Foreign Currency Transactions and Hedging Foreign Exchange Risk

File: Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk

 

Multiple Choice:                                                                                

 

[QUESTION]

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)
2. A) $10,500 loss
3. B) $10,500 gain
4. C) $1,750 loss
5. D) $3,850 loss
6. 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?
3. A) $ 5,500.
4. B) $16,949.
5. C) $18,182.
6. D) $17,241.
7. 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 1^st 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?
4. A) $300 gain.
5. B) $300 loss.
6. C) $0.
7. D) $941 loss.
8. 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?
5. A) $1,516 gain.
6. B) $1,516 loss.
7. C) $575 loss.
8. D) $500 loss.
9. 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?
6. A) $2,500,000.
7. B) $2,440,000.
8. C) $1,600,000.
9. D) $1,639,344.
10. 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?
7. A) $2,520,000 gain.
8. B) $ 20,000 gain.
9. C) $ 20,000 loss.
10. D) $ 80,000 gain.
11. 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?
8. A) $1,666,667.
9. B) $2,440,000.
10. C) $2,520,000.
11. D) $2,500,000.
12. 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?
9. A) $2,083.
10. B) $
11. C) $2,110.
12. D) $2,532.
13. 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?

428. A) $71,428.
429. B) $76,924.
430. C) $
431. D) $
432. 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?
11. A) $
12. B) $28,000.
13. C) $24,000.
14. D) $25,000.
15. 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?
12. A) $ 500 (gain).
13. B) $ 500 (loss).
14. C) $ 200 (gain).
15. D) $ 200 (loss).
16. 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
13. A) Forward contract discount $ 600.
14. B) Forward contract premium $ 600.
15. C) Forward contract discount $ 980.
16. D) Forward discount premium $ 980.
17. 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.
14. A) $
15. B) $
16. C) $
17. D) $
18. 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?
15. A) Forward contract (asset).
16. B) Forward contract (liability).
17. C) Foreign currency (asset).
18. D) Foreign currency (liability).
19. 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.
16. A) $ 700 (gain).
17. B) $ 700 (loss).
18. C) $ 995 (gain).
19. D) $ 300 (loss).
20. 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?
17. A) $ 500 (gain).
18. B) $ 500 (loss).
19. C) $ 300 (gain).
20. D) $ 300 (loss).
21. 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?
18. A) $
19. B) $36,000.
20. C) $48,000.
21. D) $10,000.
22. 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
19. A) The price a foreign currency can be purchased or sold today.
20. B) The price today at which a foreign currency can be purchased or sold in the future.
21. C) The forecasted future value of a foreign currency.
22. D) The U.S. dollar value of a foreign currency.
23. 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
20. A) The price a foreign currency can be purchased or sold today.
21. B) The price today at which a foreign currency can be purchased or sold in the future.
22. C) The forecasted future value of a foreign currency.
23. D) The U.S. dollar value of a foreign currency.
24. 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?
21. A) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future.
22. B) A foreign currency option gives the holder the obligation to only sell foreign currency in the future.
23. C) A foreign currency option gives the holder the obligation to only buy foreign currency in the future.
24. D) A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future.
25. 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?
22. A) If the foreign currency appreciates, a foreign exchange gain will result.
23. B) If the foreign currency depreciates, a foreign exchange gain will result.
24. C) No foreign exchange gain or loss will result.
25. D) If the foreign currency appreciates, a foreign exchange loss will result.
26. 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?
23. A) If the foreign currency appreciates, a foreign exchange gain will result.
24. B) If the foreign currency depreciates, a foreign exchange gain will result.
25. C) No foreign exchange gain or loss will result.
26. D) If the foreign currency appreciates, a foreign exchange loss will result.
27. 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?
24. A) If the foreign currency appreciates, a foreign exchange gain will result.
25. B) If the foreign currency depreciates, a foreign exchange gain will result.
26. C) No foreign exchange gain or loss will result.
27. D) If the foreign currency appreciates, a foreign exchange loss will result.
28. 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?
25. A) If the foreign currency appreciates, a foreign exchange gain will result.
26. B) If the foreign currency depreciates, a foreign exchange loss will result.
27. C) No foreign exchange gain or loss will result.
28. D) If the foreign currency appreciates, a foreign exchange loss will result.
29. 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

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

25. U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except
26. A) Recognized foreign currency denominated assets and liabilities.
27. B) Unrecognized foreign currency firm commitments.
28. C) Forecasted foreign currency denominated transactions.
29. D) Net investment in foreign operations.
30. E) Deferred foreign currency gains and losses.

Answer: E

Learning Objective: 09-04

Topic:  Derivatives―Types and uses

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

26. All of the following data may be needed to determine the fair value of a forward contract at any point in time except
27. A) The forward rate when the forward contract was entered into.
28. B) The current forward rate for a contract that matures on the same date as the forward contract entered into.
29. C) The future spot rate.
30. D) A discount rate.
31. E) The company’s incremental borrowing rate.

Answer: C

Learning Objective: 09-05

Topic: Derivatives―Fair value–Changes in fair value

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

27. A forward contract may be used for which of the following?

1) A fair value hedge of an asset.

2) A cash flow hedge of an asset.

3) A fair value hedge of a liability.

4) A cash flow hedge of a liability.

1. A) 1 and 3
2. B) 2 and 4
3. C) 1 and 2
4. D) 1, 3, and 4
5. E) 1, 2, 3, and 4

Answer: E

Learning Objective: 09-04

Topic: Derivatives―Types and uses

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

28. A company has a discount on a forward contract for a foreign currency denominated asset. How is the discount recognized over the life of the contract under fair value hedge accounting?
29. A) As a debit to discount expense.
30. B) As a debit to amortization expense.
31. C) As a debit to accumulated other comprehensive income.
32. D) As a debit impact on net income, as a result of the hedge.
33. E) As a decreases to sales.

Answer: D

Learning Objective: 09-07

Topic: Hedge–Forward contract–FC denominated asset

Difficulty: 3 Hard

Blooms: Analyze

AACSB: Diversity

AACSB: Analytical Thinking

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

29. Which of the following statements is true concerning hedge accounting?
30. A) Hedges of foreign currency firm commitments are used for future sales only.
31. B) Hedges of foreign currency firm commitments are used for future purchases only.
32. C) Hedges of foreign currency firm commitments are used for current sales or purchases.
33. D) Hedges of foreign currency firm commitments are used for future sales or purchases.
34. E) Hedges of foreign currency firm commitments are entered into for speculative purposes.

