Foreign currency transactions and hedging

Chapter 9 Foreign Currency Transactions and Hedging Foreign Exchange Risk
Foreign Currency Transactions and Hedging Foreign Exchange Risk
Multiple 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 = £0.65
on April 8 and $1 = £0.70 on May 8. What amount of foreign exchange gain or loss should be
recognized? (round to the nearest dollar)
A) $10,500 loss
B) $10,500 gain
C) $1,750 loss
D) $3,846 loss
E) No gain or loss should be recognized.
Answer: D
Difficulty: Medium
REFERENCE: Ref. 09_01
Norton Co., a U.S. corporation, sold inventory on December 1, 2008, with payment of 10,000 British
pounds to be received in sixty days. The pertinent exchange rates were as follows:
[QUESTION]
REFER TO: Ref. 09_01
2. 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: D
Difficulty: Medium
[QUESTION]
3. 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: E
Difficulty: Medium
[QUESTION]
4. What amount of foreign exchange gain or loss should be recorded on January 30?
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A) $1,516 gain.
B) $1,516 loss.
C) $575 loss.
D) $500 loss.
E) $500 gain.
Answer: B
Difficulty: Medium
Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of
2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The
pertinent exchange rates were as follows:
[QUESTION]
REFER TO: 09_02
5. For what amount should Brisco's 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: A
Difficulty: Medium
[QUESTION]
REFER TO: 09_02
6. 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: C
Difficulty: Medium
[QUESTION]
REFER TO: 09_02
7. 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: E
Difficulty: Medium
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[QUESTION]
8. On June 1, CamCo received a contract to sell inventory for ¥500,000. The sale would take place in 90
days. CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received.
The spot rate on June 1 was $1 = ¥240, and the 90-day forward rate was $1 = ¥234. At what amount
would CamCo record the Forward Contract on June 1?
A) $2,083.
B) $0.
C) $2,110.
D) $2,532.
E) $2,137.
Answer: B
Difficulty: Medium
[QUESTION]
9. Belsen purchased inventory on December 1, 2008. Payment of 200,000 stickles was to be made in
sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days. The spot
rate was $1 = §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 fair
value hedge. The present value for one month at 12% is .9901.
In the journal entry to record the establishment of a forward exchange contract, at what amount should the
Forward Contract account be recorded on December 1?
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: E
Difficulty: 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 a
forward rate of $.25 per stickle. On June 12, when the parts were received and payment was made, the
spot 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: B
Difficulty: Medium
Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2008, with payment
of 10 million Korean won to be received on January 15, 2009. The following exchange rates applied:
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[QUESTION]
11. Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2008
income statement related to this transaction?
A) $ 500 (gain).
B) $ 500 (loss).
C) $ 200 (gain).
D) $ 200 (loss).
E) $ - 0 -
Answer: C
Difficulty: Medium
[QUESTION]
12. Assuming a forward contract was entered into, what would be the net impact on Car Corp.'s 2008
income statement related to this transaction? Assume an annual interest rate of 12% and a fair value
hedge. 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: E
Difficulty: Hard
[QUESTION]
13. Assuming a forward contract was entered into on December 16, what would be the net impact on Car
Corp.'s 2009 income statement related to this transaction?
A) $ 500 (gain).
B) $ 100 (loss).
C) $ 200 (gain).
D) $ 200 (loss).
E) $0.
Answer: A
Difficulty: 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' balance
sheet at $132,000. When the receivable was collected on February 15, 2009, the U.S. dollar equivalent
was $144,000. In Mills' 2009 consolidated income statement, how much should have been reported as a
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Forward
Spot Rate
Date Rate To Jan. 15
December 16, 2008 $ .00090 $ .00098
December 31, 2008 .00092 .00093
January 15, 2009 .00095 .00095

