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Foreign Currency Transactions and Hedging Foreign Exchange Risk

1.  Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2018.  Pigskin received payment of 35,000 British pounds on May 8, 2018.  The exchange rate was £1 = $1.54 on April 8 and £1 = 1.43 on May 8.  What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar)

A) $10,500 loss

B) $10,500 gain

C) $1,750 loss

D) $3,850 loss

E) No gain or loss should be recognized.

Answer: D

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global 

AICPA: FN Measurement

Feedback: $1.43 – $1.54 = ($.11) × £35,000 = ($3,850) Loss

REFERENCE: 09-01

Norton Co., a U.S. corporation, sold inventory on December 1, 2018, with payment of 10,000 British pounds to be received in sixty days.  The pertinent exchange rates were as follows:

[QUESTION]

REFER TO: 09-01

2.  For what amount should Sales be credited on December 1?

A) $ 5,500.

B) $16,949.

C) $18,182.

D) $17,241.

E) $16,667.

Answer: D

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

 Difficulty: 1 Easy 

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: December 1st Spot Rate $1.7241 × £10,000 = $17,241 Sales Revenue

[QUESTION]

REFER TO: 09-01

3.  What amount of foreign exchange gain or loss should be recorded on December 31?

A) $300 gain.

B) $300 loss.

C) $0.

D) $941 loss.

E) $941 gain.

Answer: E 

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 2 Medium 

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $1.8182 – $1.7241 = $.0941 × £10,000 Gain

[QUESTION]

REFER TO: 09-01

4.  What amount of foreign exchange gain or loss should be recorded on January 30?

A) $1,516 gain.

B) $1,516 loss.

C) $575 loss.

D) $500 loss.

E) $500 gain.

Answer: B

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 2 Medium 

Blooms: Apply

AACSB: Diversity

AACSB: Knowledge Application

AICPA: BB Global

AICPA: FN Measurement

Feedback: $1.6666 – $1.8182 = ($.1516) × £10,000 = ($1,516) Loss

REFERENCE: 09-02

Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8.  Payment of 2,000,000 foreign currency units (FC) is due in 30 days.  May 31 is Brisco’s fiscal year-end.  The pertinent exchange rates were as follows:

[QUESTION]

REFER TO: 09-02

5.  For what amount should Brisco’s Accounts Payable be credited on May 8?

A) $2,500,000.

B) $2,440,000.

C) $1,600,000.

D) $1,639,344.

E) $1,666,667.

Answer: A  

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 1 Easy 

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $1.25 × FC 2,000,000 = $2,500,000 A/P

[QUESTION]

REFER TO: 09-02

6.  How much Foreign Exchange Gain or Loss should Brisco record on May 31?

A) $2,520,000 gain.

B) $     20,000 gain.

C) $     20,000 loss.

D) $     80,000 gain.

E) $     80,000 loss.

Answer: C  

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 2 Medium 

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $1.26 – $1.25 = ($.01) × FC 2,000,000 = ($20,000) Loss

[QUESTION]

REFER TO: 09-02

7.  How much US $ will it cost Brisco to finally pay the payable on June 7?

A) $1,666,667.

B) $2,440,000.

C) $2,520,000.

D) $2,500,000.

E) $2,400,000.

Answer: E  

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 2 Medium 

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $1.20 × FC 2,000,000 = FC 2,400,000 A/P

[QUESTION]

8.  On June 1, CamCo received a signed agreement to sell inventory for ¥500,000.  The sale would take place in 90 days.  CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received.  The spot rate on June 1 was ¥1 =$.004167, and the 90-day forward rate was ¥1 = $.00427.  At what amount would CamCo record the Forward Contract on June 1?

A) $2,083.

B) $       0.

C) $2,110.

D) $2,532.

E) $2,135.

Answer: B

Learning Objective: 09-08

Topic: Hedge–Forward contract–FC firm commitment

Difficulty: 2 Medium 

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: Forward Contract Not Recorded at Date of Sale

[QUESTION]

9.  Belsen purchased inventory on December 1, 2017.  Payment of 200,000 stickles was to be made in sixty days.  Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days.  The spot rate was §1 = .35714, and the 60-day forward rate was §1 = $.38462.  On December 31, the spot rate was §1 = .34483 and the 30-day forward rate was §1 = .38168.  Assume an annual interest rate of 12% and a fair value hedge.  The present value for one month at 12% is .9901.