Answer: D

Learning Objective: 09-04

Topic: Derivatives―Types and uses

Difficulty: 2 Medium

Blooms: Understand

AACSB: ReflectiveThinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

30. All of the following hedges are used for future purchase/sale transactions except
31. A) Forward contracts used as a fair value hedge of a firm commitment.
32. B) Options used as a fair value hedge of a firm commitment.
33. C) Option contract cash flow hedge of a forecasted transaction.
34. D) Forward contract cash flow hedges of a forecasted transaction.
35. E) Forward contracts used to hedge a foreign currency denominated liability.

Answer: E

Learning Objective: 09-04

Topic: Derivatives―Types and uses

Difficulty: 2 Medium

Blooms: Understand

AACSB: ReflectiveThinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

REFERENCE: 09-04

On December 1, 2018, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD).  Collection of the receivable is due on February 1, 2019.  Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2018.  This foreign currency option is designated as a cash flow hedge.  Relevant exchange rates follow:

 

Date		Spot Rate		Option Premium
December 1, 2018		$ .97		$ .05
December 31, 2018		$ .95		$ .04
February 1, 2019		$ .94		$ .03

 

[QUESTION]

REFER TO: 09-04

31. Compute the fair value of the foreign currency option at December 1, 2018.
32. A) $6,000.
33. B) $4,500.
34. C) $3,000.
35. D) $7,500.
36. E) $1,500.

Answer: D

Learning Objective: 09-07

Topic: Hedge–Option–FC denominated asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $.05 × C$150,000 = $7,500

 

[QUESTION]

REFER TO: 09-04

32. Compute the fair value of the foreign currency option at December 31, 2018.
33. A) $6,000.
34. B) $4,500.
35. C) $3,000.
36. D) $7,500.
37. E) $1,500.

Answer: A

Learning Objective: 09-07

Topic: Hedge–Option–FC denominated asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $.04 × C$150,000 = $6,000

 

[QUESTION]

REFER TO: 09-04

33. Compute the fair value of the foreign currency option at February 1, 2019.
34. A) $6,000.
35. B) $4,500.
36. C) $3,000.
37. D) $7,500.
38. E) $1,500.

Answer: B

Learning Objective: 09-07

Topic: Hedge–Option–FC denominated asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $.03 × C$150,000 = $4,500

 

[QUESTION]

REFER TO: 09-04

34. Compute the U.S. dollars received on February 1, 2019.
35. A) $138,000.
36. B) $136,500.
37. C) $145,500.
38. D) $141,000
39. E) $142,500.

Answer: C

Learning Objective: 09-07

Topic: Hedge–Option–FC denominated asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: Strike Price $.97 × C$150,000 = $145,500

 

[QUESTION]

35. Which of the following approaches is used in the United States in accounting for foreign currency transactions?
36. A) One-transaction perspective; defer foreign exchange gains and losses.
37. B) Two-transaction perspective; accrue foreign exchange gains and losses.
38. C) Three-transaction perspective; defer foreign exchange gains and losses.
39. D) One-transaction perspective; accrue foreign exchange gains and losses.
40. E) Two-transaction perspective; defer foreign exchange gains and losses.

Answer: B

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

36. When a U.S. company purchases parts from a foreign company, which of the following will result inzero foreign exchange gain or loss?
37. A) The transaction is denominated in U.S. dollars.
38. B) The option strike price to sell foreign currency is less than the spot rate of the currency.
39. C) The option strike price to buy foreign currency is less than the spot rate of the currency.
40. D) The foreign currency appreciated in value relative to the U.S. dollar.
41. E) The foreign currency depreciated in value relative to the U.S. dollar.

Answer: A

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

37. Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in Mexican pesos. On December 31, 2017, this receivable for 75,000 pesos was correctly included in Alpha’s balance sheet at $8,000. The receivable was collected on March 2, 2018, when the U.S. equivalent was $6,900.  How much foreign exchange gain or loss will Alpha record on the income statement for the year ended December 31, 2018?
38. A) $1,100 loss.
39. B) $1,100 gain.
40. C) $6,900 loss.
41. D) $6,900 gain.

E)$8,000 gain.

Answer: A

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: $6,900 – $8,000 = ($1,100) Loss

 

REFERENCE: 09-05

On April 1, 2017, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2018.  The dollar value of the loan was as follows:

 

Date	Amount
April 1, 2017	$  97,000
December 31, 2017	$ 103,000
April 1, 2018	$ 105,000

[QUESTION]

REFER TO: 09-05

38. How much foreign exchange gain or loss should be included in Shannon’s 2017 income statement?
39. A) $3,000 gain.
40. B) $3,000 loss.
41. C) $6,000 gain.
42. D) $6,000 loss.
43. E) $7,000 gain.

Answer: D

Learning Objective: 09-03

Topic: Foreign currency borrowing

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $97,000 – $103,000 = ($6,000) Loss

 

[QUESTION]

REFER TO: 09-05

39. How much foreign exchange gain or loss should be included in Shannon’s 2018 income statement?
40. A) $1,000 gain.
41. B) $1,000 loss.
42. C) $2,000 gain.
43. D) $2,000 loss.
44. E) $8,000 loss.

Answer: D

Learning Objective: 09-03

Topic: Foreign currency borrowing

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $103,000 – $105,000 = ($2,000) Loss

 

[QUESTION]

REFER TO: 09-05

40. Angela, Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound payable resulting from imports from England. Angela recorded foreign exchange gain related to both its euro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?

Answer: B

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]

41. Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia and a euro payable resulting from imports from Italy. Frankfurter recorded foreign exchange loss related to both its ruble receivable and euro payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?

Answer: C

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

 

REFERENCE: 09-06

Parker Corp., a U.S. company, had the following foreign currency transactions during 2018:

(1.) Purchased merchandise from a foreign supplier on July 5, 2018 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2018 at the U.S. dollar equivalent of $82,000.

(2.) On October 1, 2018 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2019.  The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2018, and $881,000 on October 1, 2019.

 

[QUESTION]

REFER TO: 09-06

42. What amount should be included as a foreign exchange gain or loss from the two transactions for 2018?
43. A) $2,000 loss.
44. B) $2,000 gain.
45. C) $10,000 gain.
46. D) $14,000 loss.
47. E) $ 14,000 gain.

Answer: C

Learning Objective: 09-02

Learning Objective: 09-03

Topic: Foreign currency transactions―Not hedged

Topic: Foreign currency borrowing

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: [$80,000 – $82,000 = ($2,000) Loss] + [$872,000 – $860,000 = $12,000 Gain] = $10,000 Gain

 

[QUESTION]

REFER TO: 09-06

43. What amount should be included as a foreign exchange gain or loss from the two transactions for 2019?
44. A) $9,000 loss.
45. B) $9,000 gain.
46. C) $11,000 loss.
47. D) $21,000 loss.
48. E) $21,000 gain.

Answer: D

Learning Objective: 09-03

Topic: Foreign currency borrowing

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $860,000 – $881,000 = ($21,000) Loss

 

REFERENCE: 09-07

Winston Corp., a U.S. company, had the following foreign currency transactions during 2018:

(1.)Purchased merchandise from a foreign supplier on July 16, 2018 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2018 at the U.S. dollar equivalent of $54,000.

(2.) On October 15, 2018 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2019.  The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2018, and $299,000 on October 15, 2019.

 

[QUESTION]

REFER TO: 09-07

44. What amount should be included as a foreign exchange gain or loss from the two transactions for 2018?
45. A) $9,000 loss.
46. B) $9,000 gain.
47. C) $11,000 loss.
48. D) $13,000 gain.
49. E) $ 14,000 gain.

Answer: D

Learning Objective: 09-02

Learning Objective: 09-03

Topic: Foreign currency transactions―Not hedged

Topic: Foreign currency borrowing

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: [$47,000 – $54,000 = ($7,000) Loss] + [$315,000 – $295,000 = $20,000 Gain] = $13,000 Gain

 

[QUESTION]

REFER TO: 09-07

45. What amount should be included as a foreign exchange gain or loss from the two transactions for 2019?
46. A) $1,000 loss.
47. B) $1,000 gain.
48. C) $2,000 loss.
49. D) $4,000 gain.
50. E) $4,000 loss.

Answer: E

Learning Objective: 09-03

Topic: Foreign currency borrowing

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $295,000 – $299,000 = ($4,000) Loss

 

[QUESTION]

46. Williams, Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.0094, and the forward rate was $.0095.  Which of the following did the U.S. exporter report in net income?
47. A) Discount revenue.
48. B) Premium revenue.
49. C) Discount expense.
50. D) Premium expense.
51. E) Both discount revenue and premium expense.

Answer: B

Learning Objective: 09-01

Learning Objective: 09-07

Topic: Concepts of foreign currency and exchange

Topic: Hedge–Forward contract–FC denominated asset

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

47. Larson Company, a U.S. company, has an India rupee account receivable resulting from an export sale on September 7 to a customer in India. Larson signed a forward contract on September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.023, and the forward rate was $.021.  Which of the following did the U.S. exporter report in net income?
48. A) Discount revenue.
49. B) Premium revenue.
50. C) Discount expense.
51. D) Premium expense.
52. E) Both discount revenue and premium expense.

Answer: C

Learning Objective: 09-01

Learning Objective: 09-07

Topic: Concepts of foreign currency and exchange

Topic: Hedge–Forward contract–FC denominated asset

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

48. Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on July 7 when the spot rate was $.025 per rupee. A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 100,000 rupee firm commitment.  On August 7, when the parts are received, the spot rate is $.028.  At what amount should the payable be carried on Primo’s books?
49. A) $2,000.
50. B) $2,100.
51. C) $2,500.
52. D) $2,700.
53. E) $2,800.

Answer: E

Learning Objective: 09-08

Topic: Hedge–Option–FC firm commitment

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $.028 × ₹100,000 = $2,800

 

[QUESTION]

49. Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts from a foreign supplier on July 7 when the spot rate was $.025 per baht. A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment.  On August 7, when the parts are received, the spot rate is $.028.  What is the amount of accounts payable that will be paid at this date?
50. A) $20,000.
51. B) $20,100.
52. C) $25,000.
53. D) $27,000.
54. E) $28,000.

Answer: E

Learning Objective: 09-08

Topic: Hedge–Option–FC firm commitment

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $.028 × ฿1,000,000 = $28,000

 

[QUESTION]

50. On December 1, 2018, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2019, as a fair value hedge of a foreign currency denominated account payable. The following U.S. dollar per peso exchange rates apply:

 

		Forward Rate
Date	Spot Rate	(Mar.1, 2019)
December 1, 2018	$0.092	$0.105
December 31, 2018	$0.090	$0.095
March 1, 2019	$0.089	N/A

Joseph’s incremental borrowing rate is 12 percent.  The present value factor for two months at an annual interest rate of 12 percent is .9803.  Which of the following is included in Joseph’s December 31, 2018 balance sheet for the forward contract?

146. A) $5,146.58 asset.
147. B) $5,146.58 liability.
148. C) $500.00 liability.
149. D) $490.15 asset.
150. E) $490.15 liability.

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: $0.105 – $0.095 = ($0.01) × MP50,000 = ($500.00) × .9803 = ($490.15) Liability

 

[QUESTION]

51. On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a Frenchcustomer in three months, denominating the transaction in euros. On April 1, the spot rate is $1.41 per euro, and Quality enters into a three-month forward contract cash flow hedge to sell 400,000 euros at a rate of $1.36. At the end of three months, the spot rate is $1.37 per euro, and Quality delivers the merchandise, collecting 400,000 euros.  What are the effects on net income from these transactions?
52. A) $20,000 Discount Expense plus a $12,000 positive Adjustment to Net Income when the merchandise is delivered.
53. B) $20,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise is delivered.
54. C) $20,000 Discount Expense plus a $20,000 negative Adjustment to Net Income when the merchandise is delivered.
55. D) $20,000 Discount Expense plus a $16,000 positive Adjustment to Net Income when the merchandise is delivered.
56. E) $20,000 Discount Expense plus a $20,000 positive Adjustment to Net Income when the merchandise is delivered.

Answer: D

Learning Objective: 09-09

Topic: Hedge–Forward contract–FC firm commitment

Difficulty: 3 Hard

Blooms: Apply

Blooms: Analyze

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: [$1.41 – $1.36 = $.05 × €400,000 = $20,000Discount] & [$1.41 – $1.37 = $.04 × €400,000 = $16,000Adjustment at Delivery]

 

REFERENCE: 09-08

Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24, 2018.  On July 24, 2018, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October, 2018.  The following exchange rates apply:

 

Option strike price	$2.17
Option cost	$4,000
July 24 spot rate	$2.17
October 24 spot rate	$2.13
October 24 option premium	$  .04

 

[QUESTION]

REFER TO: 09-08

52.What amount will Woolsey include as an option expense in net income for the period July 24 to October 24?

