Date Spot Rate Forward Rate
(to March 1, 2012)
December 1, 2011 $ 2.00 $ 2.075
December 31, 2011 2.10 2.200
March 1, 2012 2.25 N/A
Brandlin's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803. Brandlin must close its books and prepare financial statements at December 31.
Assuming that Brandlin designates the forward contract as a cash flow hedge of a foreign currency receivable and recognizes any premium or discount using the straight-line method.
Prepare journal entries for these transactions in U.S. dollars.
What is the impact on 2011 net income?
What is the impact on 2012 net income?
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