In the journal entry to record the establishment of a forward exchange contract, at what amount should the Forward Contract account be recorded on December 1?

A) $71,428.

B) $76,924.

C) $     588.

D) $     582.

E) $ 0, since there is no cost, there is no value for the contract at this date.

Answer: E 

Learning Objective: 09-07

Topic: Hedge–Forward contract–FC denominated asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: Forward Contract Not Recorded at Date of Sale

[QUESTION]

10.  Meisner Co. ordered parts costing §100,000 for a foreign supplier on May 12 when the spot rate was $.24 per stickle.  A one-month forward contract was signed on that date to purchase §100,000 at a forward rate of $.25 per stickle.  On June 12, when the parts were received and payment was made, the spot rate was $.28 per stickle.  At what amount should inventory be reported?

A) $         0.

B) $28,000.

C) $24,000.

D) $25,000.

E) $   2,000.

Answer: B

Learning Objective: 09-07

Topic: Hedge–Forward contract–FC denominated asset

Difficulty: 2 Medium 

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $.28 × §100,000 = $28,000

REFERENCE: 09-03

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2018, with payment of 10 million Korean won to be received on January 15, 2019.  The following exchange rates applied:


[QUESTION]

REFER TO: 09-03

11.  Assuming a forward contract was not entered into, what would be the net impact on Car Corp.’s 2018income statement related to this transaction?

A) $ 500 (gain).

B) $ 500 (loss).

C) $ 200 (gain).

D) $ 200 (loss).

E) $ – 0 –

Answer: D

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 2 Medium 

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $.00090 – $.00092 = ($.00002) × $10,000,000 = ($200) Loss

[QUESTION]

REFER TO: 09-03

12.  Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2018 ata

A) Forward contract discount $ 600.

B) Forward contract premium $ 600.

C) Forward contract discount $ 980.

D) Forward discount premium $ 980.

E) There is no premium or discount because the fair value of the contract is zero.

Answer: B

Learning Objective: 09-01

Topic:Concepts of foreign currency and exchange

Difficulty: 2 Medium 

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $.00098 – $.00092 = $.00006 × $10,000,000 = $600 Premium

[QUESTION]

REFER TO: 09-03

13.  Assuming a forward contract was entered into on December 16, at what amount should the forward contract be recorded at December 31, 2018?  Assume an annual interest rate of 12% and a fair value hedge.  The present value for one month at 12% is .9901.

A) $    200.

B) $    295.

C) $    495.

D) $    500.

E) $ 9,300.

Answer: C

Learning Objective: 09-07  

Topic: Hedge–Forward contract–FC denominated asset

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $.00098 – $.00093 = $.00005 × .9901 × $10,000,000 = $495

[QUESTION]

REFER TO: 09-03

14.  Assuming a forward contract was entered into on December 16, how would the forward contract be reflected on Car’s December 31, 2018 balance sheet?

A) Forward contract (asset).

B) Forward contract (liability).

C) Foreign currency (asset).

D) Foreign currency (liability).

E) Foreign exchange (liability)

Answer: A

Learning Objective: 09-07  

Topic: Hedge–Forward contract–FC denominated asset

Difficulty: 2 Medium  

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

[QUESTION]

REFER TO: 09-03

15.  Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.’s 2018 income statement related to this transaction?  Assume an annual interest rate of 12% and a fair value hedge.  The present value for one half-month at 12% is .9950.

A) $ 700 (gain).

B) $ 700 (loss).

C) $ 995 (gain).

D) $ 300 (loss).

E) $ 298 (gain).

Answer: E

Learning Objective: 09-07 

Topic: Hedge–Forward contract–FC denominated asset

Difficulty: 3 Hard

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: [($.00090 – $.00092) X $10,000,000] = $200Foreign Exchange Loss + [($.00098 – $.00093) × .9950 × $10,000,000] = $498 Gain on Forward Contract. Gain of $298.

[QUESTION]

REFER TO: 09-03

16.  Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.’s 2019 income statement related to this transaction?

A) $ 500 (gain).

B) $ 500 (loss).

C) $ 300 (gain).

