Question
On November 1, 2015, Ambrose Company sold merchandise to a foreign customer for 220,000 FCUs with payment to be received on April 30, 2016. At
On November 1, 2015, Ambrose Company sold merchandise to a foreign customer for 220,000 FCUs with payment to be received on April 30, 2016. At the date of sale, Ambrose entered into a six-month forward contract to sell 220,000 LCUs. It properly designates the forward contract as a cash flow hedge of a foreign currency receivable. The following exhange rates apply:
Date | Spot Rate | Forward Rate (to April 30, 2016) |
11/1/2015 | 0.63 | 0.62 |
12/31/2015 | 0.60 | 0.58 |
4/30/2016 | 0.59 | N/A |
Ambrose's incremental borrowing rate is 12 percent. The present value factor for four months at an annual interest rate of 12 percent (1 percent per month) is 0.9610.
a. Prepare all journal entries, including Dec. 31 adjusting entries, to record the sale and forward contract. (Do not round intermediate calculations) 1. Record sale of merchandise to foreign customer 2. Record the forward contract 3. Record the entry for changes in the exchange rate 4. REcord the change in the fair value of the forward contract 5. Record entry to adjust the carrying value of the forward contract to its current fair value 6. Record the premium or discount expense 7. Record the entry for changes in the exchange rate 8. Record the change in the fair value of the forward contract 9. Record entry to adjust the carrying value of the forward contract to current fair value 10. Record the premium or discount expense 11. Record the receipt of FCUs 12. Record settlement of forward contract b. What is the impact on net income in 2015? c. What is the impact on net income in 2016?
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