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

question 33

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 fair value 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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