REFERENCE: Ref.09_12 on November 10,2008,King Co.sold Inventory to a Customer in a in a Foreign

question 17

Essay

REFERENCE: Ref.09_12
On November 10,2008,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 1,2009.On December 1,2008,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.The spot rates and forward rates on various dates were as follows:
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 2008 net income.
(C. )Compute the effect on 2009 net income.

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Definitions:

Demand Increase

A situation where the quantity of a product or service that consumers are willing and able to buy at a given price rises.

Price Elasticity

The sensitivity measure of demand for a good relative to its price changes.

Demand Curve

It illustrates the relationship between the price of a good or service and the quantity demanded for a given period, assuming all other factors are constant (ceteris paribus).

Midpoint Method

A technique used in economics to calculate the elasticity of a variable, which averages the starting and ending values to minimize the bias in the elasticities calculated at different points.