Question 1

How is the fair value of a Forward Contract determined by U.S. GAAP?

Accepted Answer

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Question 2

On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: $\begin{array}{|l|c|c|}
\hline {\text { Date }} & \text { Spot Rate } & \text { Option Premium } \
\hline \text { December 1,2013 } & \$ .97 & \$ .05 \
\hline \text { December 31,2013 } & \$ .95 & \$ .04 \
\hline \text { February 1,2014 } & \$ .94 & \$ .03 \
\hline
\end{array}$ Compute the fair value of the foreign currency option at February 1, 2014.

Accepted Answer

A) $6,000. 
B) $4,500. 
C) $3,000. 
D) $7,500. 
E) $1,500.

Question 3

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows: $\begin{array}{|l|l|}
\hline {\text { Date }} & \text { Amount } \
\hline \text { April 1,2012 } & \$ 97,000 \
\hline \text { December 31,2012 } & \$ 103,000 \
\hline \text { April 1,2013 } & \$ 105,000 \
\hline
\end{array}$ How much foreign exchange gain or loss should be included in Shannon's 2013 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 4

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013: $$\begin{array} { | l | l | } 
\hline \text { Mar. 1 } & \text { Bought inventory costing } 60,000 \text { pesos on credit. } \
\hline \text { May 1 } & \text { Sold } 60 \% \text { of the inventory for } 54,000 \text { pesos on credit. } \
\hline \text { Aug. 1 } & \text { Collected } 48,000 \text { pesos from customers } \
\hline \text { Sept. 1 } & \text { Paid } 36,000 \text { pesos to creditors } \
\hline
\end{array}$$ The appropriate exchange rates during 2013 were as follows: $\begin{array}{|c|c|}
\hline & \text { Exchange } \
\hline \text { Date } & \text { Rate } \
\hline \text { March } 1,2013 & \$ .20=1 \text { peso } \\hline \text { May } 1,2013 & \mathbf{\$ . 2 2}=1 \text { peso } \
\hline \text { August } 1,2013 & \mathbf{\$ . 2 3}=1 \text { peso } \
\hline \text { September } 1,2013 & \mathbf{\$ . 2 4}=1 \text { peso } \
\hline \text { December } 31,2013 & \mathbf{\$ . 2 5}=1 \text { peso } \
\hline
\end{array}$ What amount will Coyote Corp. report in its 2013 income statement for Sales?

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Question 5

What factors create a foreign exchange gain?

Accepted Answer

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Question 6

When a U.S. company purchases parts from a foreign company, which of the following will result in zero foreign exchange gain or loss?

Accepted Answer

A) The transaction is denominated in U.S. dollars. 
B) The option strike price to sell foreign currency is less than the spot rate of the currency. 
C) The option strike price to buy foreign currency is less than the spot rate of the currency. 
D) The foreign currency appreciated in value relative to the U.S. dollar. 
E) The foreign currency depreciated in value relative to the U.S. dollar.

Question 7

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

Accepted Answer

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Question 8

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, 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, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: $\begin{array}{|l|c|}
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1, 2013 } & \$ 2.00 \
\hline \text { December 31,2013 } & \$ 1.97 \
\hline \text { February 1,2014 } & \$ 2.01 \
\hline
\end{array}$ What is the 2014 effect on net income as a result of these transactions?

Accepted Answer

A) $195,000 
B) $201,600 
C) $201,000 
D) $202,600 
E) $203,000

Question 9

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: $\begin{array}{lrr}&&\text { Forward }\
&\text { Spot}&\text {  Rate }\
\text { Date }&\text { Rate}&\text { to Jan. } 15\
\hline\text { December 16, 2013 } & \$ .00092 & \text { \$. } 00098 \
\text { December 31, 2013 } & .00090 & .00093 \
\text { January 15, 2014 } & .00095 & .00095
\end{array}$ Assuming a forward contract was entered into, how would the forward contract be reflected on Car's December 31, 2013 balance sheet?

Accepted Answer

A) Forward contract (asset). 
B) Forward contract (liability). 
C) Foreign currency (asset). 
D) Foreign currency (liability). 
E) Foreign exchange (liability).

Question 10

Parker Corp., a U.S. company, had the following foreign currency transactions during 2013: (1) Purchased merchandise from a foreign supplier on July 5, 2013 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $82,000.
(2) On October 1, 2013 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2013. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2013, and $881,000 on October 1, 2014.
What amount should be included as a foreign exchange gain or loss from the two transactions for 2014?

Accepted Answer

A) $9,000 loss. 
B) $9,000 gain. 
C) $11,000 loss. 
D) $21,000 loss. 
E) $21,000 gain.

Question 11

Alpha Inc., a U.S. company, had a receivable from a customer that was denominated in Mexican pesos. On December 31, 2012, this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000. The receivable was collected on March 2, 2013, when the U.S. equivalent was $6,900. How much foreign exchange gain or loss will Alpha record on the income statement for the year ended December 31, 2013?

