Question
On November 1, 2020, Cheng Company (a U.S.-based company) forecasts the purchase of goods from a foreign supplier for 190,000 yuan. Cheng expects to receive
On November 1, 2020, Cheng Company (a U.S.-based company) forecasts the purchase of goods from a foreign supplier for 190,000 yuan. Cheng expects to receive the goods on April 30, 2021, and make immediate payment. On November 1, 2020, Cheng enters into a six-month forward contract to buy 190,000 yuan. The company properly designates the forward contract as a cash flow hedge of a forecasted foreign currency transaction. Forward points are excluded in assessing hedge effectiveness and are amortized to net income using a straight-line method on a monthly basis over the life of the contract. The following U.S. dollarYuan exchange rates apply:
Date | Spot Rate | Forward Rate (to April 30, 2021) | ||||
November 1, 2020 | $ | 0.30 | $ | 0.285 | ||
December 31, 2020 | 0.29 | 0.260 | ||||
April 30, 2021 | 0.27 | N/A | ||||
As expected, Cheng receives goods from the foreign supplier on April 30, 2021, and pays 190,000 yuan immediately. Cheng sells the imported goods in the local market in May 2021.
- Prepare all journal entries, including December 31 adjusting entries, to record the foreign currency forward contract and import purchase.
- What is the impact on net income in 2020?
- What is the impact on net income in 2021?
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