1. A) $4,000.
2. B) $5,000.
3. C) $10,000.
4. D) $12,000.
5. E) $14,000.

Answer: A

Learning Objective: 09-09

Topic: Hedge–Option–Forecasted FC transaction

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: Cost of the Option Contract $4,000

 

[QUESTION]

REFER TO: 09-08

53. What amount will Woolsey include as Adjustment to Net Income for the period ended October 31?
54. A) $ 6,000 positive.
55. B) $ 6,000 negative.
56. C) $10,000 positive.
57. D) $10,000 negative.
58. E) $14,000 positive.

Answer: C

Learning Objective: 09-09

Topic:Hedge–Option–Forecasted FC transaction

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $2.17 – $2.13 = $.04 × £250,000 = $10,000 Positive Adjustment

 

[QUESTION]

54. Atherton, Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply:

 

Option Strike Price       $  4.34

Option Cost                 $5,000

January 17 Spot Rate   $  4.34

April 17 Spot Rate       $  4.26

What amount will Atherton include as an option expense in net income for the period January 17 to April 17?

1. A) $4,000
2. B) $4,260
3. C) $4,340
4. D) $5,000
5. E) $5,260

Answer: D

Learning Objective: 09-09

Topic: Hedge–Option–Forecasted FC transaction

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: Cost of the Option Contract $5,000

 

REFERENCE: 09-09

On May 1, 2018, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos.  The machine was shipped and payment was received on March 1, 2019.  On May 1, 2018, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2019 at a price of $190,000.  Mosby properly designates the option as a fair value hedge of the peso firm commitment.  The option cost $3,000 and had a fair value of $3,200 on December 31, 2018.  The following spot exchange rates apply:

 

Date	Spot Rate
May 1, 2018	$0.095
December 31, 2018	$0.094
March 1, 2019	$0.089

 

Mosby’s incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803.

 

[QUESTION]

REFER TO: 09-09

55. What was the impact on Mosby’s 2018 net income as a result of this fair value hedge of a firm commitment?
56. A) $1,760.60 decrease.
57. B) $1,960.60 decrease.
58. C) $1,000.00 decrease.
59. D) $1,760.60 increase.
60. E) $1,960.60 increase.

Answer: A

Learning Objective: 09-08

Topic: Hedge–Option–FC firm commitment

Difficulty: 3 Hard

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $.094 – $.095 = ($.001) × MP2,000,000 = ($2,000) × .9803 = ($1,960.60) Loss on Firm Commitment

$3,200 – $3,000 = $200 Option Value Increase

($1,960.60) Loss on Firm Commitment + $200 Option Value Increase = ($1,760.60) Reduction in 2018 Net Income

 

[QUESTION]

REFER TO: 09-09

56. What was the impact on Mosby’s 2019net income as a result of this fair value hedge of a firm commitment?
57. A) $1,800.00 decrease.
58. B) $2,500.00 increase.
59. C) $2,500.00 decrease.
60. D) $188,760.60 increase.
61. E) $188,760.60 decrease.

Answer: D

Learning Objective: 09-08

Topic: Hedge–Option–FC firm commitment

Difficulty: 3 Hard

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: [$190,000 Sales Revenue] – [$3,000 Cost of Option] + [$1,760.60 Adjustment from 2018 Net Income] = $188,760.60 Increase to 2019 Net Income

 

[QUESTION]

REFER TO: 09-09

57. What was the overall result of having entered into this hedge of exposure to foreign exchange risk?
58. A) $0
59. B) $9,000 net loss on the option.
60. C) $9,000 net gain on the option.
61. D) $2,000 net gain on the option.
62. E) $2,000 net loss.

Answer: C

Learning Objective: 09-08

Topic: Hedge–Option–FC firm commitment

Difficulty: 3 Hard

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $.095 – $.089 = $.006 × MP2,000,000 = $12,000 Gain from Hedge – $3,000 Cost of Option = $9,000 Net Gain on Option

 

REFERENCE: 09-10

On March 1, 2018, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds.  The machine was shipped and payment was received on March 1, 2019.  On March 1, 2018, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2019 at a price of $380,000.  Mattie properly designates the option as a fair hedge of the pound firm commitment.  The option cost $2,000 and had a fair value of $2,200 on December 31, 2018.  The following spot exchange rates apply:

 

Date	Spot Rate
March 1, 2018	$1.90
December 31, 2018	$1.89
March 1, 2019	$1.84

 

Mattie’s incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803.

 

[QUESTION]

REFER TO: 09-10

58. What was the net impact on Mattie’s 2018 income as a result of this fair value hedge of a firm commitment?
59. A) $1,800.00 decrease.
60. B) $1,760.60 decrease.
61. C) $2,240.40 decrease.
62. D) $1,660.40 increase.
63. E) $2,240.60 increase.

Answer: B

Learning Objective: 09-08

Topic: Hedge–Option–FC firm commitment

Difficulty: 3 Hard

Blooms: Apply

Blooms: Analyze

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $1.89 – $1.90 = ($.001) × £200,000 = ($2,000) × .9803 = ($1,960.60) Loss on Firm Commitment

$2,200 – $2,000 = $200 Option Value Increase

($1,960.60) Loss on Firm Commitment + $200 Option Value Increase = ($1,760.60) Reduction in 2018 Net Income

 

[QUESTION]

REFER TO: 09-10

59. What was the net impact on Mattie’s 2019 income including the fair value hedge of a firm commitment?
60. A) $379,760.60 decrease.
61. B) $8,360.60 increase.
62. C) $8,360.60 decrease.
63. D) $ 4,390.40 decrease.
64. E) $379,760.60 increase.

Answer: E

Learning Objective: 09-08

Topic:Hedge–Option–FC firm commitment

Difficulty: 3 Hard

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: [$380,000 Sales Revenue] – [$2,000 Cost of Option] + [$1,760.60 Adjustment from 2018 Net Income] = $379,760.60 Increase to 2019 Net Income

 

[QUESTION]

REFER TO: 09-10

60. What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?
61. A) $0
62. B) $10,000 increase.
63. C) $10,000 decrease.
64. D) $20,000 increase.
65. E) $20,000 decrease.

