Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

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?

Angela,Inc. ,a U.S.company,had a euro receivable from exports to Spain and a British pound payable resulting from imports from England.Angela recorded foreign exchange gain related to both its euro receivable and pound payable.Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date? Euro Pound A) Increase Increase B) Increase Decrease C) Decrease Decrease D) Decrease Increase E) No change Decrease

A company has a discount on a forward contract for a foreign currency denominated asset.How is the discount recognized over the life of the contract under fair value hedge accounting?

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,what would be the net impact on Car Corp.'s 2011 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge.The present value for one month at 12% is .9901.

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 October 1,2011? A) Cash 1,800 Foreign Currency Option 1,800 B) Forward Contract 1,800 Cash 1,800 C) Foreign Currency Option 1,800 Gain on Foreign Currency 1,800 D) Loss on Foreign Currency 1,800 Cash 1,800 E) Foreign Currency Option 1,800 Cash 1,800

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 overall result of having entered into this hedge of exposure to 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 -What amount will Coyote Corp.report in its 2011 income statement for Cost of goods sold?

On November 10,2011,King Co.sold inventory to a customer in a foreign country.King agreed to accept 96,000 local currency units (LCU)in full payment for this inventory.Payment was to be made on February 1,2012.On December 1,2011,King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months.The two month forward exchange rate on that date was 1 LCU = $.30.Any contract discount or premium is amortized using the straight-line method.The spot rates and forward rates on various dates were as follows: Date Rate Description Exchange Rate November 10, 2011 Spot Rate \ .35=1 December 1, 2011 Spot Rate \ 32=1 2-Month Forward Rate \ .30=1 December 31,2011 Spot Rate \ .29=1 1-Month Forward Rate \ .28=1 February 1, 2012 Spot Rate \ .27=1 The company's borrowing rate is 12%.The present value factor for one month is .9901. -(A. )Assume this hedge is designated as a fair value hedge.Prepare the journal entries relating to the transaction and the forward contract. (B. )Compute the effect on 2011 net income. (C. )Compute the effect on 2012 net income.

On November 10,2011,King Co.sold inventory to a customer in a foreign country.King agreed to accept 96,000 local currency units (LCU)in full payment for this inventory.Payment was to be made on February 1,2012.On December 1,2011,King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months.The two month forward exchange rate on that date was 1 LCU = $.30.Any contract discount or premium is amortized using the straight-line method.The spot rates and forward rates on various dates were as follows: Date Rate Description Exchange Rate November 10, 2011 Spot Rate \ .35=1 December 1, 2011 Spot Rate \ 32=1 2-Month Forward Rate \ .30=1 December 31,2011 Spot Rate \ .29=1 1-Month Forward Rate \ .28=1 February 1, 2012 Spot Rate \ .27=1 The company's borrowing rate is 12%.The present value factor for one month is .9901. -(A. )Assume this hedge is designated as a cash flow hedge.Prepare the journal entries relating to the transaction and the forward contract. (B. )Compute the effect on 2011 net income. (C. )Compute the effect on 2012 net income.

Gaw Produce Co.purchased inventory from a Japanese company on December 18,2011.Payment of 4,000,000 yen (¥)was due on January 18,2012.Exchange rates between the dollar and the yen were as follows: Exchange December 18, 2011 ¥1=\ .0080 December 31, 2011 ¥1=\ .0082 January 18,2012 ¥1=\ .0083 Required: Prepare all journal entries for Gaw Produce Co.in connection with the purchase and payment.

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

Pigskin Co. ,a U.S.corporation,sold inventory on credit to a British company on April 8,2011.Pigskin received payment of 35,000 British pounds on May 8,2011.The exchange rate was £1 = $1.54 on April 8 and £1 = 1.43 on May 8.What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar)