Exam 8: Multinational Accounting: Foreign Currency Transactions and Financial Instruments

On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds ( $\leq$ ) at a forward rate of $\leq$ 1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42. The rates are as follows: Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. -Based on the preceding information, what is the net gain or loss on the euro speculative contract?

Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 20X9 with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were: -Based on the preceding information, the entry to revalue foreign currency payable to current U.S. dollar value on March 1 will have:

Company X issues variable-rate debt but wishes to fix its interest rates because it believes the variable rate may increase. Company Y has a fixed-rate bond but is looking for a variable-rate interest because it assumes the interest rates may decrease. The two companies agree to exchange cash flows. Such an arrangement is called:

All of the following are management tools available for a U.S. company to hedge its net investment in a foreign affiliate except for:

On December 1, 2008, Secure Company bought a 90-day forward contract to purchase 200,000 euros (€) at a forward rate of €1 = $1.35 when the spot rate was $1.33. Other exchange rates were as follows: Required: 1) Prepare all journal entries related to Secure Company's foreign currency speculation from December 1, 2008, through March 1, 2009, assuming the fiscal year ends on December 31, 2008. 2) Did the company gain or lose on its purchase of the forward contract?

On December 1, 2008, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen's fiscal year ends on December 31. The forward contract was to hedge a firm commitment agreement made on December 1, 2008, to purchase electronic goods on January 30, with payment due on March 31, 2008. The derivative is designated as a fair value hedge. The direct exchange rates follow: Required: Prepare all journal entries for Denizen Corporation.

On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds ( $\leq$ ) at a forward rate of $\leq$ 1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42. The rates are as follows: Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. -Based on the preceding information, what is the net gain or loss on the British pound speculative contract?

All of the following are true statements when measuring hedge effectiveness except:

Corporation X has a number of exporting transactions with companies based in Vietnam. Exporting activities result in receivables. If the settlement currency is the US dollar, which of the following will happen by changes in the direct or indirect exchange rates?

Which of the following observations is true of forwards contracts?

Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 20X9 with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were: -Based on the preceding information, had Myway not used the forward exchange contract, net income for the year would have:

Suppose the direct foreign exchange rates in U.S. dollars are: 1 Singapore dollar = $.7025 1 Cyprus pound = $2.5132 -Based on the information given above, the indirect exchange rates for the Singapore dollar and the Cyprus Pound are:

On September 3, 20X8, Jackson Corporation purchases goods for a U.S. dollar equivalent of $17,000 from a Swiss company. The transaction is denominated in Swiss francs (SFr). The payment is made on October 10. The exchange rates were: What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on October 10?

Suppose the direct foreign exchange rates in U.S. dollars are: 1 Singapore dollar = $.7025 1 Cyprus pound = $2.5132 -Based on the information given above, how many U.S. dollars must be paid for a purchase of citrus fruits costing 10,000 Cyprus pounds?

Spiralling crude oil prices prompted AMAR Company to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 20X8, AMAR purchases call options for 20,000 barrels of oil at $100 per barrel at a premium of $4 per barrel, with a February 1, 20X9, call date. The following is the pricing information for the term of the call: The information for the change in the fair value of the options follows: On February 1, 20X9, AMAR sells the options at their value on that date and acquires 20,000 barrels of oil at the spot price. On April 1, 20X9, AMAR sells the oil for $112 per barrel. -Based on the preceding information, in the entry to record the increase in the intrinsic value of the options on December 31, 20X8,

On December 1, 20X8, Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share. Winston classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow: Assume that Winston exercises the put option and sells Linked shares on February 20, 20X9. -Based on the preceding information, what is the market price of Linked Corporation stock on December 31, 20X8?

Company X denominated a December 1, 20X9, purchase of goods in a currency other than its functional currency. The transaction resulted in a payable fixed in terms of the amount of foreign currency, and was paid on the settlement date, January 10, 2010. Exchange rates moved unfavorably at December 31, 20X9, resulting in a loss that should:

Which of the following observations is true of futures contracts?

On December 5, 20X8, Texas based Imperial Corporation purchased goods from a Saudi Arabian firm for 100,000 riyals (SAR), to be paid on January 10, 20X9. The transaction is denominated in Saudi riyals. Imperial's fiscal year ends on December 31, and its reporting currency is the U.S. dollar. The exchange rates are: -Based on the preceding information, what journal entry would Imperial make on January 10, 20X9, to revalue foreign currency payable to equivalent U.S. dollar value?

On December 1, 2008, Merry Corporation acquired 100 shares of Venus Corporation at a cost of $60 per share. Merry classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $400, an at-the-money put option to sell the 100 shares at $60 per share. The option expires on February 20, 2009. Selected information concerning the fair values of the investment and the options follow: Assume that Merry exercises the put option and sells Venus shares on February 20, 2009. Required: 1) Prepare the entries required on December 1, 2008, to record the purchase of the Venus stock and the put options. 2) Prepare the entries required on December 31, 2008, to record the change in intrinsic value and time value of the options, as well as the revaluation of the available-for-sale securities. 3) Prepare the entries required on February 20, 2008, to record the exercise of the put option and the sale of the securities at that date.