Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
Chapter 07 Foreign Currency Transactions and Hedging Foreign Exchange Risk Multiple Choice Questions
1. Pigskin Co., a .!. corporation, so"d in#entory on credit to a $ritish co%pany on &pri" ', (011. Pigskin recei#ed pay%ent o) *+,000 $ritish pounds on o n ay ', (011. The exchange rate as 1 / 1.+ on &pri" ' and 1 / 1.* on ay '. 2hat a%ount o) foreign exchange gain or loss shou"d 3e recogni4ed5 6round to the nearest dollar &. 10,+00 "oss $. 10,+00 gain C. 1,7+0 "oss 8. *,'+0 "oss E. 9o gain or "oss shou"d 3e recogni4ed.
9orton Co., a .!. corporation, so"d in#entory on 8ece%3er 1, (011, ith pay%ent o) 10,000 $ritish pounds to 3e recei#ed in sixty days. day s. The pertinent exchange rates ere as )o""os:
(. For hat a%ount shou"d Sales 3e credited on 8ece%3er 15 &. +,+00. $. 1;,<<. C. 1',1'(. 8. 17,(1. E. 1;,;;7.
*. 2hat a%ount o) foreign exchange gain or loss shou"d 3e recorded on 8ece%3er *15 &. *00 gain. $. *00 "oss. C. 0. 8. <1 "oss. E. <1 gain.
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
. 2hat a%ount o) foreign exchange gain or loss shou"d 3e recorded on =anuary *05 &. 1,+1; gain. $. 1,+1; "oss. C. +7+ "oss. 8. +00 "oss. E. +00 gain.
$risco $ricks purchases ra %ateria" )ro% its )oreign supp"ier, $o"i#ian C"ay, on ay '. Pay%ent o) (,000,000 )oreign currency units 6FC is due in *0 days. ay *1 is $risco>s )isca" year-end. The pertinent exchange rates ere as )o""os:
+. For hat a%ount shou"d $risco>s Accounts Payable 3e credited on ay '5 &. (,+00,000. $. (,0,000. C. 1,;00,000. 8. 1,;*<,*. E. 1,;;;,;;7.
;. Ho %uch Foreign Exchange Gain or Loss shou"d $risco record on ay *15 &. (,+(0,000 gain. $. (0,000 gain. C. (0,000 "oss. 8. '0,000 gain. E. '0,000 "oss.
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
. 2hat a%ount o) foreign exchange gain or loss shou"d 3e recorded on =anuary *05 &. 1,+1; gain. $. 1,+1; "oss. C. +7+ "oss. 8. +00 "oss. E. +00 gain.
$risco $ricks purchases ra %ateria" )ro% its )oreign supp"ier, $o"i#ian C"ay, on ay '. Pay%ent o) (,000,000 )oreign currency units 6FC is due in *0 days. ay *1 is $risco>s )isca" year-end. The pertinent exchange rates ere as )o""os:
+. For hat a%ount shou"d $risco>s Accounts Payable 3e credited on ay '5 &. (,+00,000. $. (,0,000. C. 1,;00,000. 8. 1,;*<,*. E. 1,;;;,;;7.
;. Ho %uch Foreign Exchange Gain or Loss shou"d $risco record on ay *15 &. (,+(0,000 gain. $. (0,000 gain. C. (0,000 "oss. 8. '0,000 gain. E. '0,000 "oss.
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
7. Ho %uch ! i"" it cost $risco to )ina""y pay the paya3"e on =une 75 &. 1,;;;,;;7. $. (,0,000. C. (,+(0,000. 8. (,+00,000. E. (,00,000.
'. ?n =une 1, Ca%Co recei#ed a signed agree%ent to se"" in#entory )or @+00,000. The sa"e ou"d take p"ace in <0 days. Ca%Co i%%ediate"y signed a <0-day )orard contract to se"" the yen as soon as they are recei#ed. The spot rate on =une 1 as @1 /.001;7, and the <0-day )orard rate as @1 / .00(7. &t hat a%ount ou"d Ca%Co record the Forard Contract on =une 15 &. (,0'*. $. 0. C. (,110. 8. (,+*(. E. (,1*+.
<. $e"sen purchased in#entory on 8ece%3er 1, (010. Pay%ent o) (00,000 stick"es as to 3e %ade in sixty days. &"so on 8ece%3er 1, $e"sen signed a contract to purchase A(00,000 in sixty days. The spot rate as A1 / .*+71, and the ;0-day )orard rate as A1 / .*';(. ?n 8ece%3er *1, the spot rate as A1 / .*'* and the *0-day )orard rate as A1 / .*'1;'. &ssu%e an annua" interest rate o) 1(B and a )air #a"ue hedge. The present #a"ue )or one %onth at 1(B is .<<01. n the Dourna" entry to record the esta3"ish%ent o) a )orard exchange contract, at hat a%ount shou"d the Forward Contract account account 3e recorded on 8ece%3er 15 &. 71,('. $. 7;,<(. C. +''. 8. +'(. E. 0, since there is no cost, there is no #a"ue )or the contract at this date.
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
10. eisner Co. ordered parts costing A100,000 )or a )oreign supp"ier on ay 1( hen the spot rate as .( per stick"e. & one-%onth )orard contract as signed on that date to purchase A100,000 at a )orard rate o) .(+ per stick"e. ?n =une 1(, hen the parts ere recei#ed and pay%ent as %ade, the spot rate as .(' per stick"e. &t hat a%ount shou"d in#entory 3e reported5 &. 0. $. (',000. C. (,000. 8. (+,000. E. (,000.
Car Corp. 6a .!.-3ased co%pany so"d parts to a orean custo%er on 8ece%3er 1;, (011, ith pay%ent o) 10 %i""ion orean on to 3e recei#ed on =anuary 1+, (01(. The )o""oing exchange rates app"ied:
11. &ssu%ing a )orard contract as not entered into, hat ou"d 3e the net i%pact on Car Corp.>s (011 inco%e state%ent re"ated to this transaction5 &. +00 6gain. $. +00 6"oss. C. (00 6gain. 8. (00 6"oss. E. - 0 -
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
1(. &ssu%ing a )orard contract as entered into, the )oreign currency as origina""y so"d in the )oreign currency %arket on 8ece%3er 1;, (011 at a &. )orard contract discount ;00. $. )orard contract pre%iu% ;00. C. )orard contract discount <'0. 8. )orard discount pre%iu% <'0. E. There is no pre%iu% or discount 3ecause the )air #a"ue o) the contract is 4ero.
1*. &ssu%ing a )orard contract as entered into, at hat a%ount shou"d the )orard contract 3e recorded at 8ece%3er *1, (0115 &ssu%e an annua" interest rate o) 1(B and a )air #a"ue hedge. The present #a"ue )or one %onth at 1(B is .<<01. &. (00. $. (<+. C. <+. 8. +00. E. <,*00.
1. &ssu%ing a )orard contract as entered into, ho ou"d the )orard contract 3e re)"ected on Car>s 8ece%3er *1, (011 3a"ance sheet5 &. Forard contract 6asset. $. Forard contract 6"ia3i"ity. C. Foreign currency 6asset. 8. Foreign currency 6"ia3i"ity. E. Foreign exchange 6"ia3i"ity.
1+. &ssu%ing a )orard contract as entered into, hat ou"d 3e the net i%pact on Car Corp.>s (011 inco%e state%ent re"ated to this transaction5 &ssu%e an annua" interest rate o) 1(B and a )air #a"ue hedge. The present #a"ue )or one %onth at 1(B is .<<01. &. 700 6gain. $. 700 6"oss. C. *00 6gain. 8. *00 6"oss. E. (<+ 6gain.
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
1;. &ssu%ing a )orard contract as entered into on 8ece%3er 1;, hat ou"d 3e the net i%pact on Car Corp.>s (01( inco%e state%ent re"ated to this transaction5 &. +00 6gain. $. *0+ 6gain. C. *00 6gain. 8. *00 6"oss. E. 0.
17. i""s nc. had a recei#a3"e )ro% a )oreign custo%er that is due in the "oca" currency o) the custo%er 6stick"es. ?n 8ece%3er *1, (010, this recei#a3"e )or A(00,000 as correct"y inc"uded in i""s> 3a"ance sheet at 1*(,000. 2hen the recei#a3"e as co""ected on Fe3ruary 1+, (011, the .!. do""ar eui#a"ent as 1,000. n i""s> (011 conso"idated inco%e state%ent, ho %uch shou"d ha#e 3een reported as a )oreign exchange gain5 &. 0. $. *;,000. C. ',000. 8. 10,000. E. 1(,000.
1'. & spot rate %ay 3e de)ined as &. The price a )oreign currency can 3e purchased or so"d today. $. The price today at hich a )oreign currency can 3e purchased or so"d in the )uture. C. The )orecasted )uture #a"ue o) a )oreign currency. 8. The .!. do""ar #a"ue o) a )oreign currency. E. The Euro #a"ue o) a )oreign currency.
1<. The )orard rate %ay 3e de)ined as &. The price a )oreign currency can 3e purchased or so"d today. $. The price today at hich a )oreign currency can 3e purchased or so"d in the )uture. C. The )orecasted )uture #a"ue o) a )oreign currency. 8. The .!. do""ar #a"ue o) a )oreign currency. E. The Euro #a"ue o) a )oreign currency.
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
(0. 2hich state%ent is true regarding a )oreign currency option5 &. & )oreign currency option gi#es the ho"der the o3"igation to 3 uy or se"" )oreign currency in the )uture. $. & )oreign currency option gi#es the ho"der the o3"igation on"y se"" )oreign currency in the )uture. C. & )oreign currency option gi#es the ho"der the o3"igation to on"y 3uy )oreign currency in the )uture. 8. & )oreign currency option gi#es the ho"der the right 3ut not the o3"igation to 3uy or se"" )oreign currency in the )uture. E. & )oreign currency option gi#es the ho"der the o3"igation to 3uy or se"" )oreign currency in the )uture at the spot rate on the )uture date.
(1. & .!. co%pany se""s %erchandise to a )oreign co%pany deno%inated in .!. do""ars. 2hich o) the )o""oing state%ents is true5 &. ) the )oreign currency appreciates, a )oreign exchange gain i"" resu"t. $. ) the )oreign currency depreciates, a )oreign exchange gain i"" resu"t. C. 9o )oreign exchange gain or "oss i"" resu"t. 8. ) the )oreign currency appreciates, a )oreign exchange "oss i"" resu"t. E. ) the )oreign currency depreciates, a )oreign exchange "oss i"" resu"t.
((. & .!. co%pany se""s %erchandise to a )oreign co%pany deno%inated in the )oreign currency. 2hich o) the )o""oing state%ents is true5 &. ) the )oreign currency appreciates, a )oreign exchange gain i"" resu"t. $. ) the )oreign currency depreciates, a )oreign exchange gain i"" resu"t. C. 9o )oreign exchange gain or "oss i"" resu"t. 8. ) the )oreign currency appreciates, a )oreign exchange "oss i"" resu"t. E. &ny gain or "oss i"" 3e inc"uded in co%prehensi#e inco%e.
(*. & .!. co%pany 3uys %erchandise )ro% a )oreign co%pany deno%inated in .!. do""ars. 2hich o) the )o""oing state%ents is true5 &. ) the )oreign currency appreciates, a )oreign exchange gain i"" resu"t. $. ) the )oreign currency depreciates, a )oreign exchange gain i"" resu"t. C. 9o )oreign exchange gain or "oss i"" resu"t. 8. ) the )oreign currency appreciates, a )oreign exchange "oss i"" resu"t. E. &ny gain or "oss i"" 3e inc"uded in co%prehensi#e inco%e.
