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 2018 income statement?

A) $1,000 gain. B) $1,000 loss. C) $2,000 gain. D) $2,000 loss. E) $8,000 loss. A) $1,000 gain. B) $1,000 loss. C) $2,000 gain. D) $2,000 loss. E) $8,000 loss.

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds. On October 1, 2018, 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, 2018, the option has a fair value of $1,600. The following spot exchange rates apply: \[\begin{array} { | l | c | } \hline \text { Date } & \text { Spot Rate } \\ \hline \text { October 1,2018 } & \$ 2.00 \\ \hline \text { December 31, 2018 } & \$ 1.97 \\ \hline \text { February 1,2019 } & \$ 2.01 \\ \hline \end{array}\] -What journal entry should Eagle prepare on October 1,2018? \[\begin{array} { | l | l | l | l | } \hline \text { A) } & \text { Cash } & 1,800 & \\ \hline & \text { Foreipn Currency Option } & & 1,800 \\ \hline \text { B) } & \text { Forward Contract } & 1,800 & \\ \hline & \text { Cash } & & 1,800 \\ \hline \text { C) } & \text { Foraipn Currency Option } & 1,800 & \\ \hline & \text { Gain an Foreipn Currency } & & 1,800 \\ \hline \text { D) } & \text { Loss an Foreipn Currency } & 1,800 & \\ \hline & \text { Cash } & & 1,800 \\ \hline \text { E) } & \text { Foreipn Curency Option } & 1,800 & \\ \hline & \text { Cash } & & 1,800 \\ \hline \end{array}\]

The answer of On October 1, 2018, Eagle Company forecasts...

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: $\begin{array}{lrr} &&\text { Forward }\\ &\text { Spot } & \text { Rate }\\ \text { Date }& \text { Rate } & \text { to Jan. } 15\\ \text { December } 16,2018 & \$ .00092 & \$ .00098 \\ \text { December } 31,2018 & .00090 & .00093 \\ \text { January } 15,2019 & .00095 & .00095 \end{array}$ -Assuming a forward contract was entered into on December 16,what would be the net impact on Car Corp.'s 2019 income statement related to this transaction?

A) $ 500 (gain). B) $ 500 (loss). C) $ 300 (gain). D) $ 300 (loss). E) $0. A) $ 500 (gain). B) $ 500 (loss). C) $ 300 (gain). D) $ 300 (loss). E) $0.

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: $\begin{array}{lrr} &&\text { Forward }\\ &\text { Spot } & \text { Rate }\\ \text { Date }& \text { Rate } & \text { to Jan. } 15\\ \text { December } 16,2018 & \$ .00092 & \$ .00098 \\ \text { December } 31,2018 & .00090 & .00093 \\ \text { January } 15,2019 & .00095 & .00095 \end{array}$ -Assuming a forward contract was entered into on December 16,what would be the net impact on Car Corp.'s 2018 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge.The present value for one half-month at 12% is .9950.

A) $ 700 (gain). B) $ 700 (loss). C) $ 995 (gain). D) $ 300 (loss). E) $ 298 (gain). A) $ 700 (gain). B) $ 700 (loss). C) $ 995 (gain). D) $ 300 (loss). E) $ 298 (gain).

On December 1,2018,Joseph Company,a U.S.company,entered into a three-month forward contract to purchase 50,000 pesos on March 1,2019,as a fair value hedge of a foreign currency denominated account payable.The following U.S.dollar per peso exchange rates apply: \[\begin{array} { | l | c | c | } \hline & & \text { Forward Rate } \\ \hline \text { Date } & \text { Spot Rate } & \text { (Mar.1, 2019) } \\ \hline \text { December 1, 2018 } & \$ 0.092 & \$ 0.105 \\ \hline \text { December 31, 2018 } & \$ 0.090 & \$ 0.095 \\ \hline \text { March 1, 2019 } & \$ 0.089 & \text { N/A } \\ \hline \end{array}\] Joseph's incremental borrowing rate is 12 percent.The present value factor for two months at an annual interest rate of 12 percent is .9803.Which of the following is included in Joseph's December 31,2018 balance sheet for the forward contract?

A) $5,146.58 asset. B) $5,146.58 liability. C) $ 500.00 liability. D) $ 490.15 asset. E) $ 490.15 liability. A) $5,146.58 asset. B) $5,146.58 liability. C) $ 500.00 liability. D) $ 490.15 asset. E) $ 490.15 liability.

