Question 1

Which of the following statements is true concerning hedge accounting?

Accepted Answer

A) Hedges of foreign currency firm commitments are used for future sales only. 
B) Hedges of foreign currency firm commitments are used for future purchases only. 
C) Hedges of foreign currency firm commitments are used for current sales or purchases. 
D) Hedges of foreign currency firm commitments are used for future sales or purchases. 
E) Hedges of foreign currency firm commitments are speculative in nature. 
A) Hedges of foreign currency firm commitments are used for future sales only. 
B) Hedges of foreign currency firm commitments are used for future purchases only. 
C) Hedges of foreign currency firm commitments are used for current sales or purchases. 
D) Hedges of foreign currency firm commitments are used for future sales or purchases. 
E) Hedges of foreign currency firm commitments are speculative in nature. D

Question 2

Gaw Produce Company purchased inventory from a Japanese company on December 18, 2013. Payment of 4,000,000 yen (×) was due on January 18, 2014. Exchange rates between the dollar and the yen were as follows: $\begin{array}{ll}
\text { Date } & \begin{array}{c}
\text { Exchange } \
\text { Rate }
\end{array} \
 18,2013& ¥ 1=\$ .0080 \
\text { December } 31,2013 & ¥ 1=\$ .0082 \
\text { January } 18,2014 & ¥ 1=\$ .0083
\end{array}$ Required:
Prepare all journal entries for Gaw Produce Co. in connection with the purchase and payment.

Accepted Answer

$\begin{array}{|l|l|l|l|}
\hline 2013 & & & \
\hline \text { Dec. } 18 & \text { Purchases }( \pm 4,000,000 \times .0080) & 32,000 & \
\hline & \text { Accounts payable } & & 32.000 \\hline\\hline 31 & \text { Foreign exchange loss } & 800 & \
\hline & \text { Accounts payable } & & 800 \
\hline & (¥ 4,000,000 \times .0080)-( ¥ 4,000,000 \times .0082) & & \
\hline\\hline 2014 & & & \
\hline \text { Jan. 18 } & \text { Foreign exchange loss } & 400 & \
\hline & \text { Accounts payable } & & 400 \
\hline & ( ¥ 4,000,000 \times .0082)-(¥ 4,000,000 \times .0083) & & \\hline & & & \
\hline 18 & \text { Accounts payable } & 33,200 & \
\hline & \text { Cash }(¥ 4,000,000 \times .0083) & & 33,200 \
\hline
\end{array}$

Question 3

On November 10, 2013, King Co. sold inventory to a customer in a foreign country. King agreed to accept 96,000 local currency units (LCU) in full payment for this inventory. Payment was to be made on February 1, 2014. On December 1, 2013, King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months. The two month forward exchange rate on that date was 1 LCU = $.30. Any contract discount or premium is amortized using the straight-line method. The spot rates and forward rates on various dates were as follows:   The company's borrowing rate is 12%. The present value factor for one month is .9901.
(A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal entries relating to the transaction and the forward contract.
(B.) Compute the effect on 2013 net income.
(C.) Compute the effect on 2014 net income.

Accepted Answer

¹ [(.30 - .28) 96,000] × .9901 = 1,901 ² [(.30 - .27) 96,000] = 2,880 - 1,901 = 979

Question 4

On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: $\begin{array}{|l|c|c|}
\hline {\text { Date }} & \text { Spot Rate } & \text { Option Premium } \
\hline \text { December 1,2013 } & \$ .97 & \$ .05 \
\hline \text { December 31,2013 } & \$ .95 & \$ .04 \
\hline \text { February 1,2014 } & \$ .94 & \$ .03 \
\hline
\end{array}$ Compute the fair value of the foreign currency option at December 1, 2013.

Accepted Answer

A) $6,000. 
B) $4,500. 
C) $3,000. 
D) $7,500. 
E) $1,500. 
A) $6,000. 
B) $4,500. 
C) $3,000. 
D) $7,500. 
E) $1,500.

Question 5

On May 1, 2013, 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, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 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, 2013. The following spot exchange rates apply: $\begin{array}{|l|c|}
\hline \text { Date } & \text { Spot Rate } \
\hline \text { May 1,2013 } & \$ 0.095 \
\hline \text { December 31,2013 } & \$ 0.094 \
\hline \text { March 1,2014 } & \$ 0.089 \
\hline
\end{array}$ Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the impact on Mosby's 2013 net income as a result of this fair value hedge of a firm commitment?

Accepted Answer

A) $1,760.60 decrease. 
B) $1,960.60 decrease. 
C) $1,000.00 decrease. 
D) $1,760.60 increase. 
E) $1,960.60 increase. 
A) $1,760.60 decrease. 
B) $1,960.60 decrease. 
C) $1,000.00 decrease. 
D) $1,760.60 increase. 
E) $1,960.60 increase.

Question 6

U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except

Accepted Answer

A) Recognized foreign currency denominated assets and liabilities. 
B) Unrecognized foreign currency firm commitments. 
C) Forecasted foreign currency denominated transactions. 
D) Net investment in foreign operations. 
E) Deferred foreign currency gains and losses. 
A) Recognized foreign currency denominated assets and liabilities. 
B) Unrecognized foreign currency firm commitments. 
C) Forecasted foreign currency denominated transactions. 
D) Net investment in foreign operations. 
E) Deferred foreign currency gains and losses.

Question 7

Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2013, for 100,000 stickles. Payment was received on October 15, 2013. The following exchange rates applied: $$\begin{array} { | l | c | } 
\hline & \text { Exchange } \
\hline { \text { Date } } & \text { Rate } \
\hline \text { September } 15,2013 & \S 1 = \$ .48 \
\hline \text { September } 30,2013 & \S 1 = \$ .50 \
\hline \text { October } 15,2013 & \S 1 = \$ .44 \
\hline
\end{array}$$ 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.

Accepted Answer

The answer of Old Colonial Corp. (a U.S. company) made...

Question 8

What is the major assumption underlying the one-transaction perspective?

Accepted Answer

The one-transaction perspectiv

Question 9

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: $\begin{array}{|l|c|}
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1,2013 } & \$ 2.00 \
\hline \text { December 31,2013 } & \$ 1.97 \
\hline \text { February 1,2014 } & \$ 2.01 \
\hline
\end{array}$ What journal entry should Eagle prepare on December 31, 2013? $$\begin{array} { | l | l | r | r | } 
\hline \text { A) } & \text { Foreign Currency Option } & 200 & \
\hline & \text { Cash } & & 200 \
\hline \text { B) } & \text { Foreign Currency Option } & 200 & \
\hline & \text { Option Revenue } & & 200 \
\hline \text { C) } & \text { Foreign Currency Option } & 400 & \
\hline & \text { Option Revenue } & & 400 \
\hline \text { D) } & \text { Option Expense } & 200 & \
\hline & \text { Foreign Currency Option } & & 200 \
\hline \text { E) } & \text { Option Expense } & 400 & \
\hline & \text { Foreign Currency Option } & & 400 \
\hline
\end{array}$$

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D 
E) Option E 
A) Option A 
B) Option B 
C) Option C 
D) Option D 
E) Option E

Question 10

On March 1, 2013, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates apply: $\begin{array}{|l|c|}
\hline \text { Date } & \text { Spot Rate } \
\hline \text { March 1,2013 } & \$ 1.90 \
\hline \text { December 31,2013 } & \$ 1.89 \
\hline \text { March 1,2014 } & \$ 1.84 \
\hline
\end{array}$ Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the net impact on Mattie's 2013 income as a result of this fair value hedge of a firm commitment?

Accepted Answer

A) $1,800.00 decrease. 
B) $1,760.60 decrease. 
C) $2,240.40 decrease. 
D) $1,660.40 increase. 
E) $2,240.60 increase. 
A) $1,800.00 decrease. 
B) $1,760.60 decrease. 
C) $2,240.40 decrease. 
D) $1,660.40 increase. 
E) $2,240.60 increase.

Question 11

Which statement is true regarding a foreign currency option?

Accepted Answer

A) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future. 
B) A foreign currency option gives the holder the obligation only sell foreign currency in the future. 
C) A foreign currency option gives the holder the obligation to only buy foreign currency in the future. 
D) A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future. 
E) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate on the future date. 
A) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future. 
B) A foreign currency option gives the holder the obligation only sell foreign currency in the future. 
C) A foreign currency option gives the holder the obligation to only buy foreign currency in the future. 
D) A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future. 
E) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate on the future date.