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
(. & .!. co%pany 3uys %erchandise )ro% a )oreign co%pany deno%inated in the )oreign currency. 2hich o) the )o""oing state%ents is true5 &. ) the )oreign currency appreciates, a )oreign exchange gain i"" resu"t. $. ) the )oreign currency depreciates, a )oreign exchange "oss i"" resu"t. C. 9o )oreign exchange gain or "oss i"" resu"t. 8. ) the )oreign currency appreciates, a )oreign exchange "oss i"" resu"t. E. &ny gain or "oss i"" 3e inc"uded in co%prehensi#e inco%e.
(+. .!. G&&P pro#ides guidance )or hedges o) a"" the )o""oing sources o) )oreign exchange risk except &. Recogni4ed )oreign currency deno%inated assets and "ia3i"ities. $. nrecogni4ed )oreign currency )ir% co%%it%ents. C. Forecasted )oreign currency deno%inated transactions. 8. 9et in#est%ent in )oreign operations. E. 8e)erred )oreign currency gains and "osses.
(;. &"" o) the )o""oing data %ay 3e needed to deter%ine the )air #a"ue o) a )orard contract at any point in ti%e except &. The )orard rate hen the )orard contract as entered into. $. The current )orard rate )or a contract that %atures on the sa%e date as the )orard contract entered into. C. The )uture spot rate. 8. & discount rate. E. The co%pany>s incre%enta" 3orroing rate.
(7. & )orard contract %ay 3e used )or hich o) the )o""oing5 1 & )air #a"ue hedge o) an asset. ( & cash )"o hedge o) an asset. * & )air #a"ue hedge o) a "ia3i"ity. & cash )"o hedge o) a "ia3i"ity. &. 1 and * $. ( and C. 1 and ( 8. 1, *, and E. 1, (, *, and
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
('. & co%pany has a discount on a )orard contract )or a )oreign currency deno%inated asset. Ho is the discount recogni4ed o#er the "i)e o) the contract under )air #a"ue hedge accounting5 &. &s a de3it to discount expense. $. &s a de3it to a%orti4ation expense. C. &s a de3it to accu%u"ated other co%prehensi#e inco%e. 8. &s a de3it i%pact on net inco%e, as a resu"t o) the hedge. E. &s a decreases to sa"es.
(<. 2hich o) the )o""oing state%ents is true concerning hedge accounting5 &. Hedges o) )oreign currency )ir% co%%it%ents are used )or )uture sa"es on"y. $. Hedges o) )oreign currency )ir% co%%it%ents are used )or )uture purchases on"y. C. Hedges o) )oreign currency )ir% co%%it%ents are used )or current sa"es or purchases. 8. Hedges o) )oreign currency )ir% co%%it%ents are used )or )uture sa"es or purchases. E. Hedges o) )oreign currency )ir% co%%it%ents are specu"ati#e in nature.
*0. &"" o) the )o""oing hedges are used )or )uture purchasesa"e transactions except &. Forard contracts used as a )air #a"ue hedge o) a )ir% co%%it%ent. $. ?ptions used as a )air #a"ue hedge o) a )ir% co%%it%ent. C. ?ption contract cash )"o hedge o) a )orecasted transaction. 8. Forard contract cash )"o hedges o) a )orecasted transaction. E. Forard contracts used to hedge a )oreign currency deno%inated "ia3i"ity.
?n 8ece%3er 1, (011, eenan Co%pany, a .!. )ir%, so"d %erchandise to Ie"e4 Co%pany o) Canada )or 1+0,000 Canadian do""ars 6C&8. Co""ection o) the recei#a3"e is due on Fe3ruary 1, (01(. eenan purchased a )oreign currency put option ith a strike price o) .<7 6.!. on 8ece%3er 1, (011. This )oreign currency option is designated as a cash )"o hedge. Re"e#ant exchange rates )o""o:
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
*1. Co%pute the )air #a"ue o) the )oreign currency option at 8ece%3er 1, (011. &. ;,000. $. ,+00. C. *,000. 8. 7,+00. E. 1,+00.
*(. Co%pute the )air #a"ue o) the )oreign currency option at 8ece%3er *1, (011. &. ;,000. $. ,+00. C. *,000. 8. 7,+00. E. 1,+00.
**. Co%pute the )air #a"ue o) the )oreign currency option at Fe3ruary 1, (01(. &. ;,000. $. ,+00. C. *,000. 8. 7,+00. E. 1,+00.
*. Co%pute the .!. do""ars recei#ed on Fe3ruary 1, (01(. &. 1*',000. $. 1*;,+00. C. 1+,+00. 8. 11,000. E. 1(,+00.
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
*+. 2hich o) the )o""oing approaches is used in the nited !tates in accounting )or )oreign currency transactions5 &. ?ne-transaction perspecti#eJ de)er )oreign exchange gains and "osses. $. To-transaction perspecti#eJ accrue )oreign exchange gains and "osses. C. Three-transaction perspecti#eJ de)er )oreign exchange gains and "osses. 8. ?ne-transaction perspecti#eJ accrue )oreign exchange gains and "osses. E. To-transaction perspecti#eJ de)er )oreign exchange gains and "osses.
*;. 2hen a .!. co%pany purchases parts )ro% a )oreign co%pany, hich o) the )o""oing i"" resu"t in 4ero )oreign exchange gain or "oss5 &. The transaction is deno%inated in .!. do""ars. $. The option strike price to se"" )oreign currency is "ess than the spot rate o) the currency. C. The option strike price to 3uy )oreign currency is "ess than the spot rate o) the currency. 8. The )oreign currency appreciated in #a"ue re"ati#e to the .!. do""ar. E. The )oreign currency depreciated in #a"ue re"ati#e to the .!. do""ar.
*7. &"pha, nc., a .!. co%pany, had a recei#a3"e )ro% a custo%er that as deno%inated in exican pesos. ?n 8ece%3er *1, (010, this recei#a3"e )or 7+,000 pesos as correct"y inc"uded in &"pha>s 3a"ance sheet at ',000. The recei#a3"e as co""ected on arch (, (011, hen the .!. eui#a"ent as ;,<00. Ho %uch )oreign exchange gain or "oss i"" &"pha record on the inco%e state%ent )or the year ended 8ece%3er *1, (0115 &. 1,100 "oss. $. 1,100 gain. C. ;,<00 "oss. 8. ;,<00 gain. E. ',000 gain.
?n &pri" 1, (010, !hannon Co%pany, a .!. co%pany, 3orroed 100,000 euros )ro% a )oreign 3ank 3y signing an interest-3earing note due &pri" 1, (011. The do""ar #a"ue o) the "oan as as )o""os:
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
*'. Ho %uch )oreign exchange gain or "oss shou"d 3e inc"uded in !hannon>s (010 inco%e state%ent5 &. *,000 gain. $. *,000 "oss. C. ;,000 gain. 8. ;,000 "oss. E. 7,000 gain.
*<. Ho %uch )oreign exchange gain or "oss shou"d 3e inc"uded in !hannon>s (011 inco%e state%ent5 &. 1,000 gain. $. 1,000 "oss. C. (,000 gain. 8. (,000 "oss. E. ',000 "oss.
0. &nge"a, nc., a .!. co%pany, had a euro recei#a3"e )ro% exports to !pain and a $ritish pound paya3"e resu"ting )ro% i%ports )ro% Eng"and. &nge"a recorded )oreign exchange gain re"ated to 3oth its euro recei#a3"e and pound paya3"e. 8id the )oreign currencies increase or decrease in do""ar #a"ue )ro% the date o) the transaction to the sett"e%ent date5
&. & a3o#e $. $ a3o#e C. C a3o#e 8. 8 a3o#e E. E a3o#e
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
1. Frank)urter Co%pany, a .!. co%pany, had a ru3"e recei#a3"e )ro% exports to Russia and a euro paya3"e resu"ting )ro% i%ports )ro% ta"y. Frank)urter recorded )oreign exchange "oss re"ated to 3oth its ru3"e recei#a3"e and euro paya3"e. 8id the )oreign currencies increase or decrease in do""ar #a"ue )ro% the date o) the transaction to the sett"e%ent date5
&. & a3o#e $. $ a3o#e C. C a3o#e 8. 8 a3o#e E. E a3o#e
Parker Corp., a .!. co%pany, had the )o""oing )oreign currency transactions during (011: 61. Purchased %erchandise )ro% a )oreign supp"ier on =u"y +, (011 )or the .!. do""ar eui#a"ent o) '0,000 and paid the in#oice on &ugust *, (011 at the .!. do""ar eui#a"ent o) '(,000. 6(. ?n ?cto3er 1, (011 3orroed the .!. do""ar eui#a"ent o) '7(,000 e#idenced 3y a noninterest-3earing note paya3"e in euros on ?cto3er 1, (011. The .!. do""ar eui#a"ent o) the note a%ount as ';0,000 on 8ece%3er *1, (011, and ''1,000 on ?cto3er 1, (01(.
(. 2hat a%ount shou"d 3e inc"uded as a )oreign exchange gain or "oss )ro% the to transactions )or (0115 &. (,000 "oss. $. (,000 gain. C. 10,000 gain. 8. 1,000 "oss. E. 1,000 gain.
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
*. 2hat a%ount shou"d 3e inc"uded as a )oreign exchange gain or "oss )ro% the to transactions )or (01(5 &. <,000 "oss. $. <,000 gain. C. 11,000 "oss. 8. (1,000 "oss. E. (1,000 gain.
2inston Corp., a .!. co%pany, had the )o""oing )oreign currency transactions during (011: 61. Purchased %erchandise )ro% a )oreign supp"ier on =u"y 1;, (011 )or the .!. do""ar eui#a"ent o) 7,000 and paid the in#oice on &ugust *, (011 at the .!. do""ar eui#a"ent o) +,000. 6(. ?n ?cto3er 1+, (011 3orroed the .!. do""ar eui#a"ent o) *1+,000 e#idenced 3y a non-interest-3earing note paya3"e in euros on ?cto3er 1+, (011. The .!. do""ar eui#a"ent o) the note a%ount as (<+,000 on 8ece%3er *1, (011, and (<<,000 on ?cto3er 1+, (01(.
. 2hat a%ount shou"d 3e inc"uded as a )oreign exchange gain or "oss )ro% the to transactions )or (0115 &. <,000 "oss. $. <,000 gain. C. 11,000 "oss. 8. 1*,000 gain. E. 1,000 gain.
+. 2hat a%ount shou"d 3e inc"uded as a )oreign exchange gain or "oss )ro% the to transactions )or (01(5 &. 1,000 "oss. $. 1,000 gain. C. (,000 "oss. 8. ,000 gain. E. ,000 "oss.
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
;. 2i""ia%s, nc., a .!. co%pany, has a =apanese yen account recei#a3"e resu"ting )ro% an export sa"e on arch 1 to a custo%er in =apan. The exporter signed a )orard contract on arch 1 to se"" yen and designated it as a cash )"o hedge o) a recogni4ed recei#a3"e. The spot rate as .00<, and the )orard rate as .00<+. 2hich o) the )o""oing did the .!. exporter report in net inco%e5 &. 8iscount re#enue. $. Pre%iu% re#enue. C. 8iscount expense. 8. Pre%iu% expense. E. $oth a discount re#enue and a pre%iu% expense.
7. Karson Co%pany, a .!. co%pany, has an ndia rupee account recei#a3"e resu"ting )ro% an export sa"e on !epte%3er 7 to a custo%er in ndia. Karson signed a )orard contract on !epte%3er 7 to se"" rupees and designated it as a cash )"o hedge o) a recogni4ed recei#a3"e. The spot rate as .0(*, and the )orard rate as .0(1. 2hich o) the )o""oing did the .!. exporter report in net inco%e5 &. 8iscount re#enue. $. Pre%iu% re#enue. C. 8iscount expense. 8. Pre%iu% expense. E. $oth a discount re#enue and a pre%iu% expense.
'. Pri%o nc., a .!. co%pany, ordered parts costing 100,000 rupee )ro% a )oreign supp"ier on =u"y 7 hen the spot rate as .0(+ per rupee. & one-%onth )orard contract as signed on that date to purchase 100,000 rupee at a rate o) .0(7. The )orard contract is proper"y designated as a )air #a"ue hedge o) the 100,000 rupee )ir% co%%it%ent. ?n &ugust 7, hen the parts are recei#ed, the spot rate is .0('. &t hat a%ount shou"d the parts in#entory 3e carried on Pri%o>s 3ooks5 &. (,000. $. (,100. C. (,+00. 8. (,700. E. (,'00.
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
<. Karence Co%pany, a .!. co%pany, ordered parts costing 1,000,000 Thai"and 3ahts )ro% a )oreign supp"ier on =u"y 7 hen the spot rate as .0(+ per 3aht. & one-%onth )orard contract as signed on that date to purchase 1,000,000 3ahts at a rate o) .0(7. The )orard contract is proper"y designated as a )air #a"ue hedge o) the 1,000,000 3aht )ir% co%%it%ent. ?n &ugust 7, hen the parts are recei#ed, the spot rate is .0('. 2hat is the a%ount o) accounts paya3"e that i"" 3e paid at this date5 &. (0,000. $. (0,100. C. (+,000. 8. (7,000. E. (',000.
+0. ?n 8ece%3er 1, (011, =oseph Co%pany, a .!. co%pany, entered into a three-%onth )orard contract to purchase +0,000 pesos on arch 1, (01(, as a )air #a"ue hedge o) a )oreign currency deno%inated account paya3"e. The )o""oing .!. do""ar per peso exchange rates app"y:
=oseph>s incre%enta" 3orroing rate is 1( percent. The present #a"ue )actor )or to %onths at an annua" interest rate o) 1( percent is .<'0*. 2hich o) the )o""oing is inc"uded in =oseph>s 8ece%3er *1, (011 3a"ance sheet )or the )orard contract5 &. +,1;.+' asset. $. +,1;.+' "ia3i"ity. C. +00 "ia3i"ity. 8. <0.1+ asset. E. <0.1+ "ia3i"ity.
7-1;
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
+1. ?n &pri" 1, Lua"ity Corporation, a .!. co%pany, expects to se"" %erchandise to a French custo%er in three %onths, deno%inating the transaction in euros. ?n &pri" 1, the spot rate is 1.1 per euro, and Lua"ity enters into a three-%onth )orard contract cash )"o hedge to se"" 00,000 euros at a rate o) 1.*;. &t the end o) three %onths, the spot rate is 1.*7 per euro, and Lua"ity de"i#ers the %erchandise, co""ecting 00,000 euros. 2hat are the e))ects on net inco%e )ro% these transactions5 &. ',000 8iscount Expense p"us a 1(,000 negati#e &dDust%ent to 9et nco%e hen the %erchandise is de"i#ered. $. ',000 8iscount Expense p"us a 1(,000 positi#e &dDust%ent to 9et nco%e hen the %erchandise is de"i#ered. C. ',000 8iscount Expense p"us a (0,000 negati#e &dDust%ent to 9et nco%e hen the %erchandise is de"i#ered. 8. ',000 8iscount Expense p"us a (0,000 positi#e &dDust%ent to 9et nco%e hen the %erchandise is de"i#ered. E. ',000 8iscount Expense p"us an ',000 positi#e &dDust%ent to 9et nco%e hen the %erchandise is de"i#ered.
2oo"sey Corporation, a .!. co%pany, expects to se"" goods to a $ritish custo%er at a price o) (+0,000 pounds, ith de"i#ery and pay%ent to 3e %ade on ?cto3er (. ?n =u"y (, 2oo"sey purchased a three-%onth put option )or (+0,000 $ritish pounds and designated this option as a cash )"o hedge o) a )orecasted )oreign currency transaction expected to 3e co%p"eted in "ate ?cto3er. The )o""oing exchange rates app"y:
+(. 2hat a%ount i"" 2oo"sey inc"ude as an option expense in net inco%e )or the period =u"y ( to ?cto3er (5 &. ,000. $. +,000. C. 10,000. 8. 1(,000. E. 1,000.
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Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
+*. 2hat a%ount i"" 2oo"sey inc"ude as &dDust%ent to 9et nco%e )or the period ended ?cto3er *15 &. ;,000 positi#e. $. ;,000 negati#e. C. 10,000 positi#e. 8. 10,000 negati#e. E. 1,000 positi#e.
+. &therton, nc., a .!. co%pany, expects to order goods )ro% a )oreign supp"ier at a price o) 100,000 "ira, ith de"i#ery and pay%ent to 3e %ade on &pri" 17. ?n =anuary 17, &therton purchased a three-%onth ca"" option on 100,000 "ira and designated this option as a cash )"o hedge o) a )orecasted )oreign currency transaction. The )o""oing exchange rates app"y:
2hat a%ount i"" &therton inc"ude as an option expense in net inco%e )or the period =anuary 17 to &pri" 175 &. ,000 $. ,(;0 C. ,*0 8. +,000 E. +,(;0
?n ay 1, (011, os3y Co%pany recei#ed an order to se"" a %achine to a custo%er in Canada at a price o) (,000,000 exican pesos. The %achine as shipped and pay%ent as recei#ed on arch 1, (01(. ?n ay 1, (011, os3y purchased a put option gi#ing it the right to se"" (,000,000 pesos on arch 1, (01( at a price o) 1<0,000. os3y proper"y designates the option as a )air #a"ue hedge o) the peso )ir% co%%it%ent. The option cost *,000 and had a )air #a"ue o) *,(00 on 8ece%3er *1, (011. The )o""oing spot exchange rates app"y:
os3y>s incre%enta" 3orroing rate is 1( percent, and the present #a"ue )actor )or to %onths at a 1( percent annua" rate is .<'0*.
7-1'
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
++. 2hat as the i%pact on os3y>s (011 net inco%e as a resu"t o) this )air #a"ue hedge o) a )ir% co%%it%ent5 &. 1,7;0.;0 decrease. $. 1,<;0.;0 decrease. C. 1,000.00 decrease. 8. 1,7;0.;0 increase. E. 1,<;0.;0 increase.
+;. 2hat as the i%pact on os3y>s (01( net inco%e as a resu"t o) this )air #a"ue hedge o) a )ir% co%%it%ent5 &. 1,'00.00 decrease. $. (,+00 increase. C. (,+00 decrease. 8. 1'',7;0.;0 increase. E. 1'',7;0.;0 decrease.
+7. 2hat as the o#era"" resu"t o) ha#ing entered into this hedge o) exposure to )oreign exchange risk5 &. 0 $. <,000 net "oss on the option. C. <,000 net gain on the option. 8. (,000 net gain on the option. E. (,000 net "oss.
7-1<
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
?n arch 1, (011, attie Co%pany recei#ed an order to se"" a %achine to a custo%er in Eng"and at a price o) (00,000 $ritish pounds. The %achine as shipped and pay%ent as recei#ed on arch 1, (01(. ?n arch 1, (011, attie purchased a put option gi#ing it the right to se"" (00,000 $ritish pounds on arch 1, (01( at a price o) *'0,000. attie proper"y designates the option as a )air hedge o) the pound )ir% co%%it%ent. The option cost (,000 and had a )air #a"ue o) (,(00 on 8ece%3er *1, (011. The )o""oing spot exchange rates app"y:
attie>s incre%enta" 3orroing rate is 1( percent, and the present #a"ue )actor )or to %onths at a 1( percent annua" rate is .<'0*.
+'. 2hat as the net i%pact on attie>s (011 inco%e as a resu"t o) this )air #a"ue hedge o) a )ir% co%%it%ent5 &. 1,'00.00 decrease. $. 1,7;0.;0 decrease. C. (,(0.0 decrease. 8. 1,;;0.0 increase. E. (,(0.;0 increase.
+<. 2hat as the net i%pact on attie>s (01( inco%e as a resu"t o) this )air #a"ue hedge o) a )ir% co%%it%ent5 &. *7<,7;0.;0 decrease. $. ',*;0.;0 increase. C. ',*;0.;0 decrease. 8. ,*<0.0 decrease. E. *7<,7;0.;0 increase.
7-(0
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
;0. 2hat as the net increase or decrease in cash )"o )ro% ha#ing purchased the )oreign currency option to hedge this exposure to )oreign exchange risk5 &. 0 $. 10,000 increase. C. 10,000 decrease. 8. (0,000 increase. E. (0,000 decrease.
?n ?cto3er 1, (011, Eag"e Co%pany )orecasts the purchase o) in#entory )ro% a $ritish supp"ier on Fe3ruary 1, (01(, at a price o) 100,000 $ritish pounds. ?n ?cto3er 1, (011, Eag"e pays 1,'00 )or a three-%onth ca"" option on 100,000 pounds ith a strike price o) (.00 per pound. The option is considered to 3e a cash )"o hedge o) a )orecasted )oreign currency transaction. ?n 8ece%3er *1, (011, the option has a )air #a"ue o) 1,;00. The )o""oing spot exchange rates app"y:
;1. 2hat Dourna" entry shou"d Eag"e prepare on ?cto3er 1, (0115
&. & a3o#e. $. $ a3o#e. C. C a3o#e. 8. 8 a3o#e. E. E a3o#e.
7-(1
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
;(. 2hat Dourna" entry shou"d Eag"e prepare on 8ece%3er *1, (0115
&. & a3o#e. $. $ a3o#e. C. C a3o#e. 8. 8 a3o#e. E. E a3o#e.
;*. 2hat is the a%ount o) option expense )or (01( )ro% these transactions5 &. 1,000. $. 1,;00. C. (,+00. 8. (,;00. E. 0.
;. 2hat is the a%ount o) &dDust%ent to &ccu%u"ated ?ther Co%prehensi#e nco%e )or (01( )ro% these transactions5 &. 1,000. $. 1,;00. C. 1,'00. 8. (,000. E. (,;00.
7-((
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
;+. 2hat is the a%ount o) Cost o) Goods !o"d )or (01( as a resu"t o) these transactions5 &. (00,000. $. 1<+,000. C. (01,000. 8. (0(,;00. E. (0*,000.
;;. 2hat is the (01( e))ect on net inco%e as a resu"t o) these transactions5 &. 1<+,000 $. (01,;00 C. (01,000 8. (0(,;00 E. (0*,000
Essay Questions
;7. Me"ton Co. Dust so"d in#entory )or '0,000 euros, hich Me"ton i"" co""ect in sixty days. $rie)"y descri3e a hedging transaction Me"ton cou"d engage in to reduce its risk o) un)a#ora3"e exchange rates.
;'. 2here can you )ind exchange rates 3eteen the .!. do""ar and %ost )oreign currencies5
7-(*
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
;<. 2hat is %eant 3y the spot rate5
70. Ho is the )air #a"ue o) a Forard Contract deter%ined 3y .!. G&&P5
71. 2hat is the %aDor assu%ption under"ying the one-transaction perspecti#e5
7(. 2hat is the purpose o) a hedge o) )oreign exchange risk5
7-(
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
7*. Ho does a )oreign currency )orard contract di))er )ro% a )oreign currency option5
7. 2hat )actors create a )oreign exchange gain5
7+. 2hat happens hen a .!. co%pany purchases goods deno%inated in a )oreign currency and the )oreign currency depreciates5
7;. 2hat happens hen a .!. co%pany purchases goods deno%inated in a )oreign currency and the )oreign currency appreciates5
7-(+
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
77. 2hat happens hen a .!. co%pany se""s goods deno%inated in a )oreign currency and the )oreign currency depreciates5
7'. 2hat happens hen a .!. co%pany se""s goods deno%inated in a )oreign currency and the )oreign currency appreciates5
7<. Ga Produce Co. purchased in#entory )ro% a =apanese co%pany on 8ece%3er 1', (011. Pay%ent o) ,000,000 yen 6@ as due on =anuary 1', (01(. Exchange rates 3eteen the do""ar and the yen ere as )o""os:
Required Prepare a"" Dourna" entries )or Ga Produce Co. in connection ith the purchase and pay%ent.
7-(;
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
'0. ?"d Co"onia" Corp. 6a .!. co%pany %ade a sa"e to a )oreign custo%er on !epte%3er 1+, (011, )or 100,000 stick"es. Pay%ent as recei#ed on ?cto3er 1+, (011. The )o""oing exchange rates app"ied:
Required Prepare a"" Dourna" entries )or ?"d Co"onia" Corp. in connection ith this sa"e assu%ing that the co%pany c"oses its 3ooks on !epte%3er *0 to prepare interi% )inancia" state%ents.
Coyote Corp. 6a .!. co%pany in Texas had the )o""oing series o) transactions in a )oreign country during (011:
The appropriate exchange rates during (011 ere as )o""os:
7-(7
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
'1. Prepare a"" Dourna" entries in .!. do""ars a"ong ith any 8ece%3er *1, (011 adDusting entries. Coyote uses a perpetua" in#entory syste%.
'(. 2hat a%ount i"" Coyote Corp. report in its (011 3a"ance sheet )or !n"entory5
'*. 2hat a%ount i"" Coyote Corp. report in its (011 inco%e state%ent )or Cost of goods sold 5
'. 2hat a%ount i"" Coyote Corp. report in its (011 inco%e state%ent )or Sales5
7-('
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
'+. 2hat a%ount i"" Coyote Corp. report in its (011 3a"ance sheet )or Accounts recei"able5
';. 2hat a%ount i"" Coyote Corp. report in its (011 3a"ance sheet )or Accounts payable5
'7. The 3eginning 3a"ance o) cash as +0,000 pesos on =anuary 1, (011, trans"ated at 1 peso / .1'. 2hat a%ount i"" Coyote Corp. report in its (011 3a"ance sheet )or Cash5
7-(<
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
?n 9o#e%3er 10, (011, ing Co. so"d in#entory to a custo%er in a )oreign country. ing agreed to accept <;,000 "oca" currency units 6KC in )u"" pay%ent )or this in#entory. Pay%ent as to 3e %ade on Fe3ruary 1, (01(. ?n 8ece%3er 1, (011, ing entered into a )orard exchange contract herein <;,000 KC ou"d 3e de"i#ered to a currency 3roker in to %onths. The to %onth )orard exchange rate on that date as 1 KC / .*0. &ny contract discount or pre%iu% is a%orti4ed using the straight-"ine %ethod. The spot rates and )orard rates on #arious dates ere as )o""os:
The co%pany>s 3orroing rate is 1(B. The present #a"ue )actor )or one %onth is .<<01.
''. 6&. &ssu%e this hedge is designated as a cash )"o hedge. Prepare the Dourna" entries re"ating to the transaction and the )orard contract. 6$. Co%pute the e))ect on (011 net inco%e. 6C. Co%pute the e))ect on (01( net inco%e.
'<. 6&. &ssu%e this hedge is designated as a )air #a"ue hedge. Prepare the Dourna" entries re"ating to the transaction and the )orard contract. 6$. Co%pute the e))ect on (011 net inco%e. 6C. Co%pute the e))ect on (01( net inco%e.
7-*0
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
?n ?cto3er 1, (011, =ar#is Co. so"d in#entory to a custo%er in a )oreign country, deno%inated in 100,000 "oca" currency units 6KC. Co""ection is expected in )our %onths. ?n ?cto3er 1, (011, a )orard exchange contract as acuired here3y =ar#is Co. as to pay 100,000 KC in )our %onths 6on Fe3ruary 1, (01( and recei#e 7',000 in .!. do""ars. The spot and )orard rates )or the KC ere as )o""os:
The co%pany>s 3orroing rate is 1(B. The present #a"ue )actor )or one %onth is .<<01. &ny discount or pre%iu% on the contract is a%orti4ed using the straight-"ine %ethod.
<0. &ssu%ing this is a cash )"o hedge, prepare Dourna" entries )or this sa"es transaction and )orard contract.
<1. &ssu%ing this is a )air #a"ue hedge, prepare Dourna" entries )or this sa"es transaction and )orard contract.
7-*1
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
<(. ?n ?cto3er *1, (010, 8ar"ing Co%pany negotiated a to-year 100,000 )ranc "oan )ro% a )oreign 3ank at an interest rate o) * percent per year. nterest pay%ents are %ade annua""y on ?cto3er *1, and the principa" i"" 3e repaid on ?cto3er *1, (01(. 8ar"ing prepares .!.-do""ar )inancia" state%ents and has a 8ece%3er *1 year-end. Prepare a"" Dourna" entries re"ated to this )oreign currency 3orroing assu%ing the )o""oing:
7-*(
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
Matching Questions
<*. For each o) the )o""oing situations, se"ect the 3est anser concerning accounting )or )oreign currency transactions: 6G Resu"ts in a )oreign exchange gain. 6K Resu"ts in a )oreign exchange "oss. 69 9o )oreign exchange gain or "oss. 1. 9o )oreign exchange gain or "oss (. 9o )oreign exchange gain or "oss *. Resu"ts in a )oreign exchange "oss . Resu"ts in a )oreign exchange "oss +. Resu"ts in a )oreign exchange gain ;. 9o )oreign exchange gain or "oss 7. 9o )oreign exchange gain or "oss '. Resu"ts in a )oreign exchange gain
Export sa"e 3y a .!. co%pany deno%inated in do""ars, )oreign currency o) 3uyer appreciates. NNNN Export sa"e 3y a .!. co%pany deno%inated in )oreign currency, )oreign currency o) 3uyer appreciates. NNNN %port purchase 3y a .!. co%pany deno%inated in )oreign currency, )oreign currency o) 3uyer appreciates. NNNN %port purchase 3y a .!. co%pany deno%inated in do""ars, )oreign currency o) 3uyer appreciates. NNNN %port purchase 3y a .!. co%pany deno%inated in )oreign currency, )oreign currency o) 3uyer depreciates. NNNN %port purchase 3y a .!. co%pany deno%inated in do""ars, )oreign currency o) 3uyer depreciates. NNNN Export sa"e 3y a .!. co%pany deno%inated in do""ars, )oreign currency o) 3uyer depreciates. NNNN Export sa"e 3y a .!. co%pany deno%inated in )oreign currency, )oreign currency o) 3uyer depreciates. NNNN
7-**
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
Chapter 07 Foreign Currency Transactions and Hedging Foreign Exchange Risk &nser ey
Multiple Choice Questions
1. Pigskin Co., a .!. corporation, so"d in#entory on credit to a $ritish co%pany on &pri" ', (011. Pigskin recei#ed pay%ent o) *+,000 $ritish pounds on ay ', (011. The exchange rate as 1 / 1.+ on &pri" ' and 1 / 1.* on ay '. 2hat a%ount o) foreign exchange gain or loss shou"d 3e recogni4ed5 6round to the nearest dollar &. 10,+00 "oss $. 10,+00 gain C. 1,7+0 "oss D. *,'+0 "oss E. 9o gain or "oss shou"d 3e recogni4ed.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
9orton Co., a .!. corporation, so"d in#entory on 8ece%3er 1, (011, ith pay%ent o) 10,000 $ritish pounds to 3e recei#ed in sixty days. The pertinent exchange rates ere as )o""os:
7-*
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
(. For hat a%ount shou"d Sales 3e credited on 8ece%3er 15 &. +,+00. $. 1;,<<. C. 1',1'(. D. 17,(1. E. 1;,;;7.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty Easy Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-*+
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
*. 2hat a%ount o) foreign exchange gain or loss shou"d 3e recorded on 8ece%3er *15 &. *00 gain. $. *00 "oss. C. 0. 8. <1 "oss. E. <1 gain.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
. 2hat a%ount o) foreign exchange gain or loss shou"d 3e recorded on =anuary *05 &. 1,+1; gain. . 1,+1; "oss. C. +7+ "oss. 8. +00 "oss. E. +00 gain.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
$risco $ricks purchases ra %ateria" )ro% its )oreign supp"ier, $o"i#ian C"ay, on ay '. Pay%ent o) (,000,000 )oreign currency units 6FC is due in *0 days. ay *1 is $risco>s )isca" year-end. The pertinent exchange rates ere as )o""os:
7-*;
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
+. For hat a%ount shou"d $risco>s Accounts Payable 3e credited on ay '5 !. (,+00,000. $. (,0,000. C. 1,;00,000. 8. 1,;*<,*. E. 1,;;;,;;7.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty Easy Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
;. Ho %uch Foreign Exchange Gain or Loss shou"d $risco record on ay *15 &. (,+(0,000 gain. $. (0,000 gain. C. (0,000 "oss. 8. '0,000 gain. E. '0,000 "oss.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7. Ho %uch ! i"" it cost $risco to )ina""y pay the paya3"e on =une 75 &. 1,;;;,;;7. $. (,0,000. C. (,+(0,000. 8. (,+00,000. E. (,00,000.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-*7
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
'. ?n =une 1, Ca%Co recei#ed a signed agree%ent to se"" in#entory )or @+00,000. The sa"e ou"d take p"ace in <0 days. Ca%Co i%%ediate"y signed a <0-day )orard contract to se"" the yen as soon as they are recei#ed. The spot rate on =une 1 as @1 /.001;7, and the <0-day )orard rate as @1 / .00(7. &t hat a%ount ou"d Ca%Co record the Forard Contract on =une 15 &. (,0'*. . 0. C. (,110. 8. (,+*(. E. (,1*+.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+1 2nderstand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange ris30 Learning )b*ecti"e +,-+4 Account for forward contracts and options used as hedges of foreign currency fir' co''it'ents0
<. $e"sen purchased in#entory on 8ece%3er 1, (010. Pay%ent o) (00,000 stick"es as to 3e %ade in sixty days. &"so on 8ece%3er 1, $e"sen signed a contract to purchase A(00,000 in sixty days. The spot rate as A1 / .*+71, and the ;0-day )orard rate as A1 / .*';(. ?n 8ece%3er *1, the spot rate as A1 / .*'* and the *0-day )orard rate as A1 / .*'1;'. &ssu%e an annua" interest rate o) 1(B and a )air #a"ue hedge. The present #a"ue )or one %onth at 1(B is .<<01. n the Dourna" entry to record the esta3"ish%ent o) a )orard exchange contract, at hat a%ount shou"d the Forward Contract account 3e recorded on 8ece%3er 15 &. 71,('. $. 7;,<(. C. +''. 8. +'(. E. 0, since there is no cost, there is no #a"ue )or the contract at this date.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty Easy Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
7-*'
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
