Deck 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

Question 1

On June 1, Cagle Co. received a signed agreement to sell inventory for ¥650,000. The sale would take place in 90 days. Cagle 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 = $0.003986, and the 90-day forward rate was ¥1 = $0.004021. At what amount would Cagle record the Forward Contract on June 1?

A)$2,613.65.
B)$0.
C)$2,590.90.
D)$2,275.00.
E)$1,993.00.

Answer 1

B

Question 2

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 2

A

Question 3

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 3

C

Question 4

Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of 12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: For what amount should Sales be credited on December 1?

A)$18,310.
B)$19,760.
C)$23,712.
D)$21,972.
E)$21,216.

Question 5

Jackson Corp. (a U.S.-based company)sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Assuming a forward contract was entered into on December 16, at what amount should the forward contract be recorded at December 31, 2021? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is 0.9901.

A)$396.
B)$594.
C)$1,188.
D)$1,200.
E)$792.

Question 6

Clark Stone purchases raw material from its foreign supplier, Rinne Clay, on May 8. Payment of 1,500,000 foreign currency units (FC)is due in 30 days. May 31 is Clark's fiscal year-end. The pertinent exchange rates were as follows: How much Foreign Exchange Gain or Loss should Clark record on May 31?

A)$0.
B)$30,000 gain.
C)$30,000 loss.
D)$60,000 gain.
E)$60,000 loss.

Question 7

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.

Question 8

Jackson Corp. (a U.S.-based company)sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2021 at a:

A)Forward contract discount $1,400.
B)Forward contract premium $1,400.
C)Forward contract discount $600.
D)Forward discount premium $600.
E)There is no premium or discount because the fair value of the contract is zero.

Question 9

Clark Stone purchases raw material from its foreign supplier, Rinne Clay, on May 8. Payment of 1,500,000 foreign currency units (FC)is due in 30 days. May 31 is Clark's fiscal year-end. The pertinent exchange rates were as follows: How much US $ will it cost Clark to finally pay the payable on June 7?

A)$1,850,000.
B)$1,500,000.
C)$1,770,000.
D)$1,740,000.
E)$1,680,000.

Question 10

Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of 12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: What amount of foreign exchange gain or loss should be recorded on January 30?

A)$2,496 gain.
B)$2,496 loss.
C)$0.
D)$1,740 loss.
E)$1,740 gain.

Question 11

Curtis purchased inventory on December 1, 2020. Payment of 250,000 stickles was to be made in sixty days. Also on December 1, Curtis signed a contract to purchase §250,000 in sixty days. The spot rate was §1 = 0.33682, and the 60-day forward rate was §1 = $0.36842. On December 31, the spot rate was §1 = 0.32438 and the 30-day forward rate was §1 = 0.36386. Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is 0.9901.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)$90,965.
B)$84,205.
C)$81,095.
D)$92,105.
E)$0.

Question 12

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 to 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 on the future date.

Question 13

Schrute Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2021, this receivable for §200,000 was correctly included in Schrute's balance sheet at $167,000. When the receivable was collected on February 15, 2022, the U.S. dollar equivalent was $181,000. In Schrute's 2022 consolidated income statement, how much should have been reported as a foreign exchange gain?

A)$0.
B)$7,000.
C)$19,000.
D)$33,000.
E)$14,000.

Question 14

Clark Stone purchases raw material from its foreign supplier, Rinne Clay, on May 8. Payment of 1,500,000 foreign currency units (FC)is due in 30 days. May 31 is Clark's fiscal year-end. The pertinent exchange rates were as follows: For what amount should Clark's Accounts Payable be credited on May 8?

A)$1,740,000.
B)$1,850,000.
C)$1,500,000.
D)$1,680,000.
E)$1,770,000.

Question 15

Jackson Corp. (a U.S.-based company)sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Assuming a forward contract was entered into on December 16, how would the forward contract be reflected on Jackson's December 31, 2021 balance sheet?

