Question: Artco Inc. engages in various transactions with companies in the country of Santrica. On November 30, Year 1, Artco sold artwork at a price of 400,000 ricas to a Santrican customer with payment to be received on January 31, Year 2. In addition, on November 30, Year 1, Artco purchased art supplies from a Santrican supplier at a price of 300,000 ricas; payment will be made on January 31, Year 2. The art supplies are consumed by the end of November, Year 1. To hedge its net exposure in ricas, Artco entered into a two-month forward contract on November 30, Year 1, wherein Artco will deliver 100,000 ricas to the foreign currency broker in exchange for U.S dollars at the agreedon forward rate. Artco properly designates its forward contract as a fair value hedge of a foreign currency receivable. The following rates for the rica apply:

                                                                                          Forward Rate
Date                                                                 Spot Rate            (to January 31, Year 2)

November 30, Year 1                                $0.13                            $0.12

December 31, Year 1                                  0.10                             0.08

January 31, Year 2  .................................. 0.09

Artco Inc.'s incremental borrowing rate is 12 percent. The present value factor for one month at an annual interest rate of 12 percent (1 percent per month) is 0.9901.

Required: Prepare all journal entries, including December 31 adjusting entries, to record these transactions and forward contract. What is the impact on net income in Year 1? What is the impact on net income in Year 2?