Deck 8: Foreign Currency Transactions and Hedges

Question 1

What is the effect of fluctuations in exchange rates on accounts payable?

A)Deferred and amortized
B)Deferred to maturity
C)Recognized immediately in income
D)Recognized if losses,deferred if gains

Answer 1

C

Question 2

Which of the following is not a major reason for fluctuating exchange rates?

A)Differences in inflation rates
B)Black market (illegal)trading of currencies
C)Differences in interest rates
D)Trade surpluses and deficits between countries

Answer 2

B

Question 3

Which of the following statements about the gross method of recording a hedge is true?

A)It can only be used for internal record-keeping.
B)The receivable and payable under the forward contract are recorded separately at fair value.
C)The receivable and payable under the forward contract are netted together and only the net amount is recorded.
D)The gross method provides a slightly different result than the net method.

Answer 3

D

Question 4

Which of the following statements is true?

A)The historical rate is the exchange rate at the beginning of the reporting period and the closing rate is the exchange rate at the end of the reporting
Period.
B)The historical rate is the exchange rate at the date of the transaction and the closing rate is the exchange rate at the end of the reporting period.
C)The spot rate is the exchange rate at the date of the transaction and the closing rate is the exchange rate at the conclusion of a hedge instrument.
D)The historical rate is the exchange rate at the beginning of the reporting period and the forward rate is the exchange rate at the end of the reporting
Period.

Question 5

Which of the following list would not be effective as a hedge for a Canadian company with a large number of transactions in Japan?

A)Japanese yen held by a Canadian bank.
B)Canadian funds held by a Japanese bank.
C)A forward contract for the purchase of yen.
D)A forward contract for the sale of yen.

Question 6

What exchange rate is usually used to report non-monetary assets on the statement of financial position?

A)Historical rate
B)Spot rate
C)Closing rate
D)Fair value

Question 7

On November 2,20X9,Henry Company purchased a machine for 100,000 Swiss francs (CHF)with payment requirement on March 30,20X10.To eliminate the risk of foreign exchange losses on this payable,Henry entered into a forward exchange contract on November 3,20X9 to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30,20X10.The spot rate was CHF1 = $1.95 on November 2,20X9 and CHF1 = $1.97 on December 1,20X9.What is the amount of the premium or discount on the forward exchange contract on December 1,20X9?

A)A premium of $3,000
B)A discount of $3,000
C)A premium of $5,000
D)A discount of $5,000

Question 8

What is the exchange rate in effect at the date of the transaction called?

A)Closing rate
B)Spot rate
C)Forward rate
D)Settlement rate

Question 9

Exchange gains and losses on accounts receivable/payable that are denominated in a foreign currency are ________.

A)deferred and reported upon settlement
B)reported as adjustments to the transaction prices
C)reported as equity adjustments from translation
D)recognized in the periods in which exchange rates change

Question 10

On December 1,20X5,Gillard Ltd.sold goods to International Traders Ltd. ,a company located in Switzerland for 500,000 Swiss francs (CHF).At the date of sale,the spot rate was CHF1 = $1.0329.On the same date,Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315.On March 1,20X6,Gillard receives full payment from International Traders and delivered the Swiss francs in execution of the forward contract.The spot rate at March 1,20X6 was CHF1 = $1.0287.What amount should Gillard record for the sale?

A)$500,000.
B)$514,300
C)$515,750
D)$516,450

Question 11

Under the two transaction theory of treating a gain on exchange rate changes,how is the gain treated?

A)As an operating activity
B)As an investing activity
C)As a financing activity
D)As a cost of acquiring assets

Question 12

Which of the following items is a non-monetary item?

A)Cash
B)Accounts receivable
C)Inventory
D)Accounts payable

Question 13

On January 1,20x4,HB Inc.issued 10,000,000 Euros (€)of bonds payable.The bonds are due on December 31,20X6.Over the life of the bonds,the exchange rates were as follows:

Assume that exchange gains and losses on long-term monetary are recognized in income immediately.What is the exchange gain (loss)recognized in income during 20X5?

