Question 1

Nelson Co. ordered parts costing §120,000 from a foreign supplier on May 12 when the spot rate was $0.31 per stickle. A one-month forward contract was signed on that date to purchase §120,000 at a forward rate of $0.32 per stickle. On June 12, when the parts were received and payment was made, the spot rate was $0.36 per stickle. At what amount should inventory be reported?

Accepted Answer

A) $0. 
B) $43,200. 
C) $38,400. 
D) $37,200. 
E) $6,000.

Question 2

Potter Corp. (a U.S. company in Colorado)had the following series of transactions in a foreign country during 2021:
  The appropriate exchange rates during 2021 were as follows:
  Prepare all journal entries in U.S. dollars along with any December 31, 2021 adjusting entries. Potter uses a perpetual inventory system.

Accepted Answer

The answer of Potter Corp. (a U.S. company in Colorado)had...

Question 3

Potter Corp. (a U.S. company in Colorado)had the following series of transactions in a foreign country during 2021:
  The appropriate exchange rates during 2021 were as follows:
  The beginning balance of cash was 250,000 Thai baht on January 1, 2021, converted at the spot rate of ฿1 = $0.041. What amount will Potter Corp. report in its 2021 balance sheet for Cash?

Accepted Answer

The answer of Potter Corp. (a U.S. company in Colorado)had...

Question 4

Potter Corp. (a U.S. company in Colorado)had the following series of transactions in a foreign country during 2021:
  The appropriate exchange rates during 2021 were as follows:
  What amount will Potter Corp. report in its 2021 balance sheet for Accounts payable?

Accepted Answer

The answer of Potter Corp. (a U.S. company in Colorado)had...

Question 5

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

Accepted Answer

A) If the foreign currency appreciates, a foreign exchange gain will result. 
B) If the foreign currency depreciates, a foreign exchange gain will result. 
C) No foreign exchange gain or loss will result. 
D) If the foreign currency appreciates, a foreign exchange loss will result. 
E) Any gain or loss will be included in comprehensive income.

Question 6

On October 31, 2020, Darling Company negotiated a two-year 100,000-franc loan from a foreign bank at an interest rate of 3% per year. Interest payments are made annually on October 31, and the principal will be repaid on October 31, 2022. Darling prepares U.S.-dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming the following:

Accepted Answer

The answer of On October 31, 2020, Darling Company negotiated...

Question 7

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

Accepted Answer

A) As a debit to discount expense. 
B) As a debit to amortization expense. 
C) As a debit to accumulated other comprehensive income. 
D) As a debit impact on net income, as a result of the hedge. 
E) As a decreases to sales.

Question 8

On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan was as follows:  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?

Accepted Answer

A) Option A. 
B) Option B. 
C) Option C. 
D) Option D. 
E) Option E.

Question 9

On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, 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, 2021, the option has a fair value of $1,600. The following spot exchange rates apply:  What journal entry should Eagle prepare on October 1, 2021?

Accepted Answer

A) Option A. 
B) Option B. 
C) Option C. 
D) Option D. 
E) Option E.

Question 10

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

Accepted Answer

The answer of What happens when a U.S. company purchases...

Question 11

On March 1, 2021, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2022. On March 1, 2021, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2022 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2021. The following spot exchange rates apply:  Mattie's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the net impact on Mattie's 2021 income as a result of this fair value hedge of a firm commitment?

Accepted Answer

A) $1,800.00 decrease. 
B) $1,760.60 decrease. 
C) $2,240.40 decrease. 
D) $1,660.40 increase. 
E) $2,240.60 increase.

Question 12

Potter Corp. (a U.S. company in Colorado)had the following series of transactions in a foreign country during 2021:
  The appropriate exchange rates during 2021 were as follows:
  What amount will Potter Corp. report in its 2021 balance sheet for Accounts receivable?

Accepted Answer

The answer of Potter Corp. (a U.S. company in Colorado)had...

Question 13

On December 1, 2021, King Co. sold inventory to a customer in a foreign country. King agreed to accept 96,000 local currency units (LCU)in full payment for this inventory. Payment was to be made on February 1, 2022. On the date of sale, King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months. The two-month forward exchange rate on that date was 1 LCU = $0.30. Any contract discount or premium is amortized using the straight-line method. The spot rates and forward rates on various dates were as follows:
  The company's borrowing rate is 12%. The present value factor for one month is 0.9901.(A.)Assume this hedge is designated as a cash flow hedge. Prepare the journal entries relating to the transaction and the forward contract.(B.)Compute the effect on 2021 net income.(C.)Compute the effect on 2022 net income.

Accepted Answer

The answer of On December 1, 2021, King Co. sold...

Question 14

Coyote Corp. (a U.S. company in Texas)had the following series of transactions in a foreign country during 2021:
  The appropriate exchange rates during 2021 were as follows:
  What amount will Coyote Corp. report in its 2021 balance sheet for Accounts receivable?

Accepted Answer

The answer of Coyote Corp. (a U.S. company in Texas)had...

Question 15

Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24, 2021. On July 24, 2021, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October, 2021. The following exchange rates apply:  What amount will Woolsey include as Adjustment to Net Income for the period ended October 31?

Accepted Answer

A) $6,000 positive. 
B) $6,000 negative. 
C) $10,000 positive. 
D) $10,000 negative. 
E) $14,000 positive.

Question 16

A spot rate may be defined as

Accepted Answer

A) The price a foreign currency can be purchased or sold today. 
B) The price today at which a foreign currency can be purchased or sold in the future. 
C) The forecasted future value of a foreign currency. 
D) The U.S. dollar value of a foreign currency. 
E) The Euro value of a foreign currency.

Question 17

On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan was as follows:  How much foreign exchange gain or loss should be included in Shannon's 2021 income statement?

Accepted Answer

A) $1,000 gain. 
B) $1,000 loss. 
C) $2,000 gain. 
D) $2,000 loss. 
E) $8,000 loss.

Question 18

On October 1, 2021, 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, 2021, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2022)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 0.9901.Any discount or premium on the contract is amortized using the straight-line method.Assuming this is a cash flow hedge; prepare journal entries for this sales transaction and forward contract.

Accepted Answer

The answer of On October 1, 2021, Jarvis Co. sold...

Question 19

On May 1, 2021, 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, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2022 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, 2021. The following spot exchange rates apply:  Mosby's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the overall result of having entered into this hedge of exposure to foreign exchange risk?

Accepted Answer

A) $0. 
B) $9,000 net loss on the option. 
C) $9,000 net gain on the option. 
D) $2,000 net gain on the option. 
E) $2,000 net loss.

Question 20

For speculative derivatives, the change in the fair value of the derivative must be:

Accepted Answer

A) Utilized to adjust the derivative asset. 
B) Recognized immediately as a gain or loss in net income. 
C) Recognized as a loss in other comprehensive income. 
D) Recognized as a gain in other comprehensive income. 
E) Recognized as a gain or loss in net income at a later date.

Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

Potter Corp. (a U.S. company in Colorado)had the following series of transactions in a foreign country during 2021: The appropriate exchange rates during 2021 were as follows: What amount will Potter Corp. report in its 2021 balance sheet for Accounts payable?

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

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

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

Potter Corp. (a U.S. company in Colorado)had the following series of transactions in a foreign country during 2021: The appropriate exchange rates during 2021 were as follows: What amount will Potter Corp. report in its 2021 balance sheet for Accounts receivable?

Coyote Corp. (a U.S. company in Texas)had the following series of transactions in a foreign country during 2021: The appropriate exchange rates during 2021 were as follows: What amount will Coyote Corp. report in its 2021 balance sheet for Accounts receivable?

A spot rate may be defined as

On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan was as follows: How much foreign exchange gain or loss should be included in Shannon's 2021 income statement?

For speculative derivatives, the change in the fair value of the derivative must be: