Question 1

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 changed from $1=10 pesos (on December 31, 2010) to $1=8.6957 pesos (on March 2, 2011). Therefore, Alpha's receivable was worth $7,246 (75,000/10) when it was recorded on December 31, 2010, and Alpha received $8,181.52 (75,000/8.6957) when it was collected on March 2, 2011. Alpha's foreign exchange gain/loss is the difference between these two amounts, which is $935.52 loss ($8,181.52 - $7,246). This loss will be recorded on the income statement for the year ended December 31, 2011, because that is when the receivable was collected.

Question 2

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 $.97 (U.S.) on December 1, 2011. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:$\begin{array}{|c|c|c|c|c|}
\hline \text { Date } & & \text { Spot Rate } & & \text { Option Premium } \
\hline \text { December 1,2011 } & & \$ .97 & & \$ .05 \\hline \text { December } 31,2011 & & \$ .95 & & \$ .04 \
\hline \text { February } 1,2012 & & \$ .94 & & \$ .03 \
\hline
\end{array}$
-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,...

Question 3

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 to mitigate the risk of future sales or purchases, meaning they can be used for either future sales or purchases. This allows a company to lock in a specific exchange rate for a future transaction and avoid fluctuations in currency exchange rates. Option A and B are incorrect because hedges can be used for either sales or purchases. Option C is partially correct, but hedges can also be used for future transactions. Option E is incorrect because hedge accounting is used to manage risk, not to speculate on future currency movements.

Question 4

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 US uses the two-transaction perspective, which means that foreign exchange gains and losses are accrued at the time of the transaction and reported in the financial statements at that time. This approach is in accordance with the generally accepted accounting principles (GAAP) in the US.

Question 5

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 6

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 7

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 all...

Question 8

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?$\begin{array}{|l|l|l|}
\hline &\text { Euro } & \text { Pound } \
\hline \text { A) } & \text { Increase } & \text { Increase } \
\hline \text { B) } & \text { Increase } & \text { Decrease } \
\hline \text { C) } & \text { Decrease } & \text { Decrease } \
\hline \text { D) } & \text { Decrease } & \text { Increase } \
\hline \text { E) } & \text { No change } & \text { Decrease } \
\hline
\end{array}$
A)A above
B)B above
C)C above
D)D above
E)E above

Accepted Answer

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

Question 9

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 $.97 (U.S.) on December 1, 2011. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:$\begin{array}{|c|c|c|c|c|}
\hline \text { Date } & & \text { Spot Rate } & & \text { Option Premium } \
\hline \text { December 1,2011 } & & \$ .97 & & \$ .05 \\hline \text { December } 31,2011 & & \$ .95 & & \$ .04 \
\hline \text { February } 1,2012 & & \$ .94 & & \$ .03 \
\hline
\end{array}$
-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,...

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 into U.S. dollars, resulting in a foreign exchange gain. Conversely, if the foreign currency depreciates, the U.S. company will receive fewer U.S. dollars when converting the foreign currency, resulting in a foreign exchange loss. Therefore, statement A is true.

Question 11

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 transaction is denominated in U.S. dollars, there is no foreign exchange gain or loss regardless of whether the foreign currency appreciates or depreciates.

Question 12

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 $.97 (U.S.) on December 1, 2011. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:$\begin{array}{|c|c|c|c|c|}
\hline \text { Date } & & \text { Spot Rate } & & \text { Option Premium } \
\hline \text { December 1,2011 } & & \$ .97 & & \$ .05 \\hline \text { December } 31,2011 & & \$ .95 & & \$ .04 \
\hline \text { February } 1,2012 & & \$ .94 & & \$ .03 \
\hline
\end{array}$
-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

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

Question 13

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 14

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 $.97 (U.S.) on December 1, 2011. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:$\begin{array}{|c|c|c|c|c|}
\hline \text { Date } & & \text { Spot Rate } & & \text { Option Premium } \
\hline \text { December 1,2011 } & & \$ .97 & & \$ .05 \\hline \text { December } 31,2011 & & \$ .95 & & \$ .04 \
\hline \text { February } 1,2012 & & \$ .94 & & \$ .03 \
\hline
\end{array}$
-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,...

Question 15

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:$\begin{array}{|l|c|}
\hline {\text { Date }} & \text { Amount } \
\hline \text { April 1,2010 } & \$ 97,000 \
\hline \text { December 31,2010 } & \$ 103,000 \
\hline \text { April 1,2011 } & \$ 105,000 \
\hline
\end{array}$
-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,...

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 currency exposure and thus no foreign exchange gain or loss will result.

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 foreign...

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

If the transaction is denominated in U.S. dollars, there will be no foreign exchange gain or loss as there is no need for currency conversion.

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:$\begin{array}{|l|c|}
\hline {\text { Date }} & \text { Amount } \
\hline \text { April 1,2010 } & \$ 97,000 \
\hline \text { December 31,2010 } & \$ 103,000 \
\hline \text { April 1,2011 } & \$ 105,000 \
\hline
\end{array}$
-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,...

Question 20

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 important in determining the fair value of a forward contract, it is uncertain and cannot be known with certainty. Therefore, it is not considered in the calculation of fair value. The other options listed are all important factors in determining fair value.

Quiz 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

Which of the following statements is true concerning hedge accounting?

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

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 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.

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

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

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

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?

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?

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