The Miller Company sells tires to a customer in Canada onDecember 1, 20x1 with a payment of 100,000 Canadian dollars to bereceived on February 1, 20x2. Miller enters into a forward contracton December 1, 20x1 to sell 100,000 Canadian dollars on February 1,20x2. Exchange rates for the Canadian dollars are as follows:
December 1, 20x1 ? Spot rate: 1.10; Forward rate: 1.15
December 31, 20x1 – Spot rate: 1.12; Forward rate:1.13
February 1, 20x2 – 1.16
Miller’s incremental borrowing rate is 12%. The present valuefactor for one month of interest at an annual rate of 12% is.9901.
(a)Assuming that Miller Company designates the forward contractas a cash flow hedge of a foreign currency receivable, preparejournal entries for these transactions in U.S. dollars. What is theimpact on 20x1 net income? What is the impact on net 20x2income?
(b)Calculate the impact on 20x1 and 20x2 net income assumingMiller designates the forward contract as a fair value hedge offoreign currency receivable. Prepare journal entries for thesetransactions.
