Exam 10: Foreign Currency Transactions

Scenario 10-2 On 4/1/X3, a U.S. Company commits to sell a piece of equipment to a French customer. At that time, the U.S. company enters into a forward contract to sell foreign currency on 8/1/X3 (120 days). Delivery will take place 7/1/X3 with payment due on 8/1/X3. The fiscal year end for the company is 6/30/X3. The sales price of the equipment is 200,000 Euros. Various exchange rates are as follows: Discount rate is 12%. -Refer to Scenario 10-2. What is the amount in the Firm Commitment account on 6/30/X3?

Exchange gains and losses on a forward exchange contract that covers the same time period as the transaction which it provides a hedge for should be recognized as

Zerlie's Imports purchased automotive parts from a German firm on July 1, 20X1. The parts cost 150,000 Euros to be paid for on August 15. To pay for the parts, Zerlie's Imports borrowed 150,000 euros from a German bank on July 16. The loan bears an 11% interest rate to be repaid on August 15 in euros. Another option would have been for Zerlie's to have hedged the purchase with a forward exchange contract on July 1 to buy 150,000 euros at a forward rate of $0.67. Exchange rates were as follows: Required: a. Compute the effect on net income assuming the following: (1) Zerlie did not borrow to pay for the transaction or hedge the transaction on July 1. (2) Zerlie borrowed from the German bank on July 16. (3) Zerlie hedged the full purchase on July 1. ** ignore present values and discount rates b. Determine which of these three alternatives would have been the best for Zerlie under the situation described.

A United States based company that has not hedged an exposed asset position would experience an exchange gain if

The purpose of a hedge on an identifiable commitment where the U.S. company is selling goods is to:

A U.S. Corp. purchased a computer from a French firm on July 1, 20X5, when a Euro cost $0.25. The U.S. firm will be required to pay the French manufacturer 75,000 Euros on August 1, 20X5, when the Euro costs $0.23. Required: Make the necessary journal entries for the U.S. firm on July 1 and August 1.

A U.S. company purchases medical lab equipment from a Japanese company. The Japanese company requires payment in Japanese yen. In this transaction, the yen would be referred to as the

On November 1, 20X1, DEMO Corp., a U.S. firm, sold merchandise to a foreign firm for 60,000 FCs. DEMO will be paid on January 31, 20X2, in FCs. The spot rates on selected dates were as follows: Required: Assuming that DEMO has a December 31 year end, prepare the necessary journal entries to account for the series of transactions involving the sale.

A U.S. manufacturer has sold goods to a foreign firm for a sale price of 80,000 FC on 12/15/X1. The invoice is due 1/15/X2. The U.S. Firm fiscal year is 12/31/X1. Given the following exchange rates, what gain or loss would the U.S. firm record on 12/31? 12/15 1FC = $0.60 US Dollars 12/31 1FC = $0.65 US Dollars 1/15 1FC = $0.63 US Dollars

The best definition for direct quotes would be "direct quotes measure

On September 15, 20X2, Wall Company, a U.S. firm, purchased a piece of equipment from a foreign firm for 500,000 FCs. Payment for the equipment was to be made in FCs on January 15, 20X3. The spot rates on selected dates were as follows: Required: a. Assuming that the US Corp. has a December 31 year end, prepare the necessary journal entries to account for the series of transactions involving the purchase. b. Prepare all the necessary journal entries assuming that the US Corp. will be paying for the equipment in U.S. dollars.

Current disclosure requires users of hedging instruments to provide information about all of the following except

A U.S. company that has purchased inventory from a German vendor would be exposed to a net exchange gain on the unpaid balance if the

Pile, Inc. purchased merchandise for 500,000 FC from a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. On the same day, Pile signed an agreement with a foreign exchange broker to buy 500,000 FC on January 31, 20X6. Exchange rates to purchase 1 FC are as follows: What will be the adjustment to the account payable included in the journal entry record on November 30, 20X5?

Describe the disclosures required by the FASB of firms using derivatives as foreign currency hedges.

Hugh, Inc. purchased merchandise for 300,000 FC from a British vendor on November 30, 20X3. Payment in British pounds is due January 31, 20X4. Exchange rates to purchase 1 FC is as follows: In the December 31, 20X3 income statement, what amount should Hugh report as foreign exchange gain from this transaction?

On November 1, 20X1, a U.S. company purchased inventory from a foreign supplier for 100,000 FCs, with payment to be made on January 31, 20X2, in FCs. To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on November 1 to purchase 100,000 FCs on January 31, 20X2. The U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply: Discount rate = 12% Required: Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 20X1, and January 31, 20X2.

The time value of an option is the difference between the

Scenario 10-2 On 4/1/X3, a U.S. Company commits to sell a piece of equipment to a French customer. At that time, the U.S. company enters into a forward contract to sell foreign currency on 8/1/X3 (120 days). Delivery will take place 7/1/X3 with payment due on 8/1/X3. The fiscal year end for the company is 6/30/X3. The sales price of the equipment is 200,000 Euros. Various exchange rates are as follows: Discount rate is 12%. -Refer to Scenario 10-2. What is the value of Forward Contract Payable-FC on 6/30?

Which of the following does not represent an exchange risk on an exposed position to a company transacting business with a foreign vendor?