Question 1

On December 1, 2011, 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, 2012. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2011. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at December 1, 2011.

A) $6,000.
B) $4,500.
C) $3,000.
D) $7,500.
E) $1,500.

Accepted Answer

The answer of On December 1, 2011, Keenan Company, a...

Question 2

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 will ultimately determine the fair value of the forward contract at maturity, this information alone is not sufficient for determining the fair value at any particular point in time. Rather, the fair value calculation depends on comparing the current forward rate (which is a function of the future spot rate) to the contracted forward rate, discounted to present value using a discount rate such as the company's incremental borrowing rate.

Question 3

Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in Mexican pesos. On December 31, 2010, this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000. The receivable was collected on March 2, 2011, 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, 2011?
A) $1,100 loss.
B) $1,100 gain.
C) $6,900 loss.
D) $6,900 gain.
E) $8,000 gain.

Accepted Answer

The exchange rate on December 31, 2010 was $1 = 10 pesos ($8,000 ÷ 75,000). When the receivable was collected on March 2, 2011, the exchange rate was $1 = 8.70 pesos ($6,900 ÷ 75,000). Therefore, Alpha sustained a foreign exchange loss of $1,100 ($8,000 - $6,900).

Question 4

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 involved. Therefore, no foreign exchange gain or loss will result.

Question 5

On April 1, 2010, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2011. The dollar value of the loan was as follows:
 
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?

A) Option A
B) Option B
C) Option C
D) Option D
E) Option E

Accepted Answer

Based on the information given, it is not possible to determine whether the foreign currencies increased or decreased in dollar value. The foreign exchange gain recorded by Angela could be due to changes in exchange rates or other factors.

Question 6

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 7

On April 1, 2010, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2011. The dollar value of the loan was as follows:

How much foreign exchange gain or loss should be included in Shannon's 2011 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, 2010, Shannon Company, a...

Question 8

On December 1, 2011, 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, 2012. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2011. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at February 1, 2012.

A) $6,000.
B) $4,500.
C) $3,000.
D) $7,500.
E) $1,500.

Accepted Answer

To compute the fair value of the foreign currency option at February 1, 2012, we need to compare the spot rate on that date with the option's strike price. From the table provided, we can see that the spot rate is $.99 (U.S.) per CAD on February 1, 2012, which is higher than the strike price of $.97 (U.S.). Therefore, the option would not be exercised and would expire worthless. The fair value of the option on February 1, 2012 would be zero, so the answer is B ($4,500).

Question 9

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 10

On December 1, 2011, 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, 2012. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2011. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the U.S. dollars received on February 1, 2012.

A) $138,000.
B) $136,500.
C) $145,500.
D) $141,000
E) $142,500.

Accepted Answer

The answer of On December 1, 2011, Keenan Company, a...

Question 11

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 12

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, and foreign exchange gains and losses are accrued. This approach involves recognizing the foreign currency transaction when it occurs and then recognizing any resulting gain or loss when the transaction is settled.

Question 13

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 sales are denominated in U.S. dollars, there is no exchange rate risk for the U.S. company. Therefore, there will be no foreign exchange gain or loss.

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, the U.S. company will receive more dollars when they exchange the foreign currency, resulting in a foreign exchange gain.

Question 15

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 will be no foreign exchange gain or loss as there is no exchange of currencies involved.

Question 16

On December 1, 2011, 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, 2012. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2011. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at December 31, 2011.

A) $6,000.
B) $4,500.
C) $3,000.
D) $7,500.
E) $1,500.

Accepted Answer

The answer of On December 1, 2011, Keenan Company, a...

Question 17

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 18

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 19

On April 1, 2010, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2011. The dollar value of the loan was as follows:

How much foreign exchange gain or loss should be included in Shannon's 2010 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, 2010, Shannon Company, a...

Question 20

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. Hedge accounting is used to minimize the volatility in financial statements by matching the gains and losses of a hedging instrument with the risk being hedged. Hedges can be classified as cash flow hedges, fair value hedges, and hedges of foreign currency firm commitments. In the case of hedges of foreign currency firm commitments, they are used to manage the exposure to foreign currency fluctuations for future sales or purchases.

Quiz 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

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

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

On April 1, 2010, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2011. The dollar value of the loan was as follows: How much foreign exchange gain or loss should be included in Shannon's 2011 income statement?

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?

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

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?

A U.S. company sells merchandise to 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?

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?

On April 1, 2010, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2011. The dollar value of the loan was as follows: How much foreign exchange gain or loss should be included in Shannon's 2010 income statement?

Which of the following statements is true concerning hedge accounting?