Question 1

Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: $$\begin{array} { | l | l | l | } 
\hline \text { Dec 1 } & \text { Spot rate: } & \$ 1.7241 \
\hline \text { Dec. 31 } & \text { Spot rate: } & \$ 1.8182 \
\hline \text { Jan. 30 } & \text { Spot rate: } & \$ 1.6666 \
\hline
\end{array}$$ For what amount should Sales be credited on December 1?

Accepted Answer

A) $5,500. 
B) $16,949. 
C) $18,182. 
D) $17,241. 
E) $16,667.

Question 2

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 3

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, the foreign currency was originally sold in the foreign currency market on December 16, 2013 at a

Accepted Answer

A) forward contract discount $600. 
B) forward contract premium $600. 
C) forward contract discount $980. 
D) forward discount premium $980. 
E) There is no premium or discount because the fair value of the contract is zero.

Question 4

Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: $$\begin{array} { | l | l | l | } 
\hline \text { Dec 1 } & \text { Spot rate: } & \$ 1.7241 \
\hline \text { Dec. 31 } & \text { Spot rate: } & \$ 1.8182 \
\hline \text { Jan. 30 } & \text { Spot rate: } & \$ 1.6666 \
\hline
\end{array}$$ What amount of foreign exchange gain or loss should be recorded on December 31?

Accepted Answer

A) $300 gain. 
B) $300 loss. 
C) $0. 
D) $941 loss. 
E) $941 gain.

Question 5

On November 10, 2013, 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, 2014. On December 1, 2013, 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 = $.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 .9901.
(A.) Assume this hedge is designated as a fair value hedge. Prepare the journal entries relating to the transaction and the forward contract.
(B.) Compute the effect on 2013 net income.
(C.) Compute the effect on 2014 net income.

Accepted Answer

The answer of On November 10, 2013, King Co. sold...

Question 6

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 amount of Adjustment to Accumulated Other Comprehensive Income for 2014 from these transactions?

Accepted Answer

A) $1,000. 
B) $1,600. 
C) $1,800. 
D) $2,000. 
E) $2,600.

Question 7

What is meant by the spot rate?

Accepted Answer

The answer of What is meant by the spot rate?...

Question 8

What is the purpose of a hedge of foreign exchange risk?

Accepted Answer

The answer of What is the purpose of a hedge...

Question 9

On May 1, 2013, 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, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 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, 2013. The following spot exchange rates apply: $\begin{array}{|l|c|}
\hline \text { Date } & \text { Spot Rate } \
\hline \text { May 1,2013 } & \$ 0.095 \
\hline \text { December 31,2013 } & \$ 0.094 \
\hline \text { March 1,2014 } & \$ 0.089 \
\hline
\end{array}$ Mosby'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 impact on Mosby's 2014 net income as a result of this fair value hedge of a firm commitment?

Accepted Answer

A) $1,800.00 decrease. 
B) $2,500.00 increase. 
C) $2,500.00 decrease. 
D) $188,760.60 increase. 
E) $188,760.60 decrease.

Question 10

Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty days. Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.

Accepted Answer

The answer of Yelton Co. just sold inventory for 80,000...

Question 11

Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows: $$\begin{array} { | l | l | l | } 
\hline \text { May 8 } & \text { Spot rate: } & \$ 1.25 \
\hline \text { May 31 } & \text { Spot rate: } & \$ 1.26 \
\hline \text { Jun. 7 } & \text { Spot rate: } & \$ 1.20 \
\hline
\end{array}$$ How much U.S. $ will it cost Brisco to finally pay the payable on June 7?

Accepted Answer

A) $1,666,667. 
B) $2,440,000. 
C) $2,520,000. 
D) $2,500,000. 
E) $2,400,000.

Question 12

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 Accounts receivable?

Accepted Answer

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

Question 13

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 amount of option expense for 2014 from these transactions?

Accepted Answer

A) $1,000. 
B) $1,600. 
C) $2,500. 
D) $2,600. 
E) $0.

Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

A spot rate may be defined as

What is meant by the spot rate?

What is the purpose of a hedge of foreign exchange risk?

Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty days. Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.