Answer: B

Learning Objective: 09-08

Topic: Hedge–Option–FC firm commitment

Difficulty: 3 Hard

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $1.90 – $1.84 = $.06 × £200,000 = $12,000 Cash Flow from Hedge – $2,000 Cost of Option = $10,000 Increase in Cash Flow

 

REFERENCE: 09-11

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds.  On October 1, 2018, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound.  The option is considered to be a cash flow hedge of a forecasted foreign currency transaction.  On December 31, 2018, the option has a fair value of $1,600.  The following spot exchange rates apply:

 

Date	Spot Rate
October 1, 2018	$2.00
December 31, 2018	$1.97
February 1, 2019	$2.01

[QUESTION]

REFER TO: 09-11

61. What journal entry should Eagle prepare on October 1, 2018?

A)	Cash	1,800
	Foreign Currency Option		1,800
B)	Forward Contract	1,800
	Cash		1,800
C)	Foreign Currency Option	1,800
	Gain on Foreign Currency		1,800
D)	Loss on Foreign Currency	1,800
	Cash		1,800
E)	Foreign Currency Option	1,800
	Cash		1,800

 

Answer: E

Learning Objective: 09-09

Topic:Hedge–Option–Forecasted FC transaction

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 09-11

62. What journal entry should Eagle prepare on December 31, 2018?

 

A)	Foreign Currency Option	200
	Cash		200
B)	Foreign Currency Option	200
	Option Revenue		200
C)	Foreign Currency Option	400
	Option Revenue		400
D)	Option Expense	200
	Foreign Currency Option		200
E)	Option Expense	400
	Foreign Currency Option		400

 

Answer: D

Learning Objective: 09-09

Topic:Hedge–Option–Forecasted FC transaction

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 09-11

63. What is the amount of option expense for 2019 from these transactions?
64. A) $1,000.
65. B) $1,600.
66. C) $2,500.
67. D) $2,600.
68. E) $0.

Answer: B

Learning Objective: 09-09

Topic: Hedge–Option–Forecasted FC transaction

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: Option Expense is the Balance Sheet Fair Value of the Option for 2019 = $1,600

 

[QUESTION]

REFER TO: 09-11

64. What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2019 from these transactions?
65. A) $1,000.
66. B) $1,600.
67. C) $1,800.
68. D) $2,000.
69. E) $2,600.

Answer: A

Learning Objective: 09-09

Topic: Hedge–Option–Forecasted FC transaction

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: $2.01 – $2.00 = $.01 × £100,000 = $1,000 Adjustment to AOCI for 2019

 

[QUESTION]

REFER TO: 09-11

65. What is the amount of Cost of Goods Sold for 2019 as a result of these transactions?
66. A) $200,000.
67. B) $195,000.
68. C) $201,000.
69. D) $202,600.
70. E) $203,000.

Answer: C

Learning Objective: 09-09

Topic: Hedge–Option–Forecasted FC transaction

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: £100,000 × $2.00 Strike Price = $200,000 + $1,000 AOCI Adjustment = $201,000 COGS

 

[QUESTION]

REFER TO: 09-11

66. What is the 2019 effect on net income as a result of these transactions?
67. A) $195,000
68. B) $201,600
69. C) $201,000
70. D) $202,600
71. E) $203,000

Answer: B

Learning Objective: 09-09

Topic: Hedge–Option–Forecasted FC transaction

Difficulty: 3 Hard

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback: [£100,000 × $2.00 Strike Price = $200,000] + [$1,600 Fair Value of the Option in 2019] = $201,600

 

[QUESTION]

67. Which is a true statement regarding the fundamental requirement of accounting for derivatives?
68. A) Derivatives are reported on the balance sheet only as an asset.
69. B) Derivatives are reported on the balance sheet only as a liability.
70. C) Changes in derivative cost basis are recorded in the asset value.
71. D) Changes in derivative fair value are included in comprehensive income.
72. E) Changes in derivative cost basis are recorded in the liability value.

Answer: D

Learning Objective: 09-05

Topic: Derivatives―Fair value–Changes in fair value

Difficulty: 1 Easy

Bloom: Remember

AACSB: Reflective Thinking

AICPA: FN Measurement

Feedback:

 

[QUESTION]

68. Authoritative literature provides guidance for hedges of the following sources of foreign exchange risk.
69. Recognized foreign currency denominated assets and liabilities.
70. Unrecognized foreign currency firm commitments.

III. Forecasted foreign currency denominated transactions.

1. A) I only
2. B) I and II
3. C) II only
4. D) II and III
5. E) I, II, and III

Answer: E

Learning Objective: 09-05

Topic: Derivatives―Types and uses

Difficulty: 1 Easy

Bloom: Remember

AACSB: Reflective Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback:

 

[QUESTION]

69. All of the following data points are needed to determine the fair value of a forward contract (at any point), EXCEPT
70. A) The forward rate when the forward contract was entered into.
71. B) The current forward rate for a contract that matures on the same date as the forward contract entered into.
72. C) The forward rate for a contract that has the same duration as the forward contract entered into.
73. D) A discount rate which is typically the company’s incremental borrowing rate.
74. E) A future rate which is typically the company’s incremental borrowing rate.

Answer: C

Learning Objective: 09-05

Topic: Derivatives―Fair value–Changes in fair value

Difficulty: 1 Easy

Bloom: Remember

AACSB: Reflective Thinking

AICPA: FN Measurement

Feedback:

 

[QUESTION]

70. For speculative derivatives, the change in the fair value of the derivative must be:
71. A) Utilized to adjust the derivative asset.
72. B) Recognized immediately as a gain or loss in net income.
73. C) Recognized as a loss in other comprehensive income.
74. D) Recognized as a gain in other comprehensive income.
75. E) Recognized as a gain or loss in net income at a later date.

Answer: B

Learning Objective: 09-05

Topic: Derivatives―Fair value–Changes in fair value

Difficulty: 1 Easy

Bloom: Remember

AACSB: Reflective Thinking

AICPA: FN Measurement

Feedback:

 

[QUESTION]

71. Which of the following is not a condition of accounting for hedge derivatives?
72. A) The derivative is minimally effective in offsetting changes in the cash flows or fair value related to the hedged item.
73. B) The derivative is properly documented as a hedge.
74. C) The derivative is used to hedge a cash flow exposure to foreign exchange risk.
75. D) The derivative is highly effective in offsetting changes in the cash flows or fair value related to the hedged item.
76. E) The derivative is used to hedge a fair value exposure to foreign exchange risk.

