Question 1

The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract:
A) extends beyond one year or the current operating cycle.
B) is a hedge of an identifiable foreign currency commitment.
C) is a hedge of an exposed net liability position.
D) was acquired to speculate in foreign currency.

Accepted Answer

D

Question 2

Madison Paving Company purchased equipment for 350,000 British pounds from a supplier in London on July 7, 2017. Payment in British pounds is due on Sept. 7, 2017. The exchange rates to purchase one pound is as follows:  On its August 31, 2017 income statement, what amount should Madison Paving report as a foreign exchange transaction gain:
A) $14,000.
B) $7,000.
C) $10,500.
D) $0.

Accepted Answer

C

Question 3

With respect to disclosure requirements for fair value measurements, which of the following is NOT one of the three levels in the hierarchy of classifying fair value measurements?
A) a reconciliation of beginning and ending balances
B) significant unobservable inputs
C) significant other observable inputs
D) quoted prices in active markets for identical assets or liabilities

Accepted Answer

Levels in the fair value hierarchy (Level 1, Level 2, and Level 3) are defined by the observability of the inputs used in the valuation process, not by a reconciliation of balances. Choices B, C, and D describe inputs characteristic of Levels 3, 2, and 1, respectively.

Question 4

On September 1, 2017, Mudd Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:  The second forward contract was strictly for speculation. On September 30, 2017, what amount of foreign currency transaction gain should Mudd Plating report in income?
A) $0.
B) $2,500.
C) $5,000.
D) $10,000.

Accepted Answer

The answer of On September 1, 2017, Mudd Plating Company...

Question 5

A transaction gain or loss at the settlement date is:
A) a change in the exchange rate quoted by a foreign exchange trader.
B) synonymous with the translation of foreign currency financial statements into dollars.
C) the difference between the recorded dollar amount of an account receivable denominated in a foreign currency and the amount of dollars received.
D) the difference between the buying and selling rate quoted by a foreign exchange trader at the settlement date.

Accepted Answer

A transaction gain or loss at the settlement date is the difference between the recorded dollar amount of an account receivable (or payable) denominated in a foreign currency and the amount of dollars received (or paid). This occurs because of changes in exchange rates between the initial recognition of the receivable or payable and the settlement date.

Question 6

The discount or premium on a forward contract entered into as a hedge of an exposed asset or liability position should be:
A) included as a separate component of stockholders' equity.
B) amortized over the life of the forward contract.
C) deferred and included in the measurement of related foreign currency transaction.
D) none of these.

Accepted Answer

The discount or premium on a forward contract entered into as a hedge of an exposed asset or liability position should be amortized over the life of the forward contract. This is because the discount or premium represents the difference between the forward rate and the spot rate, and this difference will be realized over the life of the contract.

Question 7

A transaction loss would result from:
A) an increase in the exchange rate applicable to an asset denominated in a foreign currency.
B) a decrease in the exchange rate applicable to a liability denominated in a foreign currency.
C) the import of merchandise when the transaction is denominated in a foreign currency.
D) a decrease in the exchange rate applicable to an asset denominated in a foreign currency.

Accepted Answer

A transaction loss occurs when the exchange rate decreases for an asset denominated in a foreign currency, reducing its value in the reporting currency.

Question 8

From the viewpoint of a U.S. company, a foreign currency transaction is a transaction:
A) measured in a foreign currency.
B) denominated in a foreign currency.
C) measured in U.S. currency.
D) denominated in U.S. currency.

Accepted Answer

A foreign currency transaction is one that is denominated in a foreign currency, meaning the amount is stated in a currency other than the U.S. dollar.

Question 9

On September 1, 2017, Mudd Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:  The first forward contract was to hedge a purchase of inventory on September 1, payable on December 1. On September 30, what amount of foreign currency transaction loss should Mudd Plating report in income?
A) $0.
B) $2,500.
C) $5,000.
D) $10,000.

Accepted Answer

The answer of On September 1, 2017, Mudd Plating Company...

Question 10

Greco, Inc. a U.S. corporation, bought machine parts from Franco Company of Germany on March 1, 2017, for 70,000 marks, when the spot rate for marks was $0.5395. Greco's year-end was March 31, 2017, when the spot rate for marks was $0.5445. Greco bought 70,000 marks and paid the invoice on April 20, 2017, when the spot rate was $0.5495. How much should be shown in Greco's income statements as foreign exchange (transaction) gain or loss for the years ended March 31, 2017 and 2018?
A) 2017, $0; 2018, $0
B) 2017, $0; 2018, $350 loss
C) 2017, $350 loss; 2018, 0
D) 2017, $350 loss; 2018, $350 loss

Accepted Answer

The answer of Greco, Inc. a U.S. corporation, bought machine...

Question 11

A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a:
A) hedge of a net investment in a foreign entity.
B) hedge of an exposed asset or liability position.
C) hedge of an identifiable foreign currency commitment.
D) contract acquired to speculate in the movement of exchange rates.

Accepted Answer

The answer of A discount or premium on a forward...

Question 12

A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to:
A) hedge a net investment in a foreign entity.
B) hedge an identifiable foreign currency commitment.
C) speculate in foreign currency.
D) none of these.

