Question 1

REFERENCE 07-02
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:
$$\begin{array} { | l | l | l | } 
\hline \text { May 8 } & \text { Spot rate: } & \$ 1.25 \
\hline \text { May 31 } & \text { Spot rate: } & \$ 1.26 \
\hline \text { Jun. 7 } & \text { Spot rate: } & \$ 1.20 \
\hline
\end{array}$$
-For what amount should Brisco's Accounts Payable be credited on May 8?

Accepted Answer

A) $2,500,000. 
B) $2,440,000. 
C) $1,600,000. 
D) $1,639,344. 
E) $1,666,667.

Question 2

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 euros,which...

Question 3

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 4

On October 1,2018,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 1,2018,a forward exchange contract was acquired whereby Jarvis Co.was to pay 100,000 LCU in four months (on February 1,2019)and receive $78,000 in U.S.dollars.The spot and forward rates for the LCU were as follows:
 $$\begin{array} { | l | l | l | } 
\hline { \text { Date } } & { \text { Rate Description } } &  { \text { Exchange Rate } } \
\hline \text { Octaber 1, 2018 } & \text { Spat Rate } & \$ .8 3  = 1 \mathrm { LCU } \
\hline \text { December 31, 2018 } & \text { Spat Rate } & \$ .8 5 = 1 \mathrm { LCU } \
\hline & \text { 1-Manth Forward Rate } & \$ .8 0 = 1 \mathrm { LCU } \
\hline \text { February 1, 2019 } & \text { Spat Rate } &  \$ .8 6  = 1 \mathrm { LCU } \
\hline
\end{array}$$ The company's borrowing rate is 12%.The present value factor for one month is .9901.
Any discount or premium on the contract is amortized using the straight-line method.
-Assuming this is a fair value hedge;prepare journal entries for this sales transaction and forward contract.

Accepted Answer

The answer of On October 1,2018,Jarvis Co.sold inventory to a...

Question 5

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 6

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds.  On October 1, 2018, 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, 2018, the option has a fair value of $1,600.  The following spot exchange rates apply:
$$\begin{array} { | l | c | } 
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1, 2018 } & \$ 2.00 \
\hline \text { December 31, 2018 } & \$ 1.97 \
\hline \text { February 1,2019 } & \$ 2.01 \
\hline
\end{array}$$
-What is the amount of Cost of Goods Sold for 2019 as a result of these transactions?

Accepted Answer

A) $200,000. 
B) $195,000. 
C) $201,000. 
D) $202,600. 
E) $203,000.

Question 7

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

Accepted Answer

The answer of What happens when a U.S.company sells goods...

Question 8

On March 1, 2018, 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, 2019.  On March 1, 2018, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2019 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, 2018.  The following spot exchange rates apply:
$$\begin{array} { | l | c | } 
\hline \text { Date } & \text { Spot Rate } \
\hline \text { March 1, 2018 } & \$ 1.90 \
\hline \text { December 31, 2018 } & \$ 1.89 \
\hline \text { March 1, 2019 } & \$ 1.84 \
\hline
\end{array}$$
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 2018 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 9

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds.  On October 1, 2018, 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, 2018, the option has a fair value of $1,600.  The following spot exchange rates apply:
$$\begin{array} { | l | c | } 
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1, 2018 } & \$ 2.00 \
\hline \text { December 31, 2018 } & \$ 1.97 \
\hline \text { February 1,2019 } & \$ 2.01 \
\hline
\end{array}$$
-What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2019 from these transactions?

Accepted Answer

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

Question 10

On June 1,CamCo received a signed agreement to sell inventory for ¥500,000.The sale would take place in 90 days.CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received.The spot rate on June 1 was ¥1 =$.004167,and the 90-day forward rate was ¥1 = $.00427.At what amount would CamCo record the Forward Contract on June 1?

Accepted Answer

A) $2,083. 
B) $ 0. 
C) $2,110. 
D) $2,532. 
E) $2,135.

Question 11

On October 1,2018,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 1,2018,a forward exchange contract was acquired whereby Jarvis Co.was to pay 100,000 LCU in four months (on February 1,2019)and receive $78,000 in U.S.dollars.The spot and forward rates for the LCU were as follows:
 $$\begin{array} { | l | l | l | } 
\hline { \text { Date } } & { \text { Rate Description } } &  { \text { Exchange Rate } } \
\hline \text { Octaber 1, 2018 } & \text { Spat Rate } & \$ .8 3  = 1 \mathrm { LCU } \
\hline \text { December 31, 2018 } & \text { Spat Rate } & \$ .8 5 = 1 \mathrm { LCU } \
\hline & \text { 1-Manth Forward Rate } & \$ .8 0 = 1 \mathrm { LCU } \
\hline \text { February 1, 2019 } & \text { Spat Rate } &  \$ .8 6  = 1 \mathrm { LCU } \
\hline
\end{array}$$ The company's borrowing rate is 12%.The present value factor for one month is .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 1,2018,Jarvis Co.sold inventory to a...

