Question 1

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 (from a U.S. perspective) are:

Accepted Answer

A)  1.7655 Singapore dollars and 1.4235 Cyprus pounds respectively. 
B)  0.2975 Singapore dollars and 1.5132 Cyprus pounds respectively. 
C)  2.1622 Singapore dollars and 0.4625 Cyprus pounds respectively. 
D)  1.4235 Singapore dollars and 0.3979 Cyprus pounds respectively.

Question 2

On December 1, 20X8, 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, 20X9. 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, 20X9.
Required:
1) Prepare the entries required on December 1, 20X8, to record the purchase of the Venus stock and the put options.
2) Prepare the entries required on December 31, 20X8, 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, 20X8, to record the exercise of the put option and the sale of the securities at that date.

Accepted Answer

The answer of On December 1, 20X8, Merry Corporation acquired...

Question 3

If 1 British pound can be exchanged for 180 cents of U.S. currency, what fraction should be used to compute the indirect quotation of the exchange rate expressed in British pounds?

Accepted Answer

A)  1/180 
B)  1/.56 
C)  1.8/1 
D)  1/1.8

Question 4

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:

Accepted Answer

A)  a credit to Foreign Currency Transaction Gain for $1,500. 
B)  a debit to Foreign Currency Transaction Loss for $2,500. 
C)  a debit to Foreign Currency Transaction Loss for $1,500. 
D)  a credit to Foreign Currency Transaction Gain for $1,000.

Question 5

Note: This is a Kaplan CPA Review Question
On September 22, 20X1, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company's local currency. On that date, the spot rate was $.55. Yumi paid the bill in full, six months later, on March 20, 20X2, when the spot rate was $.65. The spot rate was $.70 on December 31, 20X1. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, 20X1?

Accepted Answer

A)  $500 
B)  $0 
C)  $1,500 
D)  $1,000

Question 6

Chicago based Corporation X has a number of importing transactions with companies based in UK. Importing activities result in payables. If the settlement currency is the British Pound, which of the following will happen by changes in the direct or indirect exchange rates?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 7

Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5, 20X8, with payment due on December 2, 20X8. Additionally, on September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850. The forward contract was acquired to manage the exposed net liability position in Egyptian pounds, but it was not designated as a hedge. The spot rates were:  Based on the preceding information, what is the entry required to settle foreign currency payable on December 2?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 8

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 Singapore dollars are required to purchase goods costing 10,000 US dollars?

Accepted Answer

A)  7,025 
B)  14,235 
C)  17,655 
D)  2,975

Question 9

On December 1, 20X8, 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, 20X8, to purchase electronic goods on January 30, with payment due on March 31, 20X8. The derivative is designated as a fair value hedge. The direct exchange rates follow:  
Required:
Prepare all journal entries for Denizen Corporation.

Accepted Answer

The answer of On December 1, 20X8, Denizen Corporation entered...

Question 10

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,

Accepted Answer

A)  Purchased Call Options will be credited for $100,000. 
B)  Purchased Call Options will be debited for $130,000. 
C)  Retained Earnings will be credited for $100,000. 
D)  Other Comprehensive Income will be credited for $100,000.

Question 11

The fair market value of a near-month call option with a strike price of $45 is $5, when the stock is trading at $48.
Based on the preceding information, the call option:

Accepted Answer

A)  has no intrinsic value currently. 
B)  is at the money. 
C)  is out of the money. 
D)  is in the money.

Question 12

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

Accepted Answer

A)  Forward exchange contracts 
B)  Foreign currency commitments 
C)  Intercompany financing arrangements including intercompany transactions 
D)  None of these.

Question 13

Which of the following observations is true of futures contracts?

Accepted Answer

A)  Contracted through a dealer, usually a bank. 
B)  Customized to meet contracting company's terms and needs. 
C)  Typically no margin deposit required. 
D)  Traded on an exchange and acquired through an exchange broker.

Question 14

Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On October 1, 20X8, Mint purchased confectionary items from a foreign company at a price of LCU 5,000 when the direct exchange rate was 1 LCU = $1.20. The account has not been settled as of December 31, 20X8, when the exchange rate has decreased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint's records at year-end for this transaction will be:

Accepted Answer

A)  $500 loss 
B)  $500 gain 
C)  $378 gain 
D)  $5,500 loss

Question 15

Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5, 20X8, with payment due on December 2, 20X8. Additionally, on September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850. The forward contract was acquired to manage the exposed net liability position in Egyptian pounds, but it was not designated as a hedge. The spot rates were:  Based on the preceding information, in the entry made on December 2nd to revalue foreign currency receivable to current equivalent U.S. dollar value,

Accepted Answer

A)  Accounts Payable will be debited for $18,350. 
B)  Foreign Currency Units will be debited for $18,500. 
C)  Foreign Currency Transaction Gain will be credited for $150. 
D)  Other Comprehensive Income will be credited for $300.

Question 16

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, the entries made on April 1, 20X9 will include:

Accepted Answer

A)  a debit to Other Comprehensive Income for $200,000. 
B)  a debit to Cost of Goods Sold for $2,240,000. 
C)  a credit to Oil Inventory for $2,240,000. 
D)  a credit to Cost of Goods Sold for $100,000.

Question 17

Note: This is a Kaplan CPA Review Question
Hunt Co. purchased merchandise for 300,000 British pounds from a vendor in London on November 30, 20X1. Payment in British pounds was due on January 30, 20X2. The exchange rates to purchase one pound were as follows: 
In its December 31, Year One, income statement, what amount should Hunt report as foreign exchange gain?

Accepted Answer

A)  $9,000 
B)  $12,000 
C)  $6,000 
D)  $0

Question 18

On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds (£) at a forward rate of £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 overall effect of speculation on 20X8 net income?

Accepted Answer

A)  $4,000 gain 
B)  $6,000 gain 
C)  $8,000 loss 
D)  $8,000 gain

Question 19

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 was the overall foreign currency gain or loss on the accounts payable transaction?

Accepted Answer

A)  $300 loss 
B)  $200 loss 
C)  $100 gain 
D)  $200 gain

Question 20

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 December 31, 20X8, to revalue foreign currency payable to equivalent U.S. dollar value?

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Exam 11: Multinational Accounting: Foreign Currency Transactions and Financial Instruments

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 (from a U.S. perspective) are:

If 1 British pound can be exchanged for 180 cents of U.S. currency, what fraction should be used to compute the indirect quotation of the exchange rate expressed in British pounds?

Chicago based Corporation X has a number of importing transactions with companies based in UK. Importing activities result in payables. If the settlement currency is the British Pound, which of the following will happen by changes in the direct or indirect exchange rates?

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 Singapore dollars are required to purchase goods costing 10,000 US dollars?

The fair market value of a near-month call option with a strike price of $45 is $5, when the stock is trading at $48. Based on the preceding information, the call option:

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

Which of the following observations is true of futures contracts?