Deck 10: Foreign Currency Transactions

Question 1

A U.S. firm has purchased, for 50,000 FCs, an electric generator from a foreign firm. The exchange rates were 1 FC = $0.80 on the delivery date and 1 FC = $0.76 when the payable was paid. What is the final recorded value if the two-transaction method is used?

A) $40,000
B) $38,000
C) $42,000
D) $50,000

Answer 1

A

Question 2

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

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.

Answer 2

D

Question 3

Foreign currency transactions not involving a hedge should be accounted for using

A) the one-transaction method.
B) the two-transaction method.
C) a hybrid of the one- and two-transaction methods.
D) either the one- or the two-transaction method (allowed by the FASB).

Answer 3

B

Question 4

A U.S. manufacturer has sold computer services to a foreign firm and received 200,000 foreign currency units (FCs). 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?

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

Question 5

On August 1, 20X1, an American firm purchased a machine costing 200,000,000 yen from a Japanese firm to be paid for on October 1, 20X1. Also on August 1, 20X1, the American firm entered into a contract to purchase 200,000,000 yen to be delivered on October 1, 20X1, at a forward rate of 1 Yen = $0.00783. The exchange rates were as follows: $\begin{array}{ll}&\text { Spot }\\\text { August } 1,20 \mathrm{X} 1 & 1 \text { Yen }=\$ 0.00781 \\\text { August } 31,20 \mathrm{X} 1 & 1 \text { Yen }=\$ 0.00777 \\\text { October } 1,20 \mathrm{X} 1 & 1 \text { Yen }=\$ 0.00779\end{array}$ Which of the following statements is incorrect concerning the accounting treatment of these transactions?

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 gain on the accounts payable of $4,000 was recognized on October 1, 20X1.
D) The value of the accounts payable just before payment, on October 1, 20X1, was $1,558,000.

Question 6

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

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 7

Given the following information for a 90 day contract: What will be the forward rate?

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

Question 8

Scenario 10-1
On 6/1/X2, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/X2. Also on 6/1/X2, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 8/1/X2. The exchange rates were as follows:
The American firms fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%.
Refer to Scenario 10-1. What is the value of the Forward Contract Receivable-FC on 6/1/X2?

A) $73,000
B) $74,000
C) $68,000
D) $70,000

Question 9

A transaction involving foreign currency will most likely result in gains and losses to the reporting entity if the

A) forward exchange contract is selling at a premium.
B) transaction is denominated and measured in the reporting entity's currency.
C) transaction takes place in a country with a tiered monetary system.
D) transaction is denominated in a foreign currency and measured in the reporting entity's currency.

Question 10

A U.S. company that has purchased inventory from a German vendor would be exposed to a net exchange gain on the unpaid balance if the

A) amount to be paid was denominated in dollars.
B) dollar weakened relative to the Euro and the Euro was the denominated currency.
C) dollar strengthened relative to the Euro and the Euro was the denominated currency.
D) U.S. company purchased a forward contract to buy Euros.

Question 11

A U.S. manufacturer has sold goods to a foreign firm for a sale price of 80,000 FC on 12/15/X1. The invoice is due 1/15/X2. The U.S. Firm fiscal year is 12/31/X1. Given the following exchange rates, what gain or loss would the U.S. firm record on 12/31? 12/15
1FC = $0.60 US Dollars
12/31
1FC = $0.65 US Dollars
1/15
1FC = $0.63 US Dollars

A) loss of $4,000
B) loss of $1,600
C) gain of $2,400
D) gain of $4,000

Question 12

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

A) which currency is denominated as the domestic currency
B) the length of the forward exchange contract
C) the current cross rate between the two currencies
D) all are factors that may influence the spread

Question 13

Which of the following does not represent an exchange risk on an exposed position to a company transacting business with a foreign vendor?

A) transaction is denominated in foreign currency, settled at a future date
B) firm commitment to purchase inventory to be paid for in foreign currency
C) Forecasted foreign currency transaction with a high probability of occurrence
D) firm commitment to purchase inventory denominated in U.S. dollars

Question 14

Exchange gains and losses on a forward exchange contract that covers the same time period as the transaction which it provides a hedge for should be recognized as

A) an extraordinary item.
B) part of the original sales transaction.
C) income from continuing operations.
D) income from continuing operations, but only if material.

