Question 1

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.

Accepted Answer

Since the merchandise is denominated in U.S. dollars, there is no foreign currency involved and therefore no foreign exchange gain or loss will result.

Question 2

On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: $\begin{array}{|l|c|c|}
\hline {\text { Date }} & \text { Spot Rate } & \text { Option Premium } \
\hline \text { December 1,2013 } & \$ .97 & \$ .05 \
\hline \text { December 31,2013 } & \$ .95 & \$ .04 \
\hline \text { February 1,2014 } & \$ .94 & \$ .03 \
\hline
\end{array}$ Compute the U.S. dollars received on February 1, 2014.
A)$138,000.
B)$136,500.
C)$145,500.
D)$141,000.
E)$142,500.

Accepted Answer

The answer of On December 1, 2013, Keenan Company, a...

Question 3

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.

Accepted Answer

The answer of A company has a discount on a...

Question 4

On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: $\begin{array}{|l|c|c|}
\hline {\text { Date }} & \text { Spot Rate } & \text { Option Premium } \
\hline \text { December 1,2013 } & \$ .97 & \$ .05 \
\hline \text { December 31,2013 } & \$ .95 & \$ .04 \
\hline \text { February 1,2014 } & \$ .94 & \$ .03 \
\hline
\end{array}$ Compute the fair value of the foreign currency option at February 1, 2014.
A)$6,000.
B)$4,500.
C)$3,000.
D)$7,500.
E)$1,500.

Accepted Answer

The answer of On December 1, 2013, Keenan Company, a...

Question 5

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 speculative in nature.

Accepted Answer

Hedges of foreign currency firm commitments are used for future sales or purchases, as they are intended to hedge against the potential risk and volatility in exchange rates that could impact those future transactions. Hedging involves taking on a position that offsets the potential losses from adverse price movements, and in the case of foreign currency firm commitments, the hedging position is taken to reduce the risk of adverse exchange rate movements affecting the value of those commitments.

Question 6

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.

Accepted Answer

While the future spot rate is likely to be used in determining the fair value of a forward contract, it is not necessary to have this information at any given point in time as long as other relevant data is available. The forward rate at inception, current forward rate, discount rate, and incremental borrowing rate are all likely to be used in determining the fair value of a forward contract.

Question 7

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.

Accepted Answer

The answer of All of the following hedges are used...

Question 8

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.

Accepted Answer

The answer of A U.S. company buys merchandise from a...

Question 9

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.

Accepted Answer

If the transaction is denominated in U.S. dollars, there will be no foreign exchange gain or loss as there is no need to convert currencies.

Question 10

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.

Accepted Answer

The answer of U.S. GAAP provides guidance for hedges of...

Question 11

On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: $\begin{array}{|l|c|c|}
\hline {\text { Date }} & \text { Spot Rate } & \text { Option Premium } \
\hline \text { December 1,2013 } & \$ .97 & \$ .05 \
\hline \text { December 31,2013 } & \$ .95 & \$ .04 \
\hline \text { February 1,2014 } & \$ .94 & \$ .03 \
\hline
\end{array}$ Compute the fair value of the foreign currency option at December 1, 2013.
A)$6,000.
B)$4,500.
C)$3,000.
D)$7,500.
E)$1,500.

Accepted Answer

The answer of On December 1, 2013, Keenan Company, a...

Question 12

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows: $\begin{array}{|l|l|}
\hline {\text { Date }} & \text { Amount } \
\hline \text { April 1,2012 } & \$ 97,000 \
\hline \text { December 31,2012 } & \$ 103,000 \
\hline \text { April 1,2013 } & \$ 105,000 \
\hline
\end{array}$ 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? $$\begin{array} { | l | l | l | } 
\hline & \text { Euro } & \text { Pound } \
\hline \text { A) } & \text { Increase } & \text { Increase } \
\hline \text { B) } & \text { Increase } & \text { Decrease } \
\hline \text { C) } & \text { Decrease } & \text { Decrease } \
\hline \text { D) } & \text { Decrease } & \text { Increase } \
\hline \text { E) } & \text { No change } & \text { Decrease } \
\hline
\end{array}$$
A)Option A
B)Option B
C)Option C
D)Option D
E)Option E

Accepted Answer

The euro increased in dollar value as the loan amount in dollars increased from $97,000 to $105,000. Angela recorded a gain on the euro receivable, indicating the euro appreciated. The pound payable also resulted in a gain, indicating the pound depreciated in dollar value.

