Question 1

Under IFRS, which of the following statements about hedging a foreign currency risk of an accepted purchase order is true?

Accepted Answer

A)  It must be accounted for using a fair-value hedge.
B)  It must be accounted for using a cash-flow hedge.
C)  It can be accounted for using either a fair-value hedge or a cash-flow hedge.
D)  It is not eligible for hedge accounting until it becomes an accounts payable. C

Question 2

Which of the following cannot usually be a hedged item?

Accepted Answer

A)  Accounts receivable
B)  Accounts payable
C)  Derivative instrument
D)  Purchase order C

Question 3

Helvetia Corp., a Swiss firm, bought merchandise from Bouchard Company of Quebec on December 15, 20X7, for 20,000 CHF, payable on January 14, 20X8. Bouchard and Helvetia both close their books on December 31. The 20,000 CHF was paid on January 14, 20X8. The exchange rates for CHF1 were:
 $\begin{array}{ll}
\text { December } 15,20X7 \text { spot } & C \$ .9740 \
\text { December } 15,20X7\text { 30-day forward } & C \$ 9800 \
\text { December } 31,20X7 & C \$ .9700 \
\text { December } 31,20X7 \text { 14-day forward } & C \$ .9730 \
\text { lanuary } 14,20 \times 8 & C \$ .9720
\end{array}$
 The account was hedged by Bouchard through a 30-day forward contract. Bouchard uses the gross method to record hedge transactions. Bouchard reports under IFRS.
-
Required:
Provide the journal entries for Bouchard (the seller)at each of the above dates, as required.

Accepted Answer

December 15, 20X7
 $$\begin{array} { c } 
\text { Accounts receivable }&19,480 \
\text { Sales } ( 20,000 * 9740 )&&19,480 
\end{array}$$ December 15, 20X7
 $$\begin{array} { l } 
\text { Forward receivable }&19,600 \
\text { Forward payable }&&19,600 \
\text { 20,000 CHF x 0.98 }
\end{array}$$ December 31, 20X7
 $\begin{array}{llr}
  \text { Exchange gains and loses } &80\
 \text { Accounts receivable } &&80\
 \text {$ 20,000 \mathrm{CHF} \times(0,97-0,974) $  } &
\end{array}$

$\begin{array}{llr}
  \text { Forward payable } &140\
 \text { Exchange gains and losses } &&140\
 \text { $ 20,000 \mathrm{CHF} \times(0.973-0.98) $ } & 
\end{array}$
 January 14, 20X8
 $\begin{array}{lll}
\text { Cash }[20,000 \times(.972)] & 19,440 & \
\text { Exchange gains and losses } & & 40 \
\text { A/R }[19,480-80] & &19,400 \
& &
\end{array}$
 $\begin{array}{ll}
\text { Cash } & 19,600 \
\text { Forward receivable } && 19,600
\end{array}$
 $\begin{array}{lll}
\text { Forward payable } & 19,460 & \
\text { Exchange gains and losses } & & 20 \
\text { Cash } 20,000 \times 0.972 & & 19,440
\end{array}$

Question 4

Short Link Company (SLC)issued a purchase order to buy a machine from Frankfurt Ltd., a German company, on April 2, 20X6. The contract price is €650,000 and delivery is to occur on August 31, 20X6. Payment is due on October 15, 20X6.
SCL entered into a forward contract to hedge against the euro exchange rate for €650,000, coming due on August 31, 20X6. SLC has a December 31 year-end.
Delivery of the machine occurred on the date specified and the company paid the amount and settled the forward contract October 15, 20X6.
The exchange rates were as follows:
 $$\begin{array} { | l | c | c | } 
\hline \text { Canadian equivalent of euro } & \text { Spot rate } & \begin{array} { c } 
\text { Forward rate to } \
\text { January } 30,20X7
\end{array} \
\hline \text { April } 2,20X6 & 1.50 & 1.59 \
\hline \text { August } 31,20X6 & 1.63 & 1.67 \
\hline \text { October } 15,20X6 & 1.66 & \text { settled } \
\hline
\end{array}$$ Required:
SLC reports under ASPE.
a. Explain how the forward contract will be accounted for under ASPE.
b. Prepare the journal entries to record the above transactions.

