Exam 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October. The following exchange rates apply: What amount will Woolsey include as Adjustment to Net Income for the period ended October 31?

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013: The appropriate exchange rates during 2013 were as follows: What amount will Coyote Corp. report in its 2013 income statement for Sales?

Gaw Produce Company purchased inventory from a Japanese company on December 18, 2013. Payment of 4,000,000 yen (×) was due on January 18, 2014. Exchange rates between the dollar and the yen were as follows: Required: Prepare all journal entries for Gaw Produce Co. in connection with the purchase and payment.

Meisner Co. ordered parts costing §100,000 for a foreign supplier on May 12 when the spot rate was $.24 per stickle. A one-month forward contract was signed on that date to purchase §100,000 at a forward rate of $.25 per stickle. On June 12, when the parts were received and payment was made, the spot rate was $.28 per stickle. At what amount should inventory be reported?

Williams Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.0094, and the forward rate was $.0095. Which of the following did the U.S. exporter report in net income?

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2014 income statement related to this transaction?

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013: The appropriate exchange rates during 2013 were as follows: Prepare all journal entries in U.S. dollars along with any December 31, 2013 adjusting entries. Coyote uses a perpetual inventory system.

Where can you find exchange rates between the U.S. dollar and most foreign currencies?

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, 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, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: What journal entry should Eagle prepare on December 31, 2013?

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2013 at a

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

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows: How much foreign exchange gain or loss should be included in Shannon's 2012 income statement?

Which of the following approaches is used in the United States in accounting for foreign currency transactions?

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

On October 31, 2012, Darling Company negotiated a two-year 100,000 franc loan from a foreign bank at an interest rate of 3 percent per year. Interest payments are made annually on October 31, and the principal will be repaid on October 31, 2014. Darling prepares U.S.-dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming the following: In US dollars:

Parker Corp., a U.S. company, had the following foreign currency transactions during 2013: (1)) Purchased merchandise from a foreign supplier on July 5, 2013 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $82,000. (2)) On October 1, 2013 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2013. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2013, and $881,000 on October 1, 2014. What amount should be included as a foreign exchange gain or loss from the two transactions for 2013?

On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Compute the fair value of the foreign currency option at December 31, 2013.

For each of the following situations, select the best answer concerning accounting for foreign currency transactions: (G) Results in a foreign exchange gain. (L) Results in a foreign exchange loss. (N) No foreign exchange gain or loss. _____1. Export sale by a U.S. company denominated in dollars, foreign currency of buyer appreciates. _____2. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates. _____3. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates. _____4. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer appreciates. _____5. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates. _____6. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer depreciates. _____7. Export sale by a U.S. company denominated in dollars, foreign currency of buyer depreciates. _____8. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates.

Winston Corp., a U.S. company, had the following foreign currency transactions during 2013: (1)) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $54,000. (2)) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2013. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2013, and $299,000 on October 15, 2014. What amount should be included as a foreign exchange gain or loss from the two transactions for 2013?

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