Question 15

When an economic transaction is denominated in a currency other than the entity's domestic currency, the entity must establish a

A) domestic rate.
B) hedge rate.
C) rate of currency change.
D) rate of exchange.

Question 16

The purpose of a hedge on an identifiable commitment where the U.S. company is selling goods is to:

A) fix the basis of sales revenue to the date of the commitment
B) eliminate all exchange gains/losses from the date of commitment to the date of settlement
C) fix the basis of cost of goods sold to the date of commitment
D) eliminate any exchange gains/losses from the transaction date to the settlement date

Question 17

A U.S. company that has sold its product to a German firm would be exposed to a net exchange gain on the unpaid receivable if the

A) amount to be paid was denominated in dollars.
B) dollar weakened relative to the Euro and the Euro was the denominated currency.
C) dollar strengthened relative to the Euro and the Euro was the denominated currency.
D) U.S. company purchased a forward contract to buy Euros.

Question 18

A U.S. company purchases medical lab equipment from a Japanese company. The Japanese company requires payment in Japanese yen. In this transaction, the yen would be referred to as the

A) domestic currency for the U.S. company.
B) denominated currency.
C) purchasing currency.
D) selling currency.

Question 19

Scenario 10-1
On 6/1/X2, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/X2. Also on 6/1/X2, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 8/1/X2. The exchange rates were as follows:
The American firms fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%.
Refer to Scenario 10-1. What is the value of the Forward Contract Receivable-FC on 6/30/X2?

A) $75,000
B) $75,693
C) $74,693
D) $74,993

Question 20

A bank dealing in foreign currency tells you that the foreign currency will buy you $.80 US dollars. The bank has given you

A) a direct quote.
B) an indirect quote.
C) the official (fixed) rate.
D) a forward rate.

Question 21

The two distinguishing characteristics of a financial instrument are

A) one or more options and one or more exchange rates.
B) one or more underlyings and one or more notional amounts.
C) cash flows and economic exchange.
D) a per share price and a quantity.

Question 22

On November 1, 20X1, DEMO Corp., a U.S. firm, sold merchandise to a foreign firm for 60,000 FCs. DEMO will be paid on January 31, 20X2, in FCs. The spot rates on selected dates were as follows:
Required:
Assuming that DEMO has a December 31 year end, prepare the necessary journal entries to account for the series of transactions involving the sale.

Question 23

Wild, Inc. sold merchandise for 500,000 FC to a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. Exchange rates to purchase 1 foreign currency unit are as follows: In the year in which the sale was made, 20X5, what amount should Wild report as foreign exchange gain/loss from this transaction?

A) $25,000
B) $20,000
C) $5,000
D) $0

Question 24

On September 15, 20X2, Wall Company, a U.S. firm, purchased a piece of equipment from a foreign firm for 500,000 FCs. Payment for the equipment was to be made in FCs on January 15, 20X3. 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.

Question 25

Which of the following statements is true concerning forward contracts classified as hedges of an identifiable foreign currency commitment?

A) Forward contracts used as hedges cannot exceed the foreign currency commitment.
B) Forward contracts cannot extend for a time period after the transaction date of the commitment.
C) The gain or loss traceable to the time period after the transaction date of the commitment should not be deferred.
D) None of these statements is true.

Question 26

Pile, Inc. purchased merchandise for 500,000 FC from a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. On the same day, Pile signed an agreement with a foreign exchange broker to buy 500,000 FC on January 31, 20X6. Exchange rates to purchase 1 FC are as follows: What will be the adjustment to the account payable included in the journal entry record on November 30, 20X5?

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

Question 27

Larson, Inc. sold merchandise for 600,000 FC to a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. On the same day, Larson signed an agreement with a foreign exchange broker to sell 600,000 FC on January 31, 20X6. Exchange rates to purchase 1 FC are as follows: What will be the amount of the Forward Contract Receivable-Dollars on November 30, 20X5?

A) $894,000
B) $888,000
C) $882,000
D) $858,000

Question 28

In a hedge of a forecasted transaction, gains or losses on derivative instruments prior to the occurrence of the actual transaction should be reported as

A) a component of stockholders' equity.
B) a component of other comprehensive income.
C) an extraordinary item.
D) income from continuing operations.

Question 29

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)?

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 30

Current disclosure requires users of hedging instruments to provide information about all of the following except

A) objectives of using hedging instruments.
B) descriptions of various types of hedges entered into.
C) the original cost of entering into the derivative instrument hedge.
D) how gains and losses are recognized in earnings or other comprehensive income.

Question 31

Scenario 10-2
On 4/1/X3, 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/X3 (120 days). Delivery will take place 7/1/X3 with payment due on 8/1/X3. The fiscal year end for the company is 6/30/X3. The sales price of the equipment is 200,000 Euros. Various exchange rates are as follows:
Discount rate is 12%.
Refer to Scenario 10-2. What is the amount in the Firm Commitment account on 6/30/X3?

A) 4,000 debit
B) 8,000 debit
C) 4,000 credit
D) 10,000 credit

Question 32

The time value of an option is the difference between the

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 33

Hugh, Inc. purchased merchandise for 300,000 FC from a British vendor on November 30, 20X3. Payment in British pounds is due January 31, 20X4. Exchange rates to purchase 1 FC is as follows: In the December 31, 20X3 income statement, what amount should Hugh report as foreign exchange gain from this transaction?

A) $12,000
B) $9,000
C) $6,000
D) $0

Question 34

Scenario 10-2
On 4/1/X3, 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/X3 (120 days). Delivery will take place 7/1/X3 with payment due on 8/1/X3. The fiscal year end for the company is 6/30/X3. The sales price of the equipment is 200,000 Euros. Various exchange rates are as follows:
Discount rate is 12%.
Refer to Scenario 10-2. What is the value of Forward Contract Payable-FC on 6/30?

A) 112,000
B) 112,040
C) 116,000
D) none of the above

Question 35

Happ, Inc. agreed to purchase merchandise from a British vendor on November 30, 20X3. The goods will arrive on January 31, 20X4 and payment of 100,000 British pounds is due February 28, 20X4. On November 30, 20X3, Happ signed an agreement with a foreign exchange broker to buy 100,000 British pounds on February 28, 20X4. Exchange rates to purchase 1 British pound are as follows: Because of this commitment hedge, Happ, Inc. will record the merchandise at what value when it arrives in January?

A) $165,000
B) $164,000
C) $160,000
D) $159,000

Question 36

A U.S. Corp. purchased a computer from a French firm on July 1, 20X5, when a Euro cost $0.25. The U.S. firm will be required to pay the French manufacturer 75,000 Euros on August 1, 20X5, when the Euro costs $0.23.
Required:
Make the necessary journal entries for the U.S. firm on July 1 and August 1.

Question 37

In the accounting for forward exchange contracts, gains and losses are measured using either spot or forward rates. Which of the following statements concerning measurement of gains and losses is true?

A) The gains or losses in a hedge on an exposed asset will use the spot rate for the asset and the forward rate for the forward contract.
B) The gains or losses in a speculative hedge will use the forward rate throughout the contract.
C) The gains or losses in a hedge on an identifiable commitment will use the spot rate for the commitment and the forward rate for the forward contract.
D) All of these statements are true.

Question 38

Which of the following is not true concerning the accounting for hedges of forecasted transactions using an option?

A) An intrinsic value must be calculate throughout the hedge period
B) The accounting requires revaluing the market value of the option
C) The option fixes the value of the transaction to the date of the commitment.
D) All of these statements are true.

Question 39

A United States based company that has not hedged an exposed asset position would experience an exchange gain if

A) forward rates increased.
B) forward rates decreased.
C) spot rates increased.
D) spot rates decreased.

Question 40

The accounting treatment given a cash flow hedge of a forecasted transaction continues unless:

A) The hedging relationship is no longer highly effective based on management policies.
B) The derivative instrument is sold, terminated, or exercised.
C) The derivative instrument is no longer designated as a hedge on a forecasted transaction.
D) all of these statements are true.

Question 41

Differentiate between the following monetary systems: floating system, controlled float system and tiered system.

Question 42

Rex Corporation, a U.S. firm with a calendar accounting year, agreed to buy a specially made truck from a Japanese firm for delivery on January 31, 20X2 with payment due on 2/28/X2. On the same date the agreement was signed, November 1, 20X1, a forward contract due on February 28, 20X2, was also signed to purchase 1,000,000 yen, the contract price of the truck. Exchange rates were as follows:
Discount rate = 8%
Required:
Prepare the journal entries needed to properly reflect the purchase and forward contract through the end of the fiscal year.

Question 43

On January 1, 20X4, Branson Company, a U.S. corporation, purchased lab equipment from a Japanese vendor for 1,000,000 FC. The 1,000,000 FC is to be paid on March 31, 20X4. On February 1 the company purchased a forward contract to buy foreign currency which would expire on March 31, 20X4. The contract was to purchase 1,000,000 FC.
Exchange Rates are as follows:
Discount rate = 15%
Required:
Prepare the entries to record the transactions.

Question 44

On January 1, 20X1, a U.S. firm bought a truck from a foreign firm for 10,000 FCs, to be paid on March 1 in FCs. The spot rate was 1 FC = $1.25 on January 1 and 1 FC = $1.265 on March 1. To protect themselves from exchange rate changes, the U.S. firm entered into a forward exchange contract on January 1 to buy FCs on March 1 for $1.28.
Required:
Make all the necessary journal entries to record the transactions for the U.S. firm on January 1 and March 1.

Question 45

On January 1, 20X1, a domestic firm agrees to sell goods to a foreign customer, with delivery to be made on March 1, 20X1. The goods, valued at 50,000 FCs, are to be paid for 30 days after delivery. On January 1, 20X1, the domestic firm purchased a 90-day forward contract to sell 50,000 FCs. Exchange rates on selected dates are as follows:
Discount rate = 10%
Required:
Prepare the journal entries needed to properly reflect the sales transaction and the forward exchange contract. The forward contract meets the conditions necessary to be classified as a hedge on an identifiable foreign currency commitment. Include the table to calculate the split between exchange gains or losses on the contract due to changes in spot rates and the changes in time value.

Question 46

Wolters Corporation is a U.S. corporation that purchased 50,000 chocolate bars from a foreign manufacturer on March 1, 20X9 for 80,000 foreign currency units, to be paid on April 30, 20X9. On March 1, 20X9 Wolters also entered into a forward contract to purchase 80,000 foreign currency units on April 30, 20X9. Wolters has a December 31 year end.
Exchange rates are as follows:
Required:
Prepare the journal entries to record the transactions through April 30, 20X9. March 31 is NOT a fiscal period end. Ignore the split between spot gain/loss and time value.

Question 47

Bulldog Enterprise, a U.S. firm, agreed on February 1, 20X1, to buy gears from a Mexican firm for 75,000 pesos. Delivery is scheduled for April 1, 20X1, with payment due on May 1, 20X1. On February 1, 20X1, Bulldog also acquired a forward contract to buy 75,000 pesos on May 1, 20X1. (The gears represent inventory to the U.S. firm.) There are no fiscal period ends.
Required:
Prepare the journal entries necessary for Bulldog Enterprise to record this activity. Assume that the following exchange rates existed:
Discount rate 15%

Question 48

On November 1, 20X1, a U.S. company purchased inventory from a foreign supplier for 100,000 FCs, with payment to be made on January 31, 20X2, in FCs. To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on November 1 to purchase 100,000 FCs on January 31, 20X2. The U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply:
Discount rate = 12%
Required:
Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 20X1, and January 31, 20X2.

Question 49

Describe the disclosures required by the FASB of firms using derivatives as foreign currency hedges.

Question 50

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 $1,000.
Required:
Prepare the journal entries required through 10/1.

Question 51

On November 1, 20X2, a calendar-year investor purchased a 90-day forward contract to buy 1,000 FCs at a forward rate of 1 FC = $1.01, when the spot rate was 1 FC = $1.00. On December 31, 20X2, the forward rate for a 30-day forward contract was 1 FC = $1.02. On February 1, 20X3, when the spot rate was 1 FC = $1.03, the investor paid the broker and received the foreign currency.
Required:
Prepare the entries necessary to record this information. Ignore the present value calculations.

Question 52

On November 1, 20X1, a U.S. company sold merchandise to a foreign firm for 100,000 FCs with payment to be made on January 31, 20X2, in FCs. To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on December 1, 20X1 to sell 100,000 FCs on January 31, 20X2. The U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply:
Discount rate = 10%
Required:
Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 20X1, and January 31, 20X2.

Question 53

Explain how the risks differ for holders and writers of foreign exchange options. Additionally, describe the difference between American and European options. Finally, how is the intrinsic value of an option calculated?

Question 54

Zerlie's Imports purchased automotive parts from a German firm on July 1, 20X1. The parts cost 150,000 Euros to be paid for on August 15. To pay for the parts, Zerlie's Imports borrowed 150,000 euros from a German bank on July 16. The loan bears an 11% interest rate to be repaid on August 15 in euros.
Another option would have been for Zerlie's to have hedged the purchase with a forward exchange contract on July 1 to buy 150,000 euros at a forward rate of $0.67. Exchange rates were as follows:
Required:
a.
Compute the effect on net income assuming the following:
(1)
Zerlie did not borrow to pay for the transaction or hedge the transaction on July 1.
(2)
Zerlie borrowed from the German bank on July 16.
(3)
Zerlie hedged the full purchase on July 1.
** ignore present values and discount rates
b.
Determine which of these three alternatives would have been the best for Zerlie under the situation described.

Question 55

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 December 1 with payment to be received January 31, 20X9.
The hedging contract, signed on November 1, 20X8, called for the sale of 200,000 FC on January 31, 20X9. Assume the December 31 is fiscal year end. Exchange rates are as follows:
Discount rate = 12%
Required:
Prepare all necessary entries through December 31, 20X8 for the commitment hedge and sale.

Question 56

Wolters Corporation is a U.S. corporation that purchased 50,000 chocolate bars from a foreign manufacturer on 6/1/X9 for 80,000 foreign currency units, to be paid on 9/1/X9. On 6/1/X9 Wolters also entered into a forward contract to purchase 80,000 foreign currency units on 9/1/X9. Wolters has a July 31 year end.
Exchange rates are as follows:
Discount rate = 12%
Required:
Make the necessary journal entries for Wolters for the period June 1 through September 1, 20X9.

Question 57

Lion Corporation, a U.S. firm, entered into several foreign currency transactions during the year. Determine the effect of each transaction on net income for that current accounting year only. Bear has a June 30 year end.
Required:
a.
On January 15, Lion sold $30,000 (Canadian) in merchandise to a Canadian firm, to be paid for on February 15 in Canadian dollars. Canadian dollars were worth $0.85 (U.S.) on January 15 and $0.82 (U.S.) on February 15.
b.
On June 1, Lion purchased and received a computer costing 100,000 euros from a German firm. Bear paid for the computer on August 1. On June 1, to reduce exchange risks, Lion purchased a contract to buy 100,000 marks in 60 days. Exchange rates are as follows:
Discount rate = 6%
c.
On June 1, Lion purchased an option to sell 100,000 FC in 60 days to hedge a forecasted sale to a customer. The option sold for a premium of $6,500 and a strike price of $1.20. The value of the option 6/30 was $12,500. The spot rate on June 1 was $1.19 and $1.25 on June 30.

Question 58

Red & Blue Company, a U.S. corporation, agreed to purchase merchandise from a British vendor on January 1, 20X4. The goods will be shipped on January 31, 20X4 and payment of 200,000 British pounds is due February 28, 20X4. On January 1, USA signed an agreement with a foreign exchange broker to buy 200,000 British pounds on February 28, 20X4. Exchange rates to purchase 1 British pound are as follows:
Discount Rate = 15%
Required:
Journalize these transactions.

Question 59

For a hedge on an exposed position, describe the process of valuing the forward contract as of the fiscal period end date.

Question 60

Blue & Green, Inc. purchased merchandise for 100,000 FC from a foreign vendor on December 1, 20X5. Payment in FC is due January 31, 20X6. On December 1, 20X5, Blue & Green signed an agreement with a foreign exchange broker to buy 100,000 FC on January 30, 20X6. Exchange rates to purchase 1 FC are as follows:
Fiscal Year End is 12/31; Discount rate = 12%
Required:
Prepare the journal entries for December 1 through January 31 related to the events described above.

Question 61

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.