Question 1

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:  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

$97,000 - $103,000 = ($6,000) Loss

Question 2

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 3

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:  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

$.04 × C$150,000 = $6,000

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:  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

$.03 × C$150,000 = $4,500

Question 5

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:  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

Strike Price $.97 × C$150,000 = $145,500

Question 6

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:  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

$103,000 - $105,000 = ($2,000) Loss

Question 7

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 need for currency conversion and thus no foreign exchange gain or loss will result regardless of whether the foreign currency appreciates or depreciates.

Question 8

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, a foreign exchange gain will result. When the U.S. company receives payment from the foreign company in a currency different from the U.S. dollar, the exchange rate between the two currencies at the time of the transaction will determine the value of the payment that the U.S. company receives. If the exchange rate in the foreign currency appreciates (i.e., it takes fewer units of that currency to equal one U.S. dollar), then the U.S. company will receive more U.S. dollars than it would have at the initial exchange rate, resulting in a foreign exchange gain.

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

While the future spot rate is an important factor in determining the fair value of a forward contract, it is a variable that cannot be determined with certainty at any point in time. Thus, it cannot be used to definitively determine the fair value of a forward contract. The other options listed, including the forward rate at the time of entering the contract, the current forward rate for a contract maturing on the same date, a discount rate, and the company's incremental borrowing rate, are all important factors that can be used to calculate the fair value of a forward contract.

Question 10

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 11

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 approach is used in the United States in accounting for foreign currency transactions. Under this approach, foreign exchange gains and losses are accrued based on the difference between the exchange rate at the time of the transaction and the rate at the settlement date. This approach is in line with the generally accepted accounting principles in the United States.

Question 12

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 exposure to foreign currency fluctuation, and therefore no foreign exchange gain or loss will result.

Question 13

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 14

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 15

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:  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

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

Question 16

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 17

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 18

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 can be used for future sales or purchases. Hedge accounting is used to mitigate the risk of changes in the exchange rate affecting the value of firm commitments. This allows companies to accurately predict future cash flows and reduce volatility in their financial statements.

Question 19

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 because the purchase price will remain constant in U.S. dollars regardless of any changes in the exchange rate.

Question 20

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:  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

$.05 × C$150,000 = $7,500

Quiz 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

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: How much foreign exchange gain or loss should be included in Shannon's 2012 income statement?

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

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: How much foreign exchange gain or loss should be included in Shannon's 2013 income statement?

A U.S. company buys merchandise from 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?

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

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

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

Which of the following statements is true concerning hedge accounting?

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