cebreaker Company (a U.S.-based company) purchases materials from a foreign supplier on December 1, 2020, with payment of 29,000 dinars to be made on March 1, 2021. The materials are consumed immediately and recognized as cost of goods sold at the date of purchase. On December 1, 2020, Icebreaker enters into a forward contract to purchase 29,000 dinars on March 1, 2021. Relevant exchange rates for the dinar on various dates are as follows: Date Spot Rate Forward Rate (to March 1, 2021) December 1, 2020 $ 4.70 $ 4.775 December 31, 2020 4.80 4.900 March 1, 2021 4.95 N/A a-1. Assuming that Icebreaker designates the forward contract as a cash flow hedge of a foreign currency payable, prepare journal entries for the import purchase and foreign currency forward contract in U.S. dollars. a-2. What is the impact on 2020 net income? a-3. What is the impact on 2021 net income?
cebreaker Company (a U.S.-based company) purchases materials from a foreign supplier on December 1, 2020, with payment of 29,000 dinars to be made on March 1, 2021. The materials are consumed immediately and recognized as cost of goods sold at the date of purchase. On December 1, 2020, Icebreaker enters into a forward contract to purchase 29,000 dinars on March 1, 2021.
Relevant exchange rates for the dinar on various dates are as follows:
| Date | Spot Rate | Forward Rate (to March 1, 2021) |
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| December 1, 2020 | $ | 4.70 | $ | 4.775 | ||
| December 31, 2020 | 4.80 | 4.900 | ||||
| March 1, 2021 | 4.95 | N/A | ||||
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a-1. Assuming that Icebreaker designates the forward contract as a
cash flow hedge of a foreign currency payable, preparejournal entries for the import purchase and foreign currency forward contract in U.S. dollars. -
a-2. What is the impact on 2020 net income?
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a-3. What is the impact on 2021 net income?
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a-4. What is the impact on net income over the two accounting periods?
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b-1. Assuming that Icebreaker 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.
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b-2. What is the impact on net income in 2020 and in 2021?
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b-3. What is the impact on net income over the two accounting periods?
This is related to foreign currency transactions and hedging using forward contracts. It is a common topic in financial accounting and international finance.
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