Accepted Answer

The answer of Short Link Company (SLC)issued a purchase order...

Question 5

Phan Ltd., a Canadian company, sold goods to a foreign customer for 1,000,000 foreign currency (FC)units, which was equivalent to $500,000 CAD. By the time the customer paid Phan, the exchange rates had changed and 1,000,000 FC units was equivalent to $515,000 CAD. How should the resulting $15,000 CAD difference between the sale and payment dates be treated?

Accepted Answer

A)  As an increase in sales
B)  As a decrease to cost of sales
C)  As a realized gain
D)  As an unrealized gain

Question 6

Beauty Care Limited (BCL)manufactures and distributes leather furniture to various companies in Europe. On April 2, 20X6, BCL entered into a sales contract with a company in Germany to sell 1,000 sofas. The contract price is €2,000 per sofa. Five hundred sofas are to be delivered in May 15, 20X6, and the remaining half is to be delivered on December 20, 20X6. Payment is due in two instalments, with half due on August 31, 20X6, and the remaining half due January 30, 20X7. However, the customer has the right to cancel the contract with 30 days' notice.
BCL entered into a forward contract to hedge against the euro exchange rate for €1 million, each coming due on January 30, 20X7. BCL has an October 31 year-end.
Delivery of the furniture occurred on the dates specified and the company collected the receivables due and settled the forward contract January 30, 20X7.
The exchange rates were as follows:
 $\begin{array}{|l|l|l|}
\hline & & \text { Forward rate to } \
&&\text { January } 30, \
\text { Canadian equivalent of euro } & \text { Spot rate } & 20 \times 7 \ 
\hline \text { April } 2,20 \times 6 & 1.50 & 1.54 \
\hline \text {June } 30,20 \times 6 & 1.51 & 1.57 \
\hline \text { August } 31,20 \times 6 & 1.53 & 1.58 \
\hline \text { October } 31,20 \times 6 & 1.55 & 1.56 \
\hline \text { December } 20,20 \times 6 & 1.59 & 1.61 \
\hline \text { January } 30,20 \times 7 & 1.63 & \text { settled } \
\hline
\end{array}$

-Required:
Assume that the forward contract is designated as a cash flow hedge, since the sale is highly probable. Prepare the journal entries to record the sales and the derivative. Use the gross method to record the journal entries. BCL reports under IFRS.

Accepted Answer

The answer of Beauty Care Limited (BCL)manufactures and distributes leather...

Question 7

Under IFRS, how are monetary assets and liabilities defined?

Accepted Answer

A)  Cash and assets and liabilities that are to be received or paid in a fixed or determinable amount of currency
B)  Current assets and liabilities that are to be received or paid in a fixed or determinable amount of currency
C)  Cash and long-term assets and liabilities that are to be received or paid in a fixed or determinable amount of currency
D)  Long-term assets and liabilities that are to be received or paid in a fixed or determinable amount of currency

Question 8

What is a currency swap an example of?

Accepted Answer

A)  A futures contract
B)  A call option
C)  A derivative instrument
D)  A forward contract

Question 9

On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore)Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided: $\begin{array}{|l|c|c|}
\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \
\hline \text { March } 1,20 \times 2 & .7686 & .7810 \
\hline \text { April } 30,20 \times 2 & .7702 & .7818 \
\hline \text { June } 1,20 \times 2 & .7940 & .7985 \
\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\
\hline 
\end{array}$
 
-Assume that the transaction qualifies as a fair-value hedge. At what amount should McBride record the drilling machine?

Accepted Answer

A)  $307,440
B)  $312,400
C)  $317,600
D)  $319,800

Question 10

On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore)Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided: $\begin{array}{|l|c|c|}
\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \
\hline \text { March } 1,20 \times 2 & .7686 & .7810 \
\hline \text { April } 30,20 \times 2 & .7702 & .7818 \
\hline \text { June } 1,20 \times 2 & .7940 & .7985 \
\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\
\hline 
\end{array}$
 
-Assume that the transaction qualifies as a fair-value hedge. On March 1, at what amount should the forward contract be recorded?

