Exam 12: Accounting for Foreign Currency Transactions and Hedging Foreign Exchange Risk

On July 15,Pinta,Inc.purchased 88,500,000 yen Pinta of parts from a Tokyo company paying 20% down,and the balance is due in 90 days.Interest is payable at a rate of 8% on the unpaid balance.The exchange rate on July 15,was $1.00 = 118 Japanese yen.On October 13,the exchange rate was $1.00 = 114 Japanese yen. Required: Prepare journal entries to record the purchase and payment of this foreign currency transaction in U.S.dollars.

On April 1,2017,Manatee Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days.The relevant exchange rates are as follows: The first forward contract was to hedge a purchase of inventory on April 1,payable on December 1.On April 30,what amount of foreign currency transaction loss should Manatee report in income?

Greco,Inc.a U.S.corporation,bought machine parts from Franco Company of Germany on March 1,2017,for 70,000 marks,when the spot rate for marks was $0.5395.Greco's year-end was March 31,2017,when the spot rate for marks was $0.5445.Greco bought 70,000 marks and paid the invoice on April 20,2017,when the spot rate was $0.5495.How much should be shown in Greco's income statements as foreign exchange (transaction)gain or loss for the years ended March 31,2017 and 2018?

A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to:

On November 1,2016,Platte Corporation,a calendar-year U.S.Corporation,invested in a speculative contract to purchase 700,000 euros on January 31,2017,from a German brokerage firm.Platte agreed to buy 700,000 euros at a fixed price of $1.46 per euro.The brokerage firm agreed to send 700,000 euros to Platte on January 31,2017.The spot rates for euros are: Required: Prepare the journal entries that Platte would record on November 1,December 31,and January 31.

Montana Corporation a U.S.company,contracted to purchase foreign goods.Payment in foreign currency was due one month after delivery.Between the delivery date and the time of payment,the exchange rate changed in Montana's favor.The resulting gain should be reported in the financial statements as a(n):

A transaction loss would result from:

On November 1,2017,Cone Company sold inventory to a foreign customer.The account will be settled on March 1 with the receipt of 250,000 foreign currency units (FCU).On November 1,Cone also entered into a forward contract to hedge the exposed asset.The forward rate is $0.90 per unit of foreign currency.Cone has a December 31 fiscal year-end.Spot rates on relevant dates were: The entry to record the forward contract is

The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract:

A transaction gain is recorded when there is an:

On November 1,2016,Jagged Company sold inventory to a company in England.The sale was for 600,000 British pounds and payment will be received on February 1,2017.On November 1,Jagged entered into a forward contract to sell 600,000 British pounds on February 1 at the forward rate of $1.65.Spot rates for the British pound are as follows: Jagged has a December 31 fiscal year-end. Required: Compute each of the following: 1.The dollars to be received on February 1,2017,from selling the 600,000 pounds to the exchange dealer. 2.The dollars that would have been received from the account receivable if Jagged had not hedged the sale contract with the forward contract. 3.The discount or premium on the forward contract. 4.The transaction gain or loss on the exposed asset related to the sale in 2016 and 2017. 5.The transaction gain or loss on the forward contract in 2016 and 2017. 6.The amount of the discount or premium on the forward contract amortized in 2016 and 2017.

On October 1,2016,Kill Company shipped equipment to a foreign customer for a foreign currency (FC)price of FC 3,000,000 due on January 31,2017.All revenue realization criteria were satisfied and accordingly the sale was recorded by Kill Company on October 1.Simultaneously,Kill entered into a forward contract to sell 3,000,000 FCU on January 31,2017 for $1,200,000.Payment was received from the foreign customer on January 31,2017.Spot rates on October 1,December 31,and January 31 were $0.42,$0.425,and $0.435,respectively.Kill amortizes all premiums and discounts on forward contracts and closes its books on December 31. Required: Prepare all journal entries relative to the above to be made by Kill during 2016 and 2017.

A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a:

During 2017,a U.S.company purchased inventory from a foreign supplier.The transaction was denominated in the local currency of the seller.The direct exchange rate increased from the date of the transaction to the balance sheet date.The exchange rate decreased from the balance sheet date to the settlement date in 2018.For the years 2017 and 2018,transaction gains or losses should be recognized as:

Consider the following information: 1.On November 1,2017,a U.S.firm contracts to sell equipment (with an asking price of 500,000 pesos)in Mexico.The firm will take delivery and will pay for the equipment on February 1,2018. 2.On November 1,2017,the company enters into a forward contract to sell 500,000 pesos for $0.0948 on February 1,2018. 3.Spot rates and the forward rates for February 1,2018,settlement were as follows (dollars per peso): 4.On February 1,the equipment was sold for 500,000 pesos.The cost of the equipment was $20,000. Required: Prepare all journal entries needed on November 1,December 31,and February 1 to account for the forward contract,the firm commitment,and the transaction to sell the equipment.

On September 1,2017,Mudd Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days.The relevant exchange rates are as follows: The second forward contract was strictly for speculation.On September 30,2017,what amount of foreign currency transaction gain should Mudd Plating report in income?

The discount or premium on a forward contract entered into as a hedge of an exposed asset or liability position should be:

Imperial Corp.,a U.S.corporation,entered into a contract on November 1,2016,to sell two machines to Crown Company,for 95,000 foreign currency units (FCU).The machines were to be delivered and the amount collected on March 1,2017. In order to hedge its commitment,Imperial entered into a forward contract for 95,000 FCU delivery on March 1,2017.The forward contract met all conditions for hedging an identifiable foreign currency commitment. Selected exchange rates for FCU at various dates were as follows: Required: Prepare all journal entries relative to the above on the books of Imperial Corp.on the following dates: 1.November 1,2016. 2.Year-end adjustments on December 31,2016. 3.March 1,2017.(Include all adjustments related to the forward contract.)

There are a number of business situations in which a firm may acquire a forward exchange contract.Identify three common situations in which a forward exchange contract can be used as a hedge.

With respect to disclosure requirements for fair value measurements,which of the following is NOT one of the three levels in the hierarchy of classifying fair value measurements?