Question 1

What is the purpose of a hedge of foreign exchange risk?

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Question 2

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at the balance sheet date
A)1)Adjust hedged asset or liability to fair value,with counterpart (change in fair value)reported as foreign exchange gain or loss in net income,2.Adjust forward contract to fair value (either an asset or a liability),with counterpart (change in fair value)reported in AOCI,3.Transfer an amount from AOCI to net income to offset the foreign exchange gain or loss on the hedged asset or liability recognized in 1,and 4.Transfer from AOCI to net income (as discount expense or premium revenue)the current period's amortization of discount or premium
B)1)Adjust hedged asset or liability to fair value,with counterpart (change in fair value)reported as foreign exchange gain or loss in net income and 2.Adjust option to fair value (either an asset or zero value),with counterpart (change in fair value)reported as gain or loss in net income
C)1)Adjust forward contract to fair value (either an asset or a liability),with counterpart (change in fair value)reported as gain or loss in net income and 2.Adjust firm commitment to fair value (based on change in forward rate),with counterpart (change in fair value)reported as gain or loss in net income
D)1)Adjust hedged asset,with counterpart (change in fair value)reported as a foreign exchange gain in net income and 2.Adjust forward contract to fair value (either an asset or a liability),with counterpart (change in fair value)reported as a gain or loss in net income
E)1)None.No journal entry is required.

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Question 3

For speculative derivatives,the change in the fair value of the derivative must be:
A)Utilized to adjust the derivative asset.
B)Recognized immediately as a gain or loss in net income.
C)Recognized as a loss in other comprehensive income.
D)Recognized as a gain in other comprehensive income.
E)Recognized as a gain or loss in net income at a later date.

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Question 4

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds.  On October 1, 2018, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound.  The option is considered to be a cash flow hedge of a forecasted foreign currency transaction.  On December 31, 2018, the option has a fair value of $1,600.  The following spot exchange rates apply:
$$\begin{array} { | l | c | } 
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1, 2018 } & \$ 2.00 \
\hline \text { December 31, 2018 } & \$ 1.97 \
\hline \text { February 1,2019 } & \$ 2.01 \
\hline
\end{array}$$
-What is the amount of Cost of Goods Sold for 2019 as a result of these transactions?
A)$200,000.
B)$195,000.
C)$201,000.
D)$202,600.
E)$203,000.

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Question 5

How is the fair value of a Forward Contract determined by U.S.GAAP?

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Question 6

All of the following data points are needed to determine the fair value of a forward contract (at any point),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 forward rate for a contract that has the same duration as the forward contract entered into.
D)A discount rate which is typically the company's incremental borrowing rate.
E)A future rate which is typically the company's incremental borrowing rate.

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Question 7

What is meant by the spot rate?

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Question 8

Where can you find exchange rates between the U.S.dollar and most foreign currencies?

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Question 9

Which is a true statement regarding the fundamental requirement of accounting for derivatives?
A)Derivatives are reported on the balance sheet only as an asset.
B)Derivatives are reported on the balance sheet only as a liability.
C)Changes in derivative cost basis are recorded in the asset value.
D)Changes in derivative fair value are included in comprehensive income.
E)Changes in derivative cost basis are recorded in the liability value.

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Question 10

Which of the following is not a condition of accounting for hedge derivatives?
A)The derivative is minimally effective in offsetting changes in the cash flows or fair value related to the hedged item.
B)The derivative is properly documented as a hedge.
C)The derivative is used to hedge a cash flow exposure to foreign exchange risk.
D)The derivative is highly effective in offsetting changes in the cash flows or fair value related to the hedged item.
E)The derivative is used to hedge a fair value exposure to foreign exchange risk.

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Question 11

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds.  On October 1, 2018, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound.  The option is considered to be a cash flow hedge of a forecasted foreign currency transaction.  On December 31, 2018, the option has a fair value of $1,600.  The following spot exchange rates apply:
$$\begin{array} { | l | c | } 
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1, 2018 } & \$ 2.00 \
\hline \text { December 31, 2018 } & \$ 1.97 \
\hline \text { February 1,2019 } & \$ 2.01 \
\hline
\end{array}$$
-What is the amount of option expense for 2019 from these transactions?
A)$1,000.
B)$1,600.
C)$2,500.
D)$2,600.
E)$ 0.

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Question 12

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds.  On October 1, 2018, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound.  The option is considered to be a cash flow hedge of a forecasted foreign currency transaction.  On December 31, 2018, the option has a fair value of $1,600.  The following spot exchange rates apply:
$$\begin{array} { | l | c | } 
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1, 2018 } & \$ 2.00 \
\hline \text { December 31, 2018 } & \$ 1.97 \
\hline \text { February 1,2019 } & \$ 2.01 \
\hline
\end{array}$$
-What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2019 from these transactions?
A)$1,000.
B)$1,600.
C)$1,800.
D)$2,000.
E)$2,600.

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Question 13

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds.  On October 1, 2018, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound.  The option is considered to be a cash flow hedge of a forecasted foreign currency transaction.  On December 31, 2018, the option has a fair value of $1,600.  The following spot exchange rates apply:
$$\begin{array} { | l | c | } 
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1, 2018 } & \$ 2.00 \
\hline \text { December 31, 2018 } & \$ 1.97 \
\hline \text { February 1,2019 } & \$ 2.01 \
\hline
\end{array}$$
-What is the 2019 effect on net income as a result of these transactions?
A)$195,000
B)$201,600
C)$201,000
D)$202,600
E)$203,000

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Question 14

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date requires which of the following?
A)1)Recognize the transaction (sale or purchase)and foreign currency denominated asset or liability 2.Recognize option as an asset (purchase price is fair value)
B)1)No entry related to the firm commitment (zero value)2.No entry related to forward contract (zero fair value)
C)1)Recognize the transaction (sale or purchase)and foreign currency denominated asset or liability 2.No entry related to forward contract (zero fair value)
D)1)Recognize the transaction (sale or purchase)2.Recognize the option as a liability
E)1)None.No journal entry is required.

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Question 15

How does a foreign currency forward contract differ from a foreign currency option?

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Question 16

What are the two separate transactions that require recording under the two-transaction perspective?

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Question 17

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds.  On October 1, 2018, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound.  The option is considered to be a cash flow hedge of a forecasted foreign currency transaction.  On December 31, 2018, the option has a fair value of $1,600.  The following spot exchange rates apply:
$$\begin{array} { | l | c | } 
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1,2018 } & \$ 2.00 \
\hline \text { December 31, 2018 } & \$ 1.97 \
\hline \text { February 1,2019 } & \$ 2.01 \
\hline
\end{array}$$
-What journal entry should Eagle prepare on December 31,2018?
$\begin{array}{|l|l|r|r|}
\hline \text { A) } & \text { Foreign Currency Option } & 200 & \
\hline & \text { Cash } & & 200 \
\hline \text { B) } & \text { Foreign Currency Option } & 200 & \
\hline & \text { Option Revenue } & & 200 \
\hline \text { C) } & \text { Foreign Currency Option } & 400 & \
\hline & \text { Option Revenue } & & 400 \
\hline \text { D) } & \text { Option Expense } &  200 \
\hline & \text { Foreign Currency Option } & & 200\
\hline \text { E) } & \text { Option Expense } &  400 \
\hline & \text { Foreign Currency Option } & & 400 \
\hline
\end{array}$

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Question 18

On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds.  On October 1, 2018, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound.  The option is considered to be a cash flow hedge of a forecasted foreign currency transaction.  On December 31, 2018, the option has a fair value of $1,600.  The following spot exchange rates apply:
$$\begin{array} { | l | c | } 
\hline \text { Date } & \text { Spot Rate } \
\hline \text { October 1,2018 } & \$ 2.00 \
\hline \text { December 31, 2018 } & \$ 1.97 \
\hline \text { February 1,2019 } & \$ 2.01 \
\hline
\end{array}$$
-What journal entry should Eagle prepare on October 1,2018?
$$\begin{array} { | l | l | l | l | } 
\hline \text { A) } & \text { Cash } & 1,800 & \
\hline & \text { Foreipn Currency Option } & & 1,800 \
\hline \text { B) } & \text { Forward Contract } & 1,800 & \
\hline & \text { Cash } & & 1,800 \
\hline \text { C) } & \text { Foraipn Currency Option } & 1,800 & \
\hline & \text { Gain an Foreipn Currency } & & 1,800 \
\hline \text { D) } & \text { Loss an Foreipn Currency } & 1,800 & \
\hline & \text { Cash } & & 1,800 \
\hline \text { E) } & \text { Foreipn Curency Option } & 1,800 & \
\hline & \text { Cash } & & 1,800 \
\hline
\end{array}$$

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Question 19

Yelton Co.just sold inventory for 80,000 euros,which Yelton will collect in sixty days.Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.

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Question 20

Authoritative literature provides guidance for hedges of the following sources of foreign exchange risk.
I.Recognized foreign currency denominated assets and liabilities.
II.Unrecognized foreign currency firm commitments.
III.Forecasted foreign currency denominated transactions.
A)I only
B)I and II
C)II only
D)II and III
E)I,II,and III

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Quiz 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

What is the purpose of a hedge of foreign exchange risk?

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at the balance sheet date

For speculative derivatives,the change in the fair value of the derivative must be:

How is the fair value of a Forward Contract determined by U.S.GAAP?

All of the following data points are needed to determine the fair value of a forward contract (at any point) ,EXCEPT

What is meant by the spot rate?

Where can you find exchange rates between the U.S.dollar and most foreign currencies?

Which is a true statement regarding the fundamental requirement of accounting for derivatives?

Which of the following is not a condition of accounting for hedge derivatives?

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date requires which of the following?

How does a foreign currency forward contract differ from a foreign currency option?

What are the two separate transactions that require recording under the two-transaction perspective?

Yelton Co.just sold inventory for 80,000 euros,which Yelton will collect in sixty days.Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.

Authoritative literature provides guidance for hedges of the following sources of foreign exchange risk. I.Recognized foreign currency denominated assets and liabilities. II.Unrecognized foreign currency firm commitments. III.Forecasted foreign currency denominated transactions.