Question

Icebreaker Company (a U.S.-based company) sells parts to a foreign customer on December 1, 2020, with payment of 33,000 dinars to be received on March 1, 2021. Icebreaker enters into a forward contract on December 1, 2020, to sell 33,000 dinars on March 1, 2021. The forward points on the forward contract are excluded in assessing hedge effectiveness and are amortized to net income using a straight-line method on a monthly basis. Relevant exchange rates for the dinar on various dates are as follows: Icebreaker must close its books and prepare financial statements at December 31 . a-1. Assuming that Icebreaker designates the forward contract as a cash flow hedge of a foreign currency receivable, prepare journal entries for the sale and foreign currency forward contract in U.S. dollars. a-2. What is the impact on 2020 net income? o-3. What is the impact on 2021 net income? a-4. What is the impact on net income over the two accounting periods? b-1. Assuming that icebreaker designates the forward contract as a fair value hedge of a foreign currency receivable, prepare journal entries for the sale and foreign currency forward contract in U.S. dollars. b-2. What is the impact on 2020 net income? b-3. What is the impact on 2021 net income? b-4. What is the impact on net income over the two accounting periods? Answer is not complete. Complete this question by entering your answers in the tabs below. a−2. What is the impact on 2020 net income? a−3. What is the impact on 2021 net income? a−4. What is the impact on net income over the two accounting periods? (Negative amounts should be entered with a minus sign. Do not round intermediate calculations.) journal entries for the sale and foreign currency forward contract in U.S. dollars. b-2. What is the impact on 2020 net income? b-3. What is the impact on 2021 net income? b-4. What is the impact on net income over the two accounting periods? Answer is not complete. Complete this question by entering your answers in the tabs below. Assuming that Icebreaker designates the forward contract as a cash flow hedge of a foreign currency receivable, prepare journal entries for the sale and foreign currency forward contract in U.S. dollars. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations.) ( Answer is not complete. Complete this question by entering your answers in the tabs below. b-2. What is the impact on 2020 net income? b-3. What is the impact on 2021 net income? b-4. What is the impact on net income over the two accounting periods? (Do not round intermediate calculations. Negative amounts should be entered with a minus sign.) Assuming that Icebreaker designates the forward contract as a fair value hedge of a foreign curr for the sale and foreign currency forward contract in U.S. dollars. (If no entry is required for a tr. required" in the first account field. Do not round intermediate calculations.) Record the sales and foreign currency account receivable. 2 Record the forward contract. 3 Record the entry to revalue the foreign currency account receivable. 4 Record the change in the fair value of the forward contract. 5 Record the foreign exchange gain or loss on the forward contract. 6 Record the allocation of the premium or discount. Note : = journal entry has been entered Complete this question by entering your answers in the tabs below. Assuming that Icebreaker designates the forward contract as a fair value hedge of a fo for the sale and foreign currency forward contract in U.S. dollars. (If no entry is requir required" in the first account field. Do not round intermediate calculations.) 7 Record the entry to revalue the foreign currency account receivable. 8. Record the foreign exchange gain or loss on the forward contract. 12 Record the settlement of the forward contract. Note : = journal entry has been entered

Answer 1

Currency risk from international transactions can be mitigated through hedging, where firms use financial contracts to secure exchange rates and protect against unfavorable movements, influencing their aggregate demand and trade incentives.

Step-by-step explanation:

Many portfolio investment decisions by firms involve hedging to protect themselves from movements in exchange rates. For example, a U.S. firm exporting to France and set to receive payments in euros would be exposed to the risk that the euro may depreciate against the dollar. To mitigate this uncertainty, the firm can enter into a hedging contract with a financial institution, which guarantees a certain exchange rate at a future date for a fee, thereby securing the value of future revenue in U.S. dollars.

Firms that participate in international trade measure their costs in the local currency but often receive revenues in a foreign currency. This situation can make their financial outcomes highly susceptible to fluctuations in exchange rates.

For instance, a stronger euro can result in a French firm's costs being higher relative to their sales revenue in U.S. dollars, potentially causing a loss when converting revenues back to euros, and vice versa. Thus, exchange rate movements can significantly impact a firm's aggregate demand and incentives to export or import, which in turn influences the overall economy's aggregate demand and supply.