On November 1, Year 1, the Louisville Slugger Company placed an order with a Canadian company to purchase a particular grade of lumber for its quality line of baseball bats for 300,000 Canadian Dollars (CAD). Relevant exchange rates are as follows:

Spot Forward Rate

Date Rate (to January 30, Year 2)

November 1, Year 1. . . . . . . . . . . . . . $1.1584 $1.1576

December 31, Year 1. . . . . . . . . . . . . . 1.2597 1.2591

January 30, Year 2. . . . . . . . . . . . . . . . 1.2456 1.2456

Louisville closes its books and prepares financial statements on December 31, Year 1.

1. Assume the lumber was received on November 1, Year 1 and Louisville pays the supplier on January 30, Year 2. On November 1, Louisville entered into a three-month forward contract to purchase CAD 300,000. The forward contract is properly designated as a fair value hedge of a foreign currency payable. Louisvilles incremental borrowing rate is 12%. The present value factor for one month at an incremental borrowing rate of 12% is .99010. Prepare journal entries to account for the purchase and foreign currency forward contract. Where appropriate, round to 2 decimal points.

2. Based upon your work in No. 1 above, what is the impact on net income for each year, and in total, due to the foreign currency aspects of this transaction?