foreign exchange gain?
A) $0.
B) $36,000.
C) $48,000.
D) $10,000.
E) $12,000.
Answer: E
Difficulty: Easy
[QUESTION]
15. A spot rate may be defined as
A) 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: A
Difficulty: Easy
[QUESTION]
16. The forward rate may be defined as
A) 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: B
Difficulty: 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 foreign
currency in the future.
E) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future
at the spot rate.
Answer: D
Difficulty: Medium
[QUESTION]
18. A U.S. company sells merchandise to a foreign company denominated in U.S. dollars. 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 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: C
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Difficulty: Easy
[QUESTION]
19. A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which
of the following statements is true?
E) Any gain or loss will be included in comprehensive income.
Answer: A
Difficulty: Medium
[QUESTION]
20. A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of
the following statements is true?
Answer: C
Difficulty: 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?
B) If the foreign currency depreciates, a foreign exchange loss will result.
Answer: D
Difficulty: Medium
[QUESTION]
22. SFAS 133 provides guidance for hedges of all the following sources of foreign exchange risk except
A) 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: E
Difficulty: Medium
[QUESTION]
23. All of the following data may be needed to determine the fair value of a forward contract at any point
in time except
A) 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 entered
into.
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C) The future spot rate.
D) A discount rate.
E) The company's incremental borrowing rate.
Answer: C
Difficulty: 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 3
B) 2 and 4
C) 1 and 2
D) 1, 3, and 4
E) 1, 2, 3, and 4
Answer: E
Difficulty: Easy
[QUESTION]
25. A company has a discount on a forward contract for an asset. How is the discount recognized over
the 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: C
Difficulty: 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: B
Difficulty: 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: D
Difficulty: Medium
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[QUESTION]
28. All of the following hedges are used for future purchase/sale transactions except
A) 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: E
Difficulty: Medium
On December 1, 2007, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Spain for
150,000 euro. Payment is due on February 1, 2008. Keenan entered into a forward exchange contract on
December 1, 2007, to deliver 150,000 euro on February 1, 2008 for $.97. Keenan chose to use a foreign
currency option to hedge this foreign currency asset designated as a cash flow hedge. Relevant exchange
rates follow:
[QUESTION]
REFER TO: 09_04
29. 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: D
Difficulty: Medium
[QUESTION]
REFER TO: 09_04
30. 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: A
Difficulty: Medium
[QUESTION]
REFER TO: 09_04
31. Compute the value of the foreign currency option at February 1, 2008.
A) $6,000.
B) $4,500.
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C) $3,000.
D) $7,500.
E) $1,500.
Answer: B
Difficulty: Medium
[QUESTION]
REFER TO: 09_04
32. Compute the U.S. dollars received on February 1, 2008.
A) $138,000.
B) $136,500.
C) $145,500.
D) $141,000
E) $142,500.
Answer: C
Difficulty: Medium
[QUESTION]
33. Which of the following approaches is used in the United States in accounting for foreign currency
transactions?
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: B
Difficulty: Easy
[QUESTION]
34. When a U.S. company purchases parts from a foreign company, which of the following will result in
no 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: A
Difficulty: Easy
[QUESTION]
35. Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in pesos. On
December 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. How
much foreign exchange gain or loss will Alpha record on the income statement for the year ended
December 31, 2009?
A) $1,100 loss.
B) $1,100 gain.
C) $6,900 loss.
D) $6,900 gain.
E)$8,000 gain.
Answer: A
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Difficulty: Easy
On April 1, 2007, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign lender by
signing an interest-bearing note due April 1, 2008. The dollar value of the loan was as follows:
[QUESTION]
REFER TO: 09_05
36. 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: D
Difficulty: Medium
[QUESTION]
REFER TO: 09_05
37. 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: D
Difficulty: Medium
[QUESTION]
REFER TO: 09_05
38. Angela, Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound
payable resulting from imports from England. Angela recorded foreign exchange gain related to both its
euro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value from
the date of the transaction to the settlement date?
A) A above
B) B above
C) C above
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D) D above
E) E above
Answer: B
Difficulty: Medium
[QUESTION]
39. Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia and a euro
payable resulting from imports from Italy. Frankfurter recorded foreign exchange loss related to both its
ruble receivable and euro payable. Did the foreign currencies increase or decrease in dollar value from
the date of the transaction to the settlement date?
A) A above
B) B above
C) C above
D) D above
E) E above
Answer: C
Difficulty: Medium
Parker 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_06
40. What amount should be included as a foreign exchange gain or loss from the two transactions for
2009?
A) $2,000 loss.
B) $2,000 gain.
C) $10,000 gain.
D) $14,000 loss.
E) $ 14,000 gain.
Answer: C
Difficulty: Medium
[QUESTION]
REFER TO: 09_06
2010?
A) $9,000 loss.
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B) $9,000 gain.
C) $11,000 loss.
D) $21,000 loss.
E) $21,000 gain.
Answer: D
Difficulty: Easy
Winston 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_07
2008?
A) $9,000 loss.
B) $9,000 gain.
C) $11,000 loss.
D) $13,000 gain.
E) $ 14,000 gain.
Answer: D
Difficulty: Medium
[QUESTION]
REFER TO: 09_07
2009?
A) $1,000 loss.
B) $1,000 gain.
C) $2,000 loss.
D) $4,000 gain.
E) $4,000 loss.
Answer: E
Difficulty: Easy
[QUESTION]
44. Williams, Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale
on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and
designated it as a cash flow hedge of a recognized receivable. The spot rate was $.0094, and the forward
rate 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: B
Difficulty: Medium
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[QUESTION]
45. Larson Company, a U.S. company, has an India rupee account receivable resulting from an export
sale on September 7 to a customer in India. Larson signed a forward contract on September 7 to sell
rupees and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.023, and
the 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: B
Difficulty: Medium
[QUESTION]
46. Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on July 7
when the spot rate was $.025 per rupee. A one-month forward contract was signed on that date to
purchase 100,000 rupee at a rate of $.027. The forward contract is properly designated as a fair value
hedge 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: E
Difficulty: Medium
[QUESTION]
47. Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts from a foreign
supplier on July 7 when the spot rate was $.025 per baht. A one-month forward contract was signed on
that date to purchase 1,000,000 bahts at a rate of $.027. The forward contract is properly designated as a
fair value hedge of the 1,000,000 baht firm commitment. On August 7, when the parts are received, the
spot 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: E
Difficulty: Medium
[QUESTION]
48. On December 1, 2009, Joseph Company, a U.S. company, entered into a three-month forward
contract to purchase 50,000 pesos on March 1, 2010. The following U.S. dollar per peso exchange rates
apply:
Forward Rate
Date Spot Rate (Mar.1, 2010)
December 1,2009 $0.092 $0.105
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December 31,2009 $0.090 $0.095
March 1, 2010 $0.089 N/A
Joseph’s incremental borrowing rate is 12 percent. The present value factor for two months at an annual
interest rate of 12 percent is .9803. Which of the following is included in Joseph’s December 31, 2009
balance 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: E
Difficulty: Medium
[QUESTION]
49. On April 1, Quality Corporation, a U.S. company, expects to order merchandise from a German
supplier in three months, denominating the transaction in euros. On April 1, the spot rate is $1.19 per
euro, 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 the
merchandise, 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 is
received.
B) $ 4,000 Discount Expense plus an $8,000 negative Adjustment to Net Income when the merchandise
is received.
C) $ 4,000 Premium Expense plus a $4,000 negative Adjustment to Net Income when the merchandise is
received.
D) $ 8,000 Premium Expense plus a $4,000 positive Adjustment to Net Income when the merchandise is
received.
E) $ 8,000 Discount Expense plus an $8,000 positive Adjustment to Net Income when the merchandise is
received.
Answer: C
Difficulty: Hard
[QUESTION]
50. On August 31, Ram Corporation, a U.S. company, expects to order merchandise from a German
supplier in three months, denominating the transaction in euros. On August 31, the spot rate is $1.19 per
euro, 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 is
sold.
B) $ 6,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise
is sold.
C) $ 6,000 Premium Expense plus a $6,000 negative Adjustment to Net Income when the merchandise is
sold.
D) $ 12,000 Premium Expense plus a $6,000 positive Adjustment to Net Income when the merchandise
is sold.
E) $ 12,000 Discount Expense plus an $12,000 positive Adjustment to Net Income when the
merchandise is sold.
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Answer: C
Difficulty: Hard
[QUESTION]
51. Woolsey Corporation, a U.S. company, expects to order goods from a British supplier at a price of
250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased a
three-month call option for 250,000 British pounds and designated this option as a cash flow hedge of a
forecasted 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 to
October 24?
A) $4,000.
B) $5,000.
C) $10,000.
D) $12,000.
E) $14,000.
Answer: A
Difficulty: Easy
[QUESTION]
52. Atherton, Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000
lira, 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 foreign
currency transaction. The following exchange rates apply:
What amount will Atherton include as an option expense in net income during the period January 17 to
April 17?
A) $4,000
B) $4,260
C) $4,340
D) $5,000
E) $5,260
Answer: D
Difficulty: Easy
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On May 1, 2007, Mosby Company received an order to sell a machine to a customer in Canada at a price
of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 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 firm
commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2007. The
following spot exchange rates apply:
Mosby’s incremental borrowing rate is 12 percent, and the present value factor for two months at a 12
percent annual rate is .9803.
[QUESTION]
53. What was the net impact on Mosby’s 2007 income as a result of this fair value hedge of a firm
commitment?
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: A
Difficulty: Hard
[QUESTION]
54. What was the net impact on Mosby’s 2008 income as a result of this fair value hedge of a firm
commitment?
B) $2,500 increase.
C) $2,500 decrease.
D) $188,760.60 increase.
E) $188,760.60 decrease.
Answer: D
Difficulty: Hard
[QUESTION]
55. What was the net increase or decrease in cash flow from having purchased the foreign currency option
to hedge this exposure to foreign exchange risk?
A) $0
B) $9,000 decrease.
C) $9,000 increase.
D) $2,000 increase.
E) $2,000 decrease.
Answer: C
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Difficulty: Hard
On March 1, 2007, Mattie Company received an order to sell a machine to a customer in England at a
price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2008.
On March 1, 2007, Mattie purchased a put option giving it the right to sell 200,000 British pounds on
March 1, 2008 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound
firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2007. The
following spot exchange rates apply:
Mattie’s incremental borrowing rate is 12 percent, and the present value factor for two months at a 12
percent annual rate is .9803.
[QUESTION]
56. What was the net impact on Mattie’s 2007 income as a result of this fair value hedge of a firm
commitment?
B) $1,760.60 decrease.
D) $1,660.40 increase.
E) $2,240.60 increase.
Answer: B
Difficulty: Hard
[QUESTION]
57. What was the net impact on Mattie’s 2008 income as a result of this fair value hedge of a firm
commitment?
A) $379,760.60 decrease.
B) $8,360.60 increase.
D) $ 4,390.40 decrease.
E) $379,760.60 increase.
Answer: E
Difficulty: Hard
[QUESTION]
58. What was the net increase or decrease in cash flow from having purchased the foreign currency option
to hedge this exposure to foreign exchange risk?
A) $0
B) $10,000 increase.
C) $10,000 decrease.
Page 17

