Question 1

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 approach used in the United States for accounting for foreign currency transactions is the two-transaction perspective, where foreign exchange gains and losses are accrued. This approach requires recognizing gains and losses at the time of the transaction and again at the time of settlement or payment. This approach is consistent with GAAP (Generally Accepted Accounting Principles) and is used by most U.S. companies.

Question 2

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 foreign exchange gain or loss as there is no exchange of currencies involved. The transaction is simply carried out in the currency of the U.S. company.

Question 3

Compute the U.S.dollars received on February 1, 2019.
A) $138,000.
B) $136,500.
C) $145,500.
D) $141,000
E) $142,500.

Accepted Answer

The answer of Compute the U.S.dollars received on February 1,...

Question 4

How much foreign exchange gain or loss should be included in Shannon's 2018 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 How much foreign exchange gain or loss...

Question 5

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 6

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?

Accepted Answer

The answer of Angela, Inc., a U.S.company, had a euro...

Question 7

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 foreign...

Question 8

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 exchange rate gain or loss as the amount paid in foreign currency is known at the time of purchase and is fixed.

Question 9

How much foreign exchange gain or loss should be included in Shannon's 2017 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 How much foreign exchange gain or loss...

Question 10

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, the U.S. company will receive more U.S. dollars when it converts the foreign currency to U.S. dollars. This results in a foreign exchange gain.

Question 11

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 12

Compute the fair value of the foreign currency option at December 1, 2018.
A) $6,000.
B) $4,500.
C) $3,000.
D) $7,500.
E) $1,500.

Accepted Answer

The answer of Compute the fair value of the foreign...

Question 13

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.

Accepted Answer

Hedges of foreign currency firm commitments can be used for future sales or purchases, depending on the company's needs. The purpose of hedge accounting is to reduce the risk of financial losses due to fluctuations in exchange rates. These hedges are entered into as a risk management strategy rather than for speculative purposes.

Question 14

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

U.S.GAAP provides guidance for hedges of recognized foreign currency denominated assets and liabilities, unrecognized foreign currency firm commitments, forecasted foreign currency denominated transactions, and net investment in foreign operations. However, U.S.GAAP does not provide specific guidance for hedges of deferred foreign currency gains and losses.

Question 15

Alpha, Inc., a U.S.company, had a receivable from a customer that was denominated in Mexican pesos.On December 31, 2017, this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000.The receivable was collected on March 2, 2018, 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, 2018?
A) $1,100 loss.
B) $1,100 gain.
C) $6,900 loss.
D) $6,900 gain.
E) $8,000 gain.

Accepted Answer

To calculate the foreign exchange gain or loss, we need to compare the U.S. dollar value of the receivable on the balance sheet date ($8,000) with the U.S. dollar value of the cash received on the collection date ($6,900).

The difference between these two amounts is a foreign exchange loss for Alpha, Inc.:

$8,000 - $6,900 = $1,100 loss

Therefore, the correct answer is A) $1,100 loss.

Question 16

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 exchange gain or loss to be recognized regardless of whether the foreign currency appreciates or depreciates. The transaction is simply a purchase of goods for U.S. dollars.

Question 17

Compute the fair value of the foreign currency option at February 1, 2019.
A) $6,000.
B) $4,500.
C) $3,000.
D) $7,500.
E) $1,500.

Accepted Answer

The answer of Compute the fair value of the foreign...

Question 18

Compute the fair value of the foreign currency option at December 31, 2018.
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, 2018 is $6,000. This is because the option is in-the-money, and the difference between the exercise price and the spot rate is $6,000.

Question 19

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

Although the future spot rate may affect the fair value of a forward contract at maturity, it is not necessary to determine the fair value of the contract at any point in time prior to maturity. The other options (A, B, D, and E) are all factors that may be used to calculate the fair value of a forward contract at any point in time.

Question 20

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...

Quiz 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

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

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

Compute the U.S.dollars received on February 1, 2019.

How much foreign exchange gain or loss should be included in Shannon's 2018 income statement?

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 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?

How much foreign exchange gain or loss should be included in Shannon's 2017 income statement?

A U.S.company sells merchandise to a foreign company denominated in the foreign currency.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?

Compute the fair value of the foreign currency option at December 1, 2018.

Which of the following statements is true concerning hedge accounting?

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

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

Compute the fair value of the foreign currency option at February 1, 2019.

Compute the fair value of the foreign currency option at December 31, 2018.

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