Exam 8: Foreign Currency Transactions and Hedging

Use the following $/£ spot rates to answer the questions below. Spot Rate October 15, 2019 \ 1.358 December 31, 2019 1.375 March 1, 2020 1.395 For each question below, the U.S. company has a December 31 year-end. Required a. A U.S. company sold merchandise to a U.K. customer on October 15, 2019; payment of £100,000 is received on March 1, 2020. Calculate the following amounts: i. Accounts receivable, December 31, 2019 ii. Sales revenue, 2019 income statement iii. 2019 exchange gain/loss 2020 exchange gain/loss b. A U.S. company bought merchandise from a U.K. customer on October 15, 2019; payment of £100,000 was made on March 1, 2020. Calculate the following amounts: i. Accounts payable, December 31, 2019 ii. Inventory, December 31, 2019 iii. 2019 exchange gain/loss 2020 exchange gain/loss

Use the following information on the U.S. dollar value of the euro to answer bellow Questions Spot Rate Forward Rate for March 16, 2020 Delivery November 16, 2019 \ 1.250 \ 1.248 December 31, 2019 1.260 1.255 March 16, 2020 1.265 1.265 On November 16, 2019, a U.S. company makes a sale to a customer in Germany. Under the sale terms, the customer will pay the company €100,000 on March 16. On November 16, the company also enters a forward contract to sell €100,000 on March 16, 2020. On March 16, the company receives €100,000 from the customer and sells it using the forward contract. The company's accounting year ends December 31. -What is the net effect on 2019 income of exchange rate changes due to the sale and the forward contract?

Use the following information to answer bellow Questions A U.S. company purchases a 90-day certificate of deposit from a Singapore bank on May 15, when the spot rate is $0.72/S$. The certificate has a face value of S$100,000 and pays interest at an annual rate of 2 percent. On August 13, the certificate of deposit matures, and the company receives principal and interest of S$100,500 and records interest revenue on the investment. The spot rate on August 13 is $0.75/S$. The average spot rate for the period May 15 - August 13 is $0.73/S$. The company's accounting year ends December 31. -The total exchange gain or loss on this investment is:

A U.S. company issues a purchase order for merchandise to a Canadian supplier. The agreed upon total price is C$100,000, and the current spot rate is $0.82/C$. The company enters a forward contract when the purchase order is issued, at a rate of $0.815/C$, for delivery when the merchandise is received. If the spot rate falls to $0.80/C$ when the merchandise is received and paid for, at what value will the merchandise be reported on the company's books?

A U.S. company holds put options in euros with a strike price of $1.25/€. The spot price of euros declines to $1.23/€. The company will:

An Italian company plans to purchase merchandise from a company in Singapore at the end of September, payment of S$1,000,000 due in Singapore dollars. On May 15, the Italian company enters a forward purchase contract for S$1,000,000 to be delivered on September 30. The contract hedges a forecasted purchase of a nonfinancial asset. The forward is closed and the merchandise purchased on September 30. The merchandise is sold by the Italian company in November. The Italian company follows IFRS and has a June 30 year-end. Following is information on exchange rates (€/S$): Spot Rate Forward Rate for September 30 Delivery May 15 0.617 0.619 June 30 0.625 0.624 September 30 0.621 0.621 Required Prepare the journal entries to record the following events: a. June 30 adjusting entry b. September 30 adjusting entries and transactions c. Entry to recognize cost of goods sold in November

A U.S. company takes delivery of goods from a supplier in Hong Kong on December 1, 2020, at an invoice price of HK$100,000. The company purchases Hong Kong dollars in the spot market and pays the supplier on March 1, 2021. The U.S. company has a December 31 year-end. Spot rates ($/HK$) are as follows: Spot Rate December 1, 2020 \ 0.128 December 31, 2020 0.126 March 1, 2021 0.130 Required :Prepare the U.S. company's journal entries to record these events.

A U.S. company sells goods to a customer in Singapore on November 5, 2020, at a price of S$100,000. The company receives payment from the customer, in Singapore dollars, on February 5, 2021. The U.S. company has a December 31 year-end. Spot rates ($/S$) are as follows: Spot Rate Noyember 5, 2020 \ 0.748 December 31, 2020 0.750 February 5, 2021 0.747 Required Calculate the following amounts appearing in the U.S. company's financial statements. a. Exchange gain or loss, 2020 income statement b. Exchange gain or loss, 2021 income statement c. Sales revenue, 2020 d. Accounts receivable, December 31, 2020 balance sheet

Use the following information on the U.S. dollar value of the euro to answer bellow Questions Spot Rate Forward Rate for March 16, 2020 Delivery November 16, 2019 \ 1.250 \ 1.248 December 31, 2019 1.260 1.255 March 16, 2020 1.265 1.265 On November 16, 2019, a U.S. company makes a sale to a customer in Germany. Under the sale terms, the customer will pay the company €100,000 on March 16. On November 16, the company also enters a forward contract to sell €100,000 on March 16, 2020. On March 16, the company receives €100,000 from the customer and sells it using the forward contract. The company's accounting year ends December 31. -How much in U.S. dollars does the U.S. company receive on March 16, 2020?

A U.S. company has a forward purchase contract for delivery of euros at the end of May at a price of $1.24/€. The U.S. dollar strengthens against the euro during this period. The company will:

A U.S. company has customers in Singapore, who remit payments to the U.S. company in Singapore dollars. Which investment hedges the exchange risk associated with these customers?

A U.S. parent hedges its exposure to exchange rate changes caused by its investment in its subsidiary in Singapore. The subsidiary's functional currency is the Singapore dollar. Where are gains and losses on the hedge reported in the consolidated financial statements?

Use the following information on the U.S. dollar value of the pound sterling to answer bellow Questions Spot Rate Forward Rate for August 16, 2020 Delivery May 16, 2020 \ 1.380 \ 1.375 June 30, 2020 1.390 1.388 August 16, 2020 1.400 1.400 On May 16, 2020, a U.S. company takes delivery of £100,000 in merchandise from a U.K. supplier. The company will pay the supplier £100,000 on August 16. On May 16, the company also enters a forward contract to buy £100,000 on August 16, 2020. On August 16, the company purchases £100,000 using the forward contract, and pays the supplier. The company's accounting year ends June 30, and it sells the merchandise in September 2020. -What is the net effect on fiscal 2021 income of exchange rate changes due to the purchase and the forward contract?

You believe the U.S. dollar will significantly weaken against the euro in the future. Which position will allow you to benefit from your information?

Use the following data to answer bellow Questions On November 30, 2020, a U.S. company purchased merchandise on credit from a Swiss supplier at an invoice price of CHF1,000, when the exchange rate was $1.05/CHF. On December 31, 2020, the company's year-end, the exchange rate was $1.045/CHF. On February 1, 2021, the company purchased the CHF1,000 for $1.048/CHF and paid the invoice. On March 15, 2021, when the exchange rate was $1.044, the company sold the merchandise to a U.S. customer for $2,000. -What is the U.S. company's gross margin (sales revenue minus cost of sales) on the March 15, 2021 sale?

U.S. and IFRS hedge accounting standards divide up hedges into three categories. What are the three categories?

A U.S. company has euro-denominated receivables that it hedges with a forward sale of euros. The U.S. dollar strengthens against the euro. Which statement is true?

A U.S. company purchases a 90-day certificate of deposit from a German bank on September 15, when the spot rate is $1.231/€. The certificate has a face value of €1,000,000 and pays interest at an annual rate of 2 percent. On December 14, the certificate of deposit matures, and the company receives principal and interest due to it, in euros. The company records interest revenue at that time. The spot rate on December 14 is $1.243/€. The average spot rate for the period September 15 - December 14 is $1.265/€. The company's accounting year ends December 31. Required Prepare all necessary journal entries to record the above events on the U.S. company's books.

Use the following information on the U.S. dollar value of the New Zealand dollar to answer bellow Questions Spot Rate Forward Rate for June 30, 2020 Delivery March 28, 2020 \ 0.725 \ 0.730 May 2, 2020 0.732 0.735 June 28, 2020 0.750 0.750 On March 28, 2020, a U.S. company issues a purchase order to buy merchandise for NZ$100,000. The company will pay the supplier on June 28, 2020, so on March 28, the company enters a forward contract to purchase NZ$100,000 on June 28. The company takes delivery of the merchandise on May 2, 2020. On June 28, 2020, the company acquires NZ$100,000 using the forward contract and pays the supplier. The company sells the merchandise later in the year. The company's accounting year ends December 31. -What is the net effect on 2020 income of exchange rate changes due to the merchandise purchase and hedge?

Which one of the following is not an example of hedge accounting for a U.S. company?