Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

On June 1, Cagle Co. received a signed agreement to sell inventory for ¥650,000. The sale would take place in 90 days. Cagle 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 = $0.003986, and the 90-day forward rate was ¥1 = $0.004021. At what amount would Cagle record the Forward Contract on June 1?

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?

Old Colonial Corp. (a U.S. company)made a sale to a foreign customer on September 15, 2021, for 100,000 stickles. Payment was received on October 15, 2021. The following exchange rates applied: 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.

What is meant by the spot rate?

On December 1, 2021, 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, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97 (U.S.)on December 1, 2021. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Compute the fair value of the foreign currency option at December 1, 2021.

What factors create a foreign exchange gain?

Gaw Produce Company purchased inventory from a Japanese company on December 18, 2021. Payment of 4,000,000 yen (¥)was due on January 18, 2022. 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.

How can an import purchase result in an exposure to foreign exchange risk for the buyer?

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

On May 1, 2021, 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, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2022 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, 2021. The following spot exchange rates apply: Mosby's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the impact on Mosby's 2021 net income as a result of this fair value hedge of a firm commitment?

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, 2021. On July 24, 2021, 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, 2021. The following exchange rates apply: What amount will Woolsey include as an option expense in net income for the period July 24 to October 24?

How is the fair value of a Forward Contract determined by U.S. GAAP?

Potter Corp. (a U.S. company in Colorado)had the following series of transactions in a foreign country during 2021: The appropriate exchange rates during 2021 were as follows: What amount will Potter Corp. report in its 2021 income statement for Cost of goods sold?

Parker Corp., a U.S. company, had the following foreign currency transactions during 2021:(1.)Purchased merchandise from a foreign supplier on July 5, 2021 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of $82,000.(2.)On October 1, 2021 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2022. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2021, and $881,000 on October 1, 2022.What amount should be included as a foreign exchange gain or loss from the two transactions for 2022?

Which of the following is not a condition of accounting for hedge derivatives?

Winston Corp., a U.S. company, had the following foreign currency transactions during 2021:(1.)Purchased merchandise from a foreign supplier on July 16, 2021 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of $54,000.(2.)On October 15, 2021 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2022. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2021, and $299,000 on October 15, 2022.What amount should be included as a foreign exchange gain or loss from the two transactions for 2021?

Coyote Corp. (a U.S. company in Texas)had the following series of transactions in a foreign country during 2021: The appropriate exchange rates during 2021 were as follows: What amount will Coyote Corp. report in its 2021 balance sheet for Accounts payable?

On December 1, 2021, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2022, as a fair value hedge of a foreign currency denominated account payable. The following U.S. dollar per peso exchange rates apply: Joseph's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent is 0.9803. Which of the following is included in Joseph's December 31, 2021 balance sheet for the forward contract?

Which statement is true regarding a foreign currency option?

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.