Deck 12: Accounting for Foreign Currency Transactions and Hedging Foreign Exchange Risk

Question 1

On November 1,2017,American Company sold inventory to a foreign customer.The account will be settled on March 1 with the receipt of $500,000 foreign currency units (FCU).On November 1,American also entered into a forward contract to hedge the exposed asset.The forward rate is $0.70 per unit of foreign currency.American has a December 31 fiscal year-end.Spot rates on relevant dates were: The entry to record the forward contract is

A)FCU Receivable,350,000; Premium on Forward Contract,15,000; Dollars Payable,365,000
B)Dollars Receivable,365,000; Discount on Forward Contract,15,000; FCU Payable,350,000
C)FCU Receivable,365,000; Discount on Forward Contract,15,000; Dollars Payable,350,000
D)Dollars Receivable,350,000; Discount on Forward Contract,15,000; FCU Payable,365,000

Answer 1

D

Question 2

A transaction gain is recorded when there is an:

A)importing transaction and the exchange rate increases.
B)exporting transaction and the exchange rate increases.
C)exporting transaction and the exchange rate decreases.
D)none of these.

Answer 2

B

Question 3

A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a:

A)hedge of a net investment in a foreign entity.
B)hedge of an exposed asset or liability position.
C)hedge of an identifiable foreign currency commitment.
D)contract acquired to speculate in the movement of exchange rates.

Answer 3

C

Question 4

The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract:

A)extends beyond one year or the current operating cycle.
B)is a hedge of an identifiable foreign currency commitment.
C)is a hedge of an exposed net liability position.
D)was acquired to speculate in foreign currency.

Question 5

On September 1,2017,Mudd Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days.The relevant exchange rates are as follows: The second forward contract was strictly for speculation.On September 30,2017,what amount of foreign currency transaction gain should Mudd Plating report in income?

A)$0.
B)$2,500.
C)$5,000.
D)$10,000.

Question 6

From the viewpoint of a U.S.company,a foreign currency transaction is a transaction:

A)measured in a foreign currency.
B)denominated in a foreign currency.
C)measured in U.S.currency.
D)denominated in U.S.currency.

Question 7

On November 1,2017,American Company sold inventory to a foreign customer.The account will be settled on March 1 with the receipt of $450,000 foreign currency units (FCU).On November 1,American also entered into a forward contract to hedge the exposed asset.The forward rate is $0.70 per unit of foreign currency.American has a December 31 fiscal year-end.Spot rates on relevant dates were: What will be the adjusted balance in the Accounts Receivable account on December 31,and how much gain or loss was recorded as a result of the adjustment?

A)Receivable Balance,$319,500; Gain/Loss Recorded,$9,000 gain
B)Receivable Balance,$319,500; Gain/Loss Recorded,$9,000 loss
C)Receivable Balance,$333,000; Gain/Loss Recorded,$4,500 gain
D)Receivable Balance,$333,000; Gain/Loss Recorded,$18,000 gain

Question 8

A transaction gain or loss on a forward contract entered into as a hedge of an identifiable foreign currency commitment may be:

A)included as a separate item in the stockholders' equity section of the balance sheet.
B)recognized currently in the determination of net income.
C)deferred and included in the measurement of the related foreign currency transaction.
D)none of these.

Question 9

The discount or premium on a forward contract entered into as a hedge of an exposed asset or liability position should be:

A)included as a separate component of stockholders' equity.
B)amortized over the life of the forward contract.
C)deferred and included in the measurement of related foreign currency transaction.
D)none of these.

Question 10

The exchange rate quoted for future delivery of foreign currency is the definition of a(n):

A)direct exchange rate.
B)indirect exchange rate.
C)spot rate.
D)forward exchange rate.