D) $20,000 increase.
E) $20,000 decrease.
Answer: B
Difficulty: Hard
On October 1, 2007, Eagle Company forecasts the purchase of inventory from a British supplier on
February 1, 2008, at a price of 100,000 British pounds. On October 1, 2007, Eagle pays $1,800 for a
three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is
considered 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]
59. What journal entry should Eagle prepare on October 1, 2007?
A) Cash 1,800
Foreign Currency Option 1,800
B) Forward Contract 1,800
Cash 1,800
C) Foreign Currency Option 1,800
Gain on Foreign Currency 1,800
D) Loss on Foreign Currency 1,800
Cash 1,800
E) Foreign Currency Option 1,800
Cash 1,800
A) A above.
B) B above.
C) C above.
D) D above.
E) E above.
Answer: E
Difficulty: Medium
[QUESTION]
60. What journal entry should Eagle prepare on December 31, 2007?
A) Foreign Currency Option 200
Cash 200
B) Foreign Currency Option 200
Option Revenue 200
C) Foreign Currency Option 400
Page 18

Option Revenue 400
D) Option Expense 200
Foreign Currency Option 200
E) Option Expense 400
Foreign Currency Option 400
A) A above.
B) B above.
C) C above.
D) D above.
E) E above.
Answer: D
Difficulty: Medium
[QUESTION]
61. 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: B
Difficulty: Medium
[QUESTION]
62. What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2008 from these
transactions?
A) $1,000.
B) $1,600.
C) $1,800.
D) $2,000.
E) $2,600.
Answer: A
Difficulty: Medium
[QUESTION]
63. 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: C
Difficulty: Medium
[QUESTION]
Page 19

