Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

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 Adjustment to Accumulated Other Comprehensive Income for 2012 from these transactions?

U.S.GAAP provides guidance for hedges of all the following sources of foreign exchange risk except

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 2012 effect on net income as a result of these transactions?

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

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 fair value of the foreign currency option at February 1,2012.

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

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 -What amount of foreign exchange gain or loss should be recorded on December 31?

On October 31,2010,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 31,2012.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: Franc Rate October 31, 2010 \ 0.50 December 31, 2010 \ 0.52 October 31, 2011 \ 0.60 December 31, 2011 \ 0.62 October 31, 2012 \ 0.75

On March 1, 2011, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2012. On March 1, 2011, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2012 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2011. The following spot exchange rates apply: Date Spot Rate March 1,2011 \ 1.90 December 31,2011 \ 1.89 March 1,2012 \ 1.84 Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. -What was the net impact on Mattie's 2011 income as a result of this fair value hedge of a firm commitment?

On March 1, 2011, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2012. On March 1, 2011, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2012 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2011. The following spot exchange rates apply: Date Spot Rate March 1,2011 \ 1.90 December 31,2011 \ 1.89 March 1,2012 \ 1.84 Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. -What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?

Frankfurter Company,a U.S.company,had a ruble receivable from exports to Russia and a euro payable resulting from imports from Italy.Frankfurter recorded foreign exchange loss related to both its ruble receivable and euro payable.Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date? Ruble Euro A) Increase Decrease B) Decrease Decrease C) Decrease Increase D) No change Decrease E) Increase Increase

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 not entered into,what would be the net impact on Car Corp.'s 2011 income statement related to this transaction?

On May 1, 2011, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2012. On May 1, 2011, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2012 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2011. The following spot exchange rates apply: Date Spot Rate May 1, 2011 \ 0.095 December 31, 2011 \ 0.094 March 1, 2012 \ 0.089 Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. -What was the impact on Mosby's 2011 net income as a result of this fair value hedge of a firm commitment?

On April 1,Quality Corporation,a U.S.company,expects to sell merchandise to a French customer in three months,denominating the transaction in euros.On April 1,the spot rate is $1.41 per euro,and Quality enters into a three-month forward contract cash flow hedge to sell 400,000 euros at a rate of $1.36.At the end of three months,the spot rate is $1.37 per euro,and Quality delivers the merchandise,collecting 400,000 euros.What are the effects on net income from these transactions?

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 payable?

All of the following data may be needed to determine the fair value of a forward contract at any point in time except

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

Which of the following statements is true concerning hedge accounting?

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 -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?

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 Foreign Exchange Gain or Loss should Brisco record on May 31?