Exam 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

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: -For what amount should Brisco's Accounts Payable be credited on May 8?

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

What factors create a foreign exchange gain?

The beginning balance of cash was 50,000 pesos on January 1,2009,translated at $.18 = $1.What amount will Coyote Corp.report on its 2009 financial statements for Cash?

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 speculative derivative would be similar to which type of hedge?

REFERENCE: Ref.09_09 On March 1,2007,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 1,2008.On March 1,2007,Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1,2008 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 31,2007.The following spot exchange rates apply: 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?

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 U.S.company sells merchandise to a foreign company denominated in the foreign currency.Which of the following statements is true?

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: -How much US $ will it cost Brisco to finally pay the payable on June 7?

What is meant by the term hedging?

REFERENCE: Ref.09_09 On March 1,2007,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 1,2008.On March 1,2007,Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1,2008 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 31,2007.The following spot exchange rates apply: 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 impact on Mattie's 2008 income as a result of this fair value hedge of a firm commitment?

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 -Assuming a forward contract was entered into on December 16,what would be the net impact on Car Corp.'s 2009 income statement related to this transaction?

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 -Assuming a forward contract was not entered into,what would be the net impact on Car Corp.'s 2008 income statement related to this transaction?

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 fair value 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_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 cash flow hedge,prepare journal entries for this sales transaction and forward contract.

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 2010?

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

REFERENCE: Ref.09_04 On December 1,2007,Keenan Company,a U.S.firm,sold merchandise to Velez Company of Spain for 150,000 euro.Payment is due on February 1,2008.Keenan entered into a forward exchange contract on December 1,2007,to deliver 150,000 euro on February 1,2008 for $.97.Keenan chose to use a foreign currency option to hedge this foreign currency asset designated as a cash flow hedge.Relevant exchange rates follow: -Which of the following approaches is used in the United States in accounting for foreign currency transactions?

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: -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?

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 Cost of Goods Sold?

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. -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?