Deck 10: Foreign Currency Transactions

Question 1

Which of the following statements is correct?

A) The historical rate is the exchange rate on the date of the transaction and the closing rate is the exchange rate at the end of the reporting period.
B) The historical rate is the exchange rate on the date of the transaction and the closing rate is the rate on which any hedge transactions mature.
C) The spot rate is the rate on the date of the transaction and the relevant forward rate is the exchange rate used at the end of the reporting period.
D) The average rate is the exchange rate used for all transactions on transaction date.

Answer 1

A

Question 2

On July 1, 2020, CANCO purchased inventory from its main U.S. supplier, RNB Enterprises, at a cost of US$12,000. CANCO's year end is on July 31. Payment of US$12,000 for the inventory is due on August 31, 2020. Some important dates regarding this transaction, as well as the exchange rates in effect at each of these dates are shown below:
At what amount would CANCO record its inventory purchase from RNB on July 1, 2020?

A) CDN$15,900
B) CDN$16,440
C) CDN$16,140
D) US$12,000

Answer 2

B

Question 3

At the end of each reporting period, monetary items denominated in a foreign currency must be translated at what rate?

A) The exchange rate in effect at the time of settlement of the contract.
B) The historical rate.
C) The closing rate.
D) The forward contract rate.

Answer 3

C

Question 4

Which of the following is NOT currently a cause of fluctuation in foreign exchange rates?

A) Inflation rates.
B) The pegging of a currency to the American (U.S.) dollar.
C) Interest rates.
D) Trade surpluses and deficits.

Question 5

On January 1, 2020, Canadian Music International (CMI), a manufacturer of high-end recording equipment based in Toronto, shipped US$120,000 worth of inventory to its main U.S. distributor in Chicago, with full payment of these goods due by February 28, 2020. CMI has a January 31 year end. A list of significant dates and exchange rates is shown below. The invoice price billed by CMI was US$120,000.
What is the amount of CMI's foreign exchange gain or loss at year-end?

A) CDN$120 loss
B) CDN$480 gain
C) CDN$120 gain
D) Nil; foreign exchange gains or losses are deferred to settlement

Question 6

On July 1, 2020, CANCO purchased inventory from its main U.S. supplier, RNB Enterprises, at a cost of US$12,000. CANCO's year end is on July 31. Payment of US$12,000 for the inventory is due on August 31, 2020. Some important dates regarding this transaction, as well as the exchange rates in effect at each of these dates are shown below:
At what amount would CANCO record its liability to RNB at the time of the inventory purchase?

A) CDN$15,900
B) CDN$16,440
C) CDN$16,140
D) US$12,000

Question 7

XYZ Corp. has a calendar year end. On January 1, 2019, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2022 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates were in effect throughout the term of the loan:
The average rates in effect for 2019 and 2020 were as follows:
What is the amount of interest expense (in Canadian Dollars) recorded for 2019?

A) $250,000
B) $287,250
C) $287,325
D) $372,500

Question 8

XYZ Corp. has a calendar year end. On January 1, 2019, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2022 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates were in effect throughout the term of the loan:
The average rates in effect for 2019 and 2020 were as follows:
At what amount (in Canadian Dollars) would XYZ record its initial Loan Liability on January 1, 2019?

A) $5,471,500
B) $5,476,500
C) $5,747,500
D) $5,750,000

Question 9

On July 1, 2020, CANCO purchased inventory from its main U.S. supplier, RNB Enterprises, at a cost of US$12,000. CANCO's year end is on July 31. Payment of US$12,000 for the inventory is due on August 31, 2020. Some important dates regarding this transaction, as well as the exchange rates in effect at each of these dates are shown below:
What was the amount in Canadian dollars paid by CANCO to RNB on the settlement date?

A) CDN$15,900
B) CDN$16,440
C) CDN$16,140
D) CDN$12,000

Question 10

The rate charged by commercial banks for the purchase of any foreign currency (in Canadian dollars) on any given day would be based on which of the following?

A) The average rate.
B) The closing rate.
C) The spot rate.
D) The forward rate.

Question 11

On July 1, 2020, CANCO purchased inventory from its main U.S. supplier, RNB Enterprises, at a cost of US$12,000. CANCO's year end is on July 31. Payment of US$12,000 for the inventory is due on August 31, 2020. Some important dates regarding this transaction, as well as the exchange rates in effect at each of these dates are shown below:
What would be the amount of the foreign exchange gain or loss recorded for the year end, July 31, 2020?

A) A CDN$300 exchange loss.
B) A CDN$540 exchange gain.
C) A CDN$300 exchange gain.
D) Nil. Any exchange gain or loss is deferred until settlement.

Question 12

Which of the following statements accurately describes the manner in which transactions must be translated under IAS 21 The Effects of Changes in Foreign Exchange Rates?

A) All individual transactions must be translated into the functional currency of the reporting entity.
B) All individual transactions must be converted into the local currency of the reporting entity.
C) All individual transactions are to be reported into the currency of the jurisdiction where the majority of shareholders reside.
D) All individual transactions may be reported into the currency of the country where the corporation does the majority of its business.

Question 13

On January 1, 2020, Canadian Music International (CMI), a manufacturer of high-end recording equipment based in Toronto, shipped US$120,000 worth of inventory to its main U.S. distributor in Chicago, with full payment of these goods due by February 28, 2020. CMI has a January 31 year end. A list of significant dates and exchange rates is shown below. $\begin{array}{|l|l|}\hline \text { Transaction Date: January 1, 2020 } & \text { US \$1= CDN \$1.141 } \\\hline \text { Year-End Date: January 31, 2020 } & \text { US \$1=CDN } \$ 1.142 \\\hline \text { SettlementDate: February 28,2020 } & \text { US } \$ 1=\text { CDN } \$ 1.145\\\hline\end{array}$ The invoice price billed by CMI was US$120,000.
What is the amount of CMI's foreign exchange gain or loss on February 28th?

A) CDN$360 loss.
B) CDN$120 gain.
C) CDN$360 gain.
D) CDN$480 gain.

Question 14

On July 1, 2020, CANCO purchased inventory from its main U.S. supplier, RNB Enterprises, at a cost of US$12,000. CANCO's year end is on July 31. Payment of US$12,000 for the inventory is due on August 31, 2020. Some important dates regarding this transaction, as well as the exchange rates in effect at each of these dates are shown below:
What would be the amount of the foreign exchange gain or loss recorded at the settlement date?

A) A CDN$300 exchange loss.
B) A CDN$240 exchange gain.
C) A CDN$300 exchange gain.
D) Nil. Any exchange gain or loss is deferred until settlement.

Question 15

Some gains and losses arising on a revaluation of property plant and equipment are to be included in other comprehensive income. When the asset is measured in a foreign currency, how would exchange differences be treated?

A) As an item to be included in income or loss for the year.
B) As a reduction or increase in the carry cost of the asset.
C) As a contra account to be fully disclosed and to show the impact of foreign exchange differences.
D) The differences should be included in the calculation of other comprehensive income.

Question 16

XYZ Corp. has a calendar year end. On January 1, 2019, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2022 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates were in effect throughout the term of the loan:
The average rates in effect for 2019 and 2020 were as follows:
What is the amount of interest paid (in Canadian Dollars) during 2019?

A) $250,000
B) $287,250
C) $287,325
D) $372,500

Question 17

On January 1, 2020, Canadian Music International (CMI), a manufacturer of high-end recording equipment based in Toronto, shipped US$120,000 worth of inventory to its main U.S. distributor in Chicago, with full payment of these goods due by February 28, 2020. CMI has a January 31 year end. A list of significant dates and exchange rates is shown below. The invoice price billed by CMI was US$120,000.
What is the total amount of CMI's foreign exchange gain or loss on this transaction?

A) CDN$360 loss
B) CDN$120 gain
C) CDN$360 gain
D) CDN$480 gain

Question 18

On January 1, 2020, Canadian Music International (CMI), a manufacturer of high-end recording equipment based in Toronto, shipped US$120,000 worth of inventory to its main U.S. distributor in Chicago, with full payment of these goods due by February 28, 2020. CMI has a January 31 year end. A list of significant dates and exchange rates is shown below. The invoice price billed by CMI was US$120,000.
What is the amount of cash (in Canadian funds) received by CMI on the settlement date?

A) CDN$136,920
B) CDN$137,040
C) CDN$137,400
D) CDN$137,880

Question 19

Which of the following statements is correct?

A) In Canada, the cost of a unit of foreign currency in Canadian dollars is a direct quotation, while the cost in that foreign currency of purchasing one Canadian dollar is referred to as an indirect quotation.
B) In Canada, the cost of a unit of foreign currency in Canadian dollars is an indirect quotation, while the cost in that foreign currency of purchasing one Canadian dollar is referred to as a direct quotation.
C) In Canada, the cost of a unit of foreign currency in Canadian dollars is a direct quotation, and the cost in that foreign currency of purchasing one Canadian dollar is also referred to as a direct quotation.
D) In Canada, the cost of a unit of foreign currency in Canadian dollars is an indirect quotation, while the cost in that foreign currency of purchasing one Canadian dollar is also referred to as an indirect quotation.

Question 20

On January 1, 2020, Canadian Music International (CMI), a manufacturer of high-end recording equipment based in Toronto, shipped US$120,000 worth of inventory to its main U.S. distributor in Chicago, with full payment of these goods due by February 28, 2020. CMI has a January 31 year end. A list of significant dates and exchange rates is shown below. The invoice price billed by CMI was US$120,000.
At what value would CMI record the initial sale to its American distributor?

A) CDN$137,400
B) US$120,000
C) CDN$120,000
D) CDN$136,920

Question 21

XYZ Corp. has a calendar year end. On January 1, 2019, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2022 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates were in effect throughout the term of the loan:
The average rates in effect for 2019 and 2020 were as follows:
What is the amount of interest expense (in Canadian Dollars) recorded for 2020?

A) $249,920
B) $250,080
C) $287,175
D) $287,250

Question 22

RXN's year-end is on December 31. On November 1, 2019 when the U.S. dollar was worth CDN$1.365, RXN sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, 2020. On December 1, the spot rate was CDN$1.3450, and the three-month forward rate was CDN$1.3250. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a forward contract with its bank on December 1, 2019 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2019 to March 1, 2020 was CDN$1.34. On March 1, 2020, RXN received the US$300,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable.
Significant dates and exchange rates pertaining to this transaction are as follows:
*for contracts expiring on March 1, 2020
How much (in Canadian Dollars) will RXN expect to receive from the bank when its forward contract is settled?

A) $397,500
B) $403,500
C) $402,000
D) $409,500

Question 23

On July 1, 2019, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of October, with payment to be made in full on November 15, 2019. Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000 on the settlement date at the forward rate of CDN$1.3625. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplier.
The merchandise was received on October 1, 2019, when the spot rate was US$1 = CDN$1.3575. On October 31, the company's year-end, the spot rate was $1.3690. North purchased the U.S. dollars to pay its supplier on November 15, 2019 when the spot rate was CDN$1.3725. The forward rate to November 15, 2019, was CDN$1.365 on October 1 and CDN$1.37 on October 31.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|} \hline& \text { Spot Rates } & \text { Forward Rates } \\\hline \begin{array}{l}\text { July } 1,2019 \text { (Order date and } \\\text { hedge date) }\end{array} & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3445 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3625 \\\hline \text { October } 1,2019 \text { (Delivery date) } & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3575 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.365 \\\hline \text { October 31,2019(Year-end) } & \text { CDN\$1.369 } & \text { CDN\$1.37 } \\\hline \begin{array}{l}\text { November } 15,2019 \text { (Settlement } \\\text { date) }\end{array} & \text { US\$1=CDN\$1.3725 } & \text { US\$1=CDN\$1.3725 }\\\hline\end{array}$ *for contracts expiring on November 15, 2019
What is the amount of the liability to the bank recorded on the commitment date if the forward contract is recorded using the gross method?

A) $806,700
B) $817,500
C) $819,000
D) NIL

Question 24

XYZ Corp. has a calendar year end. On January 1, 2019, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2022 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates were in effect throughout the term of the loan:
The average rates in effect for 2019 and 2020 were as follows:
What is the amount of interest paid (in Canadian Dollars) during 2020?