Question 12

Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows: $$\begin{array} { | l | l | l | } 
\hline \text { May 8 } & \text { Spot rate: } & \$ 1.25 \
\hline \text { May 31 } & \text { Spot rate: } & \$ 1.26 \
\hline \text { Jun. 7 } & \text { Spot rate: } & \$ 1.20 \
\hline
\end{array}$$ How much Foreign Exchange Gain or Loss should Brisco record on May 31?

Accepted Answer

A) $2,520,000 gain. 
B) $20,000 gain. 
C) $20,000 loss. 
D) $80,000 gain. 
E) $80,000 loss. 
A) $2,520,000 gain. 
B) $20,000 gain. 
C) $20,000 loss. 
D) $80,000 gain. 
E) $80,000 loss.

Question 13

Williams Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.0094, and the forward rate was $.0095. Which of the following did the U.S. exporter report in net income?

Accepted Answer

A) Discount revenue. 
B) Premium revenue. 
C) Discount expense. 
D) Premium expense. 
E) Both discount revenue and premium expense. 
A) Discount revenue. 
B) Premium revenue. 
C) Discount expense. 
D) Premium expense. 
E) Both discount revenue and premium expense.

Question 14

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows: $\begin{array}{|l|l|}
\hline {\text { Date }} & \text { Amount } \
\hline \text { April 1,2012 } & \$ 97,000 \
\hline \text { December 31,2012 } & \$ 103,000 \
\hline \text { April 1,2013 } & \$ 105,000 \
\hline
\end{array}$ Angela Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound payable resulting from imports from England. Angela recorded foreign exchange gain related to both its euro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date? $$\begin{array} { | l | l | l | } 
\hline & \text { Euro } & \text { Pound } \
\hline \text { A) } & \text { Increase } & \text { Increase } \
\hline \text { B) } & \text { Increase } & \text { Decrease } \
\hline \text { C) } & \text { Decrease } & \text { Decrease } \
\hline \text { D) } & \text { Decrease } & \text { Increase } \
\hline \text { E) } & \text { No change } & \text { Decrease } \
\hline
\end{array}$$

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D 
E) Option E 
A) Option A 
B) Option B 
C) Option C 
D) Option D 
E) Option E

Question 15

A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true?

Accepted Answer

A) If the foreign currency appreciates, a foreign exchange gain will result. 
B) If the foreign currency depreciates, a foreign exchange gain will result. 
C) No foreign exchange gain or loss will result. 
D) If the foreign currency appreciates, a foreign exchange loss will result. 
E) Any gain or loss will be included in comprehensive income. 
A) If the foreign currency appreciates, a foreign exchange gain will result. 
B) If the foreign currency depreciates, a foreign exchange gain will result. 
C) No foreign exchange gain or loss will result. 
D) If the foreign currency appreciates, a foreign exchange loss will result. 
E) Any gain or loss will be included in comprehensive income.

Question 16

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: $\begin{array}{lrr}&&\text { Forward }\
&\text { Spot}&\text {  Rate }\
\text { Date }&\text { Rate}&\text { to Jan. } 15\
\hline\text { December 16, 2013 } & \$ .00092 & \text { \$. } 00098 \
\text { December 31, 2013 } & .00090 & .00093 \
\text { January 15, 2014 } & .00095 & .00095
\end{array}$ Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2013 income statement related to this transaction?

Accepted Answer

A) $500 (gain). 
B) $500 (loss). 
C) $200 (gain). 
D) $200 (loss). 
E) $- 0 - 
A) $500 (gain). 
B) $500 (loss). 
C) $200 (gain). 
D) $200 (loss). 
E) $- 0 -

Question 17

Larson Company, a U.S. company, has an India rupee account receivable resulting from an export sale on September 7 to a customer in India. Larson signed a forward contract on September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.023, and the forward rate was $.021. Which of the following did the U.S. exporter report in net income?

Accepted Answer

A) Discount revenue. 
B) Premium revenue. 
C) Discount expense. 
D) Premium expense. 
E) Both discount revenue and premium expense. 
A) Discount revenue. 
B) Premium revenue. 
C) Discount expense. 
D) Premium expense. 
E) Both discount revenue and premium expense.

Question 18

Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: $$\begin{array} { | l | l | l | } 
\hline \text { Dec 1 } & \text { Spot rate: } & \$ 1.7241 \
\hline \text { Dec. 31 } & \text { Spot rate: } & \$ 1.8182 \
\hline \text { Jan. 30 } & \text { Spot rate: } & \$ 1.6666 \
\hline
\end{array}$$ What amount of foreign exchange gain or loss should be recorded on January 30?

Accepted Answer

A) $1,516 gain. 
B) $1,516 loss. 
C) $575 loss. 
D) $500 loss. 
E) $500 gain. 
A) $1,516 gain. 
B) $1,516 loss. 
C) $575 loss. 
D) $500 loss. 
E) $500 gain.

Question 19

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: $\begin{array}{|l|c|}
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1,2013 } & \$ 2.00 \
\hline \text { December 31,2013 } & \$ 1.97 \
\hline \text { February 1,2014 } & \$ 2.01 \
\hline
\end{array}$ What journal entry should Eagle prepare on October 1, 2013? $$\begin{array} { | l | c | r | r | } 
\hline \text { A) } & \text { Cash } & 1,800 & \
\hline & \text { Foreign Currency Option } & & 1,800 \
\hline \text { B) } & \text { Forward Contract } & 1,800 & \
\hline & \text { Cash } & & 1,800 \
\hline \text { C) } & \text { Foreign Currency Option } & 1,800 & \
\hline & \text { Gain on Foreign Currency } & & 1,800 \
\hline \text { D) } & \text { Loss on Foreign Currency } & 1,800 & \
\hline & \text { Cash } & & 1,800 \
\hline \text { E) } & \text { Foreign Currency Option } & 1,800 & \
\hline & \text { Cash } & & 1,800 \
\hline
\end{array}$$

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D 
E) Option E 
A) Option A 
B) Option B 
C) Option C 
D) Option D 
E) Option E

Question 20

A company has a discount on a forward contract for a foreign currency denominated asset. How is the discount recognized over the life of the contract under fair value hedge accounting?

Accepted Answer

A) As a debit to discount expense. 
B) As a debit to amortization expense. 
C) As a debit to accumulated other comprehensive income. 
D) As a debit impact on net income, as a result of the hedge. 
E) As a decreases to sales. 
A) As a debit to discount expense. 
B) As a debit to amortization expense. 
C) As a debit to accumulated other comprehensive income. 
D) As a debit impact on net income, as a result of the hedge. 
E) As a decreases to sales.

Which of the following statements is true concerning hedge accounting?

U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except

What is the major assumption underlying the one-transaction perspective?

Which statement is true regarding a foreign currency option?

A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true?

A company has a discount on a forward contract for a foreign currency denominated asset. How is the discount recognized over the life of the contract under fair value hedge accounting?

The Equity Method of Accounting for Investments

Consolidation of Financial Information

Consolidations-Subsequent to the Date of Acquisition

Consolidated Financial Statements and Outside Ownership

Consolidated Financial Statementsintra-Entity Asset Transactions

Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

Translation of Foreign Currency Financial Statements

Partnerships: Formation and Operation

Partnerships: Termination and Liquidation

Accounting for State and Local Governments, Part I

Accounting for State and Local Governments, Part II

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Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

Which of the following statements is true concerning hedge accounting?

U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except

What is the major assumption underlying the one-transaction perspective?

Which statement is true regarding a foreign currency option?

A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true?

A company has a discount on a forward contract for a foreign currency denominated asset. How is the discount recognized over the life of the contract under fair value hedge accounting?

The Equity Method of Accounting for Investments

Consolidation of Financial Information

Consolidations-Subsequent to the Date of Acquisition

Consolidated Financial Statements and Outside Ownership

Consolidated Financial Statementsintra-Entity Asset Transactions

Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

Translation of Foreign Currency Financial Statements

Partnerships: Formation and Operation

Partnerships: Termination and Liquidation

Accounting for State and Local Governments, Part I

Accounting for State and Local Governments, Part II

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