Accepted Answer

A) $1,100 loss. 
B) $1,100 gain. 
C) $6,900 loss. 
D) $6,900 gain. 
E) $8,000 gain.

Question 12

All of the following data may be needed to determine the fair value of a forward contract at any point in time except

Accepted Answer

A) The forward rate when the forward contract was entered into. 
B) The current forward rate for a contract that matures on the same date as the forward contract entered into. 
C) The future spot rate. 
D) A discount rate. 
E) The company's incremental borrowing rate.

Question 13

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013: $$\begin{array} { | l | l | } 
\hline \text { Mar. 1 } & \text { Bought inventory costing } 60,000 \text { pesos on credit. } \
\hline \text { May 1 } & \text { Sold } 60 \% \text { of the inventory for } 54,000 \text { pesos on credit. } \
\hline \text { Aug. 1 } & \text { Collected } 48,000 \text { pesos from customers } \
\hline \text { Sept. 1 } & \text { Paid } 36,000 \text { pesos to creditors } \
\hline
\end{array}$$ The appropriate exchange rates during 2013 were as follows: $\begin{array}{|c|c|}
\hline & \text { Exchange } \
\hline \text { Date } & \text { Rate } \
\hline \text { March } 1,2013 & \$ .20=1 \text { peso } \\hline \text { May } 1,2013 & \mathbf{\$ . 2 2}=1 \text { peso } \
\hline \text { August } 1,2013 & \mathbf{\$ . 2 3}=1 \text { peso } \
\hline \text { September } 1,2013 & \mathbf{\$ . 2 4}=1 \text { peso } \
\hline \text { December } 31,2013 & \mathbf{\$ . 2 5}=1 \text { peso } \
\hline
\end{array}$ What amount will Coyote Corp. report in its 2013 balance sheet for Inventory?

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Question 14

On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a French customer in three months, denominating the transaction in euros. On April 1, the spot rate is $1.41 per euro, and Quality enters into a three-month forward contract cash flow hedge to sell 400,000 euros at a rate of $1.36. At the end of three months, the spot rate is $1.37 per euro, and Quality delivers the merchandise, collecting 400,000 euros. What are the effects on net income from these transactions?

Accepted Answer

A) $16,000 Discount Expense plus a $12,000 positive Adjustment to Net Income when the merchandise is delivered. 
B) $16,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise is delivered. 
C) $16,000 Discount Expense plus a $20,000 negative Adjustment to Net Income when the merchandise is delivered. 
D) $16,000 Discount Expense plus a $20,000 positive Adjustment to Net Income when the merchandise is delivered. 
E) $16,000 Discount Expense plus an $16,000 positive Adjustment to Net Income when the merchandise is delivered.

Question 15

Parker Corp., a U.S. company, had the following foreign currency transactions during 2013: (1) Purchased merchandise from a foreign supplier on July 5, 2013 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $82,000.
(2) On October 1, 2013 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2013. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2013, and $881,000 on October 1, 2014.
What amount should be included as a foreign exchange gain or loss from the two transactions for 2013?

Accepted Answer

A) $2,000 loss. 
B) $2,000 gain. 
C) $10,000 gain. 
D) $14,000 loss. 
E) $14,000 gain.

Question 16

On March 1, 2013, 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, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 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, 2013. The following spot exchange rates apply: $\begin{array}{|l|c|}
\hline \text { Date } & \text { Spot Rate } \
\hline \text { March 1,2013 } & \$ 1.90 \
\hline \text { December 31,2013 } & \$ 1.89 \
\hline \text { March 1,2014 } & \$ 1.84 \
\hline
\end{array}$ Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the net impact on Mattie's 2014 income as a result of this fair value hedge of a firm commitment?

Accepted Answer

A) $379,760.60 decrease. 
B) $8,360.60 increase. 
C) $8,360.60 decrease. 
D) $4,390.40 decrease. 
E) $379,760.60 increase.

Question 17

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

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Question 18

On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: $\begin{array}{|l|c|c|}
\hline {\text { Date }} & \text { Spot Rate } & \text { Option Premium } \
\hline \text { December 1,2013 } & \$ .97 & \$ .05 \
\hline \text { December 31,2013 } & \$ .95 & \$ .04 \
\hline \text { February 1,2014 } & \$ .94 & \$ .03 \
\hline
\end{array}$ Compute the U.S. dollars received on February 1, 2014.

Accepted Answer

A) $138,000. 
B) $136,500. 
C) $145,500. 
D) $141,000. 
E) $142,500.

Question 19

Winston Corp., a U.S. company, had the following foreign currency transactions during 2013: (1) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $54,000.
(2) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2013. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2013, and $299,000 on October 15, 2014.
What amount should be included as a foreign exchange gain or loss from the two transactions for 2014?

Accepted Answer

A) $1,000 loss. 
B) $1,000 gain. 
C) $2,000 loss. 
D) $4,000 gain. 
E) $4,000 loss.

Question 20

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

Accepted Answer