A)$(1,000,000)
B)$(500,000)
C)$500,000
D)$1,000,000

Question 14

On November 2,20X9,Henry Company purchased a machine for 100,000 Swiss francs (CHF)with payment requirement on March 30,20X10.To eliminate the risk of foreign exchange losses on this payable,Henry entered into a forward exchange contract on November 3,20X9 to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30,20X10.The spot rate was CHF1 = $1.95 on November 2,20X9 and CHF1 = $1.97 on December 1,20X9.How should the premium or discount on the forward exchange contract be accounted for?

A)It should be expensed on the inception date of the forward exchange contract.
B)It should be expensed over the 5-month term of the forward exchange contract.
C)It should be expensed on the maturity date of the forward exchange contract.
D)It should be added to the cost of the machine.

Question 15

Under IFRS 8,at which exchange rate should monetary assets and liabilities be translated?

A)The exchange rate at the statement of financial position date
B)The closing rate
C)The historical rate
D)The fair value rate

Question 16

On January 1,20x4,HB Inc.issued 10,000,000 Euros (€)of bonds payable.The bonds are due on December 31,20X6.Over the life of the bonds,the exchange rates were as follows:

Assume that exchange gains and losses on long-term monetary are recognized in income immediately.What is the exchange gain (loss)recognized in income during 20X6?

A)$(800,000)
B)$(200,000)
C)$ 200,000
D)$ 800,000

Question 17

On December 1,20X5,Gillard Ltd.sold goods to International Traders Ltd. ,a company located in Switzerland for 500,000 Swiss francs (CHF).At the date of sale,the spot rate was CHF1 = $1.0329.On the same date,Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315.On March 1,20X6,Gillard receives full payment from International Traders and delivered the Swiss francs in execution of the forward contract.The spot rate at March 1,20X6 was CHF1 = $1.0287.Assume that Gillard has a December 31 year-end and that the spot rate on that date was CHF1 = $1.0302.At December 31,the forward rate for a 60 day contract was CHF1 = 1.0394.At December 31,what is the balance of Gillard's forward contract payable?

A)$515,000
B)$515,650
C)$515,750
D)$515,850

Question 18

On December 1,20X5,Gillard Ltd.sold goods to International Traders Ltd. ,a company located in Switzerland for 500,000 Swiss francs (CHF).At the date of sale,the spot rate was CHF1 = $1.0329.On the same date,Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315.On March 1,20X6,Gillard receives full payment from International Traders and delivered the Swiss francs in execution of the forward contract.The spot rate at March 1,20X6 was CHF1 = $1.0287.Assume that Gillard has a December 31 year-end and that the spot rate on that date was CHF1 = $1.0302.At December 31,the forward rate for a 60 day contract was CHF1 = 1.0394.At December 31,what is the balance of Gillard's accounts receivable?

A)$515,100
B)$515,700
C)$516,450
D)$517.800

Question 19

On December 1,20X5,Gillard Ltd.sold goods to International Traders Ltd. ,a company located in Switzerland for 500,000 Swiss francs (CHF).At the date of sale,the spot rate was CHF1 = $1.0329.On the same date,Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315.On March 1,20X6,Gillard receives full payment from International Traders and delivered the Swiss francs in execution of the forward contract.The spot rate at March 1,20X6 was CHF1 = $1.0287.What is the net exchange gain (loss)on the forward contract?

A)$(2,100)
B)$(700)
C)$700
D)$1,400

Question 20

What is a currency swap an example of?

A)A futures contract
B)A call option
C)A derivative instrument
D)A forward contract

Question 21

Fransen Co.does a lot of businesses in Denmark.It has numerous trade accounts receivables and accounts payables that are to be settled in Danish krones.What type of hedge does Fransen have?

A)Fair-value hedge
B)Cash-flow hedge
C)Natural hedge
D)Hedge instrument

Question 22

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided:

Assume that the transaction qualifies as a cash-flow hedge.What is the net exchange gain (loss)that McBride should recognize in the period from May 1-July 31,20X2?