64. What is the 2008 effect on net income as a result of these transactions?
A) $195,000
B) $201,600
C) $201,000
D) $202,600
E) $203,000
Answer: B
Difficulty: Hard
Essay
[QUESTION]
65. Yelton Co. just sold inventory for 80,000 lira, which Yelton will collect in sixty days. Briefly
describe 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, and
several 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 the
contracted 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 currently
available forward rate will likely fluctuate relative to the “fixed” contracted forward rate, creating a
difference that must be accounted for as a gain or loss on the forward contract. A contract with a net gain
over its life is recorded on the balance sheet as a Forward Contract Asset. A contract with a net loss over
its 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 foreign
currency 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 potential
losses from fluctuations in exchange rates. In addition to avoiding possible losses, companies hedge
foreign currency transactions and commitments to introduce an element of certainty into the future cash
Page 20

flows resulting from foreign currency activities. Hedging involves establishing a price today at which
foreign 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 and
exchange one currency for another or not, a party to a foreign currency forward contract is obligated to
deliver 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 currency
exposures (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 the
foreign 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 the
foreign 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 foreign
currency 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 foreign
currency 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

Required:
Prepare all journal entries for Gaw Produce Co. in connection with the purchase and payment.
Answer:
2009
Dec.18 Purchases (¥4,000,000 x ($1 ÷ ¥125) 3,200.00
Accounts Payable 3,200.00
31 Foreign Exchange Loss 78.68
Accounts Payable 78,.68
(¥4,000,000 x ($1 ÷ ¥125) - (¥4,000,000 x ($1 ÷ ¥122)
2010
Jan.18 Foreign Exchange Loss 54.64
Accounts Payable 54.64
(¥4,000,000 x ($1 ÷ ¥122) - (¥4,000,000 x ($1 ÷ ¥120)
18 Accounts Payable 3,333.33
Cash (¥4,000,000 x ($1 ÷ ¥120) 3,333.33
Difficulty: Medium
[QUESTION]
78. Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2009, for
100,000 stickles. Payment was received on October 15, 2009. The following exchange rates applied:
Exchange
Date Rate
September 15, 2009 §1 = $.48
September 30,2009 §1 = $.50
October 15, 2009 §1 = $.44
Required:
Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that the company
closes its books on September 30 to prepare interim financial statements.
Answer:
2009
Sept. 15 Accounts Receivable (§100,000 x $.48) 48,000
Sales 48,000
Page 22
Exchange
Date Rate
December 18, 2009 $1 = ¥125
December 31, 2009 $1 = ¥122
January 18, 2010 $1 = ¥120

30 Accounts Receivable 2,000
Foreign Exchange Gain 2,000
(§100,000 x ($.50 - $.48)
Oct. 15 Foreign Exchange Loss 6,000
Accounts Receivable 6,000
(§100,000 x ($.50 - $.44)
Oct. 15 Cash (§100,000 x ($.50 - $.44) 44,000
Accounts Receivable 44,000
Difficulty: Medium
Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country
during 2009. The appropriate exchange rates during 2009 were as follows:
The appropriate exchange rates during 2009 were as follows:
Exchange
Date Rate
March 1, 2009 $.20 = 1 peso
May 1, 2009 $.22 = 1 peso
August 1, 2009 $.23 = 1 peso
September 1,2009 $.24 = 1 peso
December 31, 2009 $.25 = 1 peso
[QUESTION]
79. Prepare all journal entries in U.S. dollars along with any December 31, 2009 adjusting entries.
Coyote uses a perpetual inventory system.
Answer:
2009
March 1 Inventory (20,000p x $.20) 12,000
Accounts Payable 12,000
May 1 Accounts Receivable (54,000p x $.22) 11,880
Sales 11,880
August 1 Cash (48,000p x $.23) 11,040
Accounts Receivable (48,000p x $.22) 10,560
Foreign Exchange Gain 480
Page 23

