Old Colonial Corp.(a U.S.company)made a sale to a foreign customer on September 15,2018,for 100,000 stickles.Payment was received on October 15,2018.The following exchange rates applied: \[\begin{array} { | c | c | } \hline & \text { Exchange } \\ \hline { \text { Date } } & \text { Rate } \\ \hline \text { September 15, 2018 } & \S 1 = \$ .48 \\ \hline \text { September 30, 2018 } & \S 1 = \$ .50 \\ \hline \text { Oetober 15, 2018 } & \S1 = \$ .44 \\ \hline \end{array}\] 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.

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

REFERENCE 07-05 On April 1, 2017, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2018. The dollar value of the loan was as follows: \[\begin{array} { | l | c | } \hline { \text { Date } } & \text { Amount } \\ \hline \text { April } 1,2017 & \$ 97,000 \\ \hline \text { December } 31,2017 & \$ 103,000 \\ \hline \text { April } 1,2018 & \$ 105,000 \\ \hline \end{array}\] -How much foreign exchange gain or loss should be included in Shannon's 2017 income statement?

A) $3,000 gain. B) $3,000 loss. C) $6,000 gain. D) $6,000 loss. E) $7,000 gain. A) $3,000 gain. B) $3,000 loss. C) $6,000 gain. D) $6,000 loss. E) $7,000 gain.

REFERENCE 07-02 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 US $ will it cost Brisco to finally pay the payable on June 7?

A) $1,666,667. B) $2,440,000. C) $2,520,000. D) $2,500,000. E) $2,400,000. A) $1,666,667. B) $2,440,000. C) $2,520,000. D) $2,500,000. E) $2,400,000.

REFERENCE 07-02 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?

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.

REFERENCE 07-01 Norton Co., a U.S. corporation, sold inventory on December 1, 2018, 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?

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.

Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

On April 1, 2017, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2018. The dollar value of the loan was as follows: Date Amount April 1,2017 \ 97,000 December 31, 2017 \ 103,000 April 1, 2018 \ 105,000 -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? A) Increase Increase B) Increase Decrease C) Decrease Decrease D) Decrease Increase E) No change Decrease

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Question 1

Correct Answer:

Verified

B

The forward rate may be defined as

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Question 2

Correct Answer:

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B

On October 31,2017,Darling Company negotiated a two-year 100,000 franc loan from a foreign bank at an interest rate of 3 percent per year.Interest payments are made annually on October 31,and the principal will be repaid on October 31,2019.Darling prepares U.S.-dollar financial statements and has a December 31 year-end.Prepare all journal entries related to this foreign currency borrowing assuming the following: Franc Rate Octaber 31, 2017 \ 0.50 December 31,2017 \ 0.52 Octaber 31, 2018 \ 0.60 December 31,2018 \ 0.62 Octaber 31,2019 \ 0.75

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Question 3

Correct Answer:

Verified

In US dollars:
$In US dollars: \begin{array}{|l|l|r|r} \hline 10 / 31 / 19 & \text { Interest expense }[2,500 \text { francs } \times \$ .75] & 1,875 & \\ \hline & \text { Interest payable (franc) } & 310& \\ \hline & \text { Foreign exchange loss }[500 \text { francs } \times(\$ .75-\$ .62)] & 65& \\ \hline & \text { Cash [3,000 francs } \times \$ .75] & & 2,250\\ \hline & \text { To record the second annual interest payment, } & & \\ \hline & \text { record interest expense for the period } 1 / 1-10 / 31 / 19, & \\ \hline & \text { and record a foreign exchange loss on the interest payable } & & \\ \hline & \text { accrued at } 12 / 31 / 18 . & & \\ \hline & & & \\ \hline & \text { Note payable (franc) } & 62,000 & \\ \hline & \text { Foreign exchange loss } & 13,000& \\ \hline & \text { Cash }[100,000 \text { francs } \times \$ .75] && 75,000\\ \hline &\text { To record payment of the } 100,000 \text { franc note. }\\ \hline \end{array}$ $\begin{array}{|l|l|r|r}\hline 10 / 31 / 19 & \text { Interest expense }[2,500 \text { francs } \times \$ .75] & 1,875 & \\\hline & \text { Interest payable (franc) } & 310& \\\hline & \text { Foreign exchange loss }[500 \text { francs } \times(\$ .75-\$ .62)] & 65& \\\hline & \text { Cash [3,000 francs } \times \$ .75] & & 2,250\\\hline & \text { To record the second annual interest payment, } & & \\\hline & \text { record interest expense for the period } 1 / 1-10 / 31 / 19, & \\\hline & \text { and record a foreign exchange loss on the interest payable } & & \\\hline & \text { accrued at } 12 / 31 / 18 . & & \\\hline & & & \\\hline & \text { Note payable (franc) } & 62,000 & \\\hline & \text { Foreign exchange loss } & 13,000& \\\hline & \text { Cash }[100,000 \text { francs } \times \$ .75] && 75,000\\\hline &\text { To record payment of the } 100,000 \text { franc note. }\\\hline \end{array}$

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

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Question 4

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, 2018. On July 24, 2018, 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, 2018. 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 an option expense in net income for the period July 24 to October 24?

(Multiple Choice)

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Question 5

On December 1,2018,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 1,2019.Keenan purchased a foreign currency put option with a strike price of $.97 (U.S. )on December 1,2018.This foreign currency option is designated as a cash flow hedge.Relevant exchange rates follow: Date Spot Rate Option Premium December 1, 2018 \ .97 \ .05 December 31, 2018 \ .95 \ .04 February 1, 2019 \ .94 \ .03 -Compute the fair value of the foreign currency option at December 1,2018.

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Question 6

Old Colonial Corp.(a U.S.company)made a sale to a foreign customer on September 15,2018,for 100,000 stickles.Payment was received on October 15,2018.The following exchange rates applied: Exchange Date Rate September 15, 2018 \S1=\ .48 September 30, 2018 \S1=\ .50 Oetober 15, 2018 \S1=\ .44 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.

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Question 7

REFERENCE 07-05 On April 1, 2017, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2018. The dollar value of the loan was as follows: Date Amount April 1,2017 \ 97,000 December 31,2017 \ 103,000 April 1,2018 \ 105,000 -How much foreign exchange gain or loss should be included in Shannon's 2017 income statement?

(Multiple Choice)

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Question 8

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?

(Multiple Choice)

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Question 9

On November 10,2018,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 1,2019.On December 1,2018,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: Date Rate Descrintion Exchange Rate November 10, 2018 Spot Rate \ .35=1 LCU December 1,2018 Spot Rate \ .32=1 LCU 2-Month Forward Rate \ .30=1 LCU December 31, 2018 Spot Rate \ .29=1 LCU 1-Month Forward Rate \ .28=1 LCU February 1,2019 Spot Rate \ .27=1 LCU The company's borrowing rate is 12%.The present value factor for one month is .9901. -(A. )Assume this hedge is designated as a fair value hedge.Prepare the journal entries relating to the transaction and the forward contract. (B. )Compute the effect on 2018 net income. (C. )Compute the effect on 2019 net income.

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Question 10

What is the purpose of a hedge of foreign exchange risk?

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Question 11

REFERENCE 07-07 Winston Corp., a U.S. company, had the following foreign currency transactions during 2018: (1.) Purchased merchandise from a foreign supplier on July 16, 2018 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2018 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2018 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2019. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2018, and $299,000 on October 15, 2019. -What amount should be included as a foreign exchange gain or loss from the two transactions for 2018?

(Multiple Choice)

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Question 12

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2018: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60\% of the invent ory 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 2018 were as follows: Exchange Date Rate May 1,2018 \ .20=1 peso August 1,2018 \ .22=1 peso September 1,2018 \ .23=1 peso December 31,2018 \ .25=1 peso -The beginning balance of cash was 50,000 pesos on January 1,2018,translated at 1 peso = $.18.What amount will Coyote Corp.report in its 2018 balance sheet for Cash?

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Question 13

REFERENCE 07-02 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: May 8 Spot rate: \ 1.25 May 31 Spot rate: \ 1.26 Jun. 7 Spot rate: \ 1.20 -How much US $ will it cost Brisco to finally pay the payable on June 7?

(Multiple Choice)

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Question 14

Gaw Produce Company purchased inventory from a Japanese company on December 18,2018.Payment of 4,000,000 yen (¥)was due on January 18,2019.Exchange rates between the dollar and the yen were as follows: Exchange Date Rate December 18,2018 ¥1=\ .0080 December 31,2018 ¥1=\ .0082 January 18,2019 ¥1=\ .0083 Required: Prepare all journal entries for Gaw Produce Co.in connection with the purchase and payment.

(Essay)

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Question 15

For each of the following situations,select the best answer concerning accounting for foreign currency transactions: (G)Results in a foreign exchange gain. (L)Results in a foreign exchange loss. (N)No foreign exchange gain or loss. ___1.Export sale by a U.S.company denominated in dollars,foreign currency of buyer appreciates. _2.Export sale by a U.S.company denominated in foreign currency,foreign currency of buyer appreciates. _3.Import purchase by a U.S.company denominated in foreign currency,foreign currency of buyer appreciates. _4.Import purchase by a U.S.company denominated in dollars,foreign currency of buyer appreciates. _5.Import purchase by a U.S.company denominated in foreign currency,foreign currency of buyer depreciates. _6.Import purchase by a U.S.company denominated in dollars,foreign currency of buyer depreciates. _7.Export sale by a U.S.company denominated in dollars,foreign currency of buyer depreciates. ___8.Export sale by a U.S.company denominated in foreign currency,foreign currency of buyer depreciates.

(Essay)

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Question 16

REFERENCE 07-02 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: May 8 Spot rate: \ 1.25 May 31 Spot rate: \ 1.26 Jun. 7 Spot rate: \ 1.20 -How much Foreign Exchange Gain or Loss should Brisco record on May 31?

(Multiple Choice)

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Question 17

REFERENCE 07-01 Norton Co., a U.S. corporation, sold inventory on December 1, 2018, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: Dec 1 Spot rate: \ 1.7241 Dec. 31 Spot rate: \ 1.8182 Jan. 30 Spot rate: \ 1.6666 -What amount of foreign exchange gain or loss should be recorded on January 30?

(Multiple Choice)

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Question 18

On May 1, 2018, 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, 2019. On May 1, 2018, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2019 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, 2018. The following spot exchange rates apply: Date Spot Rate May 1, 2018 \ 0.095 December 31, 2018 \ 0.094 March 1, 2019 \ 0.089 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 2019 net income as a result of this fair value hedge of a firm commitment?

(Multiple Choice)

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Question 19

On December 1,2018,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 1,2019.Keenan purchased a foreign currency put option with a strike price of $.97 (U.S. )on December 1,2018.This foreign currency option is designated as a cash flow hedge.Relevant exchange rates follow: Date Spot Rate Option Premium December 1, 2018 \ .97 \ .05 December 31, 2018 \ .95 \ .04 February 1, 2019 \ .94 \ .03 -Compute the U.S.dollars received on February 1,2019.

(Multiple Choice)

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Question 20

The forward rate may be defined as

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

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?

What is the purpose of a hedge of foreign exchange risk?

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 Statements Intra-Entity Asset Transactions

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

Translation of Foreign Currency Financial

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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