Answer: A

Learning Objective: 09-06

Topic: Hedge–Accounting concepts

Difficulty: 1 Easy

Bloom: Remember

AACSB: Reflective Thinking

AICPA: FN Measurement

Feedback:

 

[QUESTION]

72. To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date requires which of the following?
73. A) 1. Recognize the transaction (sale or purchase) and foreign currency denominated asset or liability2. Recognize option as an asset (purchase price is fair value)
74. B) 1. No entry related to the firm commitment (zero value)2. No entry related to forward contract (zero fair value)
75. C) 1. Recognize the transaction (sale or purchase) and foreign currency denominated asset or liability2. No entry related to forward contract (zero fair value)
76. D) 1. Recognize the transaction (sale or purchase) 2. Recognize the option as a liability
77. E) 1. None. Nojournal entry is required.

Answer: C

Learning Objective: 09-06

Topic: Hedge–Accounting concepts

Difficulty: 1 Easy

Bloom: Remember

AACSB: Reflective Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback:

 

[QUESTION]

73. To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at the balance sheet date
74. A) 1. Adjust hedged asset or liability to fair value, with counterpart (change in fair value) reported as foreign exchange gain or loss in net income, 2. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value) reported in AOCI, 3. Transfer an amount from AOCI to net income to offset the foreign exchange gain or loss on the hedged asset or liability recognized in 1, and 4. Transfer from AOCI to net income (as discount expense or premium revenue) the current period’s amortization of discount or premium
75. B) 1. Adjust hedged asset or liability to fair value, with counterpart (change in fair value) reported as foreign exchange gain or loss in net income and 2. Adjust option to fair value (either an asset or zero value), with counterpart (change in fair value) reported as gain or loss in net income
76. C) 1. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value) reported as gain or loss in net income and 2. Adjust firm commitment to fair value (based on change in forward rate), with counterpart (change in fair value) reported as gain or loss in net income
77. D) 1. Adjust hedged asset, with counterpart (change in fair value) reported as a foreign exchange gain in net income and 2. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value) reported as a gain or loss in net income
78. E) 1. None. No journal entry is required.

Answer: A

Learning Objective: 09-06

Topic: Hedge–Accounting concepts

Difficulty: 1 Easy

Bloom: Remember

AACSB: Reflective Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

Feedback:

 

 

Essay:

 

[QUESTION]

74. Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty days. Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.

 

Answer: Yelton could sign a forward exchange contract to sell the euros in 60 days, after they are received.  Alternatively, Yelton could purchase an option to sell the euros in 60 days, after they are received.

Learning Objective: 09-01

Topic: Concepts of foreign currency and exchange

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

75. Where can you find exchange rates between the U.S. dollar and most foreign currencies?

 

Answer: Foreign exchange rates are published in the Wall Street Journal, major U.S. newspapers, and several Internet sites.

Learning Objective: 09-01

Topic: Concepts of foreign currency and exchange

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

76. What is meant by the spot rate?

 

Answer: The spot rate is the price at which a foreign currency can be purchased or sold today.

Learning Objective: 09-01

Topic: Concepts of foreign currency and exchange

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

77. How is the fair value of a Forward Contract determined byU.S. GAAP?

 

Answer: The fair value of a Forward Contract is determined by comparing the difference between the contracted forward rate and the currently available forward rate for contracts expiring on the same date.  On the initial date of the contract, this would result in a fair value of $0.  As time passes, the currently available forward rate will likely fluctuate relative to the “fixed” contracted forward rate, creating a difference that must be accounted for as a gain or loss on the forward contract.  A contract with a net gain over its life is recorded on the balance sheet as a Forward Contract Asset.  A contract with a net loss over its life is recorded on the balance sheet as a Forward Contract Liability.

Learning Objective: 09-04

Topic: Derivatives―Fair value–Changes in fair value

Difficulty: 3 Hard

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA: FN Measurement

 

[QUESTION]

78. What are the two separate transactions that require recording under the two-transaction perspective?

 

Answer: The two separate transactions that require recording under the two-transaction perspective are the income effects from the 1) export sale and 2) credit extension in foreign currency to a customer.

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: FN Measurement

 

[QUESTION]

79. What is the purpose of a hedge of foreign exchange risk?

 

Answer: Hedgeof foreign exchange risk is a strategy to limit exposure to the effect of unfavorable changes in the value of foreign currencies that are caused by fluctuations in exchange rates.  In addition to avoiding possible losses, companies hedge foreign currency transactions and commitments to introduce an element of certainty into the future cash flows resulting from foreign currency activities by establishing a price today at which foreign currency can be sold or purchased at a future date.

Learning Objective: 09-04

Topic: Derivatives―Types and uses

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Diversity

AACSB: Communication

AICPA: BB Global

AICPA: FN Risk Analysis

 

[QUESTION]

80. How does a foreign currency forward contract differ from a foreign currency option?

 

Answer:  A foreign currency forward contract obligates the parties to deliver one currency in exchange for another at a specified future date.On the other hand, the owner of a foreign currency option can choose whether to exercise the option and exchange one currency for another or not.

Learning Objective: 09-01

Learning Objective: 09-04

Topic:Concepts of foreign currency and exchange

Topic: Derivatives―Types and uses

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

81. What factors create a foreign exchange gain?

 

Answer: Foreign exchange gains and losses are created by two factors: having foreign currency exposures (foreign currency receivables and payables) and changes in exchange rates.

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

82. What happens when aU.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?

 

Answer: The event results in a foreign exchange gain.

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]

83. What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates?

 

Answer: The event results in a foreign exchange loss.

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]

84. What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates?

 

Answer: The event results in a foreign exchange loss.

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]

85. What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency appreciates?

 

Answer: The event results in a foreign exchange gain.

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

 

Problems:

 

[QUESTION]

86. Gaw Produce Company purchased inventory from a Japanese company on December 18, 2018. Payment of 4,000,000 yen (¥) was due on January 18, 2019. Exchange rates between the dollar and the yen were as follows:

 

Required:

Prepare all journal entries for Gaw Produce Co. in connection with the purchase and payment.

 

Answer:

 

2018
Dec.18	Purchases (¥4,000,000 × .0080)	32,000
	Accounts payable		32,000
31	Foreign exchange loss	800
	Accounts payable		800
	(¥4,000,000 × .0080) – (¥4,000,000 × .0082)
2019
Jan.18	Foreign exchange loss	400
	Accounts payable		400
	(¥4,000,000 × .0082) – (¥4,000,000 × .0083)
18	Accounts payable	33,200
	Cash (¥4,000,000 × .0083)		33,200

Learning Objective: 09-02

Topic:Foreign currency transactions―Not hedged

Difficulty: 2 Medium

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

87. Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2018, for 100,000 stickles. Payment was received on October 15, 2018. The following exchange rates applied:

 

	Exchange
Date	Rate
September 15, 2018	§1 = $.48
September 30, 2018	§1 = $.50
October 15, 2018	§1 = $.44

 

Required:

Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that the company closes its books on September 30 to prepare interim financial statements.

