Exam 10: Foreign Currency Transactions

XYZ Corp. has a calendar year end. On January 1, 2019, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2022 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates were in effect throughout the term of the loan: Jaruary 1,2019 US \ 1= CDN \ 1.1500 Decerrber 31,2019 US \ 1= CDN \ 1.1490 Decernber 31,2020 US \ 1= CDN \ 1.1485 Decerrber 31,2021 US \ 1= CDN \ 1.1483 December 31,2022 US \ 1= CDN \ 1.1487 The average rates in effect for 2019 and 2020 were as follows: 2019: US \ 1= CDN \ 1.1493 2020: US \ 1= CDN \ 1.1487 At what amount (in Canadian Dollars) would XYZ record its initial Loan Liability on January 1, 2019?

At the end of each reporting period, monetary items denominated in a foreign currency must be translated at what rate?

Compucat is a Canadian manufacturing company that produces inexpensive personal and laptop computers. The company has been generating progressively more of its sales from foreign markets. During 2019, the company started purchasing most of its components from a supplier in Germany. To deal with the uncertainty associated with foreign exchange fluctuations, all of Compucat's foreign currency denominated receivables and payables are hedged with contracts with the company's bank. Compucat's year-end is on December 31. The following transactions took place in 2019: On September 1, 2019, Compucat purchased components from its German supplier for 100,000 Euros. On that date AMC entered into a forward contract for 100,000 Euros at the 60 day forward rate of 1 Euro = CDN$1.50. The forward contract was designated as a fair value hedge of the amount payable to the German supplier. Compucat settled with the bank and paid its supplier in full on December 1, 2019. On December 1, 2019 Compucat also shipped a batch of laptop computers to an American client for US$250,000. The invoice required that Compucat receive its payment in full by January 31, 2019. On the date of the sale, the company entered into a forward contract for US$250,000 at the two-month forward rate of US$1 = CDN$1.25. This forward contract was designated to be a fair value hedge of the amount due from the American customer. The dates and exchange rates relevant to these transactions are shown below. Spot rate Forward rate September 1, 2019: 1 Euro = CDN \ 1.4875 1 Euro = CDN \ 1.5000 December 1,2019: 1 Euro = CDN \ 1.4800 1 Euro = CDN \ 1.4800 \ 1=\ 1.2600 \ 1=\ 1.2500 December 31,2019: \ 1=\ 1.2700 \ 1=\ 1.2600 Prepare the 2019 journal entries to record the above transactions assuming Compucat uses the gross method. In addition, prepare any adjusting journal entries that you deem necessary.

On January 1, 2020, Canadian Music International (CMI), a manufacturer of high-end recording equipment based in Toronto, shipped US$120,000 worth of inventory to its main U.S. distributor in Chicago, with full payment of these goods due by February 28, 2020. CMI has a January 31 year end. A list of significant dates and exchange rates is shown below. Transaction Date: Jaruaary 1,2020 US \ 1= CDN \ 1.141 Year-End Date: Jaruary 31,2020 US \ 1= CDN \ 1.142 Setternent Date: February 28, 2020 US \ 1= CDN \ 1.145 The invoice price billed by CMI was US$120,000. What is the amount of cash (in Canadian funds) received by CMI on the settlement date?

Some gains and losses arising on a revaluation of property plant and equipment are to be included in other comprehensive income. When the asset is measured in a foreign currency, how would exchange differences be treated?

Which of the following would NOT be considered a foreign exchange hedge?

RXN's year-end is on December 31. On November 1, 2019 when the U.S. dollar was worth CDN$1.365, RXN sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, 2020. On December 1, the spot rate was CDN$1.3450 and the three-month forward rate was CDN$1.3250. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a forward contract with its bank on December 1, 2019 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2019 to March 1, 2020 was CDN$1.34. On March 1, 2020, RXN received the US$300,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable. Significant dates and exchange rates pertaining to this transaction are as follows: Spat Rates For ward Rates Novernber 1,2019 (Trarsaction date) US \ 1= CDN \ 1.365 December 1,2019 (Hedged date) US \ 1= CDN \1 .3450 US \1 = CDN \1 .3250 December 31,2019 (Year- end) CDN \ 1.36 CDN \ 1.34 March 1,2020 (Settlement date) US \ 1= CDN \ 1.368 US \ 1= CDN \1 .368. *for contracts expiring on March 1, 2020 What is the amount of the exchange gain or loss from the recognition of the hedge discount recognized during 2019?