Cost of Goods Sold (36,000 x $.20) 7,200
Inventory 7,200
Sept. 1 Accounts Payable (36,000p x $.20) 7,200
Foreign Exchange Loss 1,440
Cash (36,000 x $.24) 8,640
Dec. 31 Foreign Exchange Loss [24,000 x ($.20 - $.25)] 1,200
Accounts Payable 1,200
Dec. 31 Accounts Receivable 180
Foreign Exchange Gain [6,000 x ($.22 - $.25)] 180
Difficulty: Medium
[QUESTION]
80. What amount will Coyote Corp. report on its 2009 financial statements for Inventory?
Answer:
Inventory (60,000 pesos x $.20 x 40%): $ 4,800
Difficulty: Medium
[QUESTION]
81. 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%): $ 7,200
Difficulty: Medium
[QUESTION]
82. What amount will Coyote Corp. report on its 2009 financial statements for Sales?
Answer:
Sales (54,000 pesos x $.22): $11,880
Difficulty: Medium
[QUESTION]
83. What amount will Coyote Corp. report on its 2009 financial statements for Accounts Receivable?
Answer:
Accounts Receivable ((54,000–48,000 pesos) x $.25): $ 1,500
Difficulty: Medium
[QUESTION]
84. What amount will Coyote Corp. report on its 2009 financial statements for Accounts Payable?
Answer:
Page 24

Accounts Payable ((60,000–36,000 pesos) x $.25): $ 6,000
Difficulty: Medium
[QUESTION]
85. The beginning balance of cash was 50,000 pesos on January 1, 2009, translated at $.18 = $1. What
amount 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)): $ 2,400
Difficulty: Medium
On November 10, 2008, King Co. sold inventory to a customer in a foreign country. King agreed to
accept 96,000 local currency units (LCU) in full payment for this inventory. Payment was to be made on
February 1, 2009. On December 1, 2008, King entered into a forward exchange contract wherein 96,000
LCU would be delivered to a currency broker in two months. The two month forward exchange rate on
that date was 1 LCU = $.30. The spot rates and forward rates on various dates were as follows:
Date Rate Description Exchange Rate
November 10, 2008 Spot Rate $.35 = 1 LCU
December 1, 2008 Spot Rate $.32 = 1 LCU
2-Month Forward Rate $.30 = 1 LCU
February 1, 2009 Spot Rate $.27 = 1 LCU
The company's borrowing rate is 12%. The present value factor for one month is .9901.
[QUESTION]
86. (A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal entries relating to the
transaction 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 Change
11/10/08 $.35 $33,600
12/01/08 $.32 $30,720 $.30
12/31/08 $.29 $27,840 -$5,760 $.28 +$1,9011
02/01/09 $.27 $25,920 -$1,920 $.27 +$ 9792
1
[(.30 - .28) 96,000] x .9901 = 1,901
2
[(.30 - .27) 96,000] = 2,880 – 1,901 = 979
A. 11/10/08 Accounts receivable 33,600
Sales 33,600
12/01/08 No entry
Page 25

12/31/08 Foreign Exchange Loss 5,760
Accounts receivable 5,760
AOCI 5,760
Gain on Forward Contract 5,760
Forward Contract 1,901
AOCI 1,901
Discount expense 9763
AOCI 976
3
[1-(28,800/30,720)1/2
x 30,720
AOCI 1,920
Forward contract 979
AOCI 979
Discount expense 9444
AOCI 944
4
(.32 - .30) x 96,000 = 1,920 -976 = 944
Foreign currency 25,920
Cash 28,800
Forward contract 2,880
Difficulty: Hard
[QUESTION]
87. (A.) Assume this hedge is designated as a fair value hedge. Prepare the journal entries relating to the
transaction 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 33,600
Sales 33,600
12/01/08 No entry
Page 26

