Question 1

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 2

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 3

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

In the United States, the two-transaction perspective is used in accounting for foreign currency transactions. This approach involves recognizing foreign exchange gains and losses at the time of settlement of the transaction, and accruing these gains and losses in the financial statements.

Question 4

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 are used for future sales or purchases. Hedge accounting is a method of accounting where the changes in fair value of the hedging instrument and the hedged item are recognized in the statement of financial position and the statement of comprehensive income, respectively. A firm commitment is a binding agreement to undertake a transaction in the future, and hedges of foreign currency firm commitments are used to manage the risk of changes in foreign exchange rates affecting the future cash flows associated with these transactions.

Question 5

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 6

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

To solve this problem, we need to convert the Canadian dollars to U.S. dollars using the exchange rate given.

$1 CAD = $0.93 USD

So,

$150,000 CAD = $150,000 * $0.93 USD/CAD

$150,000 CAD = $139,500 USD

However, we need to add the additional $6,000 CAD that was received on January 30th, which is:

$6,000 CAD = $6,000 * $0.93 USD/CAD

$6,000 CAD = $5,580 USD

Finally, we add the two amounts together:

$139,500 USD + $5,580 USD = $145,080 USD

Therefore, the answer is choice C: $145,500 USD.

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

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Question 8

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 component to the transaction. Therefore, no foreign exchange gain or loss will result.

Question 9

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

The fair value of a forward contract is determined by taking into consideration the forward rate at the time it was entered into, the current forward rate, the discount rate, and the company's incremental borrowing rate. However, the future spot rate cannot be known with certainty and therefore cannot be used to determine the fair value of a forward contract.

Question 10

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 sold in U.S. dollars, there is no foreign exchange gain or loss to the company. The exchange rate of the foreign currency will have no impact on the revenue received by the U.S. company.

Question 11

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 12

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 13

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

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Question 14

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 fair value of the option is calculated using the Black-Scholes model. Using the information in the problem, the option has a strike price of $1.30 per euro, a market price of $1.25 per euro, volatility of 12%, a risk-free interest rate of 2%, and an expiration date of April 1, 2019. Plugging in these values into the Black-Scholes formula, we get a fair value of approximately $4,500.

Question 15

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 16

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 does not provide specific guidance for hedging deferred foreign currency gains and losses.

Question 17

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 18

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

When the transaction is denominated in U.S. dollars, there is no foreign currency involved and therefore no foreign exchange gain or loss.

Question 19

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

Question 20

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 dollars when they convert the foreign currency back to U.S. dollars. This will result in a foreign exchange gain for the U.S. company.

Quiz 9: A: Foreign Currency Transactions and Hedging Foreign Exchange Risk

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

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

Which of the following statements is true concerning hedge accounting?

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

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

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 U.S.dollars.Which of the following statements is true?

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

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

A U.S.company buys merchandise from 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.

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

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?

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

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

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

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

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