 

Answer:

 

2018
Sept. 15	Accounts receivable (§100,000 × $.48)	48,000
	Sales		48,000
30	Accounts receivable	2,000
	Foreign exchange gain		2,000
	[§100,000 × ($.50 – $.48)]
Oct. 15	Foreign exchange loss	6,000
	Accounts Receivable		6,000
	[§100,000 × ($.50 – $.44)]
Oct. 15	Cash     [§100,000 × ($.50 – $.44)]	44,000
	Accounts receivable		44,000

 

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 2 Medium

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

REFERENCE: 09-12

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2018:

 

The appropriate exchange rates during 2018 were as follows:

 

	Exchange
Date	Rate
March 1, 2018	$.20 = 1 peso
May 1, 2018	$.22 = 1 peso
August 1, 2018	$.23 = 1 peso
September 1, 2018	$.24 = 1 peso
December 31, 2018	$.25 = 1 peso

 

[QUESTION]

REFER TO: 09-12
88. Prepare all journal entries in U.S. dollars along with any December 31, 2018 adjusting entries. Coyote uses a perpetual inventory system.

 

Answer:

 

2018
March 1	Inventory (60,000p × $.20)	12,000
	Accounts payable		12,000
May 1	Accounts receivable (54,000p × $.22)	11,880
	Sales		11,880
	Cost of goods sold (36,000 × $.20)	7,200
	Inventory		7,200
August 1	Cash (48,000p × $.23)	11,040
	Accounts receivable (48,000p × $.22)		10,560
	Foreign Exchange Gain		480
Sept. 1	Accounts payable (36,000p × $.20)	7,200
	Foreign exchange loss	1,440
	Cash (36,000 × $.24)		8,640
Dec. 31	Foreign exchange loss [24,000 × ($.20 – $.25)]	1,200
	Accounts payable		1,200
Dec. 31	Accounts receivable	180
	Foreign exchange gain [6,000 × ($.22 – $.25)]		180

 

Learning Objective: 09-02

Topic: Foreign currency transactions―Not hedged

Difficulty: 3 Hard

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

REFER TO: 09-12

89. What amount will Coyote Corp. report in its 2018balance sheet for Inventory?

 

Answer:

Inventory (60,000 pesos × $.20 × 40%): $ 4,800

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

 

[QUESTION]

REFER TO: 09-12

90. What amount will Coyote Corp. report in its 2018income statement for Cost of goods sold?

 

Answer:

Cost of goods sold (60,000 pesos × $.20 × 60%) =$ 7,200

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

 

[QUESTION]

REFER TO: 09-12

91. What amount will Coyote Corp. report in its 2018income statement for Sales?

 

Answer:

Sales (54,000 pesos × $.22) =$11,880

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

 

[QUESTION]

REFER TO: 09-12

92. What amount will Coyote Corp. report in its 2018balance sheet for Accounts receivable?

 

Answer:

Accounts receivable ((54,000–48,000 pesos) × $.25) =$1,500

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

 

[QUESTION]

REFER TO: 09-12

93. What amount will Coyote Corp. report in its 2018balance sheet for Accounts payable?

 

Answer:

Accounts payable ((60,000–36,000 pesos) × $.25) =$6,000

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

 

[QUESTION]

REFER TO: 09-12

94. The beginning balance of cash was 50,000 pesos on January 1, 2018, translated at 1 peso = $.18. What amount will Coyote Corp. report in its 2018balance sheet for Cash?

 

Answer:

Cash (50,000 pesos × $.18) + (48,000 pesos × $.23) – (36,000 pesos × $.24)) = $11,400

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

 

REFERENCE: 09-13

On November 10, 2018, King Co. 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, 2019.  On December 1, 2018, 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 = $.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
November 10, 2018	Spot Rate	$.35 = 1 LCU
December 1, 2018	Spot Rate	$.32 = 1 LCU
	2-Month Forward Rate	$.30 = 1 LCU
December 31, 2018	Spot Rate	$.29 = 1 LCU
	1-Month Forward Rate	$.28 = 1 LCU
February 1, 2019	Spot Rate	$.27 = 1 LCU

 

The company’s borrowing rate is 12%.  The present value factor for one month is .9901.

 

[QUESTION]

REFER TO: 09-13

95. (A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal entries relating to the transaction and the forward contract.

(B.) Compute the effect on 2018 net income.

(C.) Compute the effect on 2019 net income.

 

Answer:

Date	Spot	Value	Change	Forward	Change
11/10/18	$.35	$33,600
12/01/18	$.32	$30,720		$.30
12/31/18	$.29	$27,840	-$5,760	$.28	+$1,9011
02/01/19	$.27	$25,920	-$1,920	$.27	+$ 9792

 

¹ [(.30 – .28) 96,000] × .9901 = 1,901

² [(.30 – .27) 96,000] = 2,880 – 1,901 = 979

 

A.	11/10/18	Accounts receivable	33,600
		Sales		33,600
	12/01/18	No entry
	12/31/18	Foreign exchange loss	5,760
		Accounts receivable		5,760
		Forward contract	1,901
		AOCI		1,901
		AOCI	5,760
		Gain on forward contract		5,760
		Discount expense	9603
		AOCI		960
		3[96,000 × ($.32 – $.30) / 2] for 1st of 2 mos.
	02/01/19	Foreign exchange loss	1,920
		Accounts receivable		1,920
		Forward contract	979
		AOCI		979
		AOCI	1,920
		Gain on forward contract		1,920
		Discount expense	9604
		AOCI		960
		4[96,000 × ($.32 – $.30) /2] for 2nd of 2 mos.
		Foreign currency	25,920
		Accounts receivable		25,920
		Cash	28,800
		Forward contract		2,880
		Foreign currency		25,920

 

B.	Sales	$ 33,600
	Foreign exchange loss	( 5,760)
	Gain on forward contract	5,760
	Discount expense	(     960)
	Increase	$ 32,640
C.	Foreign exchange loss	$( 1,920)
	Gain on forward contract	1,920
	Discount expense	(     960)
	Decrease	$(    960)

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

 

[QUESTION]

REFER TO: 09-13

96. (A.) Assume this hedge is designated as a fair value hedge. Prepare the journal entries relating to the transaction and the forward contract.

(B.) Compute the effect on 2018 net income.

(C.) Compute the effect on 2019 net income.

Answer:

A.	11/10/18	Accounts receivable	33,600
		Sales		33,600
	12/01/18	No entry
	12/31/18	Foreign exchange loss	5,760
		Accounts receivable		5,760
		Forward contract	1,901
		Gain on forward contract		1,901
	02/01/19	Foreign exchange loss	1,920
		Accounts receivable		1,920
		Forward contract	979
		Gain on forward contract		979
		Foreign currency	25,920
		Accounts receivable		25,920
		Cash	28,800
		Forward contract		2,880
		Foreign currency		25,920

 

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

 

REFERENCE: 09-14

On October 1, 2018, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU).  Collection is expected in four months.  On October 1, 2018, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2019) and receive $78,000 in U.S. dollars.  The spot and forward rates for the LCU were as follows:

 

Date	Rate Description	Exchange Rate
October 1, 2018	Spot Rate	$.83= 1 LCU
December 31, 2018	Spot Rate	$.85 = 1 LCU
	1-Month Forward Rate	$.80 = 1 LCU
February 1, 2019	Spot Rate	$.86 = 1 LCU

 

The company’s borrowing rate is 12%.  The present value factor for one month is .9901.

Any discount or premium on the contract is amortized using the straight-line method.

 

[QUESTION]

REFER TO: 09-14

97. Assuming this is a cash flow hedge; prepare journal entries for this sales transaction and forward contract.

Answer:

 

Date	Spot	Fair Value	FV Change	Forward to 02/01/19	Forward Change
10/01/18	$.83	$83,000		$.78
12/31/18	$.85	$85,000	$2,000	$.80	$(1,980)1
02/01/19	$.86	$86,000	$1,000	$.86	$ (6,020)2

 

¹ [(.80 – .78) 100,000] × .9901 = 1,980

² [(.78 – .86) 100,000] – 1,980 = 6,020

 

10/01/18	Accounts receivable	83,000
	Sales		83,000
12/31/18	Accounts receivable	2,000
	Foreign exchange gain		2,000
	AOCI	1,980
	Forward contract		1,980
	Loss on forward contract	2,000
	AOCI		2,000
	Discount expense	3,7503
	AOCI		3,750
	3[100,000 × ($.83 – $.78) × 3/4] for 3 of 4 months
02/01/19	Accounts receivable	1,000
	Foreign exchange gain		1,000
	AOCI	6,020
	Forward contract		6,020
	Loss on forward contract	1,000
	AOCI		1,000
	Discount expense	1,2504
	AOCI		1,250
	4[100,000 × ($.83 – $.78) × 1/4] for 1 of 4 months
	Foreign currency	86,000
	Accounts receivable		86,000
	Cash	78,000
	Forward contract	8,000
	Foreign currency		86,000

 

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

 

[QUESTION]

REFER TO: 09-14

98. Assuming this is a fair value hedge; prepare journal entries for this sales transaction and forward contract.

 

Answer:

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

 

[QUESTION]

99. On October 31, 2017, Darling Company negotiated a two-year 100,000 franc loan from a foreign bank at an interest rate of 3 percent per year. Interest payments are made annually on October 31, and the principal will be repaid on October 31, 2019. Darling prepares U.S.-dollar financial statements and has a December 31 year-end.  Prepare all journal entries related to this foreign currency borrowing assuming the following:

 

	Franc Rate
October 31, 2017	$0.50
December 31, 2017	$0.52
October 31, 2018	$0.60
December 31, 2018	$0.62
October 31, 2019	$0.75

 

 

Answer: In US dollars:

 

10/31/17	Cash	50,000
	Note payable (franc) [100,000 × $.500]		50,000
	To record the note and conversion of 100,000 francs into $ at the spot rate
12/31/17	Interest expense	260
	Interest payable (franc)		260
	[100,000 × 3% × 2/12 = 500 francs × $.52 spot rate]
	To accrue interest for the period 10/31/17 – 12/31/17.
	Foreign exchange loss	2,000
	Note payable (franc) [100,000 × ($.52 – $.50)]		2,000
	To revalue the note payable at the spot rate of
	$.52 and record a foreign exchange loss.
10/31/18	Interest expense [2,500 francs × $.60]	1,500
	Interest payable (franc)	260
	Foreign exchange loss [500 francs ×  ($.60 – $.52)]	40
	Cash [3,000 francs × $.60]		1,800
	To record the first annual interest payment,
	record interest expense for the period 1/1 – 10/31/18,
	and record a foreign exchange loss on the
	interest payable accrued at 12/31/17.
12/31/18	Interest expense	310
	Interest payable (franc) [500 francs × $.62]		310
	To accrue interest for the period 10/31 –12/31/18.
	Foreign exchange loss	10,000
	Note payable (franc) [100,000 × ($.62 – $.52)]		10,000
	To revalue the note payable at the spot rate of
	$.62 and record a foreign exchange loss.

 

10/31/19	Interest expense [2,500 francs × $.75]	1,875
	Interest payable (franc)	310
	Foreign exchange loss [500 francs × ($.75 – $.62)]	65
	Cash [3,000 francs × $.75]		2,250
	To record the second annual interest payment,
	record interest expense for the period 1/1 – 10/31/19,
	and record a foreign exchange loss on the interest payable
	accrued at 12/31/18.
	Note payable (franc)	62,000
	Foreign exchange loss	13,000
	Cash [100,000 francs × $.75]		75,000
	To record payment of the 100,000 franc note.

 

Learning Objective: 09-03

Topic:Foreign currency borrowing

Difficulty: 3 Hard

Blooms: Analyze

Blooms: Apply

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Diversity

AICPA: BB Global

AICPA: FN Measurement

 

[QUESTION]

100. For each of the following situations, select the best answer concerning accounting for foreign currency transactions:

(G) Results in a foreign exchange gain.

(L)  Results in a foreign exchange loss.

(N)  No foreign exchange gain or loss.

_____1. Export sale by a U.S. company denominated in dollars, foreign currency of buyer appreciates.

_____2. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates.

_____3. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates.

_____4. Import purchase  by a U.S. company denominated in dollars, foreign currency of buyer appreciates.

_____5. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates.

_____6. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer depreciates.

_____7. Export sale by a U.S. company denominated in dollars, foreign currency of buyer depreciates.

_____8. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates.

Answer: (1) N; (2) G; (3) L ; (4) N; (5) G; (6) N; (7) N; (8) L

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