On December 1, 2018, King Co. purchased inventory from a supplier in a foreign country. King agreed to pay 96,000 local currency units (LCU) for this inventory. Payment was to be made on February 1, 2019. On December 1, 2018, King entered into a forward exchange contract wherein 96,000 LCU would be received from a currency broker in two months to be used to settle the payable. Assume a fair value hedge.

The spot rates and forward rates on various dates were as follows:

Date / Spot Rate

Dec. 1 2018: $.32

Dec. 31 2018: $.29

Feb. 1 2019: $.27

Date / Forward Rate

Dec. 1 2018: $.30

Dec. 31 2018: $.28

Feb. 1 2019: N/A

1. b-1. Assuming that King Co. 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.

2. b-2.What is the impact on net income over the two accounting periods resulting from flucutations in the value of the foreign currency? [Looking for net effect on the Foreign Exchange Gain/Loss account].