D) $ 300 (loss).

E) $0.

Answer: C

Learning Objective: 09-07

Topic: Hedge–Forward contract–FC denominated asset

Difficulty: 3 Hard

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: [($.00095 – $.00090) × $10,000,000] = $500Foreign Exchange Gain + [(.00093-.00095) × $10,000,000] = $200 Loss on Forward Contract. Gain of $300.

[QUESTION]

17.  Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles).  On December 31, 2018, this receivable for §200,000 was correctly included in Mills’ balance sheet at $132,000.  When the receivable was collected on February 15, 2019, the U.S. dollar equivalent was $144,000.  In Mills’ 2019consolidated income statement, how much should have been reported as a foreign exchange gain?

A) $         0.

B) $36,000.

C) $48,000.

D) $10,000.

E) $12,000.

Answer: E  

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 1 Easy 

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $144,000 – $132,000 = $12,000 Gain

[QUESTION]

18.  A spot rate may be defined as

A) The price a foreign currency can be purchased or sold today.

B) The price today at which a foreign currency can be purchased or sold in the future.

C) The forecasted future value of a foreign currency.

D) The U.S. dollar value of a foreign currency.

E) The Euro value of a foreign currency.

Answer: A

Learning Objective: 09-01

Topic:Concepts of foreign currency and exchange

Difficulty: 1 Easy 

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

[QUESTION]

19.  The forward rate may be defined as

A) The price a foreign currency can be purchased or sold today.

B) The price today at which a foreign currency can be purchased or sold in the future.

C) The forecasted future value of a foreign currency.

D) The U.S. dollar value of a foreign currency.

E) The Euro value of a foreign currency.

Answer: B 

Learning Objective: 09-01

Topic:Concepts of foreign currency and exchange

Difficulty: 1 Easy 

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

[QUESTION]

20.  Which statement is true regarding a foreign currency option?

A) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future.

B) A foreign currency option gives the holder the obligation to only sell foreign currency in the future.

C) A foreign currency option gives the holder the obligation to only buy foreign currency in the future.

D) A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future.

E) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate on the future date.

Answer: D  

Learning Objective: 09-01

Topic: Concepts of foreign currency and exchange

Difficulty: Easy

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

[QUESTION]

21.  A U.S. company sells merchandise to a foreign company denominated in U.S. dollars.  Which of the following statements is true?

A) If the foreign currency appreciates, a foreign exchange gain will result.

B) If the foreign currency depreciates, a foreign exchange gain will result.

C) No foreign exchange gain or loss will result.

D) If the foreign currency appreciates, a foreign exchange loss will result.

E) If the foreign currency depreciates, a foreign exchange loss will result.

Answer: C  

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 1 Easy 

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

[QUESTION]

22.  A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true?

A) If the foreign currency appreciates, a foreign exchange gain will result.

B) If the foreign currency depreciates, a foreign exchange gain will result.

C) No foreign exchange gain or loss will result.

D) If the foreign currency appreciates, a foreign exchange loss will result.

E) Any gain or loss will be included in comprehensive income.

Answer: A  

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 2 Medium 

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

[QUESTION]

23.  A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true?

A) If the foreign currency appreciates, a foreign exchange gain will result.

B) If the foreign currency depreciates, a foreign exchange gain will result.

C) No foreign exchange gain or loss will result.

D) If the foreign currency appreciates, a foreign exchange loss will result.

E) Any gain or loss will be included in comprehensive income.

Answer: C 

Learning Objective: 09-02

Topic:Foreign currency transactions―Not hedged

Difficulty: 1 Easy 

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

[QUESTION]

24.  A U.S. company buys merchandise from a foreign company denominated in the foreign currency. Which of the following statements is true?

A) If the foreign currency appreciates, a foreign exchange gain will result.

B) If the foreign currency depreciates, a foreign exchange loss will result.

C) No foreign exchange gain or loss will result.

D) If the foreign currency appreciates, a foreign exchange loss will result.

E) Any gain or loss will be included in comprehensive income.

Answer: D  

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 2 Medium 

Blooms: Understand

AACSB: Analytical Thinking

AACSB: Diversity

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Written by Homework Lance

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The accrual-based net income of Jade Co. is calculated to be

Translation of Foreign Currency Financial Statements