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: $\begin{array}{|l|l|l|} \hline \text { Date } & \text { Rate Descrintion } & \text { Exchange Rate } \\ \hline \text { November 10, 2018 } & \text { Spot Rate } & \$ .35=1 \text { LCU } \\ \hline \text { December 1,2018 } & \text { Spot Rate } & \$ .32=1 \text { LCU } \\ \hline & \text { 2-Month Forward Rate } & \$ .30=1 \text { LCU } \\ \hline \text { December 31, 2018 } & \text { Spot Rate } & \$ .29=1 \text { LCU } \\ \hline & \text { 1-Month Forward Rate } & \$ .28=1 \text { LCU } \\ \hline \text { February 1,2019 } & \text { Spot Rate } & \$ .27=1 \text { LCU } \\ \hline \end{array}$ 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 2018 net income. (C. )Compute the effect on 2019 net income.

\[\begin{array} { | c | c | c | l | l |

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds. On October 1, 2018, 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, 2018, the option has a fair value of $1,600. The following spot exchange rates apply: \[\begin{array} { | l | c | } \hline \text { Date } & \text { Spot Rate } \\ \hline \text { October 1,2018 } & \$ 2.00 \\ \hline \text { December 31, 2018 } & \$ 1.97 \\ \hline \text { February 1,2019 } & \$ 2.01 \\ \hline \end{array}\] -What journal entry should Eagle prepare on December 31,2018? $\begin{array}{|l|l|r|r|} \hline \text { A) } & \text { Foreign Currency Option } & 200 & \\ \hline & \text { Cash } & & 200 \\ \hline \text { B) } & \text { Foreign Currency Option } & 200 & \\ \hline & \text { Option Revenue } & & 200 \\ \hline \text { C) } & \text { Foreign Currency Option } & 400 & \\ \hline & \text { Option Revenue } & & 400 \\ \hline \text { D) } & \text { Option Expense } & 200 \\ \hline & \text { Foreign Currency Option } & & 200\\ \hline \text { E) } & \text { Option Expense } & 400 \\ \hline & \text { Foreign Currency Option } & & 400 \\ \hline \end{array}$

The answer of On October 1, 2018, Eagle Company forecasts...

Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

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 2018 income statement?

(Multiple Choice)

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Question 41

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds. On October 1, 2018, 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, 2018, the option has a fair value of $1,600. The following spot exchange rates apply: Date Spot Rate October 1,2018 \ 2.00 December 31, 2018 \ 1.97 February 1,2019 \ 2.01 -What journal entry should Eagle prepare on October 1,2018? A) Cash 1,800 Foreipn Currency Option 1,800 B) Forward Contract 1,800 Cash 1,800 C) Foraipn Currency Option 1,800 Gain an Foreipn Currency 1,800 D) Loss an Foreipn Currency 1,800 Cash 1,800 E) Foreipn Curency Option 1,800 Cash 1,800

(Short Answer)

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Question 42

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,what would be the net impact on Car Corp.'s 2019 income statement related to this transaction?

(Multiple Choice)

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Question 43

What are the two separate transactions that require recording under the two-transaction perspective?

(Essay)

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Question 44

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.

(Multiple Choice)

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Question 45

All of the following hedges are used for future purchase/sale transactions except

(Multiple Choice)

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Question 46

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

(Short Answer)

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Question 47

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

(Multiple Choice)

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Question 48

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,what would be the net impact on Car Corp.'s 2018 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge.The present value for one half-month at 12% is .9950.

(Multiple Choice)

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Question 49

On December 1,2018,Joseph Company,a U.S.company,entered into a three-month forward contract to purchase 50,000 pesos on March 1,2019,as a fair value hedge of a foreign currency denominated account payable.The following U.S.dollar per peso exchange rates apply: Forward Rate Date Spot Rate (Mar.1, 2019) December 1, 2018 \ 0.092 \ 0.105 December 31, 2018 \ 0.090 \ 0.095 March 1, 2019 \ 0.089 N/A Joseph's incremental borrowing rate is 12 percent.The present value factor for two months at an annual interest rate of 12 percent is .9803.Which of the following is included in Joseph's December 31,2018 balance sheet for the forward contract?

(Multiple Choice)

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Question 50

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 cash flow 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 51

Which of the following is not a condition of accounting for hedge derivatives?

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Question 52

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date requires which of the following?

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Question 53

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 payable be carried on Primo's books?

(Multiple Choice)

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Question 54

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds. On October 1, 2018, 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, 2018, the option has a fair value of $1,600. The following spot exchange rates apply: Date Spot Rate October 1,2018 \ 2.00 December 31, 2018 \ 1.97 February 1,2019 \ 2.01 -What journal entry should Eagle prepare on December 31,2018? A) Foreign Currency Option 200 Cash 200 B) Foreign Currency Option 200 Option Revenue 200 C) Foreign Currency Option 400 Option Revenue 400 D) Option Expense 200 Foreign Currency Option 200 E) Option Expense 400 Foreign Currency Option 400

(Short Answer)

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Question 55

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 2018 net income as a result of this fair value hedge of a firm commitment?

(Multiple Choice)

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Question 56

How does a foreign currency forward contract differ from a foreign currency option?

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Question 57

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 2019?

(Multiple Choice)

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Question 58

How is the fair value of a Forward Contract determined by U.S.GAAP?

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Question 59

What is meant by the spot rate?

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Question 60

What are the two separate transactions that require recording under the two-transaction perspective?

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.

All of the following hedges are used for future purchase/sale transactions except

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

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

Which of the following is not a condition of accounting for hedge derivatives?

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date requires which of the following?

How does a foreign currency forward contract differ from a foreign currency option?

How is the fair value of a Forward Contract determined by U.S.GAAP?

What is meant by the spot rate?

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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