Question 13

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows: $\begin{array}{|l|l|}
\hline {\text { Date }} & \text { Amount } \
\hline \text { April 1,2012 } & \$ 97,000 \
\hline \text { December 31,2012 } & \$ 103,000 \
\hline \text { April 1,2013 } & \$ 105,000 \
\hline
\end{array}$ How much foreign exchange gain or loss should be included in Shannon's 2013 income statement?
A)$1,000 gain.
B)$1,000 loss.
C)$2,000 gain.
D)$2,000 loss.
E)$8,000 loss.

Accepted Answer

The answer of On April 1, 2012, Shannon Company, a...

Question 14

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.

Accepted Answer

If the foreign currency appreciates, it will take fewer units of that currency to equal the U.S.-dollar price agreed upon for the merchandise. Therefore, when the U.S. company converts the foreign currency received into U.S. dollars, it will receive more U.S. dollars than expected, resulting in a foreign exchange gain.

Question 15

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

Accepted Answer

The answer of A forward contract may be used for...

Question 16

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.

Accepted Answer

Since the merchandise is denominated in U.S. dollars, there is no exchange rate involved. Therefore, there will be no foreign exchange gain or loss regardless of how the foreign currency's value changes.

Question 17

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows: $\begin{array}{|l|l|}
\hline {\text { Date }} & \text { Amount } \
\hline \text { April 1,2012 } & \$ 97,000 \
\hline \text { December 31,2012 } & \$ 103,000 \
\hline \text { April 1,2013 } & \$ 105,000 \
\hline
\end{array}$ How much foreign exchange gain or loss should be included in Shannon's 2012 income statement?
A)$3,000 gain.
B)$3,000 loss.
C)$6,000 gain.
D)$6,000 loss.
E)$7,000 gain.

Accepted Answer

The answer of On April 1, 2012, Shannon Company, a...

Question 18

Alpha Inc., a U.S. company, had a receivable from a customer that was denominated in Mexican pesos. On December 31, 2012, this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000. The receivable was collected on March 2, 2013, 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, 2013?
A)$1,100 loss.
B)$1,100 gain.
C)$6,900 loss.
D)$6,900 gain.
E)$8,000 gain.

Accepted Answer

$6,900 - $8,000 = ($1,100) Loss

Question 19

On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: $\begin{array}{|l|c|c|}
\hline {\text { Date }} & \text { Spot Rate } & \text { Option Premium } \
\hline \text { December 1,2013 } & \$ .97 & \$ .05 \
\hline \text { December 31,2013 } & \$ .95 & \$ .04 \
\hline \text { February 1,2014 } & \$ .94 & \$ .03 \
\hline
\end{array}$ Compute the fair value of the foreign currency option at December 31, 2013.
A)$6,000.
B)$4,500.
C)$3,000.
D)$7,500.
E)$1,500.

Accepted Answer

The fair value of the foreign currency option at December 31, 2013 is $6,000. This is calculated as follows:Fair value = (Strike price - Spot rate) x Number of units x Option premium= ($.97 - $.95) x 150,000 x $.04= $6,000

Question 20

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.

Accepted Answer

The two-transaction perspective method is used in the United States for accounting for foreign currency transactions. This approach involves recording the foreign currency transaction initially and then recording the foreign exchange gain or loss separately when it is realized. This is done by accruing the gain or loss as it occurs rather than deferring it until a later date.

Quiz 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true?

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?

Which of the following statements is true concerning hedge accounting?

All of the following data may be needed to determine the fair value of a forward contract at any point in time except

All of the following hedges are used for future purchase/sale transactions except

A U.S. company buys merchandise from a foreign company denominated in the foreign currency. Which of the following statements is true?

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

U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except

A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true?

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 U.S. company sells merchandise to a foreign company denominated in U.S. dollars. Which of the following statements is true?

Which of the following approaches is used in the United States in accounting for foreign currency transactions?