10. eisner Co. ordered parts costing A100,000 )or a )oreign supp"ier on ay 1( hen the spot rate as .( per stick"e. & one-%onth )orard contract as signed on that date to purchase A100,000 at a )orard rate o) .(+ per stick"e. ?n =une 1(, hen the parts ere recei#ed and pay%ent as %ade, the spot rate as .(' per stick"e. &t hat a%ount shou"d in#entory 3e reported5 &. 0. . (',000. C. (,000. 8. (+,000. E. (,000.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
Car Corp. 6a .!.-3ased co%pany so"d parts to a orean custo%er on 8ece%3er 1;, (011, ith pay%ent o) 10 %i""ion orean on to 3e recei#ed on =anuary 1+, (01(. The )o""oing exchange rates app"ied:
7-*<
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
11. &ssu%ing a )orard contract as not entered into, hat ou"d 3e the net i%pact on Car Corp.>s (011 inco%e state%ent re"ated to this transaction5 &. +00 6gain. $. +00 6"oss. C. (00 6gain. D. (00 6"oss. E. - 0 -
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
1(. &ssu%ing a )orard contract as entered into, the )oreign currency as origina""y so"d in the )oreign currency %arket on 8ece%3er 1;, (011 at a &. )orard contract discount ;00. . )orard contract pre%iu% ;00. C. )orard contract discount <'0. 8. )orard discount pre%iu% <'0. E. There is no pre%iu% or discount 3ecause the )air #a"ue o) the contract is 4ero.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30
7-0
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
1*. &ssu%ing a )orard contract as entered into, at hat a%ount shou"d the )orard contract 3e recorded at 8ece%3er *1, (0115 &ssu%e an annua" interest rate o) 1(B and a )air #a"ue hedge. The present #a"ue )or one %onth at 1(B is .<<01. &. (00. $. (<+. C. <+. 8. +00. E. <,*00.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
1. &ssu%ing a )orard contract as entered into, ho ou"d the )orard contract 3e re)"ected on Car>s 8ece%3er *1, (011 3a"ance sheet5 !. Forard contract 6asset. $. Forard contract 6"ia3i"ity. C. Foreign currency 6asset. 8. Foreign currency 6"ia3i"ity. E. Foreign exchange 6"ia3i"ity.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s E"aluation $ifficulty &ediu' Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
7-1
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
1+. &ssu%ing a )orard contract as entered into, hat ou"d 3e the net i%pact on Car Corp.>s (011 inco%e state%ent re"ated to this transaction5 &ssu%e an annua" interest rate o) 1(B and a )air #a"ue hedge. The present #a"ue )or one %onth at 1(B is .<<01. &. 700 6gain. $. 700 6"oss. C. *00 6gain. 8. *00 6"oss. E. (<+ 6gain.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty 7ard Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
1;. &ssu%ing a )orard contract as entered into on 8ece%3er 1;, hat ou"d 3e the net i%pact on Car Corp.>s (01( inco%e state%ent re"ated to this transaction5 &. +00 6gain. . *0+ 6gain. C. *00 6gain. 8. *00 6"oss. E. 0.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty 7ard Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
7-(
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
17. i""s nc. had a recei#a3"e )ro% a )oreign custo%er that is due in the "oca" currency o) the custo%er 6stick"es. ?n 8ece%3er *1, (010, this recei#a3"e )or A(00,000 as correct"y inc"uded in i""s> 3a"ance sheet at 1*(,000. 2hen the recei#a3"e as co""ected on Fe3ruary 1+, (011, the .!. do""ar eui#a"ent as 1,000. n i""s> (011 conso"idated inco%e state%ent, ho %uch shou"d ha#e 3een reported as a )oreign exchange gain5 &. 0. $. *;,000. C. ',000. 8. 10,000. E. 1(,000.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty Easy Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
1'. & spot rate %ay 3e de)ined as !. The price a )oreign currency can 3e purchased or so"d today. $. The price today at hich a )oreign currency can 3e purchased or so"d in the )uture. C. The )orecasted )uture #a"ue o) a )oreign currency. 8. The .!. do""ar #a"ue o) a )oreign currency. E. The Euro #a"ue o) a )oreign currency.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s 8nowledge $ifficulty Easy Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30
7-*
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
1<. The )orard rate %ay 3e de)ined as &. The price a )oreign currency can 3e purchased or so"d today. . The price today at hich a )oreign currency can 3e purchased or so"d in the )uture. C. The )orecasted )uture #a"ue o) a )oreign currency. 8. The .!. do""ar #a"ue o) a )oreign currency. E. The Euro #a"ue o) a )oreign currency.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s 8nowledge $ifficulty Easy Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30
(0. 2hich state%ent is true regarding a )oreign currency option5 &. & )oreign currency option gi#es the ho"der the o3"igation to 3 uy or se"" )oreign currency in the )uture. $. & )oreign currency option gi#es the ho"der the o3"igation on"y se"" )oreign currency in the )uture. C. & )oreign currency option gi#es the ho"der the o3"igation to on"y 3uy )oreign currency in the )uture. D. & )oreign currency option gi#es the ho"der the right 3ut not the o3"igation to 3uy or se"" )oreign currency in the )uture. E. & )oreign currency option gi#es the ho"der the o3"igation to 3uy or se"" )oreign currency in the )uture at the spot rate on the )uture date.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s 8nowledge $ifficulty Easy Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30
7-
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
(1. & .!. co%pany se""s %erchandise to a )oreign co%pany deno%inated in .!. do""ars. 2hich o) the )o""oing state%ents is true5 &. ) the )oreign currency appreciates, a )oreign exchange gain i"" resu"t. $. ) the )oreign currency depreciates, a )oreign exchange gain i"" resu"t. C. 9o )oreign exchange gain or "oss i"" resu"t. 8. ) the )oreign currency appreciates, a )oreign exchange "oss i"" resu"t. E. ) the )oreign currency depreciates, a )oreign exchange "oss i"" resu"t.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s E"aluation $ifficulty Easy Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30 Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
((. & .!. co%pany se""s %erchandise to a )oreign co%pany deno%inated in the )oreign currency. 2hich o) the )o""oing state%ents is true5 !. ) the )oreign currency appreciates, a )oreign exchange gain i"" resu"t. $. ) the )oreign currency depreciates, a )oreign exchange gain i"" resu"t. C. 9o )oreign exchange gain or "oss i"" resu"t. 8. ) the )oreign currency appreciates, a )oreign exchange "oss i"" resu"t. E. &ny gain or "oss i"" 3e inc"uded in co%prehensi#e inco%e.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s E"aluation $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-+
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
(*. & .!. co%pany 3uys %erchandise )ro% a )oreign co%pany deno%inated in .!. do""ars. 2hich o) the )o""oing state%ents is true5 &. ) the )oreign currency appreciates, a )oreign exchange gain i"" resu"t. $. ) the )oreign currency depreciates, a )oreign exchange gain i"" resu"t. C. 9o )oreign exchange gain or "oss i"" resu"t. 8. ) the )oreign currency appreciates, a )oreign exchange "oss i"" resu"t. E. &ny gain or "oss i"" 3e inc"uded in co%prehensi#e inco%e.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s E"aluation $ifficulty Easy Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30 Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
(. & .!. co%pany 3uys %erchandise )ro% a )oreign co%pany deno%inated in the )oreign currency. 2hich o) the )o""oing state%ents is true5 &. ) the )oreign currency appreciates, a )oreign exchange gain i"" resu"t. $. ) the )oreign currency depreciates, a )oreign exchange "oss i"" resu"t. C. 9o )oreign exchange gain or "oss i"" resu"t. D. ) the )oreign currency appreciates, a )oreign exchange "oss i"" resu"t. E. &ny gain or "oss i"" 3e inc"uded in co%prehensi#e inco%e.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s E"aluation $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-;
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
(+. .!. G&&P pro#ides guidance )or hedges o) a"" the )o""oing sources o) )oreign exchange risk except &. Recogni4ed )oreign currency deno%inated assets and "ia3i"ities. $. nrecogni4ed )oreign currency )ir% co%%it%ents. C. Forecasted )oreign currency deno%inated transactions. 8. 9et in#est%ent in )oreign operations. E. 8e)erred )oreign currency gains and "osses.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s 8nowledge $ifficulty Easy Learning )b*ecti"e +,-+1 2nderstand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange ris30
(;. &"" o) the )o""oing data %ay 3e needed to deter%ine the )air #a"ue o) a )orard contract at any point in ti%e except &. The )orard rate hen the )orard contract as entered into. $. The current )orard rate )or a contract that %atures on the sa%e date as the )orard contract entered into. C. The )uture spot rate. 8. & discount rate. E. The co%pany>s incre%enta" 3orroing rate.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s 8nowledge $ifficulty &ediu' Learning )b*ecti"e +,-+1 2nderstand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange ris30
7-7
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
(7. & )orard contract %ay 3e used )or hich o) the )o""oing5 1 & )air #a"ue hedge o) an asset. ( & cash )"o hedge o) an asset. * & )air #a"ue hedge o) a "ia3i"ity. & cash )"o hedge o) a "ia3i"ity. &. 1 and * $. ( and C. 1 and ( 8. 1, *, and E. 1, (, *, and
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s 8nowledge $ifficulty Easy Learning )b*ecti"e +,-+1 2nderstand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange ris30
('. & co%pany has a discount on a )orard contract )or a )oreign currency deno%inated asset. Ho is the discount recogni4ed o#er the "i)e o) the contract under )air #a"ue hedge accounting5 &. &s a de3it to discount expense. $. &s a de3it to a%orti4ation expense. C. &s a de3it to accu%u"ated other co%prehensi#e inco%e. D. &s a de3it i%pact on net inco%e, as a resu"t o) the hedge. E. &s a decreases to sa"es.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
7-'
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
(<. 2hich o) the )o""oing state%ents is true concerning hedge accounting5 &. Hedges o) )oreign currency )ir% co%%it%ents are used )or )uture sa"es on"y. $. Hedges o) )oreign currency )ir% co%%it%ents are used )or )uture purchases on"y. C. Hedges o) )oreign currency )ir% co%%it%ents are used )or current sa"es or purchases. D. Hedges o) )oreign currency )ir% co%%it%ents are used )or )uture sa"es or purchases. E. Hedges o) )oreign currency )ir% co%%it%ents are specu"ati#e in nature.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s 8nowledge $ifficulty &ediu' Learning )b*ecti"e +,-+1 2nderstand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange ris30
*0. &"" o) the )o""oing hedges are used )or )uture purchasesa"e transactions except &. Forard contracts used as a )air #a"ue hedge o) a )ir% co%%it%ent. $. ?ptions used as a )air #a"ue hedge o) a )ir% co%%it%ent. C. ?ption contract cash )"o hedge o) a )orecasted transaction. 8. Forard contract cash )"o hedges o) a )orecasted transaction. E. Forard contracts used to hedge a )oreign currency deno%inated "ia3i"ity.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s 8nowledge $ifficulty &ediu' Learning )b*ecti"e +,-+1 2nderstand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange ris30
?n 8ece%3er 1, (011, eenan Co%pany, a .!. )ir%, so"d %erchandise to Ie"e4 Co%pany o) Canada )or 1+0,000 Canadian do""ars 6C&8. Co""ection o) the recei#a3"e is due on Fe3ruary 1, (01(. eenan purchased a )oreign currency put option ith a strike price o) .<7 6.!. on 8ece%3er 1, (011. This )oreign currency option is designated as a cash )"o hedge. Re"e#ant exchange rates )o""o:
7-<
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
*1. Co%pute the )air #a"ue o) the )oreign currency option at 8ece%3er 1, (011. &. ;,000. $. ,+00. C. *,000. D. 7,+00. E. 1,+00.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
*(. Co%pute the )air #a"ue o) the )oreign currency option at 8ece%3er *1, (011. !. ;,000. $. ,+00. C. *,000. 8. 7,+00. E. 1,+00.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
**. Co%pute the )air #a"ue o) the )oreign currency option at Fe3ruary 1, (01(. &. ;,000. . ,+00. C. *,000. 8. 7,+00. E. 1,+00.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
7-+0
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
*. Co%pute the .!. do""ars recei#ed on Fe3ruary 1, (01(. &. 1*',000. $. 1*;,+00. C. 1+,+00. 8. 11,000. E. 1(,+00.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
*+. 2hich o) the )o""oing approaches is used in the nited !tates in accounting )or )oreign currency transactions5 &. ?ne-transaction perspecti#eJ de)er )oreign exchange gains and "osses. . To-transaction perspecti#eJ accrue )oreign exchange gains and "osses. C. Three-transaction perspecti#eJ de)er )oreign exchange gains and "osses. 8. ?ne-transaction perspecti#eJ accrue )oreign exchange gains and "osses. E. To-transaction perspecti#eJ de)er )oreign exchange gains and "osses.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s 8nowledge $ifficulty Easy Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30
7-+1
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
*;. 2hen a .!. co%pany purchases parts )ro% a )oreign co%pany, hich o) the )o""oing i"" resu"t in 4ero )oreign exchange gain or "oss5 !. The transaction is deno%inated in .!. do""ars. $. The option strike price to se"" )oreign currency is "ess than the spot rate o) the currency. C. The option strike price to 3uy )oreign currency is "ess than the spot rate o) the currency. 8. The )oreign currency appreciated in #a"ue re"ati#e to the .!. do""ar. E. The )oreign currency depreciated in #a"ue re"ati#e to the .!. do""ar.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30 Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
*7. &"pha, nc., a .!. co%pany, had a recei#a3"e )ro% a custo%er that as deno%inated in exican pesos. ?n 8ece%3er *1, (010, this recei#a3"e )or 7+,000 pesos as correct"y inc"uded in &"pha>s 3a"ance sheet at ',000. The recei#a3"e as co""ected on arch (, (011, hen the .!. eui#a"ent as ;,<00. Ho %uch )oreign exchange gain or "oss i"" &"pha record on the inco%e state%ent )or the year ended 8ece%3er *1, (0115 !. 1,100 "oss. $. 1,100 gain. C. ;,<00 "oss. 8. ;,<00 gain. E. ',000 gain.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty Easy Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-+(
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
?n &pri" 1, (010, !hannon Co%pany, a .!. co%pany, 3orroed 100,000 euros )ro% a )oreign 3ank 3y signing an interest-3earing note due &pri" 1, (011. The do""ar #a"ue o) the "oan as as )o""os:
*'. Ho %uch )oreign exchange gain or "oss shou"d 3e inc"uded in !hannon>s (010 inco%e state%ent5 &. *,000 gain. $. *,000 "oss. C. ;,000 gain. D. ;,000 "oss. E. 7,000 gain.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+, Prepare *ournal entries to account for foreign currency borrowings0
*<. Ho %uch )oreign exchange gain or "oss shou"d 3e inc"uded in !hannon>s (011 inco%e state%ent5 &. 1,000 gain. $. 1,000 "oss. C. (,000 gain. D. (,000 "oss. E. ',000 "oss.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+, Prepare *ournal entries to account for foreign currency borrowings0
7-+*
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
0. &nge"a, nc., a .!. co%pany, had a euro recei#a3"e )ro% exports to !pain and a $ritish pound paya3"e resu"ting )ro% i%ports )ro% Eng"and. &nge"a recorded )oreign exchange gain re"ated to 3oth its euro recei#a3"e and pound paya3"e. 8id the )oreign currencies increase or decrease in do""ar #a"ue )ro% the date o) the transaction to the sett"e%ent date5
&. & a3o#e . $ a3o#e C. C a3o#e 8. 8 a3o#e E. E a3o#e
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-+
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
1. Frank)urter Co%pany, a .!. co%pany, had a ru3"e recei#a3"e )ro% exports to Russia and a euro paya3"e resu"ting )ro% i%ports )ro% ta"y. Frank)urter recorded )oreign exchange "oss re"ated to 3oth its ru3"e recei#a3"e and euro paya3"e. 8id the )oreign currencies increase or decrease in do""ar #a"ue )ro% the date o) the transaction to the sett"e%ent date5
&. & a3o#e $. $ a3o#e C. C a3o#e 8. 8 a3o#e E. E a3o#e
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
Parker Corp., a .!. co%pany, had the )o""oing )oreign currency transactions during (011: 61. Purchased %erchandise )ro% a )oreign supp"ier on =u"y +, (011 )or the .!. do""ar eui#a"ent o) '0,000 and paid the in#oice on &ugust *, (011 at the .!. do""ar eui#a"ent o) '(,000. 6(. ?n ?cto3er 1, (011 3orroed the .!. do""ar eui#a"ent o) '7(,000 e#idenced 3y a noninterest-3earing note paya3"e in euros on ?cto3er 1, (011. The .!. do""ar eui#a"ent o) the note a%ount as ';0,000 on 8ece%3er *1, (011, and ''1,000 on ?cto3er 1, (01(.
7-++
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
(. 2hat a%ount shou"d 3e inc"uded as a )oreign exchange gain or "oss )ro% the to transactions )or (0115 &. (,000 "oss. $. (,000 gain. C. 10,000 gain. 8. 1,000 "oss. E. 1,000 gain.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0 Learning )b*ecti"e +,-+, Prepare *ournal entries to account for foreign currency borrowings0
*. 2hat a%ount shou"d 3e inc"uded as a )oreign exchange gain or "oss )ro% the to transactions )or (01(5 &. <,000 "oss. $. <,000 gain. C. 11,000 "oss. D. (1,000 "oss. E. (1,000 gain.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty Easy Learning )b*ecti"e +,-+, Prepare *ournal entries to account for foreign currency borrowings0
2inston Corp., a .!. co%pany, had the )o""oing )oreign currency transactions during (011: 61. Purchased %erchandise )ro% a )oreign supp"ier on =u"y 1;, (011 )or the .!. do""ar eui#a"ent o) 7,000 and paid the in#oice on &ugust *, (011 at the .!. do""ar eui#a"ent o) +,000. 6(. ?n ?cto3er 1+, (011 3orroed the .!. do""ar eui#a"ent o) *1+,000 e#idenced 3y a non-interest-3earing note paya3"e in euros on ?cto3er 1+, (011. The .!. do""ar eui#a"ent o) the note a%ount as (<+,000 on 8ece%3er *1, (011, and (<<,000 on ?cto3er 1+, (01(.
7-+;
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
. 2hat a%ount shou"d 3e inc"uded as a )oreign exchange gain or "oss )ro% the to transactions )or (0115 &. <,000 "oss. $. <,000 gain. C. 11,000 "oss. D. 1*,000 gain. E. 1,000 gain.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0 Learning )b*ecti"e +,-+, Prepare *ournal entries to account for foreign currency borrowings0
+. 2hat a%ount shou"d 3e inc"uded as a )oreign exchange gain or "oss )ro% the to transactions )or (01(5 &. 1,000 "oss. $. 1,000 gain. C. (,000 "oss. 8. ,000 gain. E. ,000 "oss.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty Easy Learning )b*ecti"e +,-+, Prepare *ournal entries to account for foreign currency borrowings0
7-+7
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
;. 2i""ia%s, nc., a .!. co%pany, has a =apanese yen account recei#a3"e resu"ting )ro% an export sa"e on arch 1 to a custo%er in =apan. The exporter signed a )orard contract on arch 1 to se"" yen and designated it as a cash )"o hedge o) a recogni4ed recei#a3"e. The spot rate as .00<, and the )orard rate as .00<+. 2hich o) the )o""oing did the .!. exporter report in net inco%e5 &. 8iscount re#enue. . Pre%iu% re#enue. C. 8iscount expense. 8. Pre%iu% expense. E. $oth a discount re#enue and a pre%iu% expense.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30
7. Karson Co%pany, a .!. co%pany, has an ndia rupee account recei#a3"e resu"ting )ro% an export sa"e on !epte%3er 7 to a custo%er in ndia. Karson signed a )orard contract on !epte%3er 7 to se"" rupees and designated it as a cash )"o hedge o) a recogni4ed recei#a3"e. The spot rate as .0(*, and the )orard rate as .0(1. 2hich o) the )o""oing did the .!. exporter report in net inco%e5 &. 8iscount re#enue. $. Pre%iu% re#enue. C. 8iscount expense. 8. Pre%iu% expense. E. $oth a discount re#enue and a pre%iu% expense.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30 Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
7-+'
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
'. Pri%o nc., a .!. co%pany, ordered parts costing 100,000 rupee )ro% a )oreign supp"ier on =u"y 7 hen the spot rate as .0(+ per rupee. & one-%onth )orard contract as signed on that date to purchase 100,000 rupee at a rate o) .0(7. The )orard contract is proper"y designated as a )air #a"ue hedge o) the 100,000 rupee )ir% co%%it%ent. ?n &ugust 7, hen the parts are recei#ed, the spot rate is .0('. &t hat a%ount shou"d the parts in#entory 3e carried on Pri%o>s 3ooks5 &. (,000. $. (,100. C. (,+00. 8. (,700. E. (,'00.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+4 Account for forward contracts and options used as hedges of foreign currency fir' co''it'ents0
<. Karence Co%pany, a .!. co%pany, ordered parts costing 1,000,000 Thai"and 3ahts )ro% a )oreign supp"ier on =u"y 7 hen the spot rate as .0(+ per 3aht. & one-%onth )orard contract as signed on that date to purchase 1,000,000 3ahts at a rate o) .0(7. The )orard contract is proper"y designated as a )air #a"ue hedge o) the 1,000,000 3aht )ir% co%%it%ent. ?n &ugust 7, hen the parts are recei#ed, the spot rate is .0('. 2hat is the a%ount o) accounts paya3"e that i"" 3e paid at this date5 &. (0,000. $. (0,100. C. (+,000. 8. (7,000. E. (',000.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+4 Account for forward contracts and options used as hedges of foreign currency fir' co''it'ents0
7-+<
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
+0. ?n 8ece%3er 1, (011, =oseph Co%pany, a .!. co%pany, entered into a three-%onth )orard contract to purchase +0,000 pesos on arch 1, (01(, as a )air #a"ue hedge o) a )oreign currency deno%inated account paya3"e. The )o""oing .!. do""ar per peso exchange rates app"y:
=oseph>s incre%enta" 3orroing rate is 1( percent. The present #a"ue )actor )or to %onths at an annua" interest rate o) 1( percent is .<'0*. 2hich o) the )o""oing is inc"uded in =oseph>s 8ece%3er *1, (011 3a"ance sheet )or the )orard contract5 &. +,1;.+' asset. $. +,1;.+' "ia3i"ity. C. +00 "ia3i"ity. 8. <0.1+ asset. E. <0.1+ "ia3i"ity.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
7-;0
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
+1. ?n &pri" 1, Lua"ity Corporation, a .!. co%pany, expects to se"" %erchandise to a French custo%er in three %onths, deno%inating the transaction in euros. ?n &pri" 1, the spot rate is 1.1 per euro, and Lua"ity enters into a three-%onth )orard contract cash )"o hedge to se"" 00,000 euros at a rate o) 1.*;. &t the end o) three %onths, the spot rate is 1.*7 per euro, and Lua"ity de"i#ers the %erchandise, co""ecting 00,000 euros. 2hat are the e))ects on net inco%e )ro% these transactions5 &. ',000 8iscount Expense p"us a 1(,000 negati#e &dDust%ent to 9et nco%e hen the %erchandise is de"i#ered. $. ',000 8iscount Expense p"us a 1(,000 positi#e &dDust%ent to 9et nco%e hen the %erchandise is de"i#ered. C. ',000 8iscount Expense p"us a (0,000 negati#e &dDust%ent to 9et nco%e hen the %erchandise is de"i#ered. D. ',000 8iscount Expense p"us a (0,000 positi#e &dDust%ent to 9et nco%e hen the %erchandise is de"i#ered. E. ',000 8iscount Expense p"us an ',000 positi#e &dDust%ent to 9et nco%e hen the %erchandise is de"i#ered.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+9 Account for forward contracts and options used as hedges of forecasted foreign currency transactions0
2oo"sey Corporation, a .!. co%pany, expects to se"" goods to a $ritish custo%er at a price o) (+0,000 pounds, ith de"i#ery and pay%ent to 3e %ade on ?cto3er (. ?n =u"y (, 2oo"sey purchased a three-%onth put option )or (+0,000 $ritish pounds and designated this option as a cash )"o hedge o) a )orecasted )oreign currency transaction expected to 3e co%p"eted in "ate ?cto3er. The )o""oing exchange rates app"y:
7-;1
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
+(. 2hat a%ount i"" 2oo"sey inc"ude as an option expense in net inco%e )or the period =u"y ( to ?cto3er (5 !. ,000. $. +,000. C. 10,000. 8. 1(,000. E. 1,000.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty Easy
+*. 2hat a%ount i"" 2oo"sey inc"ude as &dDust%ent to 9et nco%e )or the period ended ?cto3er *15 &. ;,000 positi#e. $. ;,000 negati#e. C. 10,000 positi#e. 8. 10,000 negati#e. E. 1,000 positi#e.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+9 Account for forward contracts and options used as hedges of forecasted foreign currency transactions0
7-;(
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
+. &therton, nc., a .!. co%pany, expects to order goods )ro% a )oreign supp"ier at a price o) 100,000 "ira, ith de"i#ery and pay%ent to 3e %ade on &pri" 17. ?n =anuary 17, &therton purchased a three-%onth ca"" option on 100,000 "ira and designated this option as a cash )"o hedge o) a )orecasted )oreign currency c urrency transaction. The )o""oing exchange rates app"y:
2hat a%ount i"" &therton inc"ude as an option expense in net inco%e )or the period =anuary 17 to &pri" 175 &. ,000 &. ,000 $. ,(;0 $. ,(;0 C. ,*0 C. ,*0 D. +,000 E. +,(;0 E. +,(;0
AACS# Analytic AACS# $i"ersity A!CPA A!CPA ## Global A!CPA A!CPA F% &easure'ent #loo'(s Application $ifficulty Easy Learning )b*ecti"e +,-+9 Account for forward forward contracts and options used as as hedges of forecasted forecasted foreign currency currency transactions0
?n ay 1, (011, os3y Co%pany recei#ed an order to se"" a %achine to a custo%er in Canada at a price o) (,000,000 exican pesos. The %achine as shipped and pay%ent as recei#ed on arch 1, (01(. ?n ay 1, (011, os3y purchased a put option gi#ing it the right to se"" (,000,000 pesos on arch 1, (01( at a price o) 1<0,000. os3y proper"y designates the option as a )air #a"ue hedge h edge o) the peso )ir% co%%it%ent. The option cost *,000 and had a )air #a"ue o) *,(00 on 8ece%3er *1, (011. The )o""oing spot exchange rates app"y:
os3y>s incre%enta" 3orroing rate is 1( percent, and the present #a"ue )actor )or to %onths at a 1( percent annua" rate is .<'0*.
7-;*
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
++. 2hat as the i%pact on os3y>s (011 net inco%e as a resu"t o) this )air #a"ue hedge o) a )ir% co%%it%ent5 !. 1,7;0.;0 decrease. $. 1,<;0.;0 $. 1,<;0.;0 decrease. C. 1,000.00 C. 1,000.00 decrease. 8. 1,7;0.;0 8. 1,7;0.;0 increase. E. 1,<;0.;0 E. 1,<;0.;0 increase.
AACS# Analytic AACS# $i"ersity A!CPA A!CPA ## Global A!CPA A!CPA F% &easure'ent #loo'(s Analysis $ifficulty 7ard Learning )b*ecti"e +,-+4 Account for forward forward contracts and options used as as hedges of foreign foreign currency fir' co''it'ents0
+;. 2hat as the i%pact on os3y>s (01( net inco%e as a resu"t o) this )air #a"ue hedge o) a )ir% co%%it%ent5 &. 1,'00.00 &. 1,'00.00 decrease. $. (,+00 $. (,+00 increase. C. (,+00 C. (,+00 decrease. D. 1'',7;0.;0 increase. E. 1'',7;0.;0 E. 1'',7;0.;0 decrease.
AACS# Analytic AACS# $i"ersity A!CPA A!CPA ## Global A!CPA A!CPA F% &easure'ent #loo'(s Analysis $ifficulty 7ard Learning )b*ecti"e +,-+4 Account for forward forward contracts and options used as as hedges of foreign foreign currency fir' co''it'ents0
7-;
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
+7. 2hat as the o#era"" resu"t o) ha#ing entered into this hedge o) exposure to )oreign exchange risk5 &. 0 &. 0 $. <,000 $. <,000 net "oss on the option. C. <,000 net gain on the option. 8. (,000 8. (,000 net gain on the option. E. (,000 E. (,000 net "oss.
AACS# Analytic AACS# $i"ersity A!CPA A!CPA ## Global A!CPA A!CPA F% &easure'ent #loo'(s Analysis $ifficulty 7ard Learning )b*ecti"e +,-+4 Account for forward forward contracts and options used as as hedges of foreign foreign currency fir' co''it'ents0
?n arch 1, (011, attie Co%pany recei#ed an order to se"" a %achine to a custo%er in Eng"and at a price o) (00,000 $ritish pounds. The %achine as shipped and pay%ent as recei#ed on arch 1, (01(. ?n arch 1, (011, attie purchased a put option gi#ing it the right to se"" (00,000 $ritish pounds on arch 1, (01( at a price o) *'0,000. attie proper"y designates the option as a )air hedge o) the pound )ir% co%%it%ent. The option cost (,000 (,00 0 and had a )air #a"ue o) (,(00 on 8ece%3er *1, (011. The )o""oing spot exchange rates app"y:
attie>s incre%enta" 3orroing rate is 1( percent, and the present #a"ue )actor )or to %onths at a 1( percent annua" rate is .<'0*.
7-;+
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
+'. 2hat as the net i%pact on attie>s (011 inco%e as a resu"t o) this )air #a"ue hedge o) a )ir% co%%it%ent5 &. 1,'00.00 decrease. . 1,7;0.;0 decrease. C. (,(0.0 decrease. 8. 1,;;0.0 increase. E. (,(0.;0 increase.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty 7ard Learning )b*ecti"e +,-+4 Account for forward contracts and options used as hedges of foreign currency fir' co''it'ents0
+<. 2hat as the net i%pact on attie>s (01( inco%e as a resu"t o) this )air #a"ue hedge o) a )ir% co%%it%ent5 &. *7<,7;0.;0 decrease. $. ',*;0.;0 increase. C. ',*;0.;0 decrease. 8. ,*<0.0 decrease. E. *7<,7;0.;0 increase.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty 7ard Learning )b*ecti"e +,-+4 Account for forward contracts and options used as hedges of foreign currency fir' co''it'ents0
7-;;
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
;0. 2hat as the net increase or decrease in cash )"o )ro% ha#ing purchased the )oreign currency option to hedge this exposure to )oreign exchange risk5 &. 0 . 10,000 increase. C. 10,000 decrease. 8. (0,000 increase. E. (0,000 decrease.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty 7ard Learning )b*ecti"e +,-+4 Account for forward contracts and options used as hedges of foreign currency fir' co''it'ents0
?n ?cto3er 1, (011, Eag"e Co%pany )orecasts the purchase o) in#entory )ro% a $ritish supp"ier on Fe3ruary 1, (01(, at a price o) 100,000 $ritish pounds. ?n ?cto3er 1, (011, Eag"e pays 1,'00 )or a three-%onth ca"" option on 100,000 pounds ith a strike price o) (.00 per pound. The option is considered to 3e a cash )"o hedge o) a )orecasted )oreign currency transaction. ?n 8ece%3er *1, (011, the option has a )air #a"ue o) 1,;00. The )o""oing spot exchange rates app"y:
7-;7
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
;1. 2hat Dourna" entry shou"d Eag"e prepare on ?cto3er 1, (0115
&. & a3o#e. $. $ a3o#e. C. C a3o#e. 8. 8 a3o#e. E. E a3o#e.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+9 Account for forward contracts and options used as hedges of forecasted foreign currency transactions0
7-;'
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
;(. 2hat Dourna" entry shou"d Eag"e prepare on 8ece%3er *1, (0115
&. & a3o#e. $. $ a3o#e. C. C a3o#e. D. 8 a3o#e. E. E a3o#e.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+9 Account for forward contracts and options used as hedges of forecasted foreign currency transactions0
;*. 2hat is the a%ount o) option expense )or (01( )ro% these transactions5 &. 1,000. . 1,;00. C. (,+00. 8. (,;00. E. 0.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+9 Account for forward contracts and options used as hedges of forecasted foreign currency transactions0
7-;<
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
;. 2hat is the a%ount o) &dDust%ent to &ccu%u"ated ?ther Co%prehensi#e nco%e )or (01( )ro% these transactions5 !. 1,000. $. 1,;00. C. 1,'00. 8. (,000. E. (,;00.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+9 Account for forward contracts and options used as hedges of forecasted foreign currency transactions0
;+. 2hat is the a%ount o) Cost o) Goods !o"d )or (01( as a resu"t o) these transactions5 &. (00,000. $. 1<+,000. C. (01,000. 8. (0(,;00. E. (0*,000.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+9 Account for forward contracts and options used as hedges of forecasted foreign currency transactions0
7-70
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
;;. 2hat is the (01( e))ect on net inco%e as a resu"t o) these transactions5 &. 1<+,000 . (01,;00 C. (01,000 8. (0(,;00 E. (0*,000
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty 7ard Learning )b*ecti"e +,-+9 Account for forward contracts and options used as hedges of forecasted foreign currency transactions0
Essay Questions
;7. Me"ton Co. Dust so"d in#entory )or '0,000 euros, hich Me"ton i"" co""ect in sixty days. $rie)"y descri3e a hedging transaction Me"ton cou"d engage in to reduce its risk o) un)a#ora3"e exchange rates. Me"ton cou"d sign a )orard exchange contract to se"" the euros in ;0 days, a)ter they are recei#ed. &"ternati#e"y, Me"ton cou"d purchase an option to se"" the euros in ;0 days, a)ter they are recei#ed.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s Co'prehension $ifficulty Easy Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30
7-71
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
;'. 2here can you )ind exchange rates 3eteen the .!. do""ar and %ost )oreign currencies5 Foreign exchange rates are pu3"ished in the :all Street ;ournal , %aDor .!. nespapers, and se#era" nternet sites.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s 8nowledge $ifficulty Easy Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30
;<. 2hat is %eant 3y the spot rate5 The spot rate is the price at hich a )oreign currency can 3e purchased or so"d today.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s 8nowledge $ifficulty Easy Learning )b*ecti"e +,-+6 2nderstand concepts related to foreign currency/ exchange rates/ and foreign exchange ris30
70. Ho is the )air #a"ue o) a Forard Contract deter%ined 3y .!. G&&P5 The )air #a"ue o) a Forard Contract is deter%ined 3y co%paring the di))erence 3eteen the contracted )orard rate and the current"y a#ai"a3"e )orard rate )or contracts expiring on the sa%e date. ?n the initia" date o) the contract, this ou"d resu"t in a )air #a"ue o) 0. &s ti%e passes, the current"y a#ai"a3"e )orard rate i"" "ike"y )"uctuate re"ati#e to the O)ixedO contracted )orard rate, creating a di))erence that %ust 3e acco unted )or as a gain or "oss on the )orard contract. & contract ith a net gain o#er its "i)e is recorded on the 3a"ance sheet as a Forard Contract &sset. & contract ith a net "oss o#er its "i)e is recorded on the 3a"ance sheet as a Forard Contract Kia3i"ity.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s Co'prehension $ifficulty 7ard Learning )b*ecti"e +,-+1 2nderstand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange ris30
7-7(
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
71. 2hat is the %aDor assu%ption under"ying the one-transaction perspecti#e5 The one-transaction perspecti#e assu%es that an export sa"e is not co%p"ete unti" the )oreign currency recei#a3"e has 3een co""ected and con#erted into .!. do""ars.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s 8nowledge $ifficulty Easy Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7(. 2hat is the purpose o) a hedge o) )oreign exchange risk5 Hedge o) )oreign exchange risk is a strategy to "i%it exposure to the e))ect o) un)a#ora3"e changes in the #a"ue o) )oreign currencies that are caused 3y )"uctuations in exchange rates. n addition to a#oiding possi3"e "osses, co%panies hedge )oreign currency transactions and co%%it%ents to introduce an e"e%ent o) certainty into the )uture cash )"os resu"ting )ro% )oreign currency acti#ities 3y esta3"ishing a price today at hich )oreign currency can 3e so"d or purchased at a )uture date.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s Co'prehension $ifficulty &ediu' Learning )b*ecti"e +,-+1 2nderstand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange ris30
7-7*
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
7*. Ho does a )oreign currency )orard contract di))er )ro% a )oreign currency option5 & )oreign currency )orard contract o3"igates the parties to de"i#er one currency in exchange )or another at a speci)ied )uture date. ?n the other hand, the oner o) a )oreign currency option can choose hether to exercise the option and exchange one currency )or another or not.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s Co'prehension $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7. 2hat )actors create a )oreign exchange gain5 Foreign exchange gains and "osses are created 3y to )actors: ha#ing )oreign currency exposures 6)oreign currency recei#a3"es and paya3"es and changes in exchange rates.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s Co'prehension $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7+. 2hat happens hen a .!. co%pany purchases goods deno%inated in a )oreign currency and the )oreign currency depreciates5 The e#ent resu"ts in a )oreign exchange gain.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s Co'prehension $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-7
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
7;. 2hat happens hen a .!. co%pany purchases goods deno%inated in a )oreign currency and the )oreign currency appreciates5 The e#ent resu"ts in a )oreign exchange "oss.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s Co'prehension $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
77. 2hat happens hen a .!. co%pany se""s goods deno%inated in a )oreign currency and the )oreign currency depreciates5 The e#ent resu"ts in a )oreign exchange "oss.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s Co'prehension $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7'. 2hat happens hen a .!. co%pany se""s goods deno%inated in a )oreign currency and the )oreign currency appreciates5 The e#ent resu"ts in a )oreign exchange gain.
AACS# $i"ersity AACS# Reflecti"e thin3ing A!CPA ## Global A!CPA F% &easure'ent #loo'(s Co'prehension $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-7+
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
7<. Ga Produce Co. purchased in#entory )ro% a =apanese co%pany on 8ece%3er 1', (011. Pay%ent o) ,000,000 yen 6@ as due on =anuary 1', (01(. Exchange rates 3eteen the do""ar and the yen ere as )o""os:
Required Prepare a"" Dourna" entries )or Ga Produce Co. in connection ith the purchase and pay%ent.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-7;
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
'0. ?"d Co"onia" Corp. 6a .!. co%pany %ade a sa"e to a )oreign custo%er on !epte%3er 1+, (011, )or 100,000 stick"es. Pay%ent as recei#ed on ?cto3er 1+, (011. The )o""oing exchange rates app"ied:
Required Prepare a"" Dourna" entries )or ?"d Co"onia" Corp. in connection ith this sa"e assu%ing that the co%pany c"oses its 3ooks on !epte%3er *0 to prepare interi% )inancia" state%ents.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-77
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
Coyote Corp. 6a .!. co%pany in Texas had the )o""oing series o) transactions in a )oreign country during (011:
The appropriate exchange rates during (011 ere as )o""os:
7-7'
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
'1. Prepare a"" Dourna" entries in .!. do""ars a"ong ith any 8ece%3er *1, (011 adDusting entries. Coyote uses a perpetua" in#entory syste%.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-7<
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
'(. 2hat a%ount i"" Coyote Corp. report in its (011 3a"ance sheet )or !n"entory5 n#entory 6;0,000 pesos x .(0 x 0B: ,'00
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
'*. 2hat a%ount i"" Coyote Corp. report in its (011 inco%e state%ent )or Cost of goods sold 5 Cost o) goods so"d 6;0,000 pesos x .(0 x ;0B: 7,(00
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
'. 2hat a%ount i"" Coyote Corp. report in its (011 inco%e state%ent )or Sales5 !a"es 6+,000 pesos x .((: 11,''0
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-'0
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
'+. 2hat a%ount i"" Coyote Corp. report in its (011 3a"ance sheet )or Accounts recei"able5 &ccounts recei#a3"e 66+,000-',000 pesos x .(+: 1,+00
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
';. 2hat a%ount i"" Coyote Corp. report in its (011 3a"ance sheet )or Accounts payable5 &ccounts paya3"e 66;0,000-*;,000 pesos x .(+: ;,000
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
'7. The 3eginning 3a"ance o) cash as +0,000 pesos on =anuary 1, (011, trans"ated at 1 peso / .1'. 2hat a%ount i"" Coyote Corp. report in its (011 3a"ance sheet )or Cash5 Cash 6+0,000pesos x .1' 6',000 pesos x .(* - 6*;,000 pesos x .(: 11,00
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Analysis $ifficulty &ediu' Learning )b*ecti"e +,-+. Account for foreign currency transactions using the two-transaction perspecti"e/ accrual approach0
7-'1
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
?n 9o#e%3er 10, (011, ing Co. so"d in#entory to a custo%er in a )oreign country. ing agreed to accept <;,000 "oca" currency units 6KC in )u"" pay%ent )or this in#entory. Pay%ent as to 3e %ade on Fe3ruary 1, (01(. ?n 8ece%3er 1, (011, ing entered into a )orard exchange contract herein <;,000 KC ou"d 3e de"i#ered to a currency 3roker in to %onths. The to %onth )orard exchange rate on that date as 1 KC / .*0. &ny contract discount or pre%iu% is a%orti4ed using the straight-"ine %ethod. The spot rates and )orard rates on #arious dates ere as )o""os:
The co%pany>s 3orroing rate is 1(B. The present #a"ue )actor )or one %onth is .<<01.
7-'(
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
''. 6&. &ssu%e this hedge is designated as a cash )"o hedge. Prepare the Dourna" entries re"ating to the transaction and the )orard contract. 6$. Co%pute the e))ect on (011 net inco%e. 6C. Co%pute the e))ect on (01( net inco%e.
7-'*
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
1
Q6.*0 - .(' <;,000 x .<<01 / 1,<01 Q6.*0 - .(7 <;,000 / (,''0 - 1,<01 / <7<
(
7-'
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty 7ard Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
7-'+
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
'<. 6&. &ssu%e this hedge is designated as a )air #a"ue hedge. Prepare the Dourna" entries re"ating to the transaction and the )orard contract. 6$. Co%pute the e))ect on (011 net inco%e. 6C. Co%pute the e))ect on (01( net inco%e.
AACS# Analytic AACS# $i"ersity A!CPA A!CPA ## Global A!CPA A!CPA F% &easure'ent #loo'(s Application $ifficulty 7ard Learning )b*ecti"e +,-+5 Account for forward forward contracts and options used as as hedges of foreign foreign currency deno'inated deno'inated assets and liabilities0
7-';
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
?n ?cto3er 1, (011, =ar#is Co. so"d in#entory to a custo%er in a )oreign country, deno%inated in 100,000 "oca" currency units 6KC. Co""ection is expected in )our %onths. ?n ?cto3er 1, (011, a )orard exchange contract as acuired here3y =ar#is Co. as to pay 100,000 KC in )our %onths 6on Fe3ruary 1, (01( and recei#e 7',000 in .!. do""ars. The spot and )orard rates )or the KC ere as )o""os:
The co%pany>s 3orroing rate is 1(B. The present #a"ue )actor )or one %onth is .<<01. &ny discount or pre%iu% on the contract is a%orti4ed using the straight-"ine %ethod.
7-'7
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
<0. &ssu%ing this is a cash )"o hedge, prepare Dourna" entries )or this sa"es transaction and )orard contract.
7-''
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
1
Q6.'0 - .7' 100,000 x .<<01 / 1,<'0 Q6.7' - .'; 100,000 - 1,<'0 / ;,0(0
(
7-'<
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty 7ard Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
<1. &ssu%ing this is a )air #a"ue hedge, prepare Dourna" entries )or this sa"es transaction and )orard contract.
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty 7ard Learning )b*ecti"e +,-+5 Account for forward contracts and options used as hedges of foreign currency deno'inated assets and liabilities0
7-<0
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
<(. ?n ?cto3er *1, (010, 8ar"ing Co%pany negotiated a to-year 100,000 )ranc "oan )ro% a )oreign 3ank at an interest rate o) * percent per year. nterest pay%ents are %ade annua""y on ?cto3er *1, and the principa" i"" 3e repaid on ?cto3er *1, (01(. 8ar"ing prepares .!.-do""ar )inancia" state%ents and has a 8ece%3er *1 year-end. Prepare a"" Dourna" entries re"ated to this )oreign currency 3orroing assu%ing the )o""oing:
7-<1
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
!n 2S dollars
7-<(
Chapter 07 - Foreign Currency Transactions and Hedging Foreign Exchange Risk
AACS# Analytic AACS# $i"ersity A!CPA ## Global A!CPA F% &easure'ent #loo'(s Application $ifficulty 7ard Learning )b*ecti"e +,-+, Prepare *ournal entries to account for foreign currency borrowings0
7-<*