A) $250,000
B) $287,125
C) $287,330
D) $372,500

Question 25

RXN's year-end is on December 31. On November 1, 2019 when the U.S. dollar was worth CDN$1.365, RXN sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, 2020. On December 1, the spot rate was CDN$1.3450 and the three-month forward rate was CDN$1.3250. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a forward contract with its bank on December 1, 2019 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2019 to March 1, 2020 was CDN$1.34. On March 1, 2020, RXN received the US$300,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable.
Significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|}\hline & \text { Spot Rates } & \text { Forward Rates } \\\hline \begin{array}{l}\text { November } 1,2019(\text { Transaction } \\\text { date) }\end{array} & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.365 & \\\hline \begin{array}{l}\text { December } 1,2019 \text { (Hedged } \\\text { date) }\end{array} & \text { US\$1=CDN\$1.3450 } & \text { US\$1=CDN\$1.3250 } \\\hline \text { December } 31,2019 \text { (Year-end) } & \text { CDN\$1.36 } & \text { CDN\$1.34 } \\\hline \text { March } 1,2020 \text { (Settlement date) } & \text { US\$1=CDN\$1.368. } & \text { US\$1=CDN\$1.368. }\\\hline\end{array}$ *for contracts expiring on March 1, 2020
Assuming that the accounts receivable balance was not adjusted on December 1, 2019, what adjustment (if any) would be required to RXN's year-end accounts receivable balance?

A) A CDN$3,000 decrease.
B) A CDN$1,500 decrease.
C) A CDN$3,000 increase.
D) No adjustment is required.

Question 26

On July 1, 2019, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of October, with payment to be made in full on November 15, 2019. Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000 on the settlement date at the forward rate of CDN$1.3625. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplier.
The merchandise was received on October 1, 2019, when the spot rate was US$1 = CDN$1.3575. On October 31, the company's year-end, the spot rate was $1.3690. North purchased the U.S. dollars to pay its supplier on November 15, 2019 when the spot rate was CDN$1.3725. The forward rate to November 15, 2019, was CDN$1.365 on October 1 and CDN$1.37 on October 31.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|} \hline& \text { Spot Rates } & \text { Forward Rates } \\\hline \begin{array}{l}\text { July } 1,2019 \text { (Order date and } \\\text { hedge date) }\end{array} & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3445 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3625 \\\hline \text { October } 1,2019 \text { (Delivery date) } & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3575 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.365 \\\hline \text { October 31,2019(Year-end) } & \text { CDN\$1.369 } & \text { CDN\$1.37 } \\\hline \begin{array}{l}\text { November } 15,2019 \text { (Settlement } \\\text { date) }\end{array} & \text { US\$1=CDN\$1.3725 } & \text { US\$1=CDN\$1.3725 }\\\hline\end{array}$ *for contracts expiring on November 15, 2019
What is the journal entry required to record the ordering of North's merchandise?

A) No entry is required.
B)
$$\begin{array} { | l | r | r | } \hline \text { Merchandise inventory } & \$ 806,700 \\\hline \text { Account payable } & & \$ 806,700 \\\hline\end{array}$$
C) $$\begin{array} { | l | r | r | } \hline \text { Merchandise irventory } & \$ 817,500 \\\hline \text { Account payable } & & \$ 817,500 \\\hline\end{array}$$
D) $\begin{array}{|l|r|r|}\hline \text { Merchandise inventory } & \$ 814,500 & \\\hline \text { Account payable } & & \$ 814,500 \\\hline\end{array}$

Question 27

RXN's year-end is on December 31. On November 1, 2019 when the U.S. dollar was worth CDN$1.365, RXN sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, 2020. On December 1, the spot rate was CDN$1.3450 and the three-month forward rate was CDN$1.3250. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a forward contract with its bank on December 1, 2019 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2019 to March 1, 2020 was CDN$1.34. On March 1, 2020, RXN received the US$300,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable.
Significant dates and exchange rates pertaining to this transaction are as follows:
*for contracts expiring on March 1, 2020
What is the amount of the exchange gain or loss from the recognition of the hedge discount recognized during 2019?

A) A loss of CDN$4,500.
B) A loss of CDN$3,000.
C) A gain of $ CDN4,500.
D) Nil.

Question 28

RXN's year-end is on December 31. On November 1, 2019 when the U.S. dollar was worth CDN$1.365, RXN sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, 2020. On December 1, the spot rate was CDN$1.3450, and the three-month forward rate was CDN$1.3250. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a forward contract with its bank on December 1, 2019 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2019 to March 1, 2020 was CDN$1.34. On March 1, 2020, RXN received the US$300,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable.
Significant dates and exchange rates pertaining to this transaction are as follows:
*for contracts expiring on March 1, 2020
What is the amount of the discount on the forward contract?

A) CDN$1,000
B) CDN$1,500
C) CDN$3,000
D) CDN$6,000

Question 29

On July 1, 2019, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of October, with payment to be made in full on November 15, 2019. Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000 on the settlement date at the forward rate of CDN$1.3625. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplier.
The merchandise was received on October 1, 2019, when the spot rate was US$1 = CDN$1.3575. On October 31, the company's year-end, the spot rate was $1.3690. North purchased the U.S. dollars to pay its supplier on November 15, 2019 when the spot rate was CDN$1.3725. The forward rate to November 15, 2019, was CDN$1.365 on October 1 and CDN$1.37 on October 31.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|} \hline& \text { Spot Rates } & \text { Forward Rates } \\\hline \begin{array}{l}\text { July } 1,2019 \text { (Order date and } \\\text { hedge date) }\end{array} & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3445 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3625 \\\hline \text { October } 1,2019 \text { (Delivery date) } & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3575 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.365 \\\hline \text { October 31,2019(Year-end) } & \text { CDN\$1.369 } & \text { CDN\$1.37 } \\\hline \begin{array}{l}\text { November } 15,2019 \text { (Settlement } \\\text { date) }\end{array} & \text { US\$1=CDN\$1.3725 } & \text { US\$1=CDN\$1.3725 }\\\hline\end{array}$ *for contracts expiring on November 15, 2019
What amount will be recorded as the value of the forward contract on the commitment date if the forward contract is recorded using the net method?

A) $806,700
B) $817,500
C) $819,000
D) NIL

Question 30

RXN's year-end is on December 31. On November 1, 2019 when the U.S. dollar was worth CDN$1.365, RXN sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, 2020. On December 1, the spot rate was CDN$1.3450 and the three-month forward rate was CDN$1.3250. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a forward contract with its bank on December 1, 2019 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2019 to March 1, 2020 was CDN$1.34. On March 1, 2020, RXN received the US$300,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable.
Significant dates and exchange rates pertaining to this transaction are as follows:
*for contracts expiring on March 1, 2020
At what amount (in Canadian Dollars) would the forward contract with the bank be recorded, if recorded gross?

A) $397,500
B) $403,500
C) $402,000
D) $409,500

Question 31

Which of the following would NOT be considered a foreign exchange hedge?

A) The placement of large amounts of Canadian funds with a bank in Zurich, Switzerland.
B) A foreign currency futures contract.
C) A foreign currency option contract.
D) A forward exchange contract.

Question 32

On July 1, 2019, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of October, with payment to be made in full on November 15, 2019. Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000 on the settlement date at the forward rate of CDN$1.3625. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplier.
The merchandise was received on October 1, 2019, when the spot rate was US$1 = CDN$1.3575. On October 31, the company's year-end, the spot rate was $1.3690. North purchased the U.S. dollars to pay its supplier on November 15, 2019 when the spot rate was CDN$1.3725. The forward rate to November 15, 2019, was CDN$1.365 on October 1 and CDN$1.37 on October 31.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|} \hline& \text { Spot Rates } & \text { Forward Rates } \\\hline \begin{array}{l}\text { July } 1,2019 \text { (Order date and } \\\text { hedge date) }\end{array} & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3445 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3625 \\\hline \text { October } 1,2019 \text { (Delivery date) } & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3575 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.365 \\\hline \text { October 31,2019(Year-end) } & \text { CDN\$1.369 } & \text { CDN\$1.37 } \\\hline \begin{array}{l}\text { November } 15,2019 \text { (Settlement } \\\text { date) }\end{array} & \text { US\$1=CDN\$1.3725 } & \text { US\$1=CDN\$1.3725 }\\\hline\end{array}$ *for contracts expiring on November 15, 2019
What is the cost of the inventory to North if the exchange gain or loss on the forward contract is adjusted to the value of the inventory on the delivery date?

A) CDN$806,700
B) CDN$819,000
C) CDN$814,500
D) CDN$813,000

Question 33

On July 1, 2019, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of October, with payment to be made in full on November 15, 2019. Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000 on the settlement date at the forward rate of CDN$1.3625. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplier.
The merchandise was received on October 1, 2019, when the spot rate was US$1 = CDN$1.3575. On October 31, the company's year-end, the spot rate was $1.3690. North purchased the U.S. dollars to pay its supplier on November 15, 2019 when the spot rate was CDN$1.3725. The forward rate to November 15, 2019, was CDN$1.365 on October 1 and CDN$1.37 on October 31.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|} \hline& \text { Spot Rates } & \text { Forward Rates } \\\hline \begin{array}{l}\text { July } 1,2019 \text { (Order date and } \\\text { hedge date) }\end{array} & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3445 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3625 \\\hline \text { October } 1,2019 \text { (Delivery date) } & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3575 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.365 \\\hline \text { October 31,2019(Year-end) } & \text { CDN\$1.369 } & \text { CDN\$1.37 } \\\hline \begin{array}{l}\text { November } 15,2019 \text { (Settlement } \\\text { date) }\end{array} & \text { US\$1=CDN\$1.3725 } & \text { US\$1=CDN\$1.3725 }\\\hline\end{array}$ *for contracts expiring on November 15, 2019
What is the amount of North's recognized exchange gain or loss arising from this transaction included in its financial statements as at October 31, 2019?

A) CDN$3,900 loss
B) CDN$3,900 gain
C) CDN$3,000 gain
D) Nil

Question 34

XYZ Corp. has a calendar year end. On January 1, 2019, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2022 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates were in effect throughout the term of the loan:
The average rates in effect for 2019 and 2020 were as follows:
What is the amount of foreign exchange gain or loss recognized on the 2020 Income Statement as a result of revaluing the loan payable?

A) $2,500 loss
B) $800 loss
C) $800 gain
D) $2,500 gain

Question 35

RXN's year-end is on December 31. On November 1, 2019 when the U.S. dollar was worth CDN$1.365, RXN sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, 2020. On December 1, the spot rate was CDN$1.3450, and the three-month forward rate was CDN$1.3250. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a forward contract with its bank on December 1, 2019 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2019 to March 1, 2020 was CDN$1.34. On March 1, 2020, RXN received the US$300,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable.
Significant dates and exchange rates pertaining to this transaction are as follows:
*for contracts expiring on March 1, 2020
At what amount (in Canadian Dollars) would RXN's sale be recorded initially?

A) $403,500
B) $408,000
C) $409,500
D) $410,400

Question 36

On July 1, 2019, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of October, with payment to be made in full on November 15, 2019. Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000 on the settlement date at the forward rate of CDN$1.3625. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplier.
The merchandise was received on October 1, 2019, when the spot rate was US$1 = CDN$1.3575. On October 31, the company's year-end, the spot rate was $1.3690. North purchased the U.S. dollars to pay its supplier on November 15, 2019 when the spot rate was CDN$1.3725. The forward rate to November 15, 2019, was CDN$1.365 on October 1 and CDN$1.37 on October 31.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|} \hline& \text { Spot Rates } & \text { Forward Rates } \\\hline \begin{array}{l}\text { July } 1,2019 \text { (Order date and } \\\text { hedge date) }\end{array} & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3445 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3625 \\\hline \text { October } 1,2019 \text { (Delivery date) } & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3575 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.365 \\\hline \text { October 31,2019(Year-end) } & \text { CDN\$1.369 } & \text { CDN\$1.37 } \\\hline \begin{array}{l}\text { November } 15,2019 \text { (Settlement } \\\text { date) }\end{array} & \text { US\$1=CDN\$1.3725 } & \text { US\$1=CDN\$1.3725 }\\\hline\end{array}$ *for contracts expiring on November 15, 2019
What amount will be recorded as the value of the forward contract on October 31, 2019 (year-end) if the forward contract is recorded using the net method?

A) A liability of CDN$4,500
B) An asset of CDN$4,500
C) An asset of CDN$6,000
D) Nil

Question 37

XYZ Corp. has a calendar year end. On January 1, 2019, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2022 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates were in effect throughout the term of the loan:
The average rates in effect for 2019 and 2020 were as follows:
By what amount (in Canadian Dollars) would XYZ have to adjust its Loan Liability on December 31, 2020 as a result of the year's foreign exchange rate fluctuations?

A) $3,500 decrease
B) $2,500 decrease
C) $2,500 increase
D) Nil

Question 38

XYZ Corp. has a calendar year end. On January 1, 2019, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2022 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates were in effect throughout the term of the loan:
The average rates in effect for 2019 and 2020 were as follows:
What is the amount of the foreign exchange gain or loss recognized on the 2019 Income Statement as a result of revaluing the loan payable?

A) A CDN$10,000 loss
B) A CDN$5,000 loss
C) A CDN$5,000 gain
D) A CDN$10,000 gain

Question 39

XYZ Corp. has a calendar year end. On January 1, 2019, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2022 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk. The following exchange rates were in effect throughout the term of the loan:
The average rates in effect for 2019 and 2020 were as follows:
By what amount (in Canadian Dollars) would XYZ have to adjust its Loan Liability on December 31, 2019 as a result of the year's foreign exchange rate fluctuations?

A) A $5,000 decrease.
B) A $2,500 decrease
C) A $5,000 increase.
D) Nil.

Question 40

RXN's year-end is on December 31. On November 1, 2019 when the U.S. dollar was worth CDN$1.365, RXN sold merchandise to an American client for US$300,000. Full payment of this invoice was expected by March 1, 2020. On December 1, the spot rate was CDN$1.3450, and the three-month forward rate was CDN$1.3250. In order to minimize its Foreign Exchange risk and exposure, RXN entered into a forward contract with its bank on December 1, 2019 to deliver US$300,000 in three months' time. The spot rate at year-end was CDN$1.36 and the forward rate from December 31, 2019 to March 1, 2020 was CDN$1.34. On March 1, 2020, RXN received the US$300,000 from its client and settled its contract with the bank. The forward contract was to be accounted for as a fair value hedge of the US dollar receivable.
Significant dates and exchange rates pertaining to this transaction are as follows:
*for contracts expiring on March 1, 2020
What is the amount of RXN's foreign exchange gain or loss prior to its hedge?

A) A CDN$6,000 loss.
B) A CDN$6,000 gain.
C) A CDN$4,500 gain.
D) Nil

Question 41

Which of the following provides the best hedge against exchange variations in the value of a stream of income in a foreign currency where the payments are expected to occur in equal amounts over a period of five years?

A) Borrowing in the foreign currency with repayment due at the end of the five years.
B) Borrowing in Canadian dollars with repayment due at the end of the five years.
C) Borrowing in the foreign currency with annual repayments equal to the expected annual revenue cash flows.
D) Borrowing in Canadian dollars with annual repayments equal to the expected annual revenue cash flows.

Question 42

Prairie Dog Inc. borrowed US$10,000,000 on January 1, 2017 at an annual rate of 8%. The loan is due December 31, 2020 and interest is payable annually each December 31. The exchange rates on selected dates throughout the life of the loan are shown below:
Assume that the average annual exchange rate was equal to the December 31^st spot rates.
Calculate the exchange gains or losses that would be reported in the net income of the company for each year over the life of the loan.

Question 43

Compucat is a Canadian manufacturing company that produces inexpensive personal and laptop computers. The company has been generating progressively more of its sales from foreign markets. During 2019, the company started purchasing most of its components from a supplier in Germany.
To deal with the uncertainty associated with foreign exchange fluctuations, all of Compucat's foreign currency denominated receivables and payables are hedged with contracts with the company's bank. Compucat's year-end is on December 31. The following transactions took place in 2019:
On September 1, 2019, Compucat purchased components from its German supplier for 100,000 Euros. On that date AMC entered into a forward contract for 100,000 Euros at the 60 day forward rate of 1 Euro = CDN$1.50. The forward contract was designated as a fair value hedge of the amount payable to the German supplier. Compucat settled with the bank and paid its supplier in full on December 1, 2019.
On December 1, 2019 Compucat also shipped a batch of laptop computers to an American client for US$250,000. The invoice required that Compucat receive its payment in full by January 31, 2019. On the date of the sale, the company entered into a forward contract for US$250,000 at the two-month forward rate of US$1 = CDN$1.25. This forward contract was designated to be a fair value hedge of the amount due from the American customer.
The dates and exchange rates relevant to these transactions are shown below.
Prepare the 2019 journal entries to record the above transactions assuming Compucat uses the gross method. In addition, prepare any adjusting journal entries that you deem necessary.

Question 44

ABC Inc. sells thermal compressors throughout the world. On January 1, 2019, the company sold 500 compressors to an American supplier at a total cost US$60,000 when the spot rate was US$1 = CDN$1.3750. Payment on the invoice was due by May 1, 2019. ABC entered into a 4-month hedge with its bank at a forward rate of CDN$1.40 on January 2, 2019. The forward contract was declared to be a fair value hedge of the fair value of the receivable from the American customer. ABC's year-end is on January 31, and on that date in 2019, the spot rate in effect was CDN$1.3825 and the forward rate to May 1, 2019 was CDN$1.3950. ABC received payment from its supplier on May 1, 2019 when the spot rate was US$1 = CDN$1.3975.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|}\hline & \text { Spot Rates } & \text { Forward Rates } \\\hline \text { january 1, } 2019 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3750 & \ldots-\cdots \\\hline\begin{array}{l}\text { January 2, } 2019 \text { (Forward contract } \\\text { date) }\end{array} & \text { US } \$ 1=\text { CDN } \$ 1.3750 & \text { US } \$ 1=\text { CDN } \$ 1.40 \\\hline \text { january 31,2019 (Year-end) } & \text { CDN } \$ 1.3825 & \text { CDN } \$ 1.3950 \\\hline \text { May 1, 2019 (Settlement date) } & \text { US\$1 =CDN\$1.3975 } & \text { US\$1 = CDN\$1.3975 }\\\hline\end{array}$ *for contracts expiring on May 1, 2019
What is the amount of the discount or premium on the forward contract?

A) $1,500 Discount
B) $1,500 Premium
C) $150 Discount
D) $150 Premium

Question 45

ABC Inc. sells thermal compressors throughout the world. On January 1, 2019, the company sold 500 compressors to an American supplier at a total cost US$60,000 when the spot rate was US$1 = CDN$1.3750. Payment on the invoice was due by May 1, 2019. ABC entered into a 4-month hedge with its bank at a forward rate of CDN$1.40 on January 2, 2019. The forward contract was declared to be a fair value hedge of the fair value of the receivable from the American customer. ABC's year-end is on January 31, and on that date in 2019, the spot rate in effect was CDN$1.3825 and the forward rate to May 1, 2019 was CDN$1.3950.
ABC received payment from its supplier on May 1, 2019 when the spot rate was US$1 = CDN$1.3975.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
*for contracts expiring on May 1, 2019
Assuming that the forward element and spot elements on the forward contract are accounted for separately, which journal entry is required to amortize the discount or premium?
A.

B.

C.

D. No journal entry required

Question 46

ABC Inc. sells thermal compressors throughout the world. On January 1, 2019, the company sold 500 compressors to an American supplier at a total cost US$60,000 when the spot rate was US$1 = CDN$1.3750. Payment on the invoice was due by May 1, 2019. ABC entered into a 4-month hedge with its bank at a forward rate of CDN$1.40 on January 2, 2019. The forward contract was declared to be a fair value hedge of the fair value of the receivable from the American customer. ABC's year-end is on January 31, and on that date in 2019, the spot rate in effect was CDN$1.3825 and the forward rate to May 1, 2019 was CDN$1.3950. ABC received payment from its supplier on May 1, 2019 when the spot rate was US$1 = CDN$1.3975.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|}\hline & \text { Spot Rates } & \text { Forward Rates } \\\hline \text { january 1, } 2019 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3750 & \ldots-\cdots \\\hline\begin{array}{l}\text { January 2, } 2019 \text { (Forward contract } \\\text { date) }\end{array} & \text { US } \$ 1=\text { CDN } \$ 1.3750 & \text { US } \$ 1=\text { CDN } \$ 1.40 \\\hline \text { january 31,2019 (Year-end) } & \text { CDN } \$ 1.3825 & \text { CDN } \$ 1.3950 \\\hline \text { May 1, 2019 (Settlement date) } & \text { US\$1 =CDN\$1.3975 } & \text { US\$1 = CDN\$1.3975 }\\\hline\end{array}$ *for contracts expiring on May 1, 2019
Which of the following memorandum entries best describes the signing of the forward contract on January 2, 2019?

A) ABC Inc. entered into a forward contract to pay US$60,000 in exchange for CDN$83,850 to be received from the bank on May 1, 2019.
B) ABC Inc. entered into a forward contract to pay US$60,000 in exchange for CDN$82,500 to be received from the bank on May 1, 2019.
C) ABC Inc. entered into a forward contract to pay CDN$84,000 in exchange for US$60,000 to be received from the bank on May 1, 2019.
D) ABC Inc. entered into a forward contract to pay US$60,000 in exchange for CDN$84,000 to be received from the bank on May 1, 2019.

Question 47

Prairie Dog Inc. borrowed US$10,000,000 on January 1, 2017 at an annual rate of 8%. The loan is due December 31, 2020 and interest is payable annually each December 31. The exchange rates on selected dates throughout the life of the loan are shown below:
Assume that the average annual exchange rate was equal to the December 31^st spot rates.
Prepare the journal entries for 2017.

Question 48

Canada Corp. sells raw lumber to a number of countries around the world. On December 1, 2019 the company shipped some lumber to a client in Japan. The selling price was established at 500,000 Yen with payment to be received on March 1, 2020.
On December 3, 2019 the company entered into a hedge with a Canadian Bank at the 90 day forward rate of 1 Yen = CDN$1.185. The forward contract was designated as a fair value hedge of the receivable from the Japanese customer.
Canada Corp received the payment from its Japanese client on March 1, 2020. Canada Corp's year end is on December 31.
Selected spot rates were as follows:
The two-month forward rate on December 31, 2019 was 1Yen = CDN$1.1800.
The two-month forward rate on December 31, 2019 was 1Yen = CDN$1.1800.
Prepare a partial Balance Sheet for Canada Corp on December 31, 2019 showing the account receivable from the Japanese client as well as the accounts associated with the hedge. Assume Canada Corp used the gross method to record the forward contract.

Question 49

Canada Corp. sells raw lumber to a number of countries around the world. On December 1, 2019 the company shipped some lumber to a client in Japan. The selling price was established at 500,000 Yen with payment to be received on March 1, 2020.
On December 3, 2019 the company entered into a hedge with a Canadian Bank at the 90 day forward rate of 1 Yen = CDN$1.185. The forward contract was designated as a fair value hedge of the receivable from the Japanese customer.
Canada Corp received the payment from its Japanese client on March 1, 2020. Canada Corp's year end is on December 31.
Selected spot rates were as follows:
The two-month forward rate on December 31, 2019 was 1Yen = CDN$1.1800.
The two-month forward rate on December 31, 2019 was 1Yen = CDN$1.1800.
Prepare the journal entries to record the receipt of the 500,000 Yen on March 1, 2020, assuming that Canada Corp did not enter into a hedge transaction in December 2019.

Question 50

ABC Inc. sells thermal compressors throughout the world. On January 1, 2019, the company sold 500 compressors to an American supplier at a total cost US$60,000 when the spot rate was US$1 = CDN$1.3750. Payment on the invoice was due by May 1, 2019. ABC entered into a 4-month hedge with its bank at a forward rate of CDN$1.40 on January 2, 2019. The forward contract was declared to be a fair value hedge of the fair value of the receivable from the American customer. ABC's year-end is on January 31, and on that date in 2019, the spot rate in effect was CDN$1.3825 and the forward rate to May 1, 2019 was CDN$1.3950. ABC received payment from its supplier on May 1, 2019 when the spot rate was US$1 = CDN$1.3975.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|}\hline & \text { Spot Rates } & \text { Forward Rates } \\\hline \text { january 1, } 2019 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3750 & \ldots-\cdots \\\hline\begin{array}{l}\text { January 2, } 2019 \text { (Forward contract } \\\text { date) }\end{array} & \text { US } \$ 1=\text { CDN } \$ 1.3750 & \text { US } \$ 1=\text { CDN } \$ 1.40 \\\hline \text { january 31,2019 (Year-end) } & \text { CDN } \$ 1.3825 & \text { CDN } \$ 1.3950 \\\hline \text { May 1, 2019 (Settlement date) } & \text { US\$1 =CDN\$1.3975 } & \text { US\$1 = CDN\$1.3975 }\\\hline\end{array}$ *for contracts expiring on May 1, 2019
What is the required adjustment to the carrying value of the forward contract at the company's year-end?

A) CDN$300 decrease
B) CDN$375 increase
C) CDN$300 increase
D) Nil

Question 51

Which of the following statements is NOT correct?

A) In a fair value hedge, the entity uses a hedging instrument to hedge against the fluctuation in the fair value of the hedged item. This method will be used when the hedged item will be valued at fair value.
B) In a cash flow hedge, the entity uses a hedging instrument to hedge against the fluctuation in the Canadian dollar value of future cash flows.
C) The gain or loss on the hedging instrument in a cash flow hedge is initially reported in other comprehensive income and reclassified to profit and loss when the hedged item affects profit.
D) The gain or loss on the hedging instrument in a fair value hedge is initially recognized in other comprehensive income and transferred to profit and loss when the hedged item has been revalued for accounting purposes in accordance with IFRS.

Question 52

According to IFRS 9, which of the following statements pertaining to a forward contract is true?

A) A forward contract is valued using spot rates throughout its life with any gains or losses to be deferred and amortized as they occur.
B) A forward contract is valued at fair value throughout its life with any gains or losses to be deferred and amortized as they occur.
C) A forward contract is valued using spot rates throughout its life with any gains or losses to be taken into income as they occur.
D) A forward contract is remeasured at fair value throughout its life, with any gains or losses reflected in net income as they occur.

Question 53

ABC Inc. sells thermal compressors throughout the world. On January 1, 2019, the company sold 500 compressors to an American supplier at a total cost US$60,000 when the spot rate was US$1 = CDN$1.3750. Payment on the invoice was due by May 1, 2019. ABC entered into a 4-month hedge with its bank at a forward rate of CDN$1.40 on January 2, 2019. The forward contract was declared to be a fair value hedge of the fair value of the receivable from the American customer. ABC's year-end is on January 31, and on that date in 2019, the spot rate in effect was CDN$1.3825 and the forward rate to May 1, 2019 was CDN$1.3950. ABC received payment from its supplier on May 1, 2019 when the spot rate was US$1 = CDN$1.3975.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|}\hline & \text { Spot Rates } & \text { Forward Rates } \\\hline \text { january 1, } 2019 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3750 & \ldots-\cdots \\\hline\begin{array}{l}\text { January 2, } 2019 \text { (Forward contract } \\\text { date) }\end{array} & \text { US } \$ 1=\text { CDN } \$ 1.3750 & \text { US } \$ 1=\text { CDN } \$ 1.40 \\\hline \text { january 31,2019 (Year-end) } & \text { CDN } \$ 1.3825 & \text { CDN } \$ 1.3950 \\\hline \text { May 1, 2019 (Settlement date) } & \text { US\$1 =CDN\$1.3975 } & \text { US\$1 = CDN\$1.3975 }\\\hline\end{array}$ *for contracts expiring on May 1, 2019
What is the required adjustment to ABC's accounts receivable at year-end as a result of this transaction?

A) CDN$450 decrease
B) CDN$900 increase
C) CDN$450 increase
D) Nil

Question 54

On January 1, 2017, GRL Inc. purchased, in U.S. Funds $500,000 of Bonds of the OBY Company. On that date, the Bonds were trading at par. These Bonds pay 10% interest annually each December 31. The Bonds mature on December 31, 2019. The following exchange rates were applicable between 2017 and 2019. The rates indicate the cost (in Canadian dollars) of purchasing 1 U.S. dollar:
Compute the carrying value of the investment at the end of each year:

Question 55

On July 1, 2019, Great White North (GWN) Inc. purchased merchandise from a supplier in the U.S. for US$800,000 with terms requiring full payment by October 31, 2019. On July 2, 2019, GWN entered into a forward contract to purchase US$800,000 on October 31, 2019 at a rate of CDN$1.2275. The forward contract was designated as a hedge of the fair value of the amount due to the supplier.
On October 31, 2019, GWN paid its supplier in full. Selected dates and spot rates are shown below:
GWN has a July 31^st year end. On that date the forward rate for US dollars for three months was CDN $1.2225.
Prepare any and all journal entries you deem necessary to record the above transaction assuming the forward contract is segregated between the spot element and the forward element. GWN uses the net method to record the forward contract.

Question 56

In which of the following situations is a gain or loss recorded on a commitment asset or liability which would not otherwise be recorded?

A) A speculative forward contract.
B) A fair value hedge of a firm commitment.
C) A fair value hedge of a recognized monetary item.
D) A cash flow hedge of a forecasted transaction.

Question 57

On July 1, 2019, North Inc., based in Alberta, ordered merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of October, with payment to be made in full on November 15, 2019. Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000 on the settlement date at the forward rate of CDN$1.3625. The forward contract was designated as a cash flow hedge of the cash flow required to settle with the American supplier.
The merchandise was received on October 1, 2019, when the spot rate was US$1 = CDN$1.3575. On October 31, the company's year-end, the spot rate was $1.3690. North purchased the U.S. dollars to pay its supplier on November 15, 2019 when the spot rate was CDN$1.3725. The forward rate to November 15, 2019, was CDN$1.365 on October 1 and CDN$1.37 on October 31.
A summary of the significant dates and exchange rates pertaining to this transaction are as follows:
$\begin{array}{|l|r|r|} \hline& \text { Spot Rates } & \text { Forward Rates } \\\hline \begin{array}{l}\text { July } 1,2019 \text { (Order date and } \\\text { hedge date) }\end{array} & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3445 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3625 \\\hline \text { October } 1,2019 \text { (Delivery date) } & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.3575 & \mathrm{US} \$ 1=\mathrm{CDN} \$ 1.365 \\\hline \text { October 31,2019(Year-end) } & \text { CDN\$1.369 } & \text { CDN\$1.37 } \\\hline \begin{array}{l}\text { November } 15,2019 \text { (Settlement } \\\text { date) }\end{array} & \text { US\$1=CDN\$1.3725 } & \text { US\$1=CDN\$1.3725 }\\\hline\end{array}$ *for contracts expiring on November 15, 2019
What amount (in Canadian dollars) did North pay to its American supplier for the purchase of the inventory?

