Question

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2015, with payment of 23,000 korunas to be received on March 1, 2016. Brandlin enters into a forward contract on December 1, 2015, to sell 23,000 korunas on March 1, 2016. Relevant exchange rates for the koruna on various dates are as follows:

Date	Spot Rate		Forward Rate (to March 1, 2016)
December 1, 2015	$	3.40	$	3.475
December 31, 2015		3.50		3.600
March 1, 2016		3.65		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.

a1. What is the impact on 2015 net income? (Do not round intermediate calculations.)

a2. What is the impact on 2016 net income? (Do not round intermediate calculations.)

a3. What is the impact on net income over the two accounting periods? (Do not round intermediate calculations.)

Answer 1

Part a1)

The impact on 2015 net income is determined as below:

Sales (23,000*3.40)	78,200
Foreign Exchange Gain [23,000*(3.50 - 3.40)]	2,300
Loss on Forward Contract	-2,300
Premium Revenue [23,000*(3.475 - 3.40)*1/3]	575
Impact on 2015 Income	$78,775

_____

Part a2)

The impact on 2016 net income is calculated as follows:

Foreign Exchange Gain [23,000*(3.65 - 3.50)]	3,450
Loss on Forward Contract	-3,450
Premium Revenue [23,000*(3.475 - 3.40)*2/3]	1,150
Impact on 2016 Income	$1,150

_____

Part a3)

The impact on net income over the two accounting periods is arrived as below:

Impact on Net Income Over Two Accounting Periods = Impact on 2015 Net Income + Impact on 2016 Net Income = 78,775 + 1,150 = $79,925