Exam 11: Multinational Accounting: Foreign Currency Transactions and Financial Instruments

On December 1,20X8,Winston Corporation acquired 10 deep discount bonds from Linked Corporation at a cost of $400 per bond.Winston classifies them as available-for-sale securities.On this same date,it decides to hedge against a possible decline in the value of the securities by purchasing,at a cost of $250,an at-the-money put option to sell the 10 bonds at $400 per bond.The option expires on February 20,20X9.Selected information concerning the fair values of the investment and the options follow: Assume that Winston exercises the put option and sells Linked bonds on February 20,20X9. -Based on the preceding information,what is the market price of Linked Corporation bonds on December 31,20X8?

Mint Corporation has several transactions with foreign entities.Each transaction is denominated in the local currency unit of the country in which the foreign entity is located.On November 2,20X8,Mint sold confectionary items to a foreign company at a price of LCU 23,000 when the direct exchange rate was 1 LCU = $1.08.The account has not been settled as of December 31,20X8,when the exchange rate has increased to 1 LCU = $1.10.The foreign exchange gain or loss on Mint's records at year-end for this transaction will be:

Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5,20X8,with payment due on December 2,20X8.Additionally,on September 5,Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850.The forward contract was acquired to manage the exposed net liability position in Egyptian pounds,but it was not designated as a hedge.The spot rates were: -Based on the preceding information,in the entry made on December 2^nd to revalue foreign currency receivable to current equivalent U.S.dollar value,

All of the following are management tools available for a U.S.company to hedge its net investment in a foreign affiliate except for:

Which of the following observations is true of forward contracts?

Robert Company sold inventory to an Australian company for 50,000 Australian dollars on April 1,20X0 with settlement to be in 60 days.On the same date,Robert entered into a 60-day forward contract to sell 50,000 Australian dollars at a forward rate of $1.164 in order to manage its exposed foreign currency receivable.The forward contract is not designated as a hedge.The spot rates were as follows: -Based on the preceding information,what is the overall effect on net income of Robert's use of the forward exchange contract?

All of the following are true statements when measuring hedge effectiveness except:

Tinitoys,Inc. ,a domestic company,purchased inventory from a Brazilian company for 500,000 Brazilian reals (Br.reals)on May 1,20X2.Payment is due on June 30,20X2.On May 1,20X2,Tinitoys also entered into a 60-day forward contract to purchase 500,000 Brazilian reals.The forward contract is not designated as a hedge.Tinitoys' fiscal year ends on May 31.The direct exchange rates were as follows: -Based on the preceding information,the entries on June 30,20X2,include a

Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$)on January 1,20X9 with settlement to be in 60 days.On the same date,Myway entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable.The forward contract is not designated as a hedge.The spot rates were: -Based on the preceding information,had Myway not used the forward exchange contract,net income for the year would have: