Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

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,at what amount should the forward contract be recorded at December 31,2011? Assume an annual interest rate of 12% and a fair value hedge.The present value for one month at 12% is .9901.

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 -For what amount should Brisco's Accounts Payable be credited on May 8?

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

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

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 2012 net income as a result of this fair value hedge of a firm commitment?

Which statement is true regarding a foreign currency option?

How is the fair value of a Forward Contract determined by U.S.GAAP?

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 January 30?

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

What factors create a foreign exchange gain?

On June 1,CamCo received a signed agreement to sell inventory for ¥500,000.The sale would take place in 90 days.CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received.The spot rate on June 1 was ¥1 =$.004167,and the 90-day forward rate was ¥1 = $.00427.At what amount would CamCo record the Forward Contract on June 1?

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 2012 income as a result of this fair value hedge of a firm commitment?

On October 1,2011,Jarvis Co.sold inventory to a customer in a foreign country,denominated in 100,000 local currency units (LCU).Collection is expected in four months.On October 1,2011,a forward exchange contract was acquired whereby Jarvis Co.was to pay 100,000 LCU in four months (on February 1,2012)and receive $78,000 in U.S.dollars.The spot and forward rates for the LCU were as follows: Date Rate Description Exchange Rate October 1, 2011 Spot Rate \ .83=1 LCU December 31,2011 Spot Rate \ .85=1 LCU 1-Month Forward Rate \ .80=1 LCU February 1,2012 Spot Rate \ .86=1 LCU The company's borrowing rate is 12%.The present value factor for one month is .9901. Any discount or premium on the contract is amortized using the straight-line method. -Assuming this is a cash flow hedge,prepare journal entries for this sales transaction and forward contract.

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

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

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 December 31,2011.

Primo Inc. ,a U.S.company,ordered parts costing 100,000 rupee from a foreign supplier on July 7 when the spot rate was $.025 per rupee.A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $.027.The forward contract is properly designated as a fair value hedge of the 100,000 rupee firm commitment.On August 7,when the parts are received,the spot rate is $.028.At what amount should the parts inventory be carried on Primo's books?

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 income statement for Sales?

Lawrence Company,a U.S.company,ordered parts costing 1,000,000 Thailand bahts from a foreign supplier on July 7 when the spot rate was $.025 per baht.A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $.027.The forward contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment.On August 7,when the parts are received,the spot rate is $.028.What is the amount of accounts payable that will be paid at this date?

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 -Prepare all journal entries in U.S.dollars along with any December 31,2011 adjusting entries.Coyote uses a perpetual inventory system.