Question 12

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2018:  
$$\begin{array} { | l | l | } 
\hline \text { Mar. 1 } & \text { Bought inventory costing } 60,000 \text { pesos on credit. } \
\hline \text { May 1 } & \text { Sold } 60 \% \text { of the invent ory for } 54,000 \text { pesos on credit. } \
\hline \text { Aug. 1 } & \text { Collected } 48,000 \text { pesos from customers } \
\hline \text { Sept. 1 } & \text { Paid } 36,000 \text { pesos to creditors } \
\hline
\end{array}$$
The appropriate exchange rates during 2018 were as follows:
$\begin{array} { | l | l | } 
\hline &  { \text { Exchange } } \
\hline{ \text { Date } } & \text { Rate } \
\hline \text { May } 1,2018 & \$ .20 = 1 \text { peso } \
\hline \text { August } 1,2018 & \$ .22 = 1 \text { peso } \
\hline \text { September } 1,2018 & \$ .23 = 1 \text { peso } \
\hline \text { December } 31,2018 & \$ .25 = 1 \text { peso } \
\hline
\end{array}$
-What amount will Coyote Corp.report in its 2018 income statement for Sales?

Accepted Answer

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

Question 13

A U.S.company sells merchandise to a foreign company denominated in U.S.dollars.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) If the foreign currency depreciates,a foreign exchange loss will result.

Question 14

Pigskin Co. ,a U.S.corporation,sold inventory on credit to a British company on April 8,2018.Pigskin received payment of 35,000 British pounds on May 8,2018.The exchange rate was £1 = $1.54 on April 8 and £1 = 1.43 on May 8.What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar)

Accepted Answer

A) $10,500 loss 
B) $10,500 gain 
C) $ 1,750 loss 
D) $ 3,850 loss 
E) No gain or loss should be recognized.

Question 15

Which statement is true regarding a foreign currency option?

Accepted Answer

A) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future. 
B) A foreign currency option gives the holder the obligation to only sell foreign currency in the future. 
C) A foreign currency option gives the holder the obligation to only buy foreign currency in the future. 
D) A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future. 
E) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate on the future date.

Question 16

Larson Company,a U.S.company,has an India rupee account receivable resulting from an export sale on September 7 to a customer in India.Larson signed a forward contract on September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable.The spot rate was $.023,and the forward rate was $.021.Which of the following did the U.S.exporter report in net income?

Accepted Answer

A) Discount revenue. 
B) Premium revenue. 
C) Discount expense. 
D) Premium expense. 
E) Both discount revenue and premium expense.

Question 17

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 goods...

Question 18

REFERENCE 07-01
Norton Co., a U.S. corporation, sold inventory on December 1, 2018, 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 19

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at the balance sheet date

Accepted Answer

A) 1)Adjust hedged asset or liability to fair value,with counterpart (change in fair value)reported as foreign exchange gain or loss in net income,2.Adjust forward contract to fair value (either an asset or a liability),with counterpart (change in fair value)reported in AOCI,3.Transfer an amount from AOCI to net income to offset the foreign exchange gain or loss on the hedged asset or liability recognized in 1,and 4.Transfer from AOCI to net income (as discount expense or premium revenue)the current period's amortization of discount or premium 
B) 1)Adjust hedged asset or liability to fair value,with counterpart (change in fair value)reported as foreign exchange gain or loss in net income and 2.Adjust option to fair value (either an asset or zero value),with counterpart (change in fair value)reported as gain or loss in net income 
C) 1)Adjust forward contract to fair value (either an asset or a liability),with counterpart (change in fair value)reported as gain or loss in net income and 2.Adjust firm commitment to fair value (based on change in forward rate),with counterpart (change in fair value)reported as gain or loss in net income 
D) 1)Adjust hedged asset,with counterpart (change in fair value)reported as a foreign exchange gain in net income and 2.Adjust forward contract to fair value (either an asset or a liability),with counterpart (change in fair value)reported as a gain or loss in net income 
E) 1)None.No journal entry is required.

Question 20

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds.  On October 1, 2018, 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, 2018, the option has a fair value of $1,600.  The following spot exchange rates apply:
$$\begin{array} { | l | c | } 
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1, 2018 } & \$ 2.00 \
\hline \text { December 31, 2018 } & \$ 1.97 \
\hline \text { February 1,2019 } & \$ 2.01 \
\hline
\end{array}$$
-What is the 2019 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

Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk