Exam 9: 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?

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

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

Which of the following statements is true concerning hedge accounting?

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: 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 fair value hedge, prepare journal entries for this sales transaction and forward contract.

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?

What is meant by the spot rate?

Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2011, for 100,000 stickles. Payment was received on October 15, 2011. The following exchange rates applied: Exchange Date Rate September 15,2011 \S1=\ .48 September 30,2011 \S1=\ .50 October 15,2011 \S1=\ .44 Required: Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that the company closes its books on September 30 to prepare interim financial statements.

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?

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?

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 Sot 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, how would the forward contract be reflected on Car's December 31, 2011 balance sheet?

Parker Corp., a U.S. company, had the following foreign currency transactions during 2011: (1.) Purchased merchandise from a foreign supplier on July 5, 2011 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2011 at the U.S. dollar equivalent of $82,000. (2.) On October 1, 2011 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2011. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2011, and $881,000 on October 1, 2012. -What amount should be included as a foreign exchange gain or loss from the two transactions for 2012?

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.

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?

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?

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

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 Sot 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.

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.

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 Sot 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?

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