Exam 12: Accounting for Foreign Currency Transactions and Hedging Foreign Exchange Risk

On November 1, 2017, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $500,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were: The entry to record the forward contract is

Madison Paving Company purchased equipment for 350,000 British pounds from a supplier in London on July 7, 2017. Payment in British pounds is due on Sept. 7, 2017. The exchange rates to purchase one pound is as follows: On its August 31, 2017 income statement, what amount should Madison Paving report as a foreign exchange transaction gain:

Consider the following information: 1. On November 1, 2017, a U.S. firm contracts to sell equipment (with an asking price of 500,000 pesos) in Mexico. The firm will take delivery and will pay for the equipment on February 1, 2018. 2. On November 1, 2017, the company enters into a forward contract to sell 500,000 pesos for $0.0948 on February 1, 2018. 3. Spot rates and the forward rates for February 1, 2018, settlement were as follows (dollars per peso): 4. On February 1, the equipment was sold for 500,000 pesos. The cost of the equipment was $20,000. Required: Prepare all journal entries needed on November 1, December 31, and February 1 to account for the forward contract, the firm commitment, and the transaction to sell the equipment.

On April 1, 2017, Manatee Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days. The relevant exchange rates are as follows: The first forward contract was to hedge a purchase of inventory on April 1, payable on December 1. On April 30, what amount of foreign currency transaction loss should Manatee report in income?

A transaction loss would result from:

The discount or premium on a forward contract entered into as a hedge of an exposed asset or liability position should be:

Greco, Inc. a U.S. corporation, bought machine parts from Franco Company of Germany on March 1, 2017, for 70,000 marks, when the spot rate for marks was $0.5395. Greco's year-end was March 31, 2017, when the spot rate for marks was $0.5445. Greco bought 70,000 marks and paid the invoice on April 20, 2017, when the spot rate was $0.5495. How much should be shown in Greco's income statements as foreign exchange (transaction) gain or loss for the years ended March 31, 2017 and 2018?

From the viewpoint of a U.S. company, a foreign currency transaction is a transaction:

A transaction gain is recorded when there is an:

On July 15, Pinta, Inc. purchased 88,500,000 yen Pinta of parts from a Tokyo company paying 20% down, and the balance is due in 90 days. Interest is payable at a rate of 8% on the unpaid balance. The exchange rate on July 15, was $1.00 = 118 Japanese yen. On October 13, the exchange rate was $1.00 = 114 Japanese yen. Required: Prepare journal entries to record the purchase and payment of this foreign currency transaction in U.S. dollars.

On September 1, 2017, Mudd Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows: The first forward contract was to hedge a purchase of inventory on September 1, payable on December 1. On September 30, what amount of foreign currency transaction loss should Mudd Plating report in income?

On November 1, 2017, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $450,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were: What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain or loss was recorded as a result of the adjustment?

On November 1, 2017, National Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of 200,000 foreign currency units (FCU). On November 1, National also entered into a forward contract to hedge the exposed asset. The forward rate is $0.80 per unit of foreign currency. National has a December 31 fiscal year-end. Spot rates on relevant dates were: What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain or loss was recorded as a result of the adjustment?

Montana Corporation a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after delivery. Between the delivery date and the time of payment, the exchange rate changed in Montana's favor. The resulting gain should be reported in the financial statements as a(n):

The exchange rate quoted for future delivery of foreign currency is the definition of a(n):

On November 1, 2017, Cone Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of 250,000 foreign currency units (FCU). On November 1, Cone also entered into a forward contract to hedge the exposed asset. The forward rate is $0.90 per unit of foreign currency. Cone has a December 31 fiscal year-end. Spot rates on relevant dates were: The entry to record the forward contract is

On November 1, 2016, Platte Corporation, a calendar-year U.S. Corporation, invested in a speculative contract to purchase 700,000 euros on January 31, 2017, from a German brokerage firm. Platte agreed to buy 700,000 euros at a fixed price of $1.46 per euro. The brokerage firm agreed to send 700,000 euros to Platte on January 31, 2017. The spot rates for euros are: Required: Prepare the journal entries that Platte would record on November 1, December 31, and January 31.

On September 1, 2017, Mudd Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows: The second forward contract was strictly for speculation. On September 30, 2017, what amount of foreign currency transaction gain should Mudd Plating report in income?

During 2017, a U.S. company purchased inventory from a foreign supplier. The transaction was denominated in the local currency of the seller. The direct exchange rate increased from the date of the transaction to the balance sheet date. The exchange rate decreased from the balance sheet date to the settlement date in 2018. For the years 2017 and 2018, transaction gains or losses should be recognized as:

An indirect exchange rate quotation is one in which the exchange rate is quoted: