Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

REFERENCE 07-06 Parker Corp., a U.S. company, had the following foreign currency transactions during 2018: (1.) Purchased merchandise from a foreign supplier on July 5, 2018 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2018 at the U.S. dollar equivalent of $82,000. (2.) On October 1, 2018 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2019. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2018, and $881,000 on October 1, 2019. -What amount should be included as a foreign exchange gain or loss from the two transactions for 2018?

When a U.S.company purchases parts from a foreign company,which of the following will result in zero foreign exchange gain or loss?

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 2019?

REFERENCE 07-03 Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2018, with payment of 10 million Korean won to be received on January 15, 2019. The following exchange rates applied: Forward Spot Rate Date Rate to Jan. 15 December 16,2018 \ .00092 \ .00098 December 31,2018 .00090 .00093 January 15,2019 .00095 .00095 -Assuming a forward contract was not entered into,what would be the net impact on Car Corp.'s 2018 income statement related to this transaction?

All of the following data points are needed to determine the fair value of a forward contract (at any point),EXCEPT

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 -What amount will Coyote Corp.report in its 2018 balance sheet for Accounts receivable?

Belsen purchased inventory on December 1,2017.Payment of 200,000 stickles was to be made in sixty days.Also on December 1,Belsen signed a contract to purchase §200,000 in sixty days.The spot rate was §1 = .35714,and the 60-day forward rate was §1 = $.38462.On December 31,the spot rate was §1 = .34483 and the 30-day forward rate was §1 = .38168.Assume an annual interest rate of 12% and a fair value hedge.The present value for one month at 12% is .9901. In the journal entry to record the establishment of a forward exchange contract,at what amount should the Forward Contract account be recorded on December 1?

What factors create a foreign exchange gain?

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?

Lawrence Company,a U.S.company,ordered parts costing 1,000,000 Thailand bahts from a foreign supplier on July 7 when the spot rate was $.025 per baht.A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $.027.The forward contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment.On August 7,when the parts are received,the spot rate is $.028.What is the amount of accounts payable that will be paid at this date?

Authoritative literature provides guidance for hedges of the following sources of foreign exchange risk. I.Recognized foreign currency denominated assets and liabilities. II.Unrecognized foreign currency firm commitments. III.Forecasted foreign currency denominated transactions.

REFERENCE 07-03 Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2018, with payment of 10 million Korean won to be received on January 15, 2019. The following exchange rates applied: Forward Spot Rate Date Rate to Jan. 15 December 16,2018 \ .00092 \ .00098 December 31,2018 .00090 .00093 January 15,2019 .00095 .00095 -Assuming a forward contract was entered into,the foreign currency was originally sold in the foreign currency market on December 16,2018 at a

What happens when a U.S.company sells goods denominated in a foreign currency and the foreign currency depreciates?

On March 1, 2018, 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, 2019. On March 1, 2018, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2019 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, 2018. The following spot exchange rates apply: Date Spot Rate March 1, 2018 \ 1.90 December 31, 2018 \ 1.89 March 1, 2019 \ 1.84 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 increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?

A spot rate may be defined as

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? A) Increase Decrease B) Decrease Decrease C) Decrease Increase D) No change Decrease E) Increase Increase

Alpha,Inc. ,a U.S.company,had a receivable from a customer that was denominated in Mexican pesos.On December 31,2017,this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000.The receivable was collected on March 2,2018,when the U.S.equivalent was $6,900.How much foreign exchange gain or loss will Alpha record on the income statement for the year ended December 31,2018?

REFERENCE 07-03 Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2018, with payment of 10 million Korean won to be received on January 15, 2019. The following exchange rates applied: Forward Spot Rate Date Rate to Jan. 15 December 16,2018 \ .00092 \ .00098 December 31,2018 .00090 .00093 January 15,2019 .00095 .00095 -Assuming a forward contract was entered into on December 16,how would the forward contract be reflected on Car's December 31,2018 balance sheet?

On April 1,Quality Corporation,a U.S.company,expects to sell merchandise to a French customer in three months,denominating the transaction in euros.On April 1,the spot rate is $1.41 per euro,and Quality enters into a three-month forward contract cash flow hedge to sell 400,000 euros at a rate of $1.36.At the end of three months,the spot rate is $1.37 per euro,and Quality delivers the merchandise,collecting 400,000 euros.What are the effects on net income from these transactions?

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 December 31?