Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

Coyote Corp.(a U.S.company in Texas)had the following series of transactions in a foreign country during 2011: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60\% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors The appropriate exchange rates during 2011 were as follows: Exchange Date Rate March 1,2011 \ .20=1 peso May 1, 2011 \ .22=1 peso August 1,2011 \ .23=1 peso September 1,2011 \ .24=1 peso December 31,2011 \ .25=1 peso -The beginning balance of cash was 50,000 pesos on January 1,2011,translated at 1 peso = $.18.What amount will Coyote Corp.report in its 2011 balance sheet for Cash?

Belsen purchased inventory on December 1,2010.Payment of 200,000 stickles was to be made in sixty days.Also on December 1,Belsen signed a contract to purchase §200,000 in sixty days.The spot rate was §1 = .35714,and the 60-day forward rate was §1 = $.38462.On December 31,the spot rate was §1 = .34483 and the 30-day forward rate was §1 = .38168.Assume an annual interest rate of 12% and a fair value hedge.The present value for one month at 12% is .9901. In the journal entry to record the establishment of a forward exchange contract,at what amount should the Forward Contract account be recorded on December 1?

The forward rate may be defined as

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: May 8 Spot rate: \ 1.25 May 31 Spot rate: \ 1.26 Jun. 7 Spot rate: \ 1.20 -How much US $ will it cost Brisco to finally pay the payable on June 7?

Mills Inc.had a receivable from a foreign customer that is due in the local currency of the customer (stickles).On December 31,2010,this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000.When the receivable was collected on February 15,2011,the U.S.dollar equivalent was $144,000.In Mills' 2011 consolidated income statement,how much should have been reported as a foreign exchange gain?

What is the purpose of a hedge of foreign exchange risk?

On December 1,2011,Joseph Company,a U.S.company,entered into a three-month forward contract to purchase 50,000 pesos on March 1,2012,as a fair value hedge of a foreign currency denominated account payable.The following U.S.dollar per peso exchange rates apply: Forward Rate Date Spot Rate (Mar.1, 2012) December 1, 2011 \ 0.092 \ 0.105 December 31, 2011 \ 0.090 \ 0.095 March 1, 2012 \ 0.089 N/A Joseph's incremental borrowing rate is 12 percent.The present value factor for two months at an annual interest rate of 12 percent is .9803.Which of the following is included in Joseph's December 31,2011 balance sheet for the forward contract?

A forward contract may be used for which of the following? 1)A fair value hedge of an asset. 2)A cash flow hedge of an asset. 3)A fair value hedge of a liability. 4)A cash flow hedge of a liability.

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

What is the major assumption underlying the one-transaction perspective?

Winston Corp., a U.S. company, had the following foreign currency transactions during 2011: (1.) Purchased merchandise from a foreign supplier on July 16, 2011 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2011 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2011 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2011. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2011, and $299,000 on October 15, 2012 -What amount should be included as a foreign exchange gain or loss from the two transactions for 2011?

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2011, with payment of 10 million Korean won to be received on January 15, 2012. The following exchange rates applied: Forward Spot Rate Date Rate to Jan 15 December 16, 2011 \ .00092 \ .00098 December 31, 2011 .00090 .00093 January 15, 2012 .00095 .00095 -Assuming a forward contract was entered into on December 16,what would be the net impact on Car Corp.'s 2012 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 2011: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60\% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors The appropriate exchange rates during 2011 were as follows: Exchange Date Rate March 1,2011 \ .20=1 peso May 1, 2011 \ .22=1 peso August 1,2011 \ .23=1 peso September 1,2011 \ .24=1 peso December 31,2011 \ .25=1 peso -What amount will Coyote Corp.report in its 2011 balance sheet for Accounts receivable?

On October 1, 2011, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2012, at a price of 100,000 British pounds. On October 1, 2011, 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, 2011, the option has a fair value of $1,600. The following spot exchange rates apply: Date Spot Rate October 1, 2011 \ 2.00 December 31, 2011 \ 1.97 February 1, 2012 \ 2.01 -What journal entry should Eagle prepare on December 31,2011? A. Foreign Currency Option 200 Cash 200 B. Foreign Currency Option 200 Option Revenue 200 C. Foreign Currency Option 400 Option Revenue 400 D. Option Expense 200 Foreign Currency Option 200 E) Option Expense 400 Foreign Currency Option 400

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: Option strike price \ 2.17 Option cost \ 4,000 July 24 spot rate \ 2.17 October 24 spot rate \ 2.13 October 24 option premium \ .04 -What amount will Woolsey include as an option expense in net income for the period July 24 to October 24?

On December 1, 2011, 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, 2012. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2011. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Date Spot Rate Option Premium December 1,2011 \ .97 \ .05 December 31,2011 \ .95 \ .04 February 1,2012 \ .94 \ .03 -Compute the U.S.dollars received on February 1,2012.

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

On October 1, 2011, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2012, at a price of 100,000 British pounds. On October 1, 2011, 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, 2011, the option has a fair value of $1,600. The following spot exchange rates apply: Date Spot Rate October 1, 2011 \ 2.00 December 31, 2011 \ 1.97 February 1, 2012 \ 2.01 -What is the amount of option expense for 2012 from these transactions?

Norton Co., a U.S. corporation, sold inventory on December 1, 2011, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: Dec 1 Spot rate: \ 1.7241 Dec. 31 Spot rate: \ 1.8182 Jan. 30 Spot rate: \ 1.6666 -For what amount should Sales be credited on December 1?

Winston Corp., a U.S. company, had the following foreign currency transactions during 2011: (1.) Purchased merchandise from a foreign supplier on July 16, 2011 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2011 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2011 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2011. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2011, and $299,000 on October 15, 2012 -What amount should be included as a foreign exchange gain or loss from the two transactions for 2012?