ABC Inc. sells thermal compressors throughout the world. On January 1, 2019, the company sold 500 compressors to an American supplier at a total cost US$60,000 when the spot rate was US$1 = CDN$1.3750. Payment on the invoice was due by May 1, 2019. ABC entered into a 4-month hedge with its bank at a forward rate of CDN$1.40 on January 2, 2019. The forward contract was declared to be a fair value hedge of the fair value of the receivable from the American customer. ABC's year-end is on January 31, and on that date in 2019, the spot rate in effect was CDN$1.3825 and the forward rate to May 1, 2019 was CDN$1.3950. ABC received payment from its supplier on May 1, 2019 when the spot rate was US$1 = CDN$1.3975. A summary of the significant dates and exchange rates pertaining to this transaction are as follows: Spot Rates Forward Rates january 1, 2019 \ 1=\ 1.3750 \ldots-\@cdots January 2, 2019 (Forward contract date) US \ 1= CDN \ 1.3750 US \ 1= CDN \ 1.40 january 31,2019 (Year-end) CDN \ 1.3825 CDN \ 1.3950 May 1, 2019 (Settlement date) US \1 =CDN \1 .3975 US \1 = CDN \1 .3975 *for contracts expiring on May 1, 2019 Which of the following memorandum entries best describes the signing of the forward contract on January 2, 2019?

XYZ Corp. has a calendar year end. On January 1, 2019, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2022 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates were in effect throughout the term of the loan: Jaruary 1,2019 US \ 1= CDN \ 1.1500 December 31,2019 US \ 1= CDN \ 1.1490 December 31,2020 US \ 1= CDN \ 1.1485 December 31,2021 US \ 1= CDN \ 1.1483 December 31,2022 US \ 1= CDN \ 1.1487 The average rates in effect for 2019 and 2020 were as follows: 2019: US \ 1= CDN \ 1.1493 2020: US \ 1= CDN \ 1.1487 What is the amount of interest paid (in Canadian Dollars) during 2020?

On July 1, 2019, Great White North (GWN) Inc. purchased merchandise from a supplier in the U.S. for US$800,000 with terms requiring full payment by October 31, 2019. On July 2, 2019, GWN entered into a forward contract to purchase US$800,000 on October 31, 2019 at a rate of CDN$1.2275. The forward contract was designated as a hedge of the fair value of the amount due to the supplier. On October 31, 2019, GWN paid its supplier in full. Selected dates and spot rates are shown below: July 1,2019 CDN \1 .2150 July 31,2019 CDN \1 .2175 October 31,2019 CDN \1 .22 GWN has a July 31^st year end. On that date the forward rate for US dollars for three months was CDN $1.2225. Prepare a July 31, 2019 Partial Trial Balance, indicating how each account balance would appear on the company's financial statements.

On July 1, 2019, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of October, with payment to be made in full on November 15, 2019. Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000 on the settlement date at the forward rate of CDN$1.3625. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplier. The merchandise was received on October 1, 2019, when the spot rate was US$1 = CDN$1.3575. On October 31, the company's year-end, the spot rate was $1.3690. North purchased the U.S. dollars to pay its supplier on November 15, 2019 when the spot rate was CDN$1.3725. The forward rate to November 15, 2019, was CDN$1.365 on October 1 and CDN$1.37 on October 31. A summary of the significant dates and exchange rates pertaining to this transaction are as follows: Spot Rates Forward Rates July 1,2019 (Order date and hedge date) \ 1=\ 1.3445 \ 1=\ 1.3625 October 1,2019 (Delivery date) \ 1=\ 1.3575 \ 1=\ 1.365 October 31,2019(Year-end) CDN \1 .369 CDN \1 .37 November 15,2019 (Settlement date) US \1 =CDN \1 .3725 US \1 =CDN \1 .3725 *for contracts expiring on November 15, 2019 What is the amount of North's recognized exchange gain or loss arising from this transaction included in its financial statements as at October 31, 2019?

On January 1, 2017, GRL Inc. purchased, in U.S. Funds $500,000 of Bonds of the OBY Company. On that date, the Bonds were trading at par. These Bonds pay 10% interest annually each December 31. The Bonds mature on December 31, 2019. The following exchange rates were applicable between 2017 and 2019. The rates indicate the cost (in Canadian dollars) of purchasing 1 U.S. dollar: January 1,2017 CDN \1 .4565 Average rate for 2017 CDN \ 1.4570 December 31,2017 CDN \ 1.4725 Average rate for 2018 CDN \ 1.4600 December 31,2018 CDN \ 1.4425 Average rate for 2019 CDN \ 1.4500 December 31,2019 CDN \ 1.4575 Compute the carrying value of the investment at the end of each year:

On July 1, 2019, Great White North (GWN) Inc. purchased merchandise from a supplier in the U.S. for US$800,000 with terms requiring full payment by October 31, 2019. On July 2, 2019, GWN entered into a forward contract to purchase US$800,000 on October 31, 2019 at a rate of CDN$1.2275. The forward contract was designated as a hedge of the fair value of the amount due to the supplier. On October 31, 2019, GWN paid its supplier in full. Selected dates and spot rates are shown below: July 1,2019 CDN \ 1.2150 July 31,2019 CDN \ 1.2175 October 31,2019 CDN \ 1.22 GWN has a July 31^st year end. On that date the forward rate for US dollars for three months was CDN $1.2225. Prepare any and all journal entries you deem necessary to record the above transaction assuming the forward contract is segregated between the spot element and the forward element. GWN uses the net method to record the forward contract.