Forward Contract 1,901
Cash 28,800
Difficulty: Hard
On October 1, 2009, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000
LCU in four months (on February 1, 2010) and receive $78,000 in U.S. dollars. The spot and forward
rates for the LCU were as follows:
Date Rate Description Exchange Rate
October 1, 2009 Spot Rate $.83= 1 LCU
February 1, 2010 Spot Rate $.86 = 1 LCU
The company's borrowing rate is 12%. The present value factor for one month is .9901.
[QUESTION]
88. Assuming this is a cash flow hedge, prepare journal entries for this sales transaction and forward
contract.
Answer:
Page 27

Difficulty: Hard
[QUESTION]
89. Assuming this is a fair value hedge, prepare journal entries for this sales transaction and forward
contract.
Answer:
Page 28
Date Spot Value Change Forward Adjustment
10/1/09 $.83 $83,000 $.78
12/31/09 $.85 $85,000 +$2,000 $.80 -$1,980 1
2/1/10 $.86 $86,000 +$1,000 $.86 -$6,020 2
1
[(.80 - .78)100,000] = 2,000 x .9901 = 1,980
2
[(.78 -.86)100,000] = 8,000 – 1,980 = 6,020
10/1/09 Accounts receivable 83,000
Sales 83,000
Loss on Forward Contract 2,000
AOCI 2,000
AOCI 1,980
Discount expense 1,2793
AOCI 1,279
3
1-(78,000/83,000)1/4
= .0154 x 83,000 = 1,279
AOCI 1,000
AOCI 6,020
Discount expense 3,7214
AOCI 3,721
4
(.83-.78)100,000=5,000-1,279 = 3,721
Cash 78,000

Difficulty: Hard
[QUESTION]
90. On October 31, 2008, Darling Company negotiated a two-year 100,000 franc loan from a foreign
bank at an interest rate of 3 percent per year. Interest payments are made annually on October 31, and the
principal will be repaid on October 31, 2010. Darling prepares U.S.-dollar financial statements and has a
December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming
the following:
Franc Rate
October 31, 2008 $0.500
December 31, 2008 $0.525
October 31, 2009 $0.600
December 31, 2009 $0.625
October 31, 2010 $0.750
Answer: In US dollars:
10/31/08 Cash 50,000
Note Payable (franc) [100,000 x $.500] 50,000
(To record the note and conversion of 100,000 francs into $ at the
spot rate
Page 29
Date Spot Value Change Forward Adjustment
10/1/09 $.83 $83,000 $.78
12/31/09 $.85 $85,000 +$2,000 $.80 -$1,980 1
2/1/10 $.86 $86,000 +1,000 $.86 -$6,020 2
1
[(.80 - .78)100,000] x 2,000 x .9901 = 1,980
2
[(.78 -.86)100,000] = 8,000 – 1,980 = 6,020
Sales 83,000
Cash 78,000

12/31/08 Interest Expense 262
Interest Payable (franc) 262
[100,000 x 3% x 2/12 = 500 francs x $.525 spot rate]
(To accrue interest for the period 10/31 – 12/31/08.)
Note payable (franc) [100,000 x ($.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 $.600] 1,500
Foreign Exchange Loss [500 francs x ($.600 – $.525)] 38
Cash [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 the
interest payable accrued at 12/31/08.)
12/31/09 Interest Expense 312
Interest Payable (franc) [500 francs x $.625] 312
(To accrue interest for the period 10/31 –12/31/09.)
Note Payable (franc) [100,000 x ($.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] $1,875
Foreign Exchange Loss [500 francs x ($.750 – $.625)] 63
Cash [3,000 francs x $.750] $2,250
(To record the second annual interest
payment, record interest expense for the
period 1/1 – 10/31/10, and record a foreign
exchange loss on the interest payable
accrued at 12/31/09.)
Note Payable (franc) $62,500
Cash [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 foreign
currency transactions:
(A) Results in a foreign exchange gain.
(B) Results in a foreign exchange loss.
(C) No foreign exchange gain or loss.
Page 30

_____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 buyer
appreciates.
_____3. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer
appreciates.
_____4. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer
appreciates.
_____5. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer
depreciates.
_____6. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer
depreciates.
_____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 buyer
depreciates.
Answer: (1) C; (2) A; (3) B ; (4) C; (5) A; (6) C; (7) C; (8) B
Difficulty: Hard
Page 31

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