Question 11

A transaction loss would result from:

A)an increase in the exchange rate applicable to an asset denominated in a foreign currency.
B)a decrease in the exchange rate applicable to a liability denominated in a foreign currency.
C)the import of merchandise when the transaction is denominated in a foreign currency.
D)a decrease in the exchange rate applicable to an asset denominated in a foreign currency.

Question 12

Greco,Inc.a U.S.corporation,bought machine parts from Franco Company of Germany on March 1,2017,for 70,000 marks,when the spot rate for marks was $0.5395.Greco's year-end was March 31,2017,when the spot rate for marks was $0.5445.Greco bought 70,000 marks and paid the invoice on April 20,2017,when the spot rate was $0.5495.How much should be shown in Greco's income statements as foreign exchange (transaction)gain or loss for the years ended March 31,2017 and 2018?

A)2017,$0; 2018,$0
B)2017,$0; 2018,$350 loss
C)2017,$350 loss; 2018,0
D)2017,$350 loss; 2018,$350 loss

Question 13

An indirect exchange rate quotation is one in which the exchange rate is quoted:

A)in terms of how many units of the domestic currency can be converted into one unit of foreign currency.
B)for the immediate delivery of currencies exchanged.
C)in terms of how many units of the foreign currency can be converted into one unit of domestic currency.
D)for the future delivery of currencies exchanged.

Question 14

On September 1,2017,Mudd Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days.The relevant exchange rates are as follows: The first forward contract was to hedge a purchase of inventory on September 1,payable on December 1.On September 30,what amount of foreign currency transaction loss should Mudd Plating report in income?

A)$0.
B)$2,500.
C)$5,000.
D)$10,000.

Question 15

During 2017,a U.S.company purchased inventory from a foreign supplier.The transaction was denominated in the local currency of the seller.The direct exchange rate increased from the date of the transaction to the balance sheet date.The exchange rate decreased from the balance sheet date to the settlement date in 2018.For the years 2017 and 2018,transaction gains or losses should be recognized as:

A)2017,gain; 2018,gain
B)2017,gain; 2018,loss
C)2017,loss; 2018 loss
D)2017,loss; 2018,gain

Question 16

A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to:

A)hedge a net investment in a foreign entity.
B)hedge an identifiable foreign currency commitment.
C)speculate in foreign currency.
D)none of these.

Question 17

Madison Paving Company purchased equipment for 350,000 British pounds from a supplier in London on July 7,2017.Payment in British pounds is due on Sept.7,2017.The exchange rates to purchase one pound is as follows: On its August 31,2017 income statement,what amount should Madison Paving report as a foreign exchange transaction gain:

A)$14,000.
B)$7,000.
C)$10,500.
D)$0.

Question 18

A transaction gain or loss at the settlement date is:

A)a change in the exchange rate quoted by a foreign exchange trader.
B)synonymous with the translation of foreign currency financial statements into dollars.
C)the difference between the recorded dollar amount of an account receivable denominated in a foreign currency and the amount of dollars received.
D)the difference between the buying and selling rate quoted by a foreign exchange trader at the settlement date.

Question 19

Montana Corporation a U.S.company,contracted to purchase foreign goods.Payment in foreign currency was due one month after delivery.Between the delivery date and the time of payment,the exchange rate changed in Montana's favor.The resulting gain should be reported in the financial statements as a(n):

A)component of other comprehensive income.
B)component of income from continuing operations.
C)extraordinary income.
D)deferred income.

Question 20

With respect to disclosure requirements for fair value measurements,which of the following is NOT one of the three levels in the hierarchy of classifying fair value measurements?

A)a reconciliation of beginning and ending balances
B)significant unobservable inputs
C)significant other observable inputs
D)quoted prices in active markets for identical assets or liabilities

Question 21

There are a number of business situations in which a firm may acquire a forward exchange contract.Identify three common situations in which a forward exchange contract can be used as a hedge.

Question 22

On April 1,2017,Manatee Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days.The relevant exchange rates are as follows: The second forward contract was strictly for speculation.On April 30,2017,what amount of foreign currency transaction gain should Manatee report in income.

