Exam 10: Foreign Currency Transactions

Bulldog Enterprise, a U.S.firm, agreed on February 1, 2016, to buy gears from a Mexican firm for 75,000 pesos.Delivery is scheduled for May 1, 2016, with payment due at that time.On February 1, 2016, Bulldog also acquired a forward contract to buy 75,000 pesos on May 1, 2016.(The gears represent inventory to the U.S.firm.) Bulldog's year end is March 31. ? Required: ? Prepare the journal entries necessary for Bulldog Enterprise to record this activity.Assume that the following exchange rates existed: ? Discount rate 15% Date Spot Rate Forward Rate February 1, 2016 1 peso =\ 0.223 1 peso =\ 0.227 March 31,2016 1 peso =\ 0.228 1 peso =\ 0.230 May 1,2016 1 peso =\ 0.226 1 peso =\ 0.226

A 60-day contract has a value today in US dollars of $6,400 and $8,000 in Foreign Currency (FC) with interest rates of 5% and 8%, respectively.The spot rate today is 1 FC= .80. Calculate the US Value in 2 months Calculate the FC Value in 2 months Calculate the Forward rate.

Discuss the differences in using an option to hedge a foreign currency risk rather than a forward contract.

Wolters Corporation is a U.S.corporation that purchased 50,000 chocolate bars from a foreign manufacturer on March 1, 2024 for 80,000 foreign currency units, to be paid on April 30, 2024.On March 1, 2024 Wolters also entered into a forward contract to purchase 80,000 foreign currency units on April 30, 2024.Wolters has a March 31 year end. ? Exchange rates are as follows: ? ? Date Spot Rate Forward Rate 3/1/24 \ 0.69 \ 0.65 3/31/24 \ 0.61 \ 0.63 4/30/24 \ 0.66 \ 0.66 Required: ? Prepare the journal entries to record the transactions through April 30, 2024.March 31 is the fiscal period end.Ignore the split between spot gain/loss and time value.

Wolters Corporation is a U.S.corporation that purchased 50,000 chocolate bars from a foreign manufacturer on 6/1/24 for 80,000 foreign currency units, to be paid on 9/1/24.On 6/1/24 Wolters also entered into a forward contract to purchase 80,000 foreign currency units on 9/1/24.Wolters has a July 31 year end. ? Exchange rates are as follows: ? Discount rate = 12% Date Spot Rate Fwd. Rate 6/1/24 \ 0.64 \ 0.645 7/31/24 \ 0.66 \ 0.68 9/1/24 \ 0.69 \ 0.69 ? Required: ? Make the necessary journal entries for Wolters for the period June 1 through September 1, 2024. ?

Zerlie's Imports purchased automotive parts from a German firm on July 1, 2016.The parts cost 150,000 Euros to be paid for on August 15.To pay for the parts, Zerlie's Imports borrowed 150,000 euros from a German bank on July 16.The loan bears an 11% interest rate to be repaid on August 15 in euros. ? Another option would have been for Zerlie's to have hedged the purchase with a forward exchange contract on July 1 to buy 150,000 euros at a forward rate of $0.67.Exchange rates were as follows: ? ? Date Spot Rate July 1,2016 1=\ 0.65 July 16,2016 1=\ 0.60 August 15,2016 1=\ 0.62 Required: ? a.Compute the effect on net income assuming the following: ? ? ? ? ? ? (1) Zerlie did not borrow to pay for the transaction or hedge the transaction on July 1.? ? (2) Zerlie borrowed from the German bank on July 16.? ? (3) Zerlie hedged the full purchase on July 1.? ? ** ignore present values and discount rates ? ? ? b.Determine which of these three alternatives would have been the best for Zerlie under the situation described.?

A U.S.company that has sold its product to a German firm would be exposed to a net exchange gain on the unpaid receivable if the

A hedge fund is similar to a mutual fund in that it invests funds on behalf of clients.Select the notable difference between hedge funds and mutual funds from the following choices?

Happ, Inc.agreed to purchase merchandise from a British vendor on November 30, 2018.The goods will arrive on January 31, 2019 and payment of 100,000 British pounds is due at that time.On November 30, 2018, Happ signed an agreement with a foreign exchange broker to buy 100,000 British pounds on January 31, 2019.Exchange rates to purchase 1 British pound are as follows: ? Nov. 30,2018 Dec. 31,2018 Jan. 31,2019 Spot \ 1.65 \ 1.62 \ 1.59 30 day \ 1.64 \ 1.59 \ 1.60 60 day \ 1.63 \ 1.56 \ 1.58 Because of this commitment hedge, Happ, Inc.will record the merchandise at what value when it arrives in January?

Which of the following is not true concerning the accounting for hedges of forecasted transactions using an option?

On January 1, 2016, a domestic firm agrees to sell goods to a foreign customer, with delivery to be made and payment to be received on April 1, 2016.The goods are valued at 50,000 FC.On January 1, 2016, the domestic firm purchased a 90-day forward contract to sell 50,000 FC.Exchange rates on selected dates are as follows: ? Discount rate = 10% Date Spot Rate Fwd Rate 1/1/16 1=\ 1.00 1=\ 0.99 2/28/16 (year-end) 1=\ 0.98 1=\ 0.97 4/1/16 1=\ 0.96 1=\ 0.96 ? Required: ? Prepare the journal entries needed to properly reflect the sales transaction and the forward exchange contract.The forward contract meets the conditions necessary to be classified as a hedge on an identifiable foreign currency commitment.Include the table to calculate the split between exchange gains or losses on the contract due to changes in spot rates and the changes in time value.

Which is true of foreign currency forward contracts and foreign currency options? Foreign currency forward contracts Foreign currency options A) Requires up-front fee Requires up-front fee B) Party may "walk" if "out of the money" Party may "walk" if "out of the money" C) Requires no up-front fee Party may "walk" if "out of the money" D) epresents a right rather than a legal bligation Requires up-front fee

Gains and losses resulting from a derivative instrument used for a cash flow hedge are recognized in current earnings:

A U.S.firm has purchased, for 50,000 FC, an electric generator from a foreign firm.The exchange rates were 1 FC = $0.80 on the delivery date and 1 FC = $0.76 when the payable was paid.What is the final recorded value of the equipment if the two-transaction method is used?

In the accounting for forward exchange contracts, gains and losses are measured using either spot or forward rates.Which of the following statements concerning measurement of gains and losses is true?