Foreign currency transactions and hedging

19,623 views
19,095 views

Published on

Published in: Business, Economy & Finance
0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
19,623
On SlideShare
0
From Embeds
0
Number of Embeds
26
Actions
Shares
0
Downloads
214
Comments
0
Likes
2
Embeds 0
No embeds

No notes for slide

Foreign currency transactions and hedging

  1. 1. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskForeign Currency Transactions and Hedging Foreign Exchange RiskMultiple Choice[QUESTION]1. Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2008.Pigskin received payment of 35,000 British pounds on May 8, 2008. The exchange rate was $1 = £0.65on April 8 and $1 = £0.70 on May 8. What amount of foreign exchange gain or loss should berecognized? (round to the nearest dollar)A) $10,500 lossB) $10,500 gainC) $1,750 lossD) $3,846 lossE) No gain or loss should be recognized.Answer: DDifficulty: MediumREFERENCE: Ref. 09_01Norton Co., a U.S. corporation, sold inventory on December 1, 2008, with payment of 10,000 Britishpounds to be received in sixty days. The pertinent exchange rates were as follows:[QUESTION]REFER TO: Ref. 09_012. For what amount should Sales be credited on December 1?A) $5,500.B) $16,949.C) $18,182.D) $17,241.E) $16,667.Answer: DDifficulty: Medium[QUESTION]REFER TO: Ref. 09_013. What amount of foreign exchange gain or loss should be recorded on December 31?A) $300 gain.B) $300 loss.C) $0.D) $941 loss.E) $941 gain.Answer: EDifficulty: Medium[QUESTION]REFER TO: Ref. 09_014. What amount of foreign exchange gain or loss should be recorded on January 30?Page 1
  2. 2. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskA) $1,516 gain.B) $1,516 loss.C) $575 loss.D) $500 loss.E) $500 gain.Answer: BDifficulty: MediumREFERENCE: Ref. 09_02Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Briscos fiscal year-end. Thepertinent exchange rates were as follows:[QUESTION]REFER TO: 09_025. For what amount should Briscos Accounts Payable be credited on May 8?A) $2,500,000.B) $2,440,000.C) $1,600,000.D) $1,639,344.E) $1,666,667.Answer: ADifficulty: Medium[QUESTION]REFER TO: 09_026. How much Foreign Exchange Gain or Loss should Brisco record on May 31?A) $2,520,000 gain.B) $20,000 gain.C) $20,000 loss.D) $80,000 gain.E) $80,000 loss.Answer: CDifficulty: Medium[QUESTION]REFER TO: 09_027. How much US $ will it cost Brisco to finally pay the payable on June 7?A) $1,666,667.B) $2,440,000.C) $2,520,000.D) $2,500,000.E) $2,400,000.Answer: EDifficulty: MediumPage 2
  3. 3. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Risk[QUESTION]8. On June 1, CamCo received a contract to sell inventory for ¥500,000. The sale would take place in 90days. CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received.The spot rate on June 1 was $1 = ¥240, and the 90-day forward rate was $1 = ¥234. At what amountwould CamCo record the Forward Contract on June 1?A) $2,083.B) $0.C) $2,110.D) $2,532.E) $2,137.Answer: BDifficulty: Medium[QUESTION]9. Belsen purchased inventory on December 1, 2008. Payment of 200,000 stickles was to be made insixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days. The spotrate was $1 = §2.80, and the 60-day forward rate was $1 = §2.60. On December 31, the spot rate was $1= §2.90 and the 30-day forward rate was $1 = §2.62. Assume an annual interest rate of 12% and a fairvalue hedge. The present value for one month at 12% is .9901.In the journal entry to record the establishment of a forward exchange contract, at what amount should theForward Contract account be recorded on December 1?A) $71,428.57.B) $76,923.08.C) $5,549.51.D) $587.20.E) $ 0, since there is no cost, there is no value for the contract at this date.Answer: EDifficulty: Easy[QUESTION]10. Meisner Co. ordered parts costing §100,000 for a foreign supplier on May 12 when the spot rate was$.24 per stickle. A one-month forward contract was signed on that date to purchase §100,000 at aforward rate of $.25 per stickle. On June 12, when the parts were received and payment was made, thespot rate was $.28 per stickle. At what amount should inventory be reported?A) $0.B) $28,000.C) $24,200.D) $25,000.E) $2,000.Answer: BDifficulty: MediumREFERENCE: Ref. 09_03Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2008, with paymentof 10 million Korean won to be received on January 15, 2009. The following exchange rates applied:Page 3
  4. 4. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Risk[QUESTION]REFER TO: Ref. 09_0311. Assuming a forward contract was not entered into, what would be the net impact on Car Corp.s 2008income statement related to this transaction?A) $ 500 (gain).B) $ 500 (loss).C) $ 200 (gain).D) $ 200 (loss).E) $ - 0 -Answer: CDifficulty: Medium[QUESTION]REFER TO: Ref. 09_0312. Assuming a forward contract was entered into, what would be the net impact on Car Corp.s 2008income statement related to this transaction? Assume an annual interest rate of 12% and a fair valuehedge. The present value for one month at 12% is .9901.A) $ 700 (gain).B) $ 700 (loss).C) $ 300 (gain).D) $ 300 (loss).E) $ 295.05 (loss).Answer: EDifficulty: Hard[QUESTION]REFER TO: Ref. 09_0313. Assuming a forward contract was entered into on December 16, what would be the net impact on CarCorp.s 2009 income statement related to this transaction?A) $ 500 (gain).B) $ 100 (loss).C) $ 200 (gain).D) $ 200 (loss).E) $0.Answer: ADifficulty: Hard[QUESTION]14. Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer(stickles). On December 31, 2008, this receivable for §200,000 was correctly included in Mills balancesheet at $132,000. When the receivable was collected on February 15, 2009, the U.S. dollar equivalentwas $144,000. In Mills 2009 consolidated income statement, how much should have been reported as aPage 4ForwardSpot RateDate Rate To Jan. 15December 16, 2008 $ .00090 $ .00098December 31, 2008 .00092 .00093January 15, 2009 .00095 .00095