Accepted Answer

A)  $307,440
B)  $312,400
C)  $317,600
D)  $319,800

Question 11

Under IFRS, a hedging relationship qualifies for special hedge accounting rules only if it meets five conditions.
Required:
Explain the conditions that must be met for a derivative to qualify for special hedge accounting. Identify what qualifies as a hedged item. Identify what qualifies as a hedging instrument. Outline the conditions required for a hedge to be effective.

Accepted Answer

The answer of Under IFRS, a hedging relationship qualifies for...

Question 12

Which approach to foreign currency transactions does IFRS support?

Accepted Answer

A)  One-transaction approach
B)  Two-transaction approach
C)  Economic theory approach
D)  Rate theory approach

Question 13

Fransen Co. does a lot of businesses in Denmark. It has numerous trade accounts receivables and accounts payables that are to be settled in Danish krones. What type of hedge does Fransen have?

Accepted Answer

A)  Fair-value hedge
B)  Cash-flow hedge
C)  Natural hedge
D)  Hedge instrument

Question 14

On November 2, 20X9, Henry Company purchased a machine for 100,000 Swiss francs (CHF)with payment required on March 30, 20X10. To eliminate the risk of foreign exchange losses on this payable, Henry entered into a forward exchange contract on November 3, 20X9, to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30, 20X10. The spot rate was CHF1 = $1.95 on November 2, 20X9, and CHF1 = $1.97 on December 1, 20X9.
- What is the amount of the premium or discount on the forward exchange contract on December 1, 20X9?

Accepted Answer

A)  A premium of $3,000
B)  A discount of $3,000
C)  A premium of $5,000
D)  A discount of $5,000

Question 15

Which of the following items is a non-monetary item?

Accepted Answer

A)  Cash
B)  Accounts receivable
C)  Inventory
D)  Accounts payable

Question 16

Which of the following statements is true?

Accepted Answer

A)  The historical rate is the exchange rate at the beginning of the reporting period, and the closing rate is the exchange rate at the end of the reporting period.
B)  The historical rate is the exchange rate at the date of the transaction, and the closing rate is the exchange rate at the end of the reporting period.
C)  The spot rate is the exchange rate at the date of the transaction, and the closing rate is the exchange rate at the conclusion of a hedge instrument.
D)  The historical rate is the exchange rate at the beginning of the reporting period, and the forward rate is the exchange rate at the end of the reporting period.

Question 17

Which of the following statements is true about the two-transaction theory?

Accepted Answer

A)  Exchange gains and losses usually flow through to net income in the period in which they are incurred.
B)  Exchange gains and losses are attached to the sales or assets from the original transaction.
C)  Exchange gains and losses are considered a cost of acquiring assets.
D)  Exchange gains and losses affect the carrying value of acquired assets.

Question 18

What exchange rate is usually used to report non-monetary assets on the statement of financial position?

Accepted Answer

A)  Historical rate
B)  Spot rate
C)  Closing rate
D)  Fair value

Question 19

On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore)Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided: $\begin{array}{|l|c|c|}
\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \
\hline \text { March } 1,20 \times 2 & .7686 & .7810 \
\hline \text { April } 30,20 \times 2 & .7702 & .7818 \
\hline \text { June } 1,20 \times 2 & .7940 & .7985 \
\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\
\hline 
\end{array}$
 
- Assume that the transaction qualifies as a cash-flow hedge. What amount should be recognized as other comprehensive income at April 30, 20X2?

Accepted Answer

A)  $ 320
B)  $ 640
C)  $4,640
D)  $5,280

Question 20

On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore)Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided: $\begin{array}{|l|c|c|}
\hline \text { Date } & \text { Spot Rate } & \text { Forward rate to July } 31,20 \times 2 \
\hline \text { March } 1,20 \times 2 & .7686 & .7810 \
\hline \text { April } 30,20 \times 2 & .7702 & .7818 \
\hline \text { June } 1,20 \times 2 & .7940 & .7985 \
\hline \text { July } 31,20 \times 2 & .7995 & \text { n/a }\
\hline 
\end{array}$
 
- Assume that the transaction qualifies as a fair-value hedge. What is the cost of the hedge?

Accepted Answer

A)  $2,200
B)  $4,640
C)  $4,960
D)  $6,680

Exam 8: Foreign Currency Transactions and Hedges