On December King Company sold inventory to a customer in a foreign country. King agreed to accept local currency units LCU in full payment for this inventory. Payment was to be made on February On the date of sale, King entered into a forward exchange contract wherein LCU would be delivered to a currency broker in two months. The twomonth forward exchange rate on that date was LCU $ Any contract discount or premium is amortized using the straightline method. The spot rates and forward rates on various dates were as follows:
Date Rate Description Exchange Rate
December Spot Rate $ LCU
Month Forward Rate $ LCU
December Spot Rate $ LCU
Month Forward Rate $ LCU
February Spot Rate $ LCU
Required:
Assume this hedge is designated as a fair value hedge. Prepare the journal entries relating to the transaction and the forward contract.
Compute the effect on net income.
Compute the effect on net income.