  5. 5. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Riskforeign exchange gain?A) $0.B) $36,000.C) $48,000.D) $10,000.E) $12,000.Answer: EDifficulty: Easy[QUESTION]15. A spot rate may be defined asA) The price a foreign currency can be purchased or sold today.B) The price today at which a foreign currency can be purchased or sold in the future.C) The forecasted future value of a foreign currency.D) The U.S. dollar value of a foreign currency.E) The Euro value of a foreign currency.Answer: ADifficulty: Easy[QUESTION]16. The forward rate may be defined asA) The price a foreign currency can be purchased or sold today.B) The price today at which a foreign currency can be purchased or sold in the future.C) The forecasted future value of a foreign currency.D) The U.S. dollar value of a foreign currency.E) The Euro value of a foreign currency.Answer: BDifficulty: Easy[QUESTION]17. Which statement is true regarding a foreign currency option?A) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future.B) A foreign currency option gives the holder the obligation only sell foreign currency in the future.C) A foreign currency option gives the holder the obligation to only buy foreign currency in the future.D) A foreign currency option gives the holder the right but not the obligation to buy or sell foreigncurrency in the future.E) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the futureat the spot rate.Answer: DDifficulty: Medium[QUESTION]18. A U.S. company sells merchandise to a foreign company denominated in U.S. dollars. Which of thefollowing statements is true?A) If the foreign currency appreciates, a foreign exchange gain will result.B) If the foreign currency depreciates, a foreign exchange gain will result.C) No foreign exchange gain or loss will result.D) If the foreign currency appreciates, a foreign exchange loss will result.E) If the foreign currency depreciates, a foreign exchange loss will result.Answer: CPage 5
  6. 6. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskDifficulty: Easy[QUESTION]19. A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Whichof the following statements is true?A) If the foreign currency appreciates, a foreign exchange gain will result.B) If the foreign currency depreciates, a foreign exchange gain will result.C) No foreign exchange gain or loss will result.D) If the foreign currency appreciates, a foreign exchange loss will result.E) Any gain or loss will be included in comprehensive income.Answer: ADifficulty: Medium[QUESTION]20. A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which ofthe following statements is true?A) If the foreign currency appreciates, a foreign exchange gain will result.B) If the foreign currency depreciates, a foreign exchange gain will result.C) No foreign exchange gain or loss will result.D) If the foreign currency appreciates, a foreign exchange loss will result.E) Any gain or loss will be included in comprehensive income.Answer: CDifficulty: Medium[QUESTION]21. A U.S. company buys merchandise from a foreign company denominated in the foreign currency.Which of the following statements is true?A) If the foreign currency appreciates, a foreign exchange gain will result.B) If the foreign currency depreciates, a foreign exchange loss will result.C) No foreign exchange gain or loss will result.D) If the foreign currency appreciates, a foreign exchange loss will result.E) Any gain or loss will be included in comprehensive income.Answer: DDifficulty: Medium[QUESTION]22. SFAS 133 provides guidance for hedges of all the following sources of foreign exchange risk exceptA) Recognized foreign currency denominated assets and liabilities.B) Unrecognized foreign currency firm commitments.C) Forecasted foreign currency denominated transactions.D) Net investment in foreign operations.E) Deferred foreign currency gains and losses.Answer: EDifficulty: Medium[QUESTION]23. All of the following data may be needed to determine the fair value of a forward contract at any pointin time exceptA) The forward rate when the forward contract was entered into.B) The current forward rate for a contract that matures on the same date as the forward contract enteredinto.Page 6
  7. 7. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskC) The future spot rate.D) A discount rate.E) The companys incremental borrowing rate.Answer: CDifficulty: Hard[QUESTION]24. A forward contract may be used for which of the following?1) A fair value hedge of an asset.2) A cash flow hedge of an asset.3) A fair value hedge of a liability.4) A cash flow hedge of a liability.A) 1 and 3B) 2 and 4C) 1 and 2D) 1, 3, and 4E) 1, 2, 3, and 4Answer: EDifficulty: Easy[QUESTION]25. A company has a discount on a forward contract for an asset. How is the discount recognized overthe life of the contract?A) It is charged to a deferred credit.B) It is charged to a deferred asset.C) It is charged to accumulated other comprehensive income.D) It increases sales.E) It decreases sales.Answer: CDifficulty: Medium[QUESTION]26. A speculative derivative would be similar to which type of hedge?A) An option designated as a cash flow hedge.B) An option designated as a fair value hedge.C) A forward contract designated as a cash flow hedge.D) A forward contract designated as a fair value hedge.E) A speculative option not designated..Answer: BDifficulty: Hard[QUESTION]27. Which of the following statements is true concerning hedge accounting?A) Hedges of foreign currency firm commitments are used for future sales only.B) Hedges of foreign currency firm commitments are used for future purchases only.C) Hedges of foreign currency firm commitments are used for current purchases or sales.D) Hedges of foreign currency firm commitments are used for future sales or purchases.E) Hedges of foreign currency firm commitments are speculative in nature.Answer: DDifficulty: MediumPage 7
  8. 8. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Risk[QUESTION]28. All of the following hedges are used for future purchase/sale transactions exceptA) Forward contracts used as a fair value hedge of a firm commitment.B) Options used as a fair value hedge of a firm commitment.C) Hedge of a foreign currency denominated asset.D) Forward cash flow hedges of a forecasted transaction.E) Forward contracts used to hedge a foreign currency denominated liability.Answer: EDifficulty: MediumREFERENCE: Ref. 09_04On December 1, 2007, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Spain for150,000 euro. Payment is due on February 1, 2008. Keenan entered into a forward exchange contract onDecember 1, 2007, to deliver 150,000 euro on February 1, 2008 for $.97. Keenan chose to use a foreigncurrency option to hedge this foreign currency asset designated as a cash flow hedge. Relevant exchangerates follow:[QUESTION]REFER TO: 09_0429. Compute the value of the foreign currency option at December 1, 2007.A) $6,000.B) $4,500.C) $3,000.D) $7,500.E) $1,500.Answer: DDifficulty: Medium[QUESTION]REFER TO: 09_0430. Compute the value of the foreign currency option at December 31, 2007.A) $6,000.B) $4,500.C) $3,000.D) $7,500.E) $1,500.Answer: ADifficulty: Medium[QUESTION]REFER TO: 09_0431. Compute the value of the foreign currency option at February 1, 2008.A) $6,000.B) $4,500.Page 8
  9. 9. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskC) $3,000.D) $7,500.E) $1,500.Answer: BDifficulty: Medium[QUESTION]REFER TO: 09_0432. Compute the U.S. dollars received on February 1, 2008.A) $138,000.B) $136,500.C) $145,500.D) $141,000E) $142,500.Answer: CDifficulty: Medium[QUESTION]33. Which of the following approaches is used in the United States in accounting for foreign currencytransactions?A) One-transaction perspective; defer foreign exchange gains and losses.B) Two-transaction perspective; accrue foreign exchange gains and losses.C) Three-transaction perspective; defer foreign exchange gains and losses.D) One-transaction perspective; accrue foreign exchange gains and losses.E) Two-transaction perspective; defer foreign exchange gains and losses.Answer: BDifficulty: Easy[QUESTION]34. When a U.S. company purchases parts from a foreign company, which of the following will result inno foreign exchange gain or loss?A) The transaction is denominated in U.S. dollars.B) The transaction resulted in an extraordinary gain.C) The transaction resulted in an extraordinary loss.D) The foreign currency appreciated in value relative to the U.S. dollar.E) The foreign currency depreciated in value relative to the U.S. dollar.Answer: ADifficulty: Easy[QUESTION]35. Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in pesos. OnDecember 31, 2008, this receivable for 75,000 pesos was correctly included in Alpha’s balance sheet at$8,000. The receivable was collected on March 2, 2009, when the U.S. equivalent was $6,900. Howmuch foreign exchange gain or loss will Alpha record on the income statement for the year endedDecember 31, 2009?A) $1,100 loss.B) $1,100 gain.C) $6,900 loss.D) $6,900 gain.E)$8,000 gain.Answer: APage 9
  10. 10. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskDifficulty: EasyREFERENCE: Ref. 09_05On April 1, 2007, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign lender bysigning an interest-bearing note due April 1, 2008. The dollar value of the loan was as follows:[QUESTION]REFER TO: 09_0536. How much foreign exchange gain or loss should be included in Shannon’s 2007 income statement?A) $3,000 gain.B) $3,000 loss.C) $6,000 gain.D) $6,000 loss.E) $7,000 gain.Answer: DDifficulty: Medium[QUESTION]REFER TO: 09_0537. How much foreign exchange gain or loss should be included in Shannon’s 2008 income statement?A) $1,000 gain.B) $1,000 loss.C) $2,000 gain.D) $2,000 loss.E) $8,000 loss.Answer: DDifficulty: Medium[QUESTION]REFER TO: 09_0538. Angela, Inc., a U.S. company, had a euro receivable from exports to Spain and a British poundpayable resulting from imports from England. Angela recorded foreign exchange gain related to both itseuro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value fromthe date of the transaction to the settlement date?A) A aboveB) B aboveC) C abovePage 10
  11. 11. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskD) D aboveE) E aboveAnswer: BDifficulty: Medium[QUESTION]39. Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia and a europayable resulting from imports from Italy. Frankfurter recorded foreign exchange loss related to both itsruble receivable and euro payable. Did the foreign currencies increase or decrease in dollar value fromthe date of the transaction to the settlement date?A) A aboveB) B aboveC) C aboveD) D aboveE) E aboveAnswer: CDifficulty: MediumREFERENCE: Ref. 09_06Parker Corp., a U.S. company, had the following foreign currency transactions during 2009:(1.) Purchased merchandise from a foreign supplier on July 5, 2009 for the U.S. dollar equivalent of$80,000 and paid the invoice on August 3, 2009 at the U.S. dollar equivalent of $82,000.(2.) On October 1, 2009 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2009. The U.S. dollar equivalent of the note amount was$860,000 on December 31, 2009, and $881,000 on October 1, 2010.[QUESTION]REFER TO: 09_0640. What amount should be included as a foreign exchange gain or loss from the two transactions for2009?A) $2,000 loss.B) $2,000 gain.C) $10,000 gain.D) $14,000 loss.E) $ 14,000 gain.Answer: CDifficulty: Medium[QUESTION]REFER TO: 09_0641. What amount should be included as a foreign exchange gain or loss from the two transactions for2010?A) $9,000 loss.Page 11
  12. 12. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskB) $9,000 gain.C) $11,000 loss.D) $21,000 loss.E) $21,000 gain.Answer: DDifficulty: EasyREFERENCE: Ref. 09_07Winston Corp., a U.S. company, had the following foreign currency transactions during 2008:(1.) Purchased merchandise from a foreign supplier on July 16, 2008 for the U.S. dollar equivalent of$47,000 and paid the invoice on August 3, 2008 at the U.S. dollar equivalent of $54,000.(2.) On October 15, 2008 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2008. The U.S. dollar equivalent of the note amount was$295,000 on December 31, 2008, and $299,000 on October 15, 2009.[QUESTION]REFER TO: 09_0742. What amount should be included as a foreign exchange gain or loss from the two transactions for2008?A) $9,000 loss.B) $9,000 gain.C) $11,000 loss.D) $13,000 gain.E) $ 14,000 gain.Answer: DDifficulty: Medium[QUESTION]REFER TO: 09_0743. What amount should be included as a foreign exchange gain or loss from the two transactions for2009?A) $1,000 loss.B) $1,000 gain.C) $2,000 loss.D) $4,000 gain.E) $4,000 loss.Answer: EDifficulty: Easy[QUESTION]44. Williams, Inc., a U.S. company, has a Japanese yen account receivable resulting from an export saleon March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen anddesignated it as a cash flow hedge of a recognized receivable. The spot rate was $.0094, and the forwardrate was $.0095. Which of the following did the U.S. exporter report in net income?A) Discount revenue.B) Premium revenue.C) Discount expense.D) Premium expense.E) Both a discount revenue and a premium expense.Answer: BDifficulty: MediumPage 12
  13. 13. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Risk[QUESTION]45. Larson Company, a U.S. company, has an India rupee account receivable resulting from an exportsale on September 7 to a customer in India. Larson signed a forward contract on September 7 to sellrupees and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.023, andthe forward rate was $.021. Which of the following did the U.S. exporter report in net income?A) Discount revenue.B) Premium revenue.C) Discount expense.D) Premium expense.E) Both a discount revenue and a premium expense.Answer: BDifficulty: Medium[QUESTION]46. Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on July 7when the spot rate was $.025 per rupee. A one-month forward contract was signed on that date topurchase 100,000 rupee at a rate of $.027. The forward contract is properly designated as a fair valuehedge of the 100,000 rupee firm commitment. On August 7, when the parts are received, the spot rate is$.028. At what amount should the parts inventory be carried on Primo’s books?A) $2,000.B) $2,100.C) $2,500.D) $2,700.E) $2,800.Answer: EDifficulty: Medium[QUESTION]47. Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts from a foreignsupplier on July 7 when the spot rate was $.025 per baht. A one-month forward contract was signed onthat date to purchase 1,000,000 bahts at a rate of $.027. The forward contract is properly designated as afair value hedge of the 1,000,000 baht firm commitment. On August 7, when the parts are received, thespot rate is $.028. What is the amount of accounts payable that will be paid at this date?A) $20,000.B) $20,100.C) $25,000.D) $27,000.E) $28,000.Answer: EDifficulty: Medium[QUESTION]48. On December 1, 2009, Joseph Company, a U.S. company, entered into a three-month forwardcontract to purchase 50,000 pesos on March 1, 2010. The following U.S. dollar per peso exchange ratesapply:Forward RateDate Spot Rate (Mar.1, 2010)December 1,2009 $0.092 $0.105Page 13
  14. 14. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskDecember 31,2009 $0.090 $0.095March 1, 2010 $0.089 N/AJoseph’s incremental borrowing rate is 12 percent. The present value factor for two months at an annualinterest rate of 12 percent is .9803. Which of the following is included in Joseph’s December 31, 2009balance sheet for the forward contract?A) $5,146.58 asset.B) $5,146.58 liability.C) $500 liability.D) $490.15 asset.E) $490.15 liability.Answer: EDifficulty: Medium[QUESTION]49. On April 1, Quality Corporation, a U.S. company, expects to order merchandise from a Germansupplier in three months, denominating the transaction in euros. On April 1, the spot rate is $1.19 pereuro, and Quality enters into a three-month forward contract to purchase 400,000 euros at a rate of $1.20.At the end of three months, the spot rate is $1.21 per euro, and Quality orders and receives themerchandise, paying 400,000 euros. What are the effects on net income from these transactions?A) $4,000 Discount Expense plus a $4,000 negative Adjustment to Net Income when the merchandise isreceived.B) $ 4,000 Discount Expense plus an $8,000 negative Adjustment to Net Income when the merchandiseis received.C) $ 4,000 Premium Expense plus a $4,000 negative Adjustment to Net Income when the merchandise isreceived.D) $ 8,000 Premium Expense plus a $4,000 positive Adjustment to Net Income when the merchandise isreceived.E) $ 8,000 Discount Expense plus an $8,000 positive Adjustment to Net Income when the merchandise isreceived.Answer: CDifficulty: Hard[QUESTION]50. On August 31, Ram Corporation, a U.S. company, expects to order merchandise from a Germansupplier in three months, denominating the transaction in euros. On August 31, the spot rate is $1.19 pereuro, and Quality enters into a three-month forward contract to purchase 600,000 euros at a rate of $1.20.At the end of three months, the spot rate is $1.21 per euro, and Ram orders and receives the merchandise,paying 600,000 euros. What are the effects on net income from these transactions?A) $6,000 Discount Expense plus a $6,000 negative Adjustment to Net Income when the merchandise issold.B) $ 6,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandiseis sold.C) $ 6,000 Premium Expense plus a $6,000 negative Adjustment to Net Income when the merchandise issold.D) $ 12,000 Premium Expense plus a $6,000 positive Adjustment to Net Income when the merchandiseis sold.E) $ 12,000 Discount Expense plus an $12,000 positive Adjustment to Net Income when themerchandise is sold.Page 14
  15. 15. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskAnswer: CDifficulty: Hard[QUESTION]51. Woolsey Corporation, a U.S. company, expects to order goods from a British supplier at a price of250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased athree-month call option for 250,000 British pounds and designated this option as a cash flow hedge of aforecasted foreign currency transaction. The following exchange rates apply:What amount will Woolsey include as an option expense in net income during the period July 24 toOctober 24?A) $4,000.B) $5,000.C) $10,000.D) $12,000.E) $14,000.Answer: ADifficulty: Easy[QUESTION]52. Atherton, Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreigncurrency transaction. The following exchange rates apply:What amount will Atherton include as an option expense in net income during the period January 17 toApril 17?A) $4,000B) $4,260C) $4,340D) $5,000E) $5,260Answer: DDifficulty: EasyREFERENCE: Ref. 09_08Page 15
  16. 16. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskOn May 1, 2007, Mosby Company received an order to sell a machine to a customer in Canada at a priceof 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2008.On May 1, 2007, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1,2008 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firmcommitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2007. Thefollowing spot exchange rates apply:Mosby’s incremental borrowing rate is 12 percent, and the present value factor for two months at a 12percent annual rate is .9803.[QUESTION]REFER TO: Ref. 09_0853. What was the net impact on Mosby’s 2007 income as a result of this fair value hedge of a firmcommitment?A) $1,760.60 decrease.B) $1,960.60 decrease.C) $1,000.00 decrease.D) $1,760.60 increase.E) $1,960.60 increase.Answer: ADifficulty: Hard[QUESTION]REFER TO: Ref. 09_0854. What was the net impact on Mosby’s 2008 income as a result of this fair value hedge of a firmcommitment?A) $1,760.60 decrease.B) $2,500 increase.C) $2,500 decrease.D) $188,760.60 increase.E) $188,760.60 decrease.Answer: DDifficulty: Hard[QUESTION]REFER TO: Ref. 09_0855. What was the net increase or decrease in cash flow from having purchased the foreign currency optionto hedge this exposure to foreign exchange risk?A) $0B) $9,000 decrease.C) $9,000 increase.D) $2,000 increase.E) $2,000 decrease.Answer: CPage 16
  17. 17. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskDifficulty: HardREFERENCE: Ref. 09_09On March 1, 2007, Mattie Company received an order to sell a machine to a customer in England at aprice of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2008.On March 1, 2007, Mattie purchased a put option giving it the right to sell 200,000 British pounds onMarch 1, 2008 at a price of $380,000. Mattie properly designates the option as a fair hedge of the poundfirm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2007. Thefollowing spot exchange rates apply:Mattie’s incremental borrowing rate is 12 percent, and the present value factor for two months at a 12percent annual rate is .9803.[QUESTION]REFER TO: Ref. 09_0956. What was the net impact on Mattie’s 2007 income as a result of this fair value hedge of a firmcommitment?A) $1,660.40 decrease.B) $1,760.60 decrease.C) $2,240.40 decrease.D) $1,660.40 increase.E) $2,240.60 increase.Answer: BDifficulty: Hard[QUESTION]REFER TO: Ref. 09_0957. What was the net impact on Mattie’s 2008 income as a result of this fair value hedge of a firmcommitment?A) $379,760.60 decrease.B) $8,360.60 increase.C) $8,360.60 decrease.D) $ 4,390.40 decrease.E) $379,760.60 increase.Answer: EDifficulty: Hard[QUESTION]REFER TO: Ref. 09_0958. What was the net increase or decrease in cash flow from having purchased the foreign currency optionto hedge this exposure to foreign exchange risk?A) $0B) $10,000 increase.C) $10,000 decrease.Page 17
  18. 18. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskD) $20,000 increase.E) $20,000 decrease.Answer: BDifficulty: HardREFERENCE: Ref. 09_10On October 1, 2007, Eagle Company forecasts the purchase of inventory from a British supplier onFebruary 1, 2008, at a price of 100,000 British pounds. On October 1, 2007, Eagle pays $1,800 for athree-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option isconsidered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2007,the option has a fair value of $1,600. The following spot exchange rates apply:[QUESTION]REFER TO: Ref. 09_1059. What journal entry should Eagle prepare on October 1, 2007?A) Cash 1,800Foreign Currency Option 1,800B) Forward Contract 1,800Cash 1,800C) Foreign Currency Option 1,800Gain on Foreign Currency 1,800D) Loss on Foreign Currency 1,800Cash 1,800E) Foreign Currency Option 1,800Cash 1,800A) A above.B) B above.C) C above.D) D above.E) E above.Answer: EDifficulty: Medium[QUESTION]REFER TO: Ref. 09_1060. What journal entry should Eagle prepare on December 31, 2007?A) Foreign Currency Option 200Cash 200B) Foreign Currency Option 200Option Revenue 200C) Foreign Currency Option 400Page 18
  19. 19. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskOption Revenue 400D) Option Expense 200Foreign Currency Option 200E) Option Expense 400Foreign Currency Option 400A) A above.B) B above.C) C above.D) D above.E) E above.Answer: DDifficulty: Medium[QUESTION]REFER TO: Ref. 09_1061. What is the amount of option expense for 2008 from these transactions?A) $1,000.B) $1,600.C) $2,500.D) $2,600.E) $0.Answer: BDifficulty: Medium[QUESTION]REFER TO: Ref. 09_1062. What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2008 from thesetransactions?A) $1,000.B) $1,600.C) $1,800.D) $2,000.E) $2,600.Answer: ADifficulty: Medium[QUESTION]REFER TO: Ref. 09_1063. What is the amount of Cost of Goods Sold for 2008 as a result of these transactions?A) $200,000.B) $195,000.C) $201,000.D) $202,600.E) $203,000.Answer: CDifficulty: Medium[QUESTION]REFER TO: Ref. 09_10Page 19
  20. 20. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Risk64. What is the 2008 effect on net income as a result of these transactions?A) $195,000B) $201,600C) $201,000D) $202,600E) $203,000Answer: BDifficulty: HardEssay[QUESTION]65. Yelton Co. just sold inventory for 80,000 lira, which Yelton will collect in sixty days. Brieflydescribe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.Answer: Yelton could sign a forward exchange contract to sell the lira in 60 days after they are received.Alternatively, Yelton could purchase an option to sell the lira in 60 days after they are received.Difficulty: Easy[QUESTION]66. Where can you find exchange rates between the U.S. dollar and most foreign currencies?Answer: Foreign exchange rates are published in the Wall Street Journal, major U.S. newspapers, andseveral Internet sites.Difficulty: Easy[QUESTION]67. What is meant by the spot rate?Answer: The spot rate is the price at which a foreign currency can be purchased or sold today.Difficulty: Easy[QUESTION]68. How is the fair value of a Forward Contract determined under SFAS 133?Answer: The fair value of a Forward Contract is determined by comparing the difference between thecontracted forward rate and the currently available forward rate for contracts expiring on the same date.On the initial date of the contract, this would result in a fair value of $0. As time passes, the currentlyavailable forward rate will likely fluctuate relative to the “fixed” contracted forward rate, creating adifference that must be accounted for as a gain or loss on the forward contract. A contract with a net gainover its life is recorded on the balance sheet as a Forward Contract Asset. A contract with a net loss overits life is recorded on the balance sheet as a Forward Contract Liability.Difficulty: Medium[QUESTION]69. What is the major assumption underlying the one-transaction perspective?Answer: The one-transaction perspective assumes that an export sale is not complete until the foreigncurrency receivable has been collected and converted into U.S. dollars.Difficulty: Easy[QUESTION]70. What is meant by the term hedging?Answer: “Hedging is the process of eliminating exposure to foreign exchange risk so as to avoid potentiallosses from fluctuations in exchange rates. In addition to avoiding possible losses, companies hedgeforeign currency transactions and commitments to introduce an element of certainty into the future cashPage 20
  21. 21. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Riskflows resulting from foreign currency activities. Hedging involves establishing a price today at whichforeign currency can be sold or purchased at a future date.”Difficulty: Medium[QUESTION]71. How does a foreign currency forward contract differ from a foreign currency option?Answer: “Whereas the owner of a foreign currency option can choose whether to exercise the option andexchange one currency for another or not, a party to a foreign currency forward contract is obligated todeliver one currency in exchange for another at a specified future date.”Difficulty: Medium[QUESTION]72. What factors create a foreign exchange gain?Answer: “Foreign exchange gains and losses are created by two factors: having foreign currencyexposures (foreign currency receivables and payables) and changes in exchange rates.”Difficulty: Medium[QUESTION]73. What happens when a U.S. company purchases goods denominated in a foreign currency and theforeign currency depreciates?Answer: The event results in a foreign exchange gain.Difficulty: Medium[QUESTION]74. What happens when a U.S. company purchases goods denominated in a foreign currency and theforeign currency appreciates?Answer: The event results in a foreign exchange loss.Difficulty: Medium[QUESTION]75. What happens when a U.S. company sells goods denominated in a foreign currency and the foreigncurrency depreciates?Answer: The event results in a foreign exchange loss.Difficulty: Medium[QUESTION]76. What happens when a U.S. company sells goods denominated in a foreign currency and the foreigncurrency appreciates?Answer: The event results in a foreign exchange gain.Difficulty: Medium[QUESTION]77. Gaw Produce Co. purchased inventory from a Japanese company on December 18, 2009. Payment of¥400,000 was due on January 18, 2010. Exchange rates between the dollar and the yen were as follows:Page 21
  22. 22. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskRequired:Prepare all journal entries for Gaw Produce Co. in connection with the purchase and payment.Answer:2009Dec.18 Purchases (¥4,000,000 x ($1 ÷ ¥125) 3,200.00Accounts Payable 3,200.0031 Foreign Exchange Loss 78.68Accounts Payable 78,.68(¥4,000,000 x ($1 ÷ ¥125) - (¥4,000,000 x ($1 ÷ ¥122)2010Jan.18 Foreign Exchange Loss 54.64Accounts Payable 54.64(¥4,000,000 x ($1 ÷ ¥122) - (¥4,000,000 x ($1 ÷ ¥120)18 Accounts Payable 3,333.33Cash (¥4,000,000 x ($1 ÷ ¥120) 3,333.33Difficulty: Medium[QUESTION]78. Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2009, for100,000 stickles. Payment was received on October 15, 2009. The following exchange rates applied:ExchangeDate RateSeptember 15, 2009 §1 = $.48September 30,2009 §1 = $.50October 15, 2009 §1 = $.44Required:Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that the companycloses its books on September 30 to prepare interim financial statements.Answer:2009Sept. 15 Accounts Receivable (§100,000 x $.48) 48,000Sales 48,000Page 22ExchangeDate RateDecember 18, 2009 $1 = ¥125December 31, 2009 $1 = ¥122January 18, 2010 $1 = ¥120
  23. 23. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Risk30 Accounts Receivable 2,000Foreign Exchange Gain 2,000(§100,000 x ($.50 - $.48)Oct. 15 Foreign Exchange Loss 6,000Accounts Receivable 6,000(§100,000 x ($.50 - $.44)Oct. 15 Cash (§100,000 x ($.50 - $.44) 44,000Accounts Receivable 44,000Difficulty: MediumREFERENCE: Ref. 09_11Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign countryduring 2009. The appropriate exchange rates during 2009 were as follows:The appropriate exchange rates during 2009 were as follows:ExchangeDate RateMarch 1, 2009 $.20 = 1 pesoMay 1, 2009 $.22 = 1 pesoAugust 1, 2009 $.23 = 1 pesoSeptember 1,2009 $.24 = 1 pesoDecember 31, 2009 $.25 = 1 peso[QUESTION]REFER TO: Ref. 09_1179. Prepare all journal entries in U.S. dollars along with any December 31, 2009 adjusting entries.Coyote uses a perpetual inventory system.Answer:2009March 1 Inventory (20,000p x $.20) 12,000Accounts Payable 12,000May 1 Accounts Receivable (54,000p x $.22) 11,880Sales 11,880August 1 Cash (48,000p x $.23) 11,040Accounts Receivable (48,000p x $.22) 10,560Foreign Exchange Gain 480Page 23
  24. 24. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskCost of Goods Sold (36,000 x $.20) 7,200Inventory 7,200Sept. 1 Accounts Payable (36,000p x $.20) 7,200Foreign Exchange Loss 1,440Cash (36,000 x $.24) 8,640Dec. 31 Foreign Exchange Loss [24,000 x ($.20 - $.25)] 1,200Accounts Payable 1,200Dec. 31 Accounts Receivable 180Foreign Exchange Gain [6,000 x ($.22 - $.25)] 180Difficulty: MediumREFERENCE: Ref. 09_11[QUESTION]REFER TO: Ref. 09_1180. What amount will Coyote Corp. report on its 2009 financial statements for Inventory?Answer:Inventory (60,000 pesos x $.20 x 40%): $ 4,800Difficulty: Medium[QUESTION]REFER TO: Ref. 09_1181. What amount will Coyote Corp. report on its 2009 financial statements for Cost of Goods Sold?Answer:Cost of Goods Sold (60,000 pesos x $.20 x 60%): $ 7,200Difficulty: Medium[QUESTION]REFER TO: Ref. 09_1182. What amount will Coyote Corp. report on its 2009 financial statements for Sales?Answer:Sales (54,000 pesos x $.22): $11,880Difficulty: Medium[QUESTION]REFER TO: Ref. 09_1183. What amount will Coyote Corp. report on its 2009 financial statements for Accounts Receivable?Answer:Accounts Receivable ((54,000–48,000 pesos) x $.25): $ 1,500Difficulty: Medium[QUESTION]REFER TO: Ref. 09_1184. What amount will Coyote Corp. report on its 2009 financial statements for Accounts Payable?Answer:Page 24
  25. 25. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskAccounts Payable ((60,000–36,000 pesos) x $.25): $ 6,000Difficulty: Medium[QUESTION]REFER TO: Ref. 09_1185. The beginning balance of cash was 50,000 pesos on January 1, 2009, translated at $.18 = $1. Whatamount will Coyote Corp. report on its 2009 financial statements for Cash?Answer:Cash (50,000pesos x $.18) + (48,000 pesos x $.23) – (36,000 pesos x $.24)): $ 2,400Difficulty: MediumREFERENCE: Ref. 09_12On November 10, 2008, King Co. sold inventory to a customer in a foreign country. King agreed toaccept 96,000 local currency units (LCU) in full payment for this inventory. Payment was to be made onFebruary 1, 2009. On December 1, 2008, King entered into a forward exchange contract wherein 96,000LCU would be delivered to a currency broker in two months. The two month forward exchange rate onthat date was 1 LCU = $.30. The spot rates and forward rates on various dates were as follows:Date Rate Description Exchange RateNovember 10, 2008 Spot Rate $.35 = 1 LCUDecember 1, 2008 Spot Rate $.32 = 1 LCU2-Month Forward Rate $.30 = 1 LCUDecember 31, 2008 Spot Rate $.29 = 1 LCU1-Month Forward Rate $.28 = 1 LCUFebruary 1, 2009 Spot Rate $.27 = 1 LCUThe companys borrowing rate is 12%. The present value factor for one month is .9901.[QUESTION]REFER TO: Ref. 09_1286. (A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal entries relating to thetransaction and the forward contract.(B.) Compute the effect on 2008 net income.(C.) Compute the effect on 2009 net income.Answer:Date Spot Value Change Forward Change11/10/08 $.35 $33,60012/01/08 $.32 $30,720 $.3012/31/08 $.29 $27,840 -$5,760 $.28 +$1,901102/01/09 $.27 $25,920 -$1,920 $.27 +$ 97921[(.30 - .28) 96,000] x .9901 = 1,9012[(.30 - .27) 96,000] = 2,880 – 1,901 = 979A. 11/10/08 Accounts receivable 33,600Sales 33,60012/01/08 No entryPage 25
  26. 26. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Risk12/31/08 Foreign Exchange Loss 5,760Accounts receivable 5,760AOCI 5,760Gain on Forward Contract 5,760Forward Contract 1,901AOCI 1,901Discount expense 9763AOCI 9763[1-(28,800/30,720)1/2x 30,72002/01/09 Foreign Exchange Loss 1,920Accounts receivable 1,920AOCI 1,920Gain on Forward Contract 1,920Forward contract 979AOCI 979Discount expense 9444AOCI 9444(.32 - .30) x 96,000 = 1,920 -976 = 944Foreign currency 25,920Accounts receivable 25,920Cash 28,800Forward contract 2,880Foreign currency 25,920Difficulty: Hard[QUESTION]REFER TO: Ref. 09_1287. (A.) Assume this hedge is designated as a fair value hedge. Prepare the journal entries relating to thetransaction and the forward contract.(B.) Compute the effect on 2008 net income.(C.) Compute the effect on 2009 net income.Answer:A. 11/10/08 Accounts receivable 33,600Sales 33,60012/01/08 No entryPage 26
  27. 27. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Risk12/31/08 Foreign Exchange Loss 5,760Accounts receivable 5,760Forward Contract 1,901Gain on Forward Contract 1,90102/01/09 Foreign Exchange Loss 1,901Accounts receivable 1,901Forward contract 1,920Gain on Forward Contract 1,920Foreign currency 25,920Accounts receivable 25,920Cash 28,800Forward contract 2,880Foreign currency 25,920Difficulty: HardREFERENCE: Ref. 09_13On October 1, 2009, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000LCU in four months (on February 1, 2010) and receive $78,000 in U.S. dollars. The spot and forwardrates for the LCU were as follows:Date Rate Description Exchange RateOctober 1, 2009 Spot Rate $.83= 1 LCUDecember 31, 2009 Spot Rate $.85 = 1 LCU1-Month Forward Rate $.80 = 1 LCUFebruary 1, 2010 Spot Rate $.86 = 1 LCUThe companys borrowing rate is 12%. The present value factor for one month is .9901.[QUESTION]REFER TO: Ref. 09_1388. Assuming this is a cash flow hedge, prepare journal entries for this sales transaction and forwardcontract.Answer:Page 27
  28. 28. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskDifficulty: Hard[QUESTION]REFER TO: Ref. 09_1389. Assuming this is a fair value hedge, prepare journal entries for this sales transaction and forwardcontract.Answer:Page 28Date Spot Value Change Forward Adjustment10/1/09 $.83 $83,000 $.7812/31/09 $.85 $85,000 +$2,000 $.80 -$1,980 12/1/10 $.86 $86,000 +$1,000 $.86 -$6,020 21[(.80 - .78)100,000] = 2,000 x .9901 = 1,9802[(.78 -.86)100,000] = 8,000 – 1,980 = 6,02010/1/09 Accounts receivable 83,000Sales 83,00012/31/09 Accounts receivable 2,000Foreign Exchange Gain 2,000Loss on Forward Contract 2,000AOCI 2,000AOCI 1,980Forward contract 1,980Discount expense 1,2793AOCI 1,27931-(78,000/83,000)1/4= .0154 x 83,000 = 1,2792/1/10 Accounts receivable 1,000Foreign Exchange Gain 1,000Loss on Forward Contract 1,000AOCI 1,000AOCI 6,020Forward contract 6,020Discount expense 3,7214AOCI 3,7214(.83-.78)100,000=5,000-1,279 = 3,721Foreign currency 86,000Accounts receivable 86,000Cash 78,000Forward contract 8,000Foreign currency 86,000
  29. 29. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange RiskDifficulty: Hard[QUESTION]REFER TO: Ref. 09_1390. On October 31, 2008, Darling Company negotiated a two-year 100,000 franc loan from a foreignbank at an interest rate of 3 percent per year. Interest payments are made annually on October 31, and theprincipal will be repaid on October 31, 2010. Darling prepares U.S.-dollar financial statements and has aDecember 31 year-end. Prepare all journal entries related to this foreign currency borrowing assumingthe following:Franc RateOctober 31, 2008 $0.500December 31, 2008 $0.525October 31, 2009 $0.600December 31, 2009 $0.625October 31, 2010 $0.750Answer: In US dollars:10/31/08 Cash 50,000Note Payable (franc) [100,000 x $.500] 50,000(To record the note and conversion of 100,000 francs into $ at thespot ratePage 29Date Spot Value Change Forward Adjustment10/1/09 $.83 $83,000 $.7812/31/09 $.85 $85,000 +$2,000 $.80 -$1,980 12/1/10 $.86 $86,000 +1,000 $.86 -$6,020 21[(.80 - .78)100,000] x 2,000 x .9901 = 1,9802[(.78 -.86)100,000] = 8,000 – 1,980 = 6,02010/1/09 Accounts receivable 83,000Sales 83,00012/31/09 Accounts receivable 2,000Foreign Exchange Gain 2,000Loss on Forward Contract 1,980Forward contract 1,9802/1/10 Accounts receivable 1,000Foreign Exchange Gain 1,000Loss on Forward Contract 6,020Forward contract 6,020Foreign currency 86,000Accounts receivable 86,000Cash 78,000Forward contract 8,000Foreign currency 86,000
  30. 30. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Risk12/31/08 Interest Expense 262Interest Payable (franc) 262[100,000 x 3% x 2/12 = 500 francs x $.525 spot rate](To accrue interest for the period 10/31 – 12/31/08.)Foreign Exchange Loss 2,500Note payable (franc) [100,000 x ($.525 – $.500)] 2,500(To revalue the note payable at the spot rate of$.525 and record a foreign exchange loss.)10/31/09 Interest Expense [2,500 francs x $.600] 1,500Interest Payable (franc) 262Foreign Exchange Loss [500 francs x ($.600 – $.525)] 38Cash [3,000 francs x $.600] 1,800(To record the first annual interest payment,record interest expense for the period 1/1 – 10/31/09,and record a foreign exchange loss on theinterest payable accrued at 12/31/08.)12/31/09 Interest Expense 312Interest Payable (franc) [500 francs x $.625] 312(To accrue interest for the period 10/31 –12/31/09.)Foreign Exchange Loss 10,000Note Payable (franc) [100,000 x ($.625 – $.525)] 10,000(To revalue the note payable at the spot rate of$.625 and record a foreign exchange loss.)10/31/10 Interest Expense [2,500 francs x $.750] $1,875Interest Payable (franc) 312Foreign Exchange Loss [500 francs x ($.750 – $.625)] 63Cash [3,000 francs x $.750] $2,250(To record the second annual interestpayment, record interest expense for theperiod 1/1 – 10/31/10, and record a foreignexchange loss on the interest payableaccrued at 12/31/09.)Note Payable (franc) $62,500Foreign Exchange Loss 12,500Cash [100,000 francs x $.750] $75,000(To record payment of the 100,000 franc note.)Difficulty: Hard[QUESTION]91. For each of the following situations, select the best answer concerning accounting for foreigncurrency transactions:(A) Results in a foreign exchange gain.(B) Results in a foreign exchange loss.(C) No foreign exchange gain or loss.Page 30
  31. 31. Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Risk_____1. Export sale by a U.S. company denominated in dollars, foreign currency of buyer appreciates._____2. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyerappreciates._____3. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyerappreciates._____4. Import purchase by a U.S. company denominated in dollars, foreign currency of buyerappreciates._____5. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyerdepreciates._____6. Import purchase by a U.S. company denominated in dollars, foreign currency of buyerdepreciates._____7. Export sale by a U.S. company denominated in dollars, foreign currency of buyer depreciates._____8. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyerdepreciates.Answer: (1) C; (2) A; (3) B ; (4) C; (5) A; (6) C; (7) C; (8) BDifficulty: HardPage 31

×