A)$0.
B)$3,000.
C)$9,000.
D)$12,000.

Question 23

On November 1,2016,Platte Corporation,a calendar-year U.S.Corporation,invested in a speculative contract to purchase 700,000 euros on January 31,2017,from a German brokerage firm.Platte agreed to buy 700,000 euros at a fixed price of $1.46 per euro.The brokerage firm agreed to send 700,000 euros to Platte on January 31,2017.The spot rates for euros are:
Required:
Prepare the journal entries that Platte would record on November 1,December 31,and January 31.

Question 24

On November 1,2017,National Company sold inventory to a foreign customer.The account will be settled on March 1 with the receipt of 200,000 foreign currency units (FCU).On November 1,National also entered into a forward contract to hedge the exposed asset.The forward rate is $0.80 per unit of foreign currency.National has a December 31 fiscal year-end.Spot rates on relevant dates were: What will be the adjusted balance in the Accounts Receivable account on December 31,and how much gain or loss was recorded as a result of the adjustment?

A)Receivable Balance,$170,000; Gain/Loss Recorded,$4,000 gain
B)Receivable Balance,$162,000; Gain/Loss Recorded,$4,000 loss
C)Receivable Balance,$168,000; Gain/Loss Recorded,$2,000 gain
D)Receivable Balance,$164,000; Gain/Loss Recorded,$2,000 loss

Question 25

Kettle Company purchased equipment for 375,000 British pounds from a supplier in London on July 3,2017.Payment in British pounds is due on Sept.3,2017.The exchange rates to purchase one pound is as follows: On its August 31,2017,income statement,what amount should Kettle report as a foreign exchange transaction gain:

A)$18,750.
B)$3,750.
C)$11,250.
D)$0.

Question 26

On October 1,2016,Philly Company purchased inventory from a foreign customer for 750,000 units of foreign currency (FCU)due on January 31,2017.Simultaneously,Philly entered into a forward contract for 750,000 units of FC for delivery on January 31,2017,at the forward rate of $0.75.Payment was made to the foreign customer on January 31,2017.Spot rates on October 1,December 31,and January 31,were $0.72,$0.73,and $0.76,respectively.Philly amortizes all premiums and discounts on forward contracts and closes its books on December 31.
Required:
A.Prepare all journal entries relative to the above to be made by Philly on October 1,2016.
B.Prepare all journal entries relative to the above to be made by Philly on December 31,2016.
C.Compute the transaction gain or loss on the forward contract that would be recorded in 2017.Indicate clearly whether the amount is a gain or loss.

Question 27

On December 1,2016,Dorn Corporation agreed to purchase a machine to be manufactured by a company in Brazil.The purchase price is 1,150,000 Brazilian reals.To hedge against fluctuations in the exchange rate,Dorn entered into a forward contract on December 1 to buy 1,150,000 reals on April 1,the agreed date of machine delivery,for $0.375 per real.The following exchange rates were quoted:
Required:
Prepare journal entries necessary for Dorn during 2016 and 2017 to account for the transactions described above.

Question 28

On November 1,2017,Cone Company sold inventory to a foreign customer.The account will be settled on March 1 with the receipt of 250,000 foreign currency units (FCU).On November 1,Cone also entered into a forward contract to hedge the exposed asset.The forward rate is $0.90 per unit of foreign currency.Cone has a December 31 fiscal year-end.Spot rates on relevant dates were: The entry to record the forward contract is

A)FCU Receivable,225,000; Premium on Forward Contract,7,500; Dollars Payable,232,500
B)Dollars Receivable,232,500; Discount on Forward Contract,7,500; FCU Payable,225,000
C)FCU Receivable,232,500; Discount on Forward Contract,7,500; Dollars Payable,225,000
D)Dollars Receivable,225,000; Discount on Forward Contract,7,500; FCU Payable,232,500

