Exam 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

REFERENCE: Ref.09_05 On April 1,2007,Shannon Company,a U.S.company,borrowed 100,000 euros from a foreign lender by signing an interest-bearing note due April 1,2008.The dollar value of the loan was as follows: -How much foreign exchange gain or loss should be included in Shannon's 2008 income statement?

REFERENCE: Ref.09_11 Coyote Corp.(a U.S.company in Texas)had the following series of transactions in a foreign country during 2009.The appropriate exchange rates during 2009 were as follows: The appropriate exchange rates during 2009 were as follows: -What amount will Coyote Corp.report on its 2009 financial statements for Inventory?

REFERENCE: Ref.09_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: -On June 1,CamCo received a contract 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 = ¥240,and the 90-day forward rate was $1 = ¥234.At what amount would CamCo record the Forward Contract on June 1?

REFERENCE: Ref.09_11 Coyote Corp.(a U.S.company in Texas)had the following series of transactions in a foreign country during 2009.The appropriate exchange rates during 2009 were as follows: The appropriate exchange rates during 2009 were as follows: -What amount will Coyote Corp.report on its 2009 financial statements for Accounts Payable?

REFERENCE: Ref.09_10 On October 1,2007,Eagle Company forecasts the purchase of inventory from a British supplier on February 1,2008,at a price of 100,000 British pounds.On October 1,2007,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 31,2007,the option has a fair value of $1,600.The following spot exchange rates apply: -What is the amount of option expense for 2008 from these transactions?

REFERENCE: Ref.09_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: -Belsen purchased inventory on December 1,2008.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 = §2.80,and the 60-day forward rate was $1 = §2.60.On December 31,the spot rate was $1 = §2.90 and the 30-day forward rate was $1 = §2.62.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?

REFERENCE: Ref.09_05 On April 1,2007,Shannon Company,a U.S.company,borrowed 100,000 euros from a foreign lender by signing an interest-bearing note due April 1,2008.The dollar value of the loan was as follows: -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?

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -Which of the following statements is true concerning hedge accounting?

REFERENCE: Ref.09_05 On April 1,2007,Shannon Company,a U.S.company,borrowed 100,000 euros from a foreign lender by signing an interest-bearing note due April 1,2008.The dollar value of the loan was as follows: -How much foreign exchange gain or loss should be included in Shannon's 2007 income statement?

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -A spot rate may be defined as

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -SFAS 133 provides guidance for hedges of all the following sources of foreign exchange risk except

REFERENCE: Ref.09_13 On October 1,2009,a forward exchange contract was acquired whereby Jarvis Co.was to pay 100,000 LCU in four months (on February 1,2010)and receive $78,000 in U.S.dollars.The spot and forward rates for the LCU were as follows: The company's borrowing rate is 12%.The present value factor for one month is .9901. -Assuming this is a fair value hedge,prepare journal entries for this sales transaction and forward contract.

REFERENCE: Ref.09_10 On October 1,2007,Eagle Company forecasts the purchase of inventory from a British supplier on February 1,2008,at a price of 100,000 British pounds.On October 1,2007,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 31,2007,the option has a fair value of $1,600.The following spot exchange rates apply: -What is the amount of Cost of Goods Sold for 2008 as a result of these transactions?

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

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

REFERENCE: Ref.09_06 Parker Corp. ,a U.S.company,had the following foreign currency transactions during 2009: (1. )Purchased merchandise from a foreign supplier on July 5,2009 for the U.S.dollar equivalent of $80,000 and paid the invoice on August 3,2009 at the U.S.dollar equivalent of $82,000. (2. )On October 1,2009 borrowed the U.S.dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1,2009.The U.S.dollar equivalent of the note amount was $860,000 on December 31,2009,and $881,000 on October 1,2010. -What amount should be included as a foreign exchange gain or loss from the two transactions for 2009?

REFERENCE: Ref.09_12 On November 10,2008,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 1,2009.On December 1,2008,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.The spot rates and forward rates on various dates were as follows: 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 2008 net income. (C. )Compute the effect on 2009 net income.

REFERENCE: Ref.09_07 Winston Corp. ,a U.S.company,had the following foreign currency transactions during 2008: (1. )Purchased merchandise from a foreign supplier on July 16,2008 for the U.S.dollar equivalent of $47,000 and paid the invoice on August 3,2008 at the U.S.dollar equivalent of $54,000. (2. )On October 15,2008 borrowed the U.S.dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15,2008.The U.S.dollar equivalent of the note amount was $295,000 on December 31,2008,and $299,000 on October 15,2009. -What amount should be included as a foreign exchange gain or loss from the two transactions for 2008?

REFERENCE: Ref.09_08 On May 1,2007,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 1,2008.On May 1,2007,Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1,2008 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 31,2007.The following spot exchange rates apply: 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 net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?

Gaw Produce Co.purchased inventory from a Japanese company on December 18,2009.Payment of ¥400,000 was due on January 18,2010.Exchange rates between the dollar and the yen were as follows: SHAPE \* MERGEFORMAT Required: Prepare all journal entries for Gaw Produce Co.in connection with the purchase and payment.