A)Forward contract (asset).
B)Forward contract (liability).
C)Foreign currency (asset).
D)Foreign currency (liability).
E)Foreign exchange (liability).

Question 16

Jackson Corp. (a U.S.-based company)sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Assuming a forward contract was entered into on December 16, what would be the net impact on Jackson's 2021 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge. The present value for one half-month at 12% is 0.9950.

A)$800 (gain).
B)$1,594 (loss).
C)$1,594 (gain).
D)$794 (loss).
E)$794 (gain).

Question 17

Jackson Corp. (a U.S.-based company)sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Assuming a forward contract was not entered into, what would be the net impact on Jackson Corp.'s 2021 income statement related to this transaction?

A)$600 (gain).
B)$600 (loss).
C)$400 (gain).
D)$400 (loss).
E)$0

Question 18

Jackson Corp. (a U.S.-based company)sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Assuming a forward contract was entered into on December 16, what would be the net impact on Jackson's 2022 income statement related to this transaction?

A)$400 (gain).
B)$400 (loss).
C)$600 (gain).
D)$600 (loss).
E)$0.

Question 19

Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of 12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: What amount of foreign exchange gain or loss should be recorded on December 31?

A)$756 gain.
B)$756 loss.
C)$0.
D)$1,740 loss.
E)$1,740 gain.

Question 20

Nelson Co. ordered parts costing §120,000 from a foreign supplier on May 12 when the spot rate was $0.31 per stickle. A one-month forward contract was signed on that date to purchase §120,000 at a forward rate of $0.32 per stickle. On June 12, when the parts were received and payment was made, the spot rate was $0.36 per stickle. At what amount should inventory be reported?

A)$0.
B)$43,200.
C)$38,400.
D)$37,200.
E)$6,000.

Question 21

On December 1, 2021, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97 (U.S.)on December 1, 2021. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Compute the fair value of the foreign currency option at December 1, 2021.

A)$6,000.
B)$4,500.
C)$3,000.
D)$7,500.
E)$1,500.

Question 22

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)Option contract cash flow hedge of a forecasted transaction.
D)Forward contract cash flow hedges of a forecasted transaction.
E)Forward contracts used to hedge a foreign currency denominated liability.

Question 23

On December 1, 2021, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97 (U.S.)on December 1, 2021. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Compute the fair value of the foreign currency option at February 1, 2022.

A)$6,000.
B)$4,500.
C)$3,000.
D)$7,500.
E)$1,500.

Question 24

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.
C)The future spot rate.
D)A discount rate.
E)The company's incremental borrowing rate.

Question 25

A U.S. company buys merchandise from 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)Any gain or loss will be included in comprehensive income.

Question 26

On December 1, 2021, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97 (U.S.)on December 1, 2021. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Compute the U.S. dollars received on February 1, 2022.

A)$138,000.
B)$136,500.
C)$145,500.
D)$141,000
E)$142,500.

Question 27

On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan was as follows: How much foreign exchange gain or loss should be included in Shannon's 2020 income statement?

A)$3,000 gain.
B)$3,000 loss.
C)$6,000 gain.
D)$6,000 loss.
E)$7,000 gain.

Question 28

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)Option A.
B)Option B.
C)Option C.
D)Option D.
E)Option E.

Question 29

A U.S. company sells merchandise to 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 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.

Question 30

U.S. GAAP 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.

Question 31

On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan was as follows: How much foreign exchange gain or loss should be included in Shannon's 2021 income statement?

A)$1,000 gain.
B)$1,000 loss.
C)$2,000 gain.
D)$2,000 loss.
E)$8,000 loss.

Question 32

Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in Mexican pesos. On December 31, 2020, this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000. The receivable was collected on March 2, 2021, 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, 2021?

A)$1,100 loss.
B)$1,100 gain.
C)$6,900 loss.
D)$6,900 gain.
E)$8,000 gain.

Question 33

A company has a discount on a forward contract for a foreign currency denominated asset. How is the discount recognized over the life of the contract under fair value hedge accounting?