A)$(2,200)
B)$(1,800)
C)$ 0
D)$400

Question 23

On June 1,20X4,Chua (Canada)Co.entered into a 90-day forward contract to sell $500,000 Singapore dollars (SGD)to its bank on August 29,20X4.The following information has been provided:
June 1,90-day forward rate SGD$1 = $0.7750
July 1,60-day forward rate SGD$1 = $0.7630
August 29,spot rate SGD$1 = $0.748
Chua has a June 30 year-end.What is the exchange gain (loss)at June 30,20X4?

A)$(6,000)
B)$0
C)$1,500
D)$6,000

Question 24

Which of the following cannot usually be a hedged item?

A)Accounts receivable
B)Accounts payable
C)Derivative instrument
D)Purchase order

Question 25

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided:

Assume that the transaction qualifies as a fair-value hedge.On March 1,at what amount should the forward contract be recorded?

A)$307,440
B)$312,400
C)$317,600
D)$319,800

Question 26

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided:

Assume that the transaction qualifies as a cash-flow hedge.What is the carrying value of the machine?

A)$307,440
B)$310,600
C)$312,400
D)$317,600

Question 27

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided:

Assume that the transaction qualifies as a fair-value hedge.What amount of exchange gain (loss)should be recognized at April 30,20X2?

A)$(640)
B)$(320)
C)$ 0
D)$320

Question 28

Under accounting standards for private enterprises,what exchange rate is used for non-monetary items carried at fair value?

A)The exchange rate at the date the item was ordered
B)The exchange rate at the date the item was received
C)The exchange rate at the date of payment for the item
D)The exchange rate at the statement of financial position date

Question 29

Under accounting standards for private enterprises,which of the following can be used as hedging instruments?

A)Options
B)Forward contracts
C)Futures contracts
D)Currency swaps

Question 30

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided:

Assume that the transaction qualifies as a cash-flow hedge.What amount should be recognized as other comprehensive income at April 30,20X2?

A)$ 320
B)$ 640
C)$4,640
D)$5,280

Question 31

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided:

Assume that the transaction qualifies as a cash-flow hedge.What is the cost of the hedge?

A)$ 1,800
B)$ 2,200
C)$ 4,960
D)$12,360

Question 32

Under IFRS,which of the following statements about hedging a foreign currency risk of an accepted purchase order is true?

A)It must be accounted for using a fair-value hedge.
B)It must be accounted for using a cash-flow hedge.
C)It can be accounted for using either a fair-value hedge or a cash-flow hedge.
D)It is not eligible for hedge accounting until it becomes an accounts payable.

Question 33

Which of the following is not one of the conditions that must be met to qualify for hedge accounting?

A)The hedge relationship must be designated and documented.
B)The hedge is expected to be effective.
C)The effectiveness of the hedge can easily be determined.
D)The hedge is assessed at the beginning and at the end of the hedging period.

Question 34

Which of the following statements about hedge accounting is true?

A)Hedge accounting is mandatory.
B)Hedge accounting is optional.
C)Hedge accounting is applicable only if a receivable is being hedged.
D)Hedge accounting is applicable only if a liability is being hedged.

Question 35

On June 1,20X4,Chua (Canada)Co.entered into a 90-day forward contract to sell $500,000 Singapore dollars (SGD)to its bank on August 29,20X4.The following information has been provided:
June 1,90-day forward rate SGD$1 = $0.7750
July 1,60-day forward rate SGD$1 = $0.7630
August 29,spot rate SGD$1 = $0.748
Chua has a June 30 year-end.What is the net exchange gain (loss)on the contract?

A)$(13,500)
B)$(6,000)
C)$6,000
D)$13,500

Question 36

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided:

Assume that the transaction qualifies as a fair-value hedge.What is the cost of the hedge?

A)$2,200
B)$4,640
C)$4,960
D)$6,680

Question 37

HCB,a Canadian public company,entered into the following transactions late in 20X6:
• Transaction #1 - On October 15,HCB purchased inventory from a Mexican supplier for 800,000 pesos (Ps).On the same day,HCB entered into a forward contract for Ps 800,000 at the 60-day forward rate of Ps1 = $0.399.The company has designated this as a fair value hedge.The Mexican supplier was paid in full on December 15,20X6.
• Transaction #2 - On November 1,HCB contracted to sell inventory to a customer in Switzerland at a selling price of CHF 400,000.The contract called for the merchandise to be delivered to the customer on December 1,with payment to be received in Swiss francs by January 31,20X7.On November 1,HBC arranged a forward contract to deliver CHF 400,000 on January 31,20X7 at a rate of CHF1 = $1.20.The company has designated this as a fair value hedge on a firm commitment.
• On December 1,20X6,the forward rate on the Swiss francs to January 31,20X7 was CHF1 = $1.21
• The company has a December 31,20X6 year end.On this date the forward rates for the Swiss francs was CHF1 = $1.23.
HBC has a year-end of December 31.Spot rates were as follows during this period of time:
Required:
The company uses the net method to record hedging transactions.Prepare the journal entries that HCB should make to record the events described above.

Question 38

On March 1,20X2,McBride Ltd.issued a purchase order to Tao Heavy Machines (Singapore)Inc.to acquire a drilling machine for $400,000 SGD.On the same day,McBride entered into a forward contract to receive $400,000 SGD on July 31,20X2.The machine was delivered on June 1,20X2 and payment was made July 31,20X2.McBride has an April 30 year-end.The following information has been provided:

Assume that the transaction qualifies as a fair-value hedge.At what amount should McBride record the drilling machine?

A)$307,440
B)$312,400
C)$317,600
D)$319,800

Question 39

Under IFRS,which of the following statements is true?

A)The hedge of a forecasted transaction is accounted for using a fair-value hedge.
B)The hedge of a firm commitment is accounted for using a cash-flow hedge.
C)The gain or loss on a hedging instrument under a cash-flow hedge is first reported as other comprehensive income and then reclassified to income
When the hedged item affects income.
D)The gain or loss on a hedging instrument under a fair-value hedge is first reported as other comprehensive income and then reclassified to income
When the hedged item affects income.

Question 40

Where is the ineffective portion of a cash-flow hedge recognized on the financial statements?

A)As part of net income
B)As part of other comprehensive income
C)As a separate component of equity
D)It does not appear on the financial statements.

Question 41

Beauty Care Limited (BCL)manufactures and distributes leather furniture to various companies in Europe.On April 2,20X6,BCL entered into a sales contract with a company in Germany to sell 1,000 sofas.The contract price is €2,000 per sofa.Five hundred sofas are to be delivered in May 15,20X6 and the remaining half is to be delivered on December 20,20X6.Payment is due in two instalments with half due on August 31,20X6 and the remaining half due January 30,20X7.However,the customer has the right to cancel the contract with 30 days' notice.
BCL entered into a forward contract to hedge against the Euro exchange rate for €1 million each coming due on January 31,20X7.BCL has an October 31 year end.
Delivery of the furniture occurred on the dates specified and the company collected the receivables due and settled the forward contract January 30,20X7.
The exchange rates were as followed:

Required:
Assume that the forward contract is designated as a cash flow hedge since the sale is highly probable.Prepare the journal entries to record the sales and the hedge.Use the net method to record the journal entries.BCL reports under IFRS.

Question 42

Helvetia Corp. ,a Swiss firm,bought merchandise from Bouchard Company of Quebec on December 15,20X7 for 20,000 CHF,payable on January 14,20X8.Bouchard and Helvetia both close their books on December 31.The 20,000 CHF was paid on January 14,20X8.The exchange rates for CHF1 were:
Required:
Provide the journal entries for Bouchard (the seller)at each of the above dates,as required.The account was not hedged by Bouchard.

Question 43

Helvetia Corp. ,a Swiss firm,bought merchandise from Bouchard Company of Quebec on December 15,20X7 for 20,000 CHF,payable on January 14,20X8.Bouchard and Helvetia both close their books on December 31.The 20,000 CHF was paid on January 14,20X8.The exchange rates for CHF1 were:
Required:
Provide the journal entries for Bouchard (the seller)at each of the above dates,as required.The account was hedged by Bouchard through a 30 day forward contract.Bouchard uses the gross method to record hedge transactions.Bouchard reports under IFRS.

