Question 1

On December 1,2008,Merry Corporation acquired 100 shares of Venus Corporation at a cost of $60 per share.Merry classifies them as available-for-sale securities.On this same date,it decides to hedge against a possible decline in the value of the securities by purchasing,at a cost of $400,an at-the-money put option to sell the 100 shares at $60 per share.The option expires on February 20,2009.Selected information concerning the fair values of the investment and the options follow:
Assume that Merry exercises the put option and sells Venus shares on February 20,2009.
Required:
1)Prepare the entries required on December 1,2008,to record the purchase of the Venus stock and the put options.
2)Prepare the entries required on December 31,2008,to record the change in intrinsic value and time value of the options,as well as the revaluation of the available-for-sale securities.
3)Prepare the entries required on February 20,2008,to record the exercise of the put option and the sale of the securities at that date.

Accepted Answer

The answer of On December 1,2008,Merry Corporation acquired 100 shares...

Question 2

Mint Corporation has several transactions with foreign entities.Each transaction is denominated in the local currency unit of the country in which the foreign entity is located.On November 2,20X8,Mint sold confectionary items to a foreign company at a price of LCU 23,000 when the direct exchange rate was 1 LCU = $1.08.The account has not been settled as of December 31,20X8,when the exchange rate has increased to 1 LCU = $1.10.The foreign exchange gain or loss on Mint's records at year-end for this transaction will be:

Accepted Answer

A)  $460 loss
B)  $387 loss
C)  $387 gain
D)  $460 gain D

Question 3

Which of the following observations is true of forwards contracts?

Accepted Answer

A)  Substantial margin is required to initiate a contract.
B)  Must be completed either with the underlying's future delivery or net
C)  cash settlement.
D)  Cannot be customized;for a specific amount at a specific date.
E)  Usually settled with a net cash amount prior to maturity date. B

Question 4

Chicago based Corporation X has a number of exporting transactions with companies based in Sweden.Exporting activities result in receivables.If the settlement currency is the Swedish Krona,which of the following will happen by changes in the direct or indirect exchange rates?

Accepted Answer

A)  Option A
B)  Option B
C)  Option C
D)  Option D

Question 5

Mint Corporation has several transactions with foreign entities.Each transaction is denominated in the local currency unit of the country in which the foreign entity is located.On October 1,20X8,Mint purchased confectionary items from a foreign company at a price of LCU 5,000 when the direct exchange rate was 1 LCU = $1.20.The account has not been settled as of December 31,20X8,when the exchange rate has decreased to 1 LCU = $1.10.The foreign exchange gain or loss on Mint's records at year-end for this transaction will be:

Accepted Answer

A)  $500 loss
B)  $500 gain
C)  $378 gain
D)  $5,500 loss

Question 6

Based on the preceding information,the entries made on April 1,20X9 will include:
A.a debit to Other Comprehensive Income for $200,000.
B.a debit to Cost of Goods Sold for $2,240,000.
C.a credit to Oil Inventory for $2,240,000.
D.a credit to Cost of Goods Sold for $100,000.

Accepted Answer

The answer of Based on the preceding information,the entries made...

Question 7

The fair market value of a near-month call option with a strike price of $45 is $5,when the stock is trading at $48.
-Based on the preceding information,which of the following is true of the intrinsic and time values associated with this option.

Accepted Answer

A)  Option A
B)  Option B
C)  Option C
D)  Option D

Question 8

Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reals on December 1,20X8,with payment due on January 20,20X9.The exchange rates were:
 
-Based on the preceding information,which of the following is true of dollar's movement vis-à-vis Brazilian real during the period?

Accepted Answer

A)  Option A
B)  Option B
C)  Option C
D)  Option D

Question 9

Suppose the direct foreign exchange rates in U.S.dollars are:
 
-Based on the information given above,the indirect exchange rates for the Singapore dollar and the Cyprus Pound are:

Accepted Answer

A)  1.7655 Singapore dollars and 1.4235 Cyprus pounds respectively.
B)  0.2975 Singapore dollars and 1.5132 Cyprus pounds respectively.
C)  2.1622 Singapore dollars and 0.4625 Cyprus pounds respectively.
D)  1.4235 Singapore dollars and 0.3979 Cyprus pounds respectively.

Question 10

On December 5,20X8,Texas based Imperial Corporation purchased goods from a Saudi Arabian firm for 100,000 riyals (SAR),to be paid on January 10,20X9.The transaction is denominated in Saudi riyals.Imperial's fiscal year ends on December 31,and its reporting currency is the U.S.dollar.The exchange rates are:
 
-Based on the preceding information,what was the overall foreign currency gain or loss on the accounts payable transaction?

Accepted Answer

A)  $300 loss
B)  $200 loss
C)  $100 gain
D)  $200 gain

Question 11

Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$)on January 1,20X9 with settlement to be in 60 days.On the same date,Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable.The forward contract is not designated as a hedge.The spot rates were:
 
-Based on the preceding information,what is the overall effect on net income of Myway's use of the forward exchange contract?

Accepted Answer

A)  Net loss of $1,000
B)  Net gain of $1,500
C)  Net loss of $500
D)  No effect

Question 12

On December 1,20X8,Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds ( )at a forward rate of 1 = $1.78.On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€)at a forward rate of €1 = $1.42.
The rates are as follows:
Hedge had no other speculation transactions in 20X8 and 20X9.Ignore taxes.
   
-Based on the preceding information,what is the net gain or loss on the British pound speculative contract?

Accepted Answer

A)  $8,000 gain
B)  $6,000 gain
C)  $3,000 loss
D)  $10,000 gain

Question 13

Based on the preceding information,the entries on January 30,20X9,include a:
A.Debit to Dollars Payable to Exchange Broker,$184,000.
B.Credit to Foreign Currency Transaction Gain,$4,000.
C.Credit to Foreign Currency Receivable from Exchange Broker,$180,000.
D.Debit to Foreign Currency Units (SFr),$184,000.

Accepted Answer

The answer of Based on the preceding information,the entries on...

Question 14

The fair market value of a near-month call option with a strike price of $45 is $5,when the stock is trading at $48.
-Based on the preceding information,the call option:

Accepted Answer

A)  has no intrinsic value currently.
B)  is at the money.
C)  is out of the money.
D)  is in the money.

Question 15

Company X denominated a December 1,20X9,purchase of goods in a currency other than its functional currency.The transaction resulted in a payable fixed in terms of the amount of foreign currency,and was paid on the settlement date,January 10,2010.Exchange rates moved unfavorably at December 31,20X9,resulting in a loss that should:

Accepted Answer

A)  be included as a separate component of stockholders' equity at Dec.31,20X9.
B)  be included as a component of income from continuing operations for 20X9.
C)  be included as a deferred charge at December 31,20X9.
D)  not be reported until January 10,2010,the settlement date.

Question 16

Based on the preceding information,what is the Heavy's overall net gain or net loss from its foreign currency exposure related to this transaction?
A.$4,860 loss
B.$2,600 loss
C.$7,120 gain
D.$2,260 gain

Accepted Answer

The answer of Based on the preceding information,what is the...

Question 17

Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$)on January 1,20X9 with settlement to be in 60 days.On the same date,Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable.The forward contract is not designated as a hedge.The spot rates were:
 
-Based on the preceding information,the entry to revalue foreign currency payable to current U.S.dollar value on March 1 will have:

Accepted Answer

A)  a credit to Foreign Currency Transaction Gain for $1,500.
B)  a debit to Foreign Currency Transaction Loss for $2,500.
C)  a debit to Foreign Currency Transaction Loss for $1,500.
D)  a credit to Foreign Currency Transaction Gain for $1,000.

Question 18

On September 3,20X8,Jackson Corporation purchases goods for a U.S.dollar equivalent of $17,000 from a Swiss company.The transaction is denominated in Swiss francs (SFr).The payment is made on October 10.The exchange rates were:
What entry is required to revalue foreign currency payable to U.S.dollar equivalent value on October 10?

Accepted Answer

A)  Option A
B)  Option B
C)  Option C
D)  Option D

Question 19

Company X issues variable-rate debt but wishes to fix its interest rates because it believes the variable rate may increase.Company Y has a fixed-rate bond but is looking for a variable-rate interest because it assumes the interest rates may decrease.The two companies agree to exchange cash flows.Such an arrangement is called:
A.a futures contract.
B.a forward contract.
C.a swap.
D.an option.

Accepted Answer

The answer of Company X issues variable-rate debt but wishes...

Question 20

Upon arrival in Chile,Karen exchanged $1,000 of U.S.currency into 480,000 Chilean Pesos.While returning after her two month visit,she exchanged her remaining 50,000 Pesos into $100 of U.S.currency.What amount of gain or a loss did Karen experience on the 50,000 pesos she held during her visit and converted to U.S.dollars at the departure date?

Accepted Answer

A)  Loss of $4.
B)  Gain of $4.
C)  Loss of $6.
D)  No gain or loss.

Exam 11: Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Which of the following observations is true of forwards contracts?

Chicago based Corporation X has a number of exporting transactions with companies based in Sweden.Exporting activities result in receivables.If the settlement currency is the Swedish Krona,which of the following will happen by changes in the direct or indirect exchange rates?

Based on the preceding information,the entries made on April 1,20X9 will include: A.a debit to Other Comprehensive Income for $200,000. B.a debit to Cost of Goods Sold for $2,240,000. C.a credit to Oil Inventory for $2,240,000. D.a credit to Cost of Goods Sold for $100,000.

The fair market value of a near-month call option with a strike price of $45 is $5,when the stock is trading at $48. -Based on the preceding information,which of the following is true of the intrinsic and time values associated with this option.

Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reals on December 1,20X8,with payment due on January 20,20X9.The exchange rates were: -Based on the preceding information,which of the following is true of dollar's movement vis-à-vis Brazilian real during the period?

Suppose the direct foreign exchange rates in U.S.dollars are: -Based on the information given above,the indirect exchange rates for the Singapore dollar and the Cyprus Pound are:

The fair market value of a near-month call option with a strike price of $45 is $5,when the stock is trading at $48. -Based on the preceding information,the call option:

Based on the preceding information,what is the Heavy's overall net gain or net loss from its foreign currency exposure related to this transaction? A.$4,860 loss B.$2,600 loss C.$7,120 gain D.$2,260 gain