Question 1

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 2

What factors create a foreign exchange gain?

Accepted Answer

The answer of What factors create a foreign exchange gain?...

Question 3

Which of the following statements is true concerning hedge accounting?

Accepted Answer

A)  Hedges of foreign currency firm commitments are used for future sales only. 
B)  Hedges of foreign currency firm commitments are used for future purchases only. 
C)  Hedges of foreign currency firm commitments are used for current sales or purchases. 
D)  Hedges of foreign currency firm commitments are used for future sales or purchases. 
E)  Hedges of foreign currency firm commitments are speculative in nature.

Question 4

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:  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 overall result of having entered into this hedge of exposure to foreign exchange risk?

Accepted Answer

A)  $0 
B)  $9,000 net loss on the option. 
C)  $9,000 net gain on the option. 
D)  $2,000 net gain on the option. 
E)  $2,000 net loss.

Question 5

On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:  Compute the U.S. dollars received on February 1, 2014.

Accepted Answer

A)  $138,000. 
B)  $136,500. 
C)  $145,500. 
D)  $141,000. 
E)  $142,500.

Question 6

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 7

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:  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 8

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:  
The appropriate exchange rates during 2013 were as follows:  
What amount will Coyote Corp. report in its 2013 balance sheet for Inventory?

Accepted Answer

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

Question 9

Belsen purchased inventory on December 1, 2012. Payment of 200,000 stickles was to be made in sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days. The spot rate was §1 = .35714, and the 60-day forward rate was §1 = $.38462. On December 31, the spot rate was §1 = .34483 and the 30-day forward rate was §1 = .38168. Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.
In the journal entry to record the establishment of a forward exchange contract, at what amount should the Forward Contract account be recorded on December 1?

Accepted Answer

A)  $71,428. 
B)  $76,924. 
C)  $588. 
D)  $582. 
E)  $0, since there is no cost, there is no value for the contract at this date.

Question 10

On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:  Compute the fair value of the foreign currency option at February 1, 2014.

Accepted Answer

A)  $6,000. 
B)  $4,500. 
C)  $3,000. 
D)  $7,500. 
E)  $1,500.

Question 11

On March 1, 2013, 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, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 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, 2013. The following spot exchange rates apply:  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 2014 income as a result of this fair value hedge of a firm commitment?

Accepted Answer

A)  $379,760.60 decrease. 
B)  $8,360.60 increase. 
C)  $8,360.60 decrease. 
D)  $4,390.40 decrease. 
E)  $379,760.60 increase.

Question 12

On December 1, 2013, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2014, as a fair value hedge of a foreign currency denominated account payable. The following U.S. dollar per peso exchange rates apply:  Joseph's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent is .9803. Which of the following is included in Joseph's December 31, 2013 balance sheet for the forward contract?

Accepted Answer

A)  $5,146.58 asset. 
B)  $5,146.58 liability. 
C)  $500.00 liability. 
D)  $490.15 asset. 
E)  $490.15 liability.

Question 13

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows:  Angela Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound payable resulting from imports from England. Angela recorded foreign exchange gain related to both its euro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?

Accepted Answer

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

Question 14

A U.S. company buys merchandise from 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)  Any gain or loss will be included in comprehensive income.

Question 15

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:  
The appropriate exchange rates during 2013 were as follows:  
The beginning balance of cash was 50,000 pesos on January 1, 2013, translated at 1 peso = $.18. What amount will Coyote Corp. report in its 2013 balance sheet for Cash?

Accepted Answer

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

Question 16

On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:  Compute the fair value of the foreign currency option at December 1, 2013.

Accepted Answer

A)  $6,000. 
B)  $4,500. 
C)  $3,000. 
D)  $7,500. 
E)  $1,500.

Question 17

Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2012, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2013, the U.S. dollar equivalent was $144,000. In Mills' 2013 consolidated income statement, how much should have been reported as a foreign exchange gain?

Accepted Answer

A)  $0. 
B)  $36,000. 
C)  $48,000. 
D)  $10,000. 
E)  $12,000.

Question 18

A forward contract may be used for which of the following?
1) A fair value hedge of an asset.
2) A cash flow hedge of an asset.
3) A fair value hedge of a liability.
4) A cash flow hedge of a liability.

Accepted Answer

A)  1 and 3 
B)  2 and 4 
C)  1 and 2 
D)  1, 3, and 4 
E)  1, 2, 3, and 4

Question 19

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:  Assuming a forward contract was entered into, how would the forward contract be reflected on Car's December 31, 2013 balance sheet?

Accepted Answer

A)  Forward contract (asset). 
B)  Forward contract (liability). 
C)  Foreign currency (asset). 
D)  Foreign currency (liability). 
E)  Foreign exchange (liability).

Question 20

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:  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.

Exam 9: Foreign Currency Transactions and Hedging 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.

What factors create a foreign exchange gain?

Which of the following statements is true concerning hedge accounting?

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013: The appropriate exchange rates during 2013 were as follows: What amount will Coyote Corp. report in its 2013 balance sheet for Inventory?

A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true?

A forward contract may be used for which of the following? 1) A fair value hedge of an asset. 2) A cash flow hedge of an asset. 3) A fair value hedge of a liability. 4) A cash flow hedge of a liability.

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: What amount of foreign exchange gain or loss should be recorded on December 31?