A)As a debit to discount expense.
B)As a debit to amortization expense.
C)As a debit to accumulated other comprehensive income.
D)As a debit impact on net income, as a result of the hedge.
E)As a decreases to sales.

Question 34

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

Question 35

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.

Question 36

On December 1, 2021, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97 (U.S.)on December 1, 2021. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Compute the fair value of the foreign currency option at December 31, 2021.

A)$6,000.
B)$4,500.
C)$3,000.
D)$7,500.
E)$1,500.

Question 37

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.

Question 38

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 sales or purchases.
D)Hedges of foreign currency firm commitments are used for future sales or purchases.
E)Hedges of foreign currency firm commitments are entered into for speculative purposes.

Question 39

On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan was as follows: 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)Option A.
B)Option B.
C)Option C.
D)Option D.
E)Option E.

Question 40

When a U.S. company purchases parts from a foreign company, which of the following will result in zero foreign exchange gain or loss?

A)The transaction is denominated in U.S. dollars.
B)The option strike price to sell foreign currency is less than the spot rate of the currency.
C)The option strike price to buy foreign currency is less than the spot rate of the currency.
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.

Question 41

On March 1, 2021, 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, 2022. On March 1, 2021, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2022 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, 2021. The following spot exchange rates apply: Mattie's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.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.
D)$20,000 increase.
E)$20,000 decrease.

Question 42

On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, 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, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: What journal entry should Eagle prepare on October 1, 2021?

A)Option A.
B)Option B.
C)Option C.
D)Option D.
E)Option E.

Question 43

On May 1, 2021, 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, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2022 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, 2021. The following spot exchange rates apply: Mosby's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the overall result of having entered into this hedge of exposure to foreign exchange risk?

A)$0.
B)$9,000 net loss on the option.
C)$9,000 net gain on the option.
D)$2,000 net gain on the option.
E)$2,000 net loss.

Question 44

Parker Corp., a U.S. company, had the following foreign currency transactions during 2021:(1.)Purchased merchandise from a foreign supplier on July 5, 2021 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of $82,000.(2.)On October 1, 2021 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2022. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2021, and $881,000 on October 1, 2022.What amount should be included as a foreign exchange gain or loss from the two transactions for 2021?

A)$2,000 loss.
B)$2,000 gain.
C)$10,000 gain.
D)$14,000 loss.
E)$14,000 gain.

Question 45

On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a French customer in three months, denominating the transaction in euros. On April 1, the spot rate is $1.41 per euro, and Quality enters into a three-month forward contract cash flow hedge to sell 400,000 euros at a rate of $1.36. At the end of three months, the spot rate is $1.37 per euro, and Quality delivers the merchandise, collecting 400,000 euros. What are the effects on net income from these transactions?

A)$20,000 Discount Expense plus a $12,000 positive Adjustment to Net Income when the merchandise is delivered.
B)$20,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise is delivered.
C)$20,000 Discount Expense plus a $20,000 negative Adjustment to Net Income when the merchandise is delivered.
D)$20,000 Discount Expense plus a $16,000 positive Adjustment to Net Income when the merchandise is delivered.
E)$20,000 Discount Expense plus a $20,000 positive Adjustment to Net Income when the merchandise is delivered.

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 $0.025 per rupee. A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $0.027. 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 $0.028. At what amount should the payable be carried on Primo's books?

A)$2,000.
B)$2,100.
C)$2,500.
D)$2,700.
E)$2,800.

Question 47

Parker Corp., a U.S. company, had the following foreign currency transactions during 2021:(1.)Purchased merchandise from a foreign supplier on July 5, 2021 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of $82,000.(2.)On October 1, 2021 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2022. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2021, and $881,000 on October 1, 2022.What amount should be included as a foreign exchange gain or loss from the two transactions for 2022?

A)$9,000 loss.
B)$9,000 gain.
C)$11,000 loss.
D)$21,000 loss.
E)$21,000 gain.