Question 44

Helvetia Corp. ,a Swiss firm,bought merchandise from Bouchard Company of Quebec on December 15,20X7 for 20,000 CHF,payable on January 14,20X8.Bouchard and Helvetia both close their books on December 31.The 20,000 CHF was paid on January 14,20X8.The exchange rates for CHF1 were:
Required:
Provide the journal entries for Helvetia (the buyer)at each of the above dates,as required.

Question 45

Under IFRS,a hedging relationship qualifies for special hedge accounting rules,only if it meets five conditions.
Required:
Explain the five conditions that must be met for a derivative to qualify for special hedge accounting.Identify what qualifies as a "hedged item".Identify what qualifies as a "hedging instrument".Outline the conditions required for a hedge to be "highly effective with respect to foreign exchange risk".

Question 46

HCB,a Canadian public company,entered into the following transactions late in 20X6:
• Transaction #1 - On October 15,HCB purchased inventory from a Mexican supplier for 800,000 pesos (Ps).On the same day,HCB entered into a forward contract for Ps 800,000 at the 60-day forward rate of Ps1 = $0.399.The company has designated this as a fair value hedge.The Mexican supplier was paid in full on December 15,20X6.
• Transaction #2 - On November 1,HCB contracted to sell inventory to a customer in Switzerland at a selling price of CHF 400,000.The contract called for the merchandise to be delivered to the customer on December 1,with payment to be received in Swiss francs by January 31,20X7.On November 1,HBC arranged a forward contract to deliver CHF 400,000 on January 31,20X7 at a rate of CHF1 = $1.20.The company has designated this as a fair value hedge on a firm commitment.
• On December 1,20X6,the forward rate on the Swiss francs to January 31,20X7 was CHF1 = $1.21
• The company has a December 31,20X6 year end.On this date the forward rates for the Swiss francs was CHF1 = $1.23.
HBC has a year-end of December 31.Spot rates were as follows during this period of time:
Required:
The company uses the gross method to record hedging transactions.Prepare the journal entries that HCB should make to record the events described above.

Question 47

Short Link Company (SLC)issued a purchase order to buy a machine from Frankfurt Ltd. ,a German company,on April 2,20X6.The contract price is €650,000 and delivery is to occur on August 31,20X6.Payment is due on October 15,20X6.
SCL entered into a forward contract to hedge against the Euro exchange rate for €1 million coming due on August 31,20X6.SLC has a December 31 year end.
Delivery of the machine occurred on the date specified and the company paid the amount and settled the forward contract October 15,20X6.
The exchange rates were as followed:

Required:
SLC reports under ASPE.
a.Explain how the forward contract will be accounted for under ASPE.
b.Prepare the journal entries to record the above transactions.

Question 48

Compare and contrast accounting for foreign currency transactions and hedges under IFRS and ASPE.

Question 49

Beauty Care Limited (BCL)manufactures and distributes leather furniture to various companies in Europe.On April 2,20X6,BCL entered into a sales contract with a company in Germany to sell 1,000 sofas.The contract price is €2,000 per sofa.Five hundred sofas are to be delivered in May 15,20X6 and the remaining half is to be delivered on December 20,20X6.Payment is due in two instalments with half due on August 31,20X6 and the remaining half due January 30,20X7.However,the customer has the right to cancel the contract with 30 days' notice.
BCL entered into a forward contract to hedge against the Euro exchange rate for €1 million each coming due on January 31,20X7.BCL has a December 31 year end.
Delivery of the furniture occurred on the dates specified and the company collected the receivables due and settled the forward contract January 30,20X7.
The exchange rates were as followed:

Required:
Assume that the forward contract is designated as a cash flow hedge since the sale is highly probable.Prepare the journal entries to record the sales and the hedge.Use the gross method to record the journal entries.BCL reports under IFRS.