Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

On October 1, 2013, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU). Collection is expected in four months. On October 1, 2013, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2014) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows: Date Rate Description Exchange Rate October 1,2013 Spot Rate \ .83=1 December 31,2013 Spot Rate \ .85=1 1-Month Forward Rate \ .80=1 February 1,2014 Spot Rate \ .86=1 The company's borrowing rate is 12%. The present value factor for one month is .9901. Any discount or premium on the contract is amortized using the straight-line method. Assuming this is a cash flow hedge; prepare journal entries for this sales transaction and forward contract.

The forward rate may be defined as

On June 1, CamCo received a signed agreement to sell inventory for ×500,000. The sale would take place in 90 days. CamCo 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 = $.004167, and the 90-day forward rate was ×1 = $.00427. At what amount would CamCo record the Forward Contract on June 1?

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

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60\% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors The appropriate exchange rates during 2013 were as follows: Exchange Date Rate March 1,2013 \ .20=1 peso May 1,2013 =1 peso August 1,2013 =1 peso September 1,2013 =1 peso December 31,2013 =1 peso What amount will Coyote Corp. report in its 2013 balance sheet for Accounts payable?

Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on July 7 when the spot rate was $.025 per rupee. A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 100,000 rupee firm commitment. On August 7, when the parts are received, the spot rate is $.028. At what amount should the parts inventory be carried on Primo's books?

Atherton Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply: Option Strike Price \ 4.34 Option Cost \ 5,000 January 17 Spot Rate \ 4.34 April 17 Spot Rate \ 4.26 What amount will Atherton include as an option expense in net income for the period January 17 to April 17?

Which of the following approaches is used in the United States in accounting for foreign currency transactions?

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60\% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors The appropriate exchange rates during 2013 were as follows: Exchange Date Rate March 1,2013 \ .20=1 peso May 1,2013 =1 peso August 1,2013 =1 peso September 1,2013 =1 peso December 31,2013 =1 peso What amount will Coyote Corp. report in its 2013 income statement for Cost of goods sold?

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

Winston Corp., a U.S. company, had the following foreign currency transactions during 2013: (1) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $54,000. (2) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2013. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2013, and $299,000 on October 15, 2014. What amount should be included as a foreign exchange gain or loss from the two transactions for 2013?

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: Date Spot Rate Option Premium December 1,2013 \ .97 \ .05 December 31,2013 \ .95 \ .04 February 1,2014 \ .94 \ .03 Compute the fair value of the foreign currency option at December 31, 2013.

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60\% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors The appropriate exchange rates during 2013 were as follows: Exchange Date Rate March 1,2013 \ .20=1 peso May 1,2013 =1 peso August 1,2013 =1 peso September 1,2013 =1 peso December 31,2013 =1 peso Prepare all journal entries in U.S. dollars along with any December 31, 2013 adjusting entries. Coyote uses a perpetual inventory system.

Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2012, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2013, the U.S. dollar equivalent was $144,000. In Mills' 2013 consolidated income statement, how much should have been reported as a foreign exchange gain?

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.

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: Forward Spot Rate Date Rate to Jan. 15 December 16, 2013 \ .00092 00098 December 31, 2013 .00090 .00093 January 15, 2014 .00095 .00095 Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2014 income statement related to this transaction?

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: Date Spot Rate October 1, 2013 \ 2.00 December 31,2013 \ 1.97 February 1,2014 \ 2.01 What is the amount of Cost of Goods Sold for 2014 as a result of these transactions?

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. On July 24, 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. The following exchange rates apply: Option strike price \ 2.17 Option cost \ 4,000 July 24 spot rate \ 2.17 October 24 spot rate \ 2.13 October 24 option premium \ .04 What amount will Woolsey include as Adjustment to Net Income for the period ended October 31?

On October 1, 2013, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU). Collection is expected in four months. On October 1, 2013, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2014) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows: Date Rate Description Exchange Rate October 1,2013 Spot Rate \ .83=1 December 31,2013 Spot Rate \ .85=1 1-Month Forward Rate \ .80=1 February 1,2014 Spot Rate \ .86=1 The company's borrowing rate is 12%. The present value factor for one month is .9901. Any discount or premium on the contract is amortized using the straight-line method. Assuming this is a fair value hedge; prepare journal entries for this sales transaction and forward contract.