 6. Record the amortization of the forward contract premium or discount 03/1/2021 7. Record the entry to revalue the foreign currency account receivable 8. Record the entry to adjust the carrying value of the forward contract to its current fair value 9. Record the foreign exchange gain or loss on the forward contract 10. Record the amortization of the forward contract premium or discount 11. Record the receipt of dinars from the foreign customer 12. Record the settlement of the forward contract REQ B1 12/01/2020 1. Record the sales and foreign currency account receivable 2. Record the forward contact 3. Record the entry to revalue for foreign currency account receivable 4. Record the change in the fair value of the forward contract 5. Record the foreign exchange gain or loss on the forward contract 6. Record the amortization of the forward contract premium or discount 03/01/2021 7. Record the entry to revalue the foreign currency account receivable 8. Record the entry to adjust the carrying value of the forward contract to its current fair value 9. Record the foreign exchange gain or loss on the forward contract 10. Record the amortization of the forward contract premium or discount 11. Record the receipt of dinars from the foreign customer 12. Record the settlement of the forward contract
