Question 1

On 4/1/18, a U.S.Company commits to sell a piece of equipment to a French customer.At that time, the U.S.company enters into a forward contract to sell foreign currency on 8/1/18 (120 days).Delivery will take place 7/1/18 with payment due on 8/1/18.The fiscal year end for the company is 6/30/18.The sales price of the equipment is 200,000 Euros.Various exchange rates are as follows: ?

$$\begin{array} { l r r } 
& \text { Spot } & \text { Forward } \
\hline 4 / 1 / 18 & 1 \mathrm { FC } = \$ 0.60 & 1 \mathrm { FC } = \$ 0.58 \
6 / 30 / 18 \text { and } 7 / 1 / 18 & 1 \mathrm { FC } = \$ 0.58 & 1 \mathrm { FC } = \$ 0.56 \
8 / 1 / 18 & 1 \mathrm { FC } = \$ 0.55 & 1 \mathrm { FC } = \$ 0.55
\end{array}$$ Discount rate is 12%.What is the value of Forward Contract on 6/30?

Accepted Answer

A) 4,000 debit 
B) 3,960 debit 
C) 4,000 credit 
D) 3,960 credit

Question 2

Larson, Inc.sold merchandise for 600,000 FC to a foreign vendor on November 30, 2020.Payment in foreign currency is due January 31, 2021.On the same day, Larson signed an agreement with a foreign exchange broker to sell 600,000 FC on January 31, 2021.The discount rate is 8% and exchange rates to purchase 1 FC are as follows: ?

$$\begin{array} { l r r r } 
& \text { Nov. } 30,2020 & \text { Dec. } 31,2020 & \text { Jan. } 31,2021 \
\text { Spot } & \$ 1.49 & \$ 1.46 & \$ 1.43 \
30 \text { day } & \$ 1.48 & \$ 1.43 & \$ 1.44 \
60 \text { day } & \$ 1.47 & \$ 1.40 & \$ 1.42
\end{array}$$ What is the net amount of the gains or losses recognized in the financial statements for the year ended December 31, 2020?

Accepted Answer

A) $5,840 gain 
B) $6,000 loss 
C) $18,000 loss 
D) $12,000 gain

Question 3

The best definition for direct quotes would be "direct quotes measure

Accepted Answer

A) ​how much foreign currency must be exchanged to receive 1 domestic currency." 
B) ​current or spot rates." 
C) ​how much domestic currency must be exchanged to receive 1 foreign currency." 
D) ​exchange rates at a future point in time."

Question 4

On November 1, 2016, a U.S.company purchased inventory from a foreign supplier for 100,000 FC, with payment to be made on January 31, 2017, in FC.To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on November 1 to purchase 100,000 FC on January 31, 2017.The U.S.firm has a December 31 year end for accounting purposes.The following exchange rates may apply:
?
Discount rate = 12%
 $$\begin{array} { l c c } 
\text { Date } & \text { Spot Rate } & \text { Fwd. Rate } \
\hline 11 / 1 / 16 & \$ 0.15 & \$ 0.13 \
12 / 31 / 16 & \$ 0.16 & \$ 0.14 \
1 / 31 / 17 & \$ 0.165 & \$ 0.165
\end{array}$$ ?
Required:
?
Make all the necessary journal entries for the U.S.firm relative to these events occurring between November 1, 2016, and January 31, 2017.

Accepted Answer

The answer of On November 1, 2016, a U.S.company purchased...

Question 5

A U.S.Corp.purchased a computer from a French firm on July 1, 2020, when a Euro cost $0.25.The U.S.firm will be required to pay the French manufacturer 75,000 Euros on August 1, 2020, when the Euro costs $0.23.
​
Required:
Make the necessary journal entries for the U.S.firm on July 1 and August 1.

Accepted Answer

The answer of A U.S.Corp.purchased a computer from a French...

Question 6

A forward exchange contract is being transacted at a premium if the current forward rate is

Accepted Answer

A) ​less than the expected spot rate. 
B) ​greater than the expected spot rate. 
C) ​less than the current spot rate. 
D) ​greater than the current spot rate.

Question 7

The time value of an option is the difference between the

Accepted Answer

A) ​premium paid and its current rate. 
B) ​premium paid and its intrinsic value. 
C) ​exercise price and its current rate. 
D) ​call option price and the put option price.

Question 8

Hugh, Inc.purchased merchandise for 300,000 FC from a British vendor on November 30, 2018.Payment in British pounds is due January 31, 2019.Exchange rates to purchase 1 FC is as follows: ?

$$\begin{array} { l c c } 
& \text { Nov. 30, 2018 } & \text { Dec. } 31,2018 \
\hline \text { Spot } & \$ 1.65 & \$ 1.62 \
30 \text { day } & \$ 1.64 & \$ 1.59 \
60 \text { day } & \$ 1.63 & \$ 1.56
\end{array}$$ In the December 31, 2018 income statement, what amount should Hugh report as foreign exchange gain from this transaction?

Accepted Answer

A) $3,000 loss 
B) $9,000 gain 
C) $9,000 loss 
D) $3,000 gain

Question 9

On November 1, 20X8 Desket, Inc.a U.S.company agreed to sell goods to a foreign buyer for 200,000 FC.The goods were to be shipped on January 31, 2024 with payment to be received on that day.
?
The hedging contract, signed on November 1, 20X8, called for the sale of 200,000 FC on January 31, 2024.Assume the December 31 is fiscal year end.Exchange rates are as follows:
?
Discount rate = 12%
 $$\begin{array} { l c c } 
& \text { Spot Rate } & \text { Fwd. Rate } \
11 / 1 / \mathrm { X } 8 & \$ 0.66 & \$ 0.69 \
12 / 31 / \mathrm { X } 8 & \$ 0.67 & \$ 0.68 \
1 / 31 / \mathrm { X } 8 & \$ 0.66 & \$ 0.66
\end{array}$$ ?
Required:
?
Prepare all necessary entries through December 31, 20X8 for the commitment hedge and sale.Ignore Cost of Goods Sold.

Accepted Answer

The answer of On November 1, 20X8 Desket, Inc.a U.S.company...

Question 10

On August 1, 2016, an American firm purchased a machine costing 200,000,000 yen from a Japanese firm to be paid for on October 1, 2016.Also on August 1, 2016, the American firm entered into a contract to purchase 200,000,000 yen to be delivered on October 1, 2016, at a forward rate of 1 Yen = $0.00783.The exchange rates were as follows: ?

$$\begin{array} { l l } 
 & \text { Spot } \
\text { August } 1,2016& 1 \text { Yen } = \$ 0.00781 \
\text { August } 31,2016 \text { (fiscal year end) } & 1 \text { Yen } = \$ 0.00777 \
\text { October } 1,2016 & 1 \text { Yen } = \$ 0.00779
\end{array}$$

Which of the following statements is incorrect concerning the accounting treatment of these transactions?

Accepted Answer

A) The machine's final recorded value was $1,558,000. 
B) The beginning balance in the accounts payable was $1,562,000. 
C) An exchange loss on the accounts payable of $4,000 was recognized on October 1, 2016. 
D) The value of the accounts payable just before payment, on October 1, 2016, was $1,558,000.

Question 11

Which of the following statements is not true regarding forward contracts that cover periods of time different from the settlement period (transaction date to the settlement date)?

Accepted Answer

A) ​If the forward contract expires before the settlement date, the gain or loss will partially offset the gain or loss on the foreign currency transaction. 
B) ​If the forward contract expires after the settlement date, post-settlement date gains and losses are not recognized as components of current operating income. 
C) ​Premium and discount are amortized over the life of the contract. 
D) ​All of these statements are true.

Question 12

On November 1, 2016, a U.S.company purchased inventory from a foreign supplier for 100,000 FC, with payment to be made on January 31, 2017, in FC.To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on November 1 to purchase 100,000 FC on January 31, 2017.The U.S.firm has a December 31 year end for accounting purposes.The following exchange rates may apply:
?
?
 $$\begin{array} { l c c } 
\text { Date } & \text { Spot Rate } & \text { Fwd Rate } \
\hline 11 / 1 / 16 & \$ 0.15 & \$ 0.13 \
12 / 31 / 16 & \$ 0.16 & \$ 0.14 \
1 / 31 / 17 & \$ 0.165 & \$ 0.165
\end{array}$$ Discount rate = 12%.The transaction qualifies for treatment as a cash flow hedge.
?
Required:
?
Make all the necessary journal entries for the U.S.firm relative to these events occurring between November 1, 2016, and January 31, 2017.
?

Accepted Answer

The answer of On November 1, 2016, a U.S.company purchased...

Question 13

On 7/1, a company forecasts the purchase of 10,000 units of inventory from a foreign vendor.The forecasted cost is estimated to be 150,000 FC.It is estimated inventory will be delivered 11/1.Also, on 7/1, the company purchased a call option to buy 150,000 FC at a strike price of $0.60 anytime during October.An option premium of $2,000 was paid.
?
?
 $$\begin{array} { l c c c c } 
& \text { July 1 } & \text { July 31 } & \text { August 31 } & \text { October 1 } \
\text { Spot } & \$ 0.58 & \$ 0.61 & \$ 0.63 & \$ 0.635 \
\text { Fair Value of Option } & \$ 2,000 & \$ 2,500 & \$ 5,100 & \$ 5,500
\end{array}$$ Required:
?
Prepare the journal entries required through 10/1.

Accepted Answer

The answer of On 7/1, a company forecasts the purchase...

Question 14

A U.S.manufacturer has sold computer services to a foreign firm, billed the firm and later received 200,000 foreign currency units (FC).The exchange rates were 1 FC = $.75 on the date of the sale and 1 FC = $.80 when the receivable was settled.On the transaction date, the settlement exchange rate is estimated to be 1 FC = $.72.By the settlement date, what is the total exchange gain or loss recorded for the transaction if the two-transaction method is used?

Accepted Answer

A) ​$10,000 exchange gain 
B) ​$6,000 exchange loss 
C) ​$10,000 exchange loss 
D) ​no gain or loss

Question 15

Given the following information for a 90 day contract: ?

$$\begin{array}{l}
\begin{array} { l c c } 
& \text { US Dollars } & \text { FC } \
\text { Value Today } & 3,750 & 5,000 \
\text { Interest Rate } & 4 \% & 7 \% \
3 \text { months interest } & 37.50 & 87.50 \
\text { Value in 3 months } & ? ? & ? ?
\end{array}\
\text { The spot rate today is } 1 \mathrm { FC } = .75
\end{array}$$ What will be the forward rate?

Accepted Answer

A) 1FC = .75 US Dollars 
B) 1FC = .57 US Dollars 
C) 1FC = .745 US Dollars 
D) 1FC = .70 US Dollars

Question 16

On September 15, 2017, Wall Company, a U.S.firm, purchased a piece of equipment from a foreign firm for 500,000 FC.Payment for the equipment was to be made in FC on January 15, 2018.The spot rates on selected dates were as follows:
​
​
  ​
Required:
​ 
a.Assuming that the US Corp.has a December 31 year end, prepare the necessary journal entries to account for the series of transactions involving the purchase.​
​
b.Prepare all the necessary journal entries assuming that the US Corp.will be paying for the equipment in U.S.dollars.​

Accepted Answer

The answer of On September 15, 2017, Wall Company, a...

Question 17

Pile, Inc.purchased merchandise for 500,000 FC from a foreign vendor on November 30, 2020.Payment in foreign currency is due January 31, 2021.On the same day, Pile signed an agreement with a foreign exchange broker to buy 500,000 FC on January 31, 2021.Exchange rates to purchase 1 FC are as follows: ?

$$\begin{array} { l r r r } 
& \text { Nov. } 30,2020 & \text { Dec. } 31,2020 & \text { Jan. } 31,2021 \
\text { Spot } & \$ 1.49 & \$ 1.45 & \$ 1.44 \
30 \text { day } & \$ 1.48 & \$ 1.43 & \$ 1.43 \
60 \text { day } & \$ 1.46 & \$ 1.41 & \$ 1.42
\end{array}$$ What will be the adjustment to the account payable included in the journal entry record on December 31, 2020?

Accepted Answer

A) $20,000 debit 
B) $20,000 credit 
C) $30,000 debit 
D) $0

Question 18

Which of the following factors influences the spread between forward and spot rates?

Accepted Answer

A) ​which currency is denominated as the domestic currency 
B) ​the interest rate differential over time 
C) ​the current cross rate between the two currencies 
D) ​all are factors that may influence the spread

Question 19

Describe the risks and uncertainty a U.S.company faces when purchasing goods from a foreign corporation and settling the transaction in the foreign currency.

Accepted Answer

The answer of Describe the risks and uncertainty a U.S.company...

Question 20

A fair value hedge may include hedges against the change in the fair value of all but:

Accepted Answer

A) ​an accounts receivable. 
B) ​a purchase order. 
C) ​a long-term loan. 
D) ​a forecasted sale.

Exam 10: Foreign Currency Transactions