Question 4

1. On November 10, 2018, King Co. sold inventory to a customer in a foreign country. King agreed to accept 96,000 local currency units (LCU) in full payment 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 delivered to a currency broker in two months. The two month forward exchange rate on that date was 1 LCU = $.30. Any contract discount or premium is amortized using the straight-line method. The spot rates and forward rates on various dates were as follows:

Date	Rate Description	Exchange Rate
November 10, 2018	Spot Rate	$.35 = 1 LCU
December 1, 2018	Spot Rate	$.32 = 1 LCU
	2-Month Forward Rate	$.30 = 1 LCU
December 31, 2018	Spot Rate	$.29 = 1 LCU
	1-Month Forward Rate	$.28 = 1 LCU
February 1, 2019	Spot Rate	$.27 = 1 LCU

The company's borrowing rate is 12%. The present value factor for one month is .9901.

(A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal entries relating to the transaction and the forward contract.

(B.) Compute the effect on 2018 net income.

(C.) Compute the effect on 2019 net income.

2. Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the stickle () was the functional currency of the subsidiary. Calculate the translation adjustment for this subsidiary for 2018 and state whether this is a positive or a negative adjustment.