Exam 10: Foreign Currency Transactions

In a hedge of a forecasted transaction, gains or losses on derivative instruments prior to the occurrence of the actual transaction should be reported as

A U.S. firm has purchased, for 50,000 FCs, an electric generator from a foreign firm. The exchange rates were 1 FC = $0.80 on the delivery date and 1 FC = $0.76 when the payable was paid. What is the final recorded value if the two-transaction method is used?

Red & Blue Company, a U.S. corporation, agreed to purchase merchandise from a British vendor on January 1, 20X4. The goods will be shipped on January 31, 20X4 and payment of 200,000 British pounds is due February 28, 20X4. On January 1, USA signed an agreement with a foreign exchange broker to buy 200,000 British pounds on February 28, 20X4. Exchange rates to purchase 1 British pound are as follows: Discount Rate = 15% Required: Journalize these transactions.

Foreign currency transactions not involving a hedge should be accounted for using

A U.S. manufacturer has sold computer services to a foreign firm and received 200,000 foreign currency units (FCs). The exchange rates were 1 FC = $.75 on the date of the sale and 1 FC = $.80 when the receivable was settled. On the transaction date, the settlement exchange rate is estimated to be 1 FC = $.72. By the settlement date, what is the total exchange gain or loss recorded for the transaction if the two-transaction method is used?

Bulldog Enterprise, a U.S. firm, agreed on February 1, 20X1, to buy gears from a Mexican firm for 75,000 pesos. Delivery is scheduled for April 1, 20X1, with payment due on May 1, 20X1. On February 1, 20X1, Bulldog also acquired a forward contract to buy 75,000 pesos on May 1, 20X1. (The gears represent inventory to the U.S. firm.) There are no fiscal period ends. Required: Prepare the journal entries necessary for Bulldog Enterprise to record this activity. Assume that the following exchange rates existed: Discount rate 15%

Rex Corporation, a U.S. firm with a calendar accounting year, agreed to buy a specially made truck from a Japanese firm for delivery on January 31, 20X2 with payment due on 2/28/X2. On the same date the agreement was signed, November 1, 20X1, a forward contract due on February 28, 20X2, was also signed to purchase 1,000,000 yen, the contract price of the truck. Exchange rates were as follows: Discount rate = 8% Required: Prepare the journal entries needed to properly reflect the purchase and forward contract through the end of the fiscal year.

Which of the following is not true concerning the accounting for hedges of forecasted transactions using an option?

Describe the risks and uncertainty a U.S. company faces when purchasing goods from a foreign corporation and settling the transaction in the foreign currency.

Differentiate between the following monetary systems: floating system, controlled float system and tiered system.

Wolters Corporation is a U.S. corporation that purchased 50,000 chocolate bars from a foreign manufacturer on 6/1/X9 for 80,000 foreign currency units, to be paid on 9/1/X9. On 6/1/X9 Wolters also entered into a forward contract to purchase 80,000 foreign currency units on 9/1/X9. Wolters has a July 31 year end. Exchange rates are as follows: Discount rate = 12% Required: Make the necessary journal entries for Wolters for the period June 1 through September 1, 20X9.

In the accounting for forward exchange contracts, gains and losses are measured using either spot or forward rates. Which of the following statements concerning measurement of gains and losses is true?

When an economic transaction is denominated in a currency other than the entity's domestic currency, the entity must establish a

Larson, Inc. sold merchandise for 600,000 FC to a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. On the same day, Larson signed an agreement with a foreign exchange broker to sell 600,000 FC on January 31, 20X6. Exchange rates to purchase 1 FC are as follows: What will be the amount of the Forward Contract Receivable-Dollars on November 30, 20X5?

On November 1, 20X1, a U.S. company sold merchandise to a foreign firm 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 December 1, 20X1 to sell 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 = 10% 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.

Given the following information for a 90 day contract: What will be the forward rate?

On November 1, 20X8 Desket, Inc. a U.S. company agreed to sell goods to a foreign buyer for 200,000 FC. The goods were to be shipped on December 1 with payment to be received January 31, 20X9. The hedging contract, signed on November 1, 20X8, called for the sale of 200,000 FC on January 31, 20X9. Assume the December 31 is fiscal year end. Exchange rates are as follows: Discount rate = 12% Required: Prepare all necessary entries through December 31, 20X8 for the commitment hedge and sale.

A transaction involving foreign currency will most likely result in gains and losses to the reporting entity if the

On August 1, 20X1, an American firm purchased a machine costing 200,000,000 yen from a Japanese firm to be paid for on October 1, 20X1. Also on August 1, 20X1, the American firm entered into a contract to purchase 200,000,000 yen to be delivered on October 1, 20X1, at a forward rate of 1 Yen = $0.00783. The exchange rates were as follows: Spot August 1,201 1 Yen =\ 0.00781 August 31,201 1 Yen =\ 0.00777 October 1,201 1 Yen =\ 0.00779 Which of the following statements is incorrect concerning the accounting treatment of these transactions?

The two distinguishing characteristics of a financial instrument are