Question 29

Consider the following information:
1.On November 1,2017,a U.S.firm contracts to sell equipment (with an asking price of 500,000 pesos)in Mexico.The firm will take delivery and will pay for the equipment on February 1,2018.
2.On November 1,2017,the company enters into a forward contract to sell 500,000 pesos for $0.0948 on February 1,2018.
3.Spot rates and the forward rates for February 1,2018,settlement were as follows (dollars per peso):
4.On February 1,the equipment was sold for 500,000 pesos.The cost of the equipment was $20,000.
Required:
Prepare all journal entries needed on November 1,December 31,and February 1 to account for the forward contract,the firm commitment,and the transaction to sell the equipment.

Question 30

On July 15,Pinta,Inc.purchased 88,500,000 yen Pinta of parts from a Tokyo company paying 20% down,and the balance is due in 90 days.Interest is payable at a rate of 8% on the unpaid balance.The exchange rate on July 15,was $1.00 = 118 Japanese yen.On October 13,the exchange rate was $1.00 = 114 Japanese yen.
Required:
Prepare journal entries to record the purchase and payment of this foreign currency transaction in U.S.dollars.

Question 31

On April 1,2017,Manatee Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days.The relevant exchange rates are as follows: The first forward contract was to hedge a purchase of inventory on April 1,payable on December 1.On April 30,what amount of foreign currency transaction loss should Manatee report in income?

A)$0.
B)$3,000.
C)$9,000.
D)$12,000.

Question 32

Imperial Corp.,a U.S.corporation,entered into a contract on November 1,2016,to sell two machines to Crown Company,for 95,000 foreign currency units (FCU).The machines were to be delivered and the amount collected on March 1,2017.
In order to hedge its commitment,Imperial entered into a forward contract for 95,000 FCU delivery on March 1,2017.The forward contract met all conditions for hedging an identifiable foreign currency commitment.
Selected exchange rates for FCU at various dates were as follows:
Required:
Prepare all journal entries relative to the above on the books of Imperial Corp.on the following dates:
1.November 1,2016.
2.Year-end adjustments on December 31,2016.
3.March 1,2017.(Include all adjustments related to the forward contract.)

Question 33

On November 1,2016,Jagged Company sold inventory to a company in England.The sale was for 600,000 British pounds and payment will be received on February 1,2017.On November 1,Jagged entered into a forward contract to sell 600,000 British pounds on February 1 at the forward rate of $1.65.Spot rates for the British pound are as follows:
Jagged has a December 31 fiscal year-end.
Required:
Compute each of the following:
1.The dollars to be received on February 1,2017,from selling the 600,000 pounds to the exchange dealer.
2.The dollars that would have been received from the account receivable if Jagged had not hedged the sale contract with the forward contract.
3.The discount or premium on the forward contract.
4.The transaction gain or loss on the exposed asset related to the sale in 2016 and 2017.
5.The transaction gain or loss on the forward contract in 2016 and 2017.
6.The amount of the discount or premium on the forward contract amortized in 2016 and 2017.

Question 34

Accounting for a foreign currency transaction involves the terms measured and denominated.Describe a foreign currency transaction and distinguish between the terms measured and denominated.

Question 35

On October 1,2016,Kill Company shipped equipment to a foreign customer for a foreign currency (FC)price of FC 3,000,000 due on January 31,2017.All revenue realization criteria were satisfied and accordingly the sale was recorded by Kill Company on October 1.Simultaneously,Kill entered into a forward contract to sell 3,000,000 FCU on January 31,2017 for $1,200,000.Payment was received from the foreign customer on January 31,2017.Spot rates on October 1,December 31,and January 31 were $0.42,$0.425,and $0.435,respectively.Kill amortizes all premiums and discounts on forward contracts and closes its books on December 31.
Required:
Prepare all journal entries relative to the above to be made by Kill during 2016 and 2017.