Question 48

Winston Corp., a U.S. company, had the following foreign currency transactions during 2021:(1.)Purchased merchandise from a foreign supplier on July 16, 2021 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of $54,000.(2.)On October 15, 2021 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2022. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2021, and $299,000 on October 15, 2022.What amount should be included as a foreign exchange gain or loss from the two transactions for 2021?

A)$9,000 loss.
B)$9,000 gain.
C)$11,000 loss.
D)$13,000 gain.
E)$14,000 gain.

Question 49

Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24, 2021. On July 24, 2021, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October, 2021. The following exchange rates apply: What amount will Woolsey include as Adjustment to Net Income for the period ended October 31?

A)$6,000 positive.
B)$6,000 negative.
C)$10,000 positive.
D)$10,000 negative.
E)$14,000 positive.

Question 50

On December 1, 2021, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2022, as a fair value hedge of a foreign currency denominated account payable. The following U.S. dollar per peso exchange rates apply: Joseph's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent is 0.9803. Which of the following is included in Joseph's December 31, 2021 balance sheet for the forward contract?

A)$5,146.58 asset.
B)$5,146.58 liability.
C)$500.00 liability.
D)$490.15 asset.
E)$490.15 liability.

Question 51

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 for the period January 17 to April 17?

A)$4,000
B)$4,260
C)$4,340
D)$5,000
E)$5,260

Question 52

On March 1, 2021, 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, 2022. On March 1, 2021, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2022 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, 2021. The following spot exchange rates apply: Mattie's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the net impact on Mattie's 2021 income as a result of this fair value hedge of a firm commitment?

A)$1,800.00 decrease.
B)$1,760.60 decrease.
C)$2,240.40 decrease.
D)$1,660.40 increase.
E)$2,240.60 increase.

Question 53

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 $0.0094, and the forward rate was $0.0095. 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 discount revenue and premium expense.

Question 54

On March 1, 2021, 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, 2022. On March 1, 2021, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2022 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, 2021. The following spot exchange rates apply: Mattie's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the net impact on Mattie's 2022 income including the fair value hedge of a firm commitment?

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.

Question 55

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 $0.023, and the forward rate was $0.021. 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 discount revenue and premium expense.

Question 56

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 $0.025 per baht. A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $0.027. 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 $0.028. 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.

Question 57

On May 1, 2021, 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, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2022 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, 2021. The following spot exchange rates apply: Mosby's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the impact on Mosby's 2022 net income as a result of this fair value hedge of a firm commitment?

A)$1,800.00 decrease.
B)$2,500.00 increase.
C)$2,500.00 decrease.
D)$188,760.60 increase.
E)$188,760.60 decrease.

Question 58

On May 1, 2021, 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, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2022 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, 2021. The following spot exchange rates apply: Mosby's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the impact on Mosby's 2021 net 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.

Question 59

Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24, 2021. On July 24, 2021, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October, 2021. The following exchange rates apply: What amount will Woolsey include as an option expense in net income for the period July 24 to October 24?

A)$4,000.
B)$5,000.
C)$10,000.
D)$12,000.
E)$14,000.

Question 60

Winston Corp., a U.S. company, had the following foreign currency transactions during 2021:(1.)Purchased merchandise from a foreign supplier on July 16, 2021 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of $54,000.(2.)On October 15, 2021 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2022. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2021, and $299,000 on October 15, 2022.What amount should be included as a foreign exchange gain or loss from the two transactions for 2022?

A)$1,000 loss.
B)$1,000 gain.
C)$2,000 loss.
D)$4,000 gain.
E)$4,000 loss.

Question 61

On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, 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, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: What is the 2022 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

Question 62

Which of the following is not a condition of accounting for hedge derivatives?

A)The derivative is minimally effective in offsetting changes in the cash flows or fair value related to the hedged item.
B)The derivative is properly documented as a hedge.
C)The derivative is used to hedge a cash flow exposure to foreign exchange risk.
D)The derivative is highly effective in offsetting changes in the cash flows or fair value related to the hedged item.
E)The derivative is used to hedge a fair value exposure to foreign exchange risk.

Question 63

What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates?

Question 64

How does a foreign currency forward contract differ from a foreign currency option?

Question 65

On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, 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, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: What journal entry should Eagle prepare on December 31, 2021?

A)Option A.
B)Option B.
C)Option C.
D)Option D.
E)Option E.

Question 66

How can an import purchase result in an exposure to foreign exchange risk for the buyer?

Question 67

On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, 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, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: What is the amount of option expense for 2022 from these transactions?

A)$1,000.
B)$1,600.
C)$2,500.
D)$2,600.
E)$0.

Question 68

On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, 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, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: What is the amount of Cost of Goods Sold for 2022 as a result of these transactions?

A)$200,000.
B)$195,000.
C)$201,000.
D)$202,600.
E)$203,000.

Question 69

What is meant by the terms direct quote and indirect quote?

Question 70

What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?

Question 71

What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates?

Question 72

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at the balance sheet date

A)1) Adjust hedged asset or liability to fair value, with counterpart (change in fair value)reported as foreign exchange gain or loss in net income,2. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value)reported in AOCI,3. Transfer an amount from AOCI to net income to offset the foreign exchange gain or loss on the hedged asset or liability recognized in 1, and4. Transfer from AOCI to net income (as discount expense or premium revenue)the current period's amortization of discount or premium.
B)1) Adjust hedged asset or liability to fair value, with counterpart (change in fair value)reported as foreign exchange gain or loss in net income and2. Adjust option to fair value (either an asset or zero value), with counterpart (change in fair value)reported as gain or loss in net income.
C)1) Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value)reported as gain or loss in net income and2. Adjust firm commitment to fair value (based on change in forward rate), with counterpart (change in fair value)reported as gain or loss in net income.
D)1) Adjust hedged asset, with counterpart (change in fair value)reported as a foreign exchange gain in net income and2. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value)reported as a gain or loss in net income.
E)1) None. No journal entry is required.

Question 73

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date requires which of the following?

A)1) Recognize the transaction (sale or purchase)and foreign currency denominated asset or liability2. Recognize option as an asset (purchase price is fair value)
B)1) No entry related to the firm commitment (zero value)2. No entry related to forward contract (zero fair value)
C)1) Recognize the transaction (sale or purchase)and foreign currency denominated asset or liability2. No entry related to forward contract (zero fair value)
D)1) Recognize the transaction (sale or purchase).2. Recognize the option as a liability.
E)1) None. No journal entry is required.

Question 74

On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, 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, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2022 from these transactions?

A)$1,000.
B)$1,600.
C)$1,800.
D)$2,000.
E)$2,600.

Question 75

For speculative derivatives, the change in the fair value of the derivative must be:

A)Utilized to adjust the derivative asset.
B)Recognized immediately as a gain or loss in net income.
C)Recognized as a loss in other comprehensive income.
D)Recognized as a gain in other comprehensive income.
E)Recognized as a gain or loss in net income at a later date.

Question 76

All of the following data points are needed to determine the fair value of a forward contract (at any point), 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.
C)The forward rate for a contract that has the same duration as the forward contract entered into.
D)A discount rate which is typically the company's incremental borrowing rate.
E)A future rate which is typically the company's incremental borrowing rate.

Question 77

What factors create a foreign exchange gain?

Question 78

What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency appreciates?

Question 79

Authoritative literature provides guidance for hedges of the following sources of foreign exchange risk.I. Recognized foreign currency denominated assets and liabilities.II. Unrecognized foreign currency firm commitments.III. Forecasted foreign currency denominated transactions.

A)I only
B)I and II
C)II only
D)II and III
E)I, II, and III

Question 80

Which is a true statement regarding the fundamental requirement of accounting for derivatives?

A)Derivatives are reported on the balance sheet only as an asset.
B)Derivatives are reported on the balance sheet only as a liability.
C)Changes in derivative cost basis are recorded in the asset value.
D)Changes in derivative fair value are included in comprehensive income.
E)Changes in derivative cost basis are recorded in the liability value.