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On December 1,2024, King Company sold inventory to a customer in a foreign country. King...

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Accounting

On December 1,2024, King Company 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 1,2025. On the date of sale, 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 = $0.30. Any contract discount or premium is amortized using the straight-line method. The spot rates and forward rates on various dates were as follows:
Date Rate Description Exchange Rate
December 1,2024 Spot Rate $ 0.32=1 LCU
2-Month Forward Rate $ 0.30=1 LCU
December 31,2024 Spot Rate $ 0.29=1 LCU
1-Month Forward Rate $ 0.28=1 LCU
February 1,2025 Spot Rate $ 0.27=1 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 2024 net income.
Compute the effect on 2025 net income.

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