ABC Inc. sells thermal compressors throughout the world. On January 1, 2019, the company sold 500 compressors to an American supplier at a total cost US$60,000 when the spot rate was US$1 = CDN$1.3750. Payment on the invoice was due by May 1, 2019. ABC entered into a 4-month hedge with its bank at a forward rate of CDN$1.40 on January 2, 2019. The forward contract was declared to be a fair value hedge of the fair value of the receivable from the American customer. ABC's year-end is on January 31, and on that date in 2019, the spot rate in effect was CDN$1.3825 and the forward rate to May 1, 2019 was CDN$1.3950. ABC received payment from its supplier on May 1, 2019 when the spot rate was US$1 = CDN$1.3975. A summary of the significant dates and exchange rates pertaining to this transaction are as follows: Spot Rates Forward Rates january 1, 2019 \ 1=\ 1.3750 \ldots-\@cdots January 2, 2019 (Forward contract date) US \ 1= CDN \ 1.3750 US \ 1= CDN \ 1.40 january 31,2019 (Year-end) CDN \ 1.3825 CDN \ 1.3950 May 1, 2019 (Settlement date) US \1 =CDN \1 .3975 US \1 = CDN \1 .3975 *for contracts expiring on May 1, 2019 Assuming that the forward element and spot elements on the forward contract are accounted for separately, which journal entry is required to amortize the discount or premium? A. OCI-Excharige gairs/losses (forward) \ 375 Forward Contract \ 375 B. OCI-Excharne gains/losses (forward) Hedge Revenue C. Hedge expense OCI-Excharige gains/losses (forward) D. No journal entry required

The rate charged by commercial banks for the purchase of any foreign currency (in Canadian dollars) on any given day would be based on which of the following?

Canada Corp. sells raw lumber to a number of countries around the world. On December 1, 2019 the company shipped some lumber to a client in Japan. The selling price was established at 500,000 Yen with payment to be received on March 1, 2020. On December 3, 2019 the company entered into a hedge with a Canadian Bank at the 90 day forward rate of 1 Yen = CDN$1.185. The forward contract was designated as a fair value hedge of the receivable from the Japanese customer. Canada Corp received the payment from its Japanese client on March 1, 2020. Canada Corp's year end is on December 31. Selected spot rates were as follows: December 1,2019: 1 Yen = CDN \1 .155 December 3,2019: 1 Yen = CDN \1 .155 December 31,2019: 1 Yen = CDN \1 .1625 March 1,2020: 1 Yen = CDN \1 .1750 The two-month forward rate on December 31, 2019 was 1Yen = CDN$1.1800. The two-month forward rate on December 31, 2019 was 1Yen = CDN$1.1800. Prepare the journal entries to record the receipt of the 500,000 Yen on March 1, 2020, assuming that Canada Corp did not enter into a hedge transaction in December 2019.

Prairie Dog Inc. borrowed US$10,000,000 on January 1, 2017 at an annual rate of 8%. The loan is due December 31, 2020 and interest is payable annually each December 31. The exchange rates on selected dates throughout the life of the loan are shown below: Tanuary 1,2017 CDN \1 .4415 December 31,2017 CDN \ 1.4325 December 31,2018 CDN \ 1.4575 December 31,2019 CDN \1 .4435 December 31,2020 CDN \ 1.4525 Assume that the average annual exchange rate was equal to the December 31^st spot rates. Calculate the exchange gains or losses that would be reported in the net income of the company for each year over the life of the loan.

Maplehauff Inc. sells lumber to a number of clients around the world. On December 1, 2019 the company shipped some lumber to a client in the U.S. The selling price was established at US$600,000 with payment to be received on March 1, 2020. On December 3, 2019 the company entered into a hedge with a Canadian Bank at the 90 day forward rate of US$1 = CDN$1.275. The forward contract was designated as a cash flow hedge of the amount due from the American customer. Maplehauff uses the net method to record the forward contract. Maplehauff Inc. received the payment from its American client on March 1, 2020. The company's year-end is on December 31. The two-month forward rate for US dollars was CDN$1.255 on that date. Selected spot rates were as follows: December 1,2019: US \ 1= CDN \ 1.2355 December 3,2019: US \ 1= CDN \ 1.2355 December 31,2019 US \ 1=CDN\ 1.2455 March 1,2020: US \ 1= CDN \ 1.2480 Prepare the journal entries to record the receipt of the US$600,000 on March 1, 2020, assuming that Maplehauff Inc did not enter into a hedge transaction in December 2019.

On July 1, 2019, Great White North (GWN) Inc. purchased merchandise from a supplier in the U.S. for US$800,000 with terms requiring full payment by October 31, 2019. On July 2, 2019, GWN entered into a forward contract to purchase US$800,000 on October 31, 2019 at a rate of CDN$1.2275. The forward contract was designated as a hedge of the fair value of the amount due to the supplier. On October 31, 2019, GWN paid its supplier in full. Selected dates and spot rates are shown below: July 1,2019 CDN \ 1.2150 July 31,2019 CDN \ 1.2175 October 31,2019 CDN \ 1.22 GWN has a July 31^st year end. On that date the forward rate for US dollars for three months was CDN $1.2225. Prepare the journal entries assuming that no forward contract was entered into.

Which of the following is NOT currently a cause of fluctuation in foreign exchange rates?