A) $806,700
B) $821,400
C) $817,500
D) $823,500

Question 58

Canada Corp. sells raw lumber to a number of countries around the world. On December 1, 2019 the company shipped some lumber to a client in Japan. The selling price was established at 500,000 Yen with payment to be received on March 1, 2020.
On December 3, 2019 the company entered into a hedge with a Canadian Bank at the 90 day forward rate of 1 Yen = CDN$1.185. The forward contract was designated as a fair value hedge of the receivable from the Japanese customer.
Canada Corp received the payment from its Japanese client on March 1, 2020. Canada Corp's year end is on December 31.
Selected spot rates were as follows:
The two-month forward rate on December 31, 2019 was 1Yen = CDN$1.1800.
Assuming Canada Corp. used the gross method to record the forward contract, prepare any and all journal entries arising from this transaction.

Question 59

Compucat is a Canadian manufacturing company that produces inexpensive personal and laptop computers. The company has been generating progressively more of its sales from foreign markets. During 2019, the company started purchasing most of its components from a supplier in Germany.
To deal with the uncertainty associated with foreign exchange fluctuations, all of Compucat's foreign currency denominated receivables and payables are hedged with contracts with the company's bank. Compucat's year-end is on December 31. The following transactions took place in 2019:
On September 1, 2019, Compucat purchased components from its German supplier for 100,000 Euros. On that date AMC entered into a forward contract for 100,000 Euros at the 60 day forward rate of 1 Euro = CDN$1.50. The forward contract was designated as a fair value hedge of the amount payable to the German supplier. Compucat settled with the bank and paid its supplier in full on December 1, 2019.
On December 1, 2019 Compucat also shipped a batch of laptop computers to an American client for US$250,000. The invoice required that Compucat receive its payment in full by January 31, 2019. On the date of the sale, the company entered into a forward contract for US$250,000 at the two-month forward rate of US$1 = CDN$1.25. This forward contract was designated to be a fair value hedge of the amount due from the American customer.
The dates and exchange rates relevant to these transactions are shown below.
Prepare the December 31, 2019 Balance Sheet Presentation of the Receivable from the American client and the accounts associated with the hedge. Assume Compucat used the gross method to record the forward contract.

Question 60

On January 1, 2017, GRL Inc. purchased, in U.S. Funds $500,000 of Bonds of the OBY Company. On that date, the Bonds were trading at par. These Bonds pay 10% interest annually each December 31. The Bonds mature on December 31, 2019. The following exchange rates were applicable between 2017 and 2019. The rates indicate the cost (in Canadian dollars) of purchasing 1 U.S. dollar:
Prepare GRL's journal entries for each of 2017, 2018 and 2019.

Question 61

Maplehauff Inc. sells lumber to a number of clients around the world. On December 1, 2019 the company shipped some lumber to a client in the U.S. The selling price was established at US$600,000 with payment to be received on March 1, 2020. On December 3, 2019 the company entered into a hedge with a Canadian Bank at the 90 day forward rate of US$1 = CDN$1.275. The forward contract was designated as a cash flow hedge of the amount due from the American customer. Maplehauff uses the net method to record the forward contract.
Maplehauff Inc. received the payment from its American client on March 1, 2020. The company's year-end is on December 31. The two-month forward rate for US dollars was CDN$1.255 on that date.
Selected spot rates were as follows:
Prepare any and all journal entries arising from this transaction.

Question 62

Maplehauff Inc. sells lumber to a number of clients around the world. On December 1, 2019 the company shipped some lumber to a client in the U.S. The selling price was established at US$600,000 with payment to be received on March 1, 2020. On December 3, 2019 the company entered into a hedge with a Canadian Bank at the 90 day forward rate of US$1 = CDN$1.275. The forward contract was designated as a cash flow hedge of the amount due from the American customer. Maplehauff uses the net method to record the forward contract.
Maplehauff Inc. received the payment from its American client on March 1, 2020. The company's year-end is on December 31. The two-month forward rate for US dollars was CDN$1.255 on that date.
Selected spot rates were as follows:
Prepare the journal entries to record the receipt of the US$600,000 on March 1, 2020, assuming that Maplehauff Inc did not enter into a hedge transaction in December 2019.

Question 63

On July 1, 2019, Great White North (GWN) Inc. purchased merchandise from a supplier in the U.S. for US$800,000 with terms requiring full payment by October 31, 2019. On July 2, 2019, GWN entered into a forward contract to purchase US$800,000 on October 31, 2019 at a rate of CDN$1.2275. The forward contract was designated as a hedge of the fair value of the amount due to the supplier.
On October 31, 2019, GWN paid its supplier in full. Selected dates and spot rates are shown below:
GWN has a July 31^st year end. On that date the forward rate for US dollars for three months was CDN $1.2225.
Prepare a July 31, 2019 Partial Trial Balance, indicating how each account balance would appear on the company's financial statements.

Question 64

On July 1, 2019, Great White North (GWN) Inc. purchased merchandise from a supplier in the U.S. for US$800,000 with terms requiring full payment by October 31, 2019. On July 2, 2019, GWN entered into a forward contract to purchase US$800,000 on October 31, 2019 at a rate of CDN$1.2275. The forward contract was designated as a hedge of the fair value of the amount due to the supplier.
On October 31, 2019, GWN paid its supplier in full. Selected dates and spot rates are shown below:
GWN has a July 31^st year end. On that date the forward rate for US dollars for three months was CDN $1.2225.
Prepare the journal entries assuming that no forward contract was entered into.

Question 65

Maplehauff Inc. sells lumber to a number of clients around the world. On December 1, 2019 the company shipped some lumber to a client in the U.S. The selling price was established at US$600,000 with payment to be received on March 1, 2020. On December 3, 2019 the company entered into a hedge with a Canadian Bank at the 90 day forward rate of US$1 = CDN$1.275. The forward contract was designated as a cash flow hedge of the amount due from the American customer. Maplehauff uses the net method to record the forward contract.