Exam 11: Multinational Accounting: Foreign Currency Transactions and Financial Instruments

On December 1, 20X8, Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share. Winston classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow: Assume that Winston exercises the put option and sells Linked shares on February 20, 20X9. Based on the preceding information, what is the market price of Linked Corporation stock on December 31, 20X8?

All of the following are true statements when measuring hedge effectiveness except:

Corporation X has a number of exporting transactions with companies based in Vietnam. Exporting activities result in receivables. If the settlement currency is the US dollar, which of the following will happen by changes in the direct or indirect exchange rates?

Company X denominated a December 1, 20X9, purchase of goods in a currency other than its functional currency. The transaction resulted in a payable fixed in terms of the amount of foreign currency, and was paid on the settlement date, January 10, 2010. Exchange rates moved unfavorably at December 31, 20X9, resulting in a loss that should:

Chicago based Corporation X has a number of exporting transactions with companies based in Sweden. Exporting activities result in receivables. If the settlement currency is the Swedish Krona, which of the following will happen by changes in the direct or indirect exchange rates?

Note: This is a Kaplan CPA Review Question Sphinx Co. (Sphinx) records its transactions in U.S. dollars. A sale of goods resulted in a receivable denominated in Japanese yen, and a purchase of goods resulted in a payable denominated in Euros. Sphinx recorded a foreign exchange transaction gain on collection of the receivable and an exchange transaction loss on the settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar. Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates?

Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 20X9 with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were: Based on the preceding information, what is the overall effect on net income of Myway's use of the forward exchange contract?

An investor purchases a put option with a strike price of $100 for $3. This option is considered "in the money" if the underlying is trading:

On December 1, 20X8, Secure Company bought a 90-day forward contract to purchase 200,000 euros (€) at a forward rate of €1 = $1.35 when the spot rate was $1.33. Other exchange rates were as follows: Required: 1) Prepare all journal entries related to Secure Company's foreign currency speculation from December 1, 20X8, through March 1, 20X9, assuming the fiscal year ends on December 31, 20X8. 2) Did the company gain or lose on its purchase of the forward contract?

On November 1, 20X8, Denver Company borrowed 500,000 local currency units (LCU) from a foreign lender evidenced by an interest-bearing note due on November 1, 20X9, which is denominated in the currency of the lender. The U.S. dollar equivalent of the note principal was as follows: In its income statement for 20X9, what amount should Denver include as a foreign exchange gain or loss on the note principal?

The fair market value of a near-month call option with a strike price of $45 is $5, when the stock is trading at $48. Based on the preceding information, which of the following is true of the intrinsic and time values associated with this option.

On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42. The rates are as follows: Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the net gain or loss on the euro speculative contract?

Note: This is a Kaplan CPA Review Question On September 1, 20X1, Bain Corp. received an order for equipment from a foreign customer for 300,000 local currency units (LCU) when the U.S. dollar equivalent was $96,000. Bain shipped the equipment on October 15, 20X1, and billed the customer for 300,000 LCU when the U.S. dollar equivalent was $100,000. Bain received the customer's remittance in full on November 16, 20X1, and sold the 300,000 LCU for $105,000. In its income statement for the year ended December 31, 20X1, Bain should report a foreign exchange gain of

Company X issues variable-rate debt but wishes to fix its interest rates because it believes the variable rate may increase. Company Y has a fixed-rate bond but is looking for a variable-rate interest because it assumes the interest rates may decrease. The two companies agree to exchange cash flows. Such an arrangement is called:

Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On November 2, 20X8, Mint sold confectionary items to a foreign company at a price of LCU 23,000 when the direct exchange rate was 1 LCU = $1.08. The account has not been settled as of December 31, 20X8, when the exchange rate has increased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint's records at year-end for this transaction will be:

Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reais on December 1, 20X8, with payment due on January 20, 20X9. The exchange rates were: Based on the preceding information, what is the Heavy's overall net gain or net loss from its foreign currency exposure related to this transaction?

On December 1, 20X8, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen's fiscal year ends on December 31. The forward contract was to hedge an anticipated purchase of electronic goods on January 30, 20X9. The purchase took place on January 30, with payment due on March 31, 20X9. The derivative is designated as a cash flow hedge. The company uses the forward exchange rate to measure hedge effectiveness. The direct exchange rates follow: Required: Prepare all journal entries for Denizen Corporation.

On December 1, 20X8, Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share. Winston classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow: Assume that Winston exercises the put option and sells Linked shares on February 20, 20X9. Based on the preceding information, which of the following journal entries will be made on February 20, 20X9?

Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reais on December 1, 20X8, with payment due on January 20, 20X9. The exchange rates were: Based on the preceding information, which of the following is true of dollar's movement vis-à-vis Brazilian real during the period?

Upon arrival in Chile, Karen exchanged $1,000 of U.S. currency into 480,000 Chilean Pesos. While returning after her two month visit, she exchanged her remaining 50,000 Pesos into $100 of U.S. currency. What amount of gain or a loss did Karen experience on the 50,000 pesos she held during her visit and converted to U.S. dollars at the departure date?