Accepted Answer

A transaction gain or loss is reported currently in the determination of income when the purpose of the forward contract is to speculate in foreign currency. Hedges of net investments and identifiable foreign currency commitments typically qualify for hedge accounting, which can defer recognition of gains or losses.

Question 13

The exchange rate quoted for future delivery of foreign currency is the definition of a(n):
A) direct exchange rate.
B) indirect exchange rate.
C) spot rate.
D) forward exchange rate.

Accepted Answer

The forward exchange rate is the rate agreed upon today for the exchange of one currency for another at a future date, distinguishing it from spot rates, which are current exchange rates. Direct and indirect exchange rates refer to how the exchange rate is quoted, not to the timing of the exchange.

Question 14

On November 1, 2017, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $450,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were:  What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain or loss was recorded as a result of the adjustment?
A) Receivable Balance, $319,500; Gain/Loss Recorded, $9,000 gain
B) Receivable Balance, $319,500; Gain/Loss Recorded, $9,000 loss
C) Receivable Balance, $333,000; Gain/Loss Recorded, $4,500 gain
D) Receivable Balance, $333,000; Gain/Loss Recorded, $18,000 gain

Accepted Answer

The answer of On November 1, 2017, American Company sold...

Question 15

During 2017, a U.S. company purchased inventory from a foreign supplier. The transaction was denominated in the local currency of the seller. The direct exchange rate increased from the date of the transaction to the balance sheet date. The exchange rate decreased from the balance sheet date to the settlement date in 2018. For the years 2017 and 2018, transaction gains or losses should be recognized as:
A) 2017, gain; 2018, gain
B) 2017, gain; 2018, loss
C) 2017, loss; 2018 loss
D) 2017, loss; 2018, gain

Accepted Answer

In 2017, the direct exchange rate increased, meaning it took more of the U.S. company's currency to buy the same amount of foreign currency, indicating a loss. In 2018, the exchange rate decreased, meaning it took less of the U.S. company's currency to buy the same amount of foreign currency, indicating a gain.

Question 16

An indirect exchange rate quotation is one in which the exchange rate is quoted:
A) in terms of how many units of the domestic currency can be converted into one unit of foreign currency.
B) for the immediate delivery of currencies exchanged.
C) in terms of how many units of the foreign currency can be converted into one unit of domestic currency.
D) for the future delivery of currencies exchanged.

Accepted Answer

An indirect exchange rate quotation is expressed as the amount of foreign currency required to buy or sell one unit of the domestic currency, which matches choice C.

Question 17

A transaction gain or loss on a forward contract entered into as a hedge of an identifiable foreign currency commitment may be:
A) included as a separate item in the stockholders' equity section of the balance sheet.
B) recognized currently in the determination of net income.
C) deferred and included in the measurement of the related foreign currency transaction.
D) none of these.

Accepted Answer

A transaction gain or loss on a forward contract used as a hedge of an identifiable foreign currency commitment can be deferred and included in the measurement of the related foreign currency transaction, aligning the timing of the gain or loss recognition with the underlying transaction.

Question 18

On November 1, 2017, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $500,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were:  The entry to record the forward contract is
A) FCU Receivable, 350,000; Premium on Forward Contract, 15,000; Dollars Payable, 365,000
B) Dollars Receivable, 365,000; Discount on Forward Contract, 15,000; FCU Payable, 350,000
C) FCU Receivable, 365,000; Discount on Forward Contract, 15,000; Dollars Payable, 350,000
D) Dollars Receivable, 350,000; Discount on Forward Contract, 15,000; FCU Payable, 365,000

Accepted Answer

The answer of On November 1, 2017, American Company sold...

Question 19

Montana Corporation a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after delivery. Between the delivery date and the time of payment, the exchange rate changed in Montana's favor. The resulting gain should be reported in the financial statements as a(n):
A) component of other comprehensive income.
B) component of income from continuing operations.
C) extraordinary income.
D) deferred income.

Accepted Answer

The resulting gain from the change in exchange rate should be reported as a component of income from continuing operations. This is because it is directly related to the core business operations of Montana Corporation, which involves purchasing foreign goods. Changes in exchange rates affecting transactions are considered part of normal business operations and are included in net income.

Question 20

A transaction gain is recorded when there is an:
A) importing transaction and the exchange rate increases.
B) exporting transaction and the exchange rate increases.
C) exporting transaction and the exchange rate decreases.
D) none of these.

Accepted Answer

A transaction gain occurs when an exporting transaction is settled at a higher exchange rate than when it was initially recorded, resulting in more revenue in the reporting currency.

Quiz 12: Accounting for Foreign Currency Transactions and Hedging Foreign Exchange Risk

The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract:

With respect to disclosure requirements for fair value measurements, which of the following is NOT one of the three levels in the hierarchy of classifying fair value measurements?

A transaction gain or loss at the settlement date is:

The discount or premium on a forward contract entered into as a hedge of an exposed asset or liability position should be:

A transaction loss would result from:

From the viewpoint of a U.S. company, a foreign currency transaction is a transaction:

A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a:

A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to:

The exchange rate quoted for future delivery of foreign currency is the definition of a(n) :

An indirect exchange rate quotation is one in which the exchange rate is quoted:

A transaction gain or loss on a forward contract entered into as a hedge of an identifiable foreign currency commitment may be:

A transaction gain is recorded when there is an: