Question 1

Prairie Dog Inc. borrowed US$10,000,000 on January 1, 2014 at an annual rate of 8%. The loan is due December 31, 2017 and interest is payable annually each December 31. The exchange rates on selected dates throughout the life of the loan are shown below: $$\begin{array} { | l | l | } 
\hline \text { January } 1,2014 & \text { CDN } \$ 1.4416 \
\hline \text { December } 31,2014 & \text { CDN } \$ 1.4325 \
\hline \text { December } 31,2015 & \text { CDN } \$ 1.4675 \
\hline \text { December } 31,2016 & \text { CDN } \$ 1.4436 \
\hline \text { December } 31,2017 & \text { CDN } \$ 1.4625 \
\hline
\end{array}$$ Assume that the average annual exchange rate was equal to the December 31S1U1P1stS1S1P0 spot rates.
-Prepare the journal entries for 2014.

Accepted Answer

The answer of Prairie Dog Inc. borrowed US$10,000,000 on January...

Question 2

What is the required adjustment to the carrying value of the forward contract at the company's year-end?
A) CDN$300 decrease.
B) CDN$375 increase.
C) CDN$300 increase.
D)Nil.

Accepted Answer

Since the forward rate is lower than the spot rate at year-end, the carrying value of the forward contract decreases. Thus, the required adjustment would be a CDN$300 decrease.

Question 3

On January 1, 2014, GRL Inc. purchased, in U.S. Funds $500,000 of Bonds of the OBY Company. On that date, the Bonds were trading at par. These Bonds pay 10% interest annually each December 31. The Bonds mature on December 31, 2016. The following exchange rates were applicable between 2014 and 2016. The rates indicate the cost (in Canadian dollars) of purchasing 1 U.S. dollar:
 $$\begin{array} { | l | l | } 
\hline \text { January } 1,2014 & \text { CDN } \$ 1.4666 \
\hline \text { Average rate for } 2014 & \text { CDN } \$ 1.4570 \
\hline \text { December } 31,2014 & \text { CDN } \$ 1.4726 \
\hline \text { Auerage rate for } 2015 & \text { CDN } \$ 1.4600 \
\hline \text { December } 31,2015 & \text { CDN } \$ 1.4426 \
\hline \text { Average rate for } 2016 & \text { CDN } \$ 1.4500 \
\hline \text { December } 31,2016 & \text { CDN } \$ 1.4575 \
\hline
\end{array}$$
-Compute the carrying value of the investment at the end of each year:

Accepted Answer

The answer of On January 1, 2014, GRL Inc. purchased,...

Question 4

In which of the following situations is a gain or loss recorded on a commitment assets or liability which would not otherwise be recorded?
A) A speculative forward contract.
B) A fair value hedge of a firm commitment.
C) A fair value hedge of a recognized monetary item.
D)A cash flow hedge of a forecasted transaction.

Accepted Answer

A fair value hedge of a firm commitment involves recognizing changes in the fair value of the firm commitment, which would not otherwise be recorded, leading to a gain or loss.

Question 5

Prepare the December 31, 2016 Balance Sheet Presentation of the Receivable from the American client and the accounts associated with the hedge.

Accepted Answer

The answer of Prepare the December 31, 2016 Balance Sheet...

Question 6

Which of the following provides the best hedge against exchange variations in the value of a stream of income in a foreign currency where the payments are expected to occur in equal amounts over a period of five years?
A) Borrowing in the foreign currency with repayment due at the end of the five years.
B) Borrowing in Canadian dollars with repayment due at the end of the five years.
C) Borrowing in the foreign currency with annual repayments equal to the expected annual revenue cash flows.
D)Borrowing in Canadian dollars with annual repayments equal to the expected annual revenue cash flows.

Accepted Answer

Borrowing in the foreign currency with annual repayments equal to the expected annual revenue cash flows provides the best hedge against exchange variations in the value of a stream of income in a foreign currency where the payments are expected to occur in equal amounts over a period of five years. This is because the annual repayments will be adjusted to reflect any fluctuations in the exchange rate, thereby minimizing the risk of exchange rate fluctuations over the five-year period. Option A and B do not provide a hedge against exchange rate fluctuations, while option D may not reflect changes in the exchange rate accurately.

Question 7

On July 1, 2016, Great White North (GWN) Inc. purchased merchandise from a supplier in the U.S. for US$800,000 with terms requiring full payment by October 31, 2016. On July 2, GWN entered into a forward contract to purchase US$800,000 on October 31, 2016 at a rate of CDN$1.2275. The forward contract was designated as a hedge of the fair value of the amount due to the supplier.
On October 31, GWN paid its supplier in full. Selected dates and spot rates are shown below: $$\begin{array} { | l | l | } 
\hline \text { July } 1,2016 & \text { CDN } \$ 1.2150 \
\hline \text { July } 31,2016 & \text { CDN } \$ 1.2175 \
\hline \text { October } 31,2016 & \text { CDN } \$ 1.22 \
\hline
\end{array}$$ GWN has a July 31S1U1P1stS1S1P0 year end. On that date the forward rate for US dollars for three months was CDN $1.2225.
-Prepare any and all journal entries you deem necessary to record the above transaction.

Accepted Answer

The answer of On July 1, 2016, Great White North...

Question 8

Which of the following statements is NOT correct?
A) In a fair value hedge, the entity uses a hedging instrument to hedge against the fluctuation in the fair value of the hedged item. This method will be used when the hedged item will be valued at fair value.
B) In a cash flow hedge, the entity uses a hedging instrument to hedge against the fluctuation in the Canadian dollar value of future cash flows.
C) The gain or loss on the hedging instrument in a cash flow hedge is initially reported in other comprehensive income and reclassified to profit and loss when the hedged item affects profit.
D)The gain or loss on the hedging instrument in a fair value hedge is initially recognized in other comprehensive income and transferred to profit and loss when the hedged item has be revalued for accounting purposes in accordance with IFRS.

Accepted Answer

In a fair value hedge, the gain or loss on the hedging instrument is recognized immediately in profit and loss, not in other comprehensive income.

Question 9

Canada Corp. sells raw lumber to a number of countries around the world. On December 1, 2016 the company shipped some lumber to a client in Japan. The selling price was established at 500,000 Yen with payment to be received on March 1, 2017.
On December 3, 2016 the company entered into a hedge with a Canadian Bank at the 90 day forward rate of 1 Yen = CDN$1.185. The forward contract was designated as a fair value hedge of the receivable from the Japanese customer.
Canada Corp received the payment from its Japanese client on March 1, 2017. Canada Corp's year end is on December 31.
Selected spot rates were as follows: $$\begin{array} { | l | l | } 
\hline \text { December 1, 2016: } & 1 \text { Yen } = \text { CDN\$1.156 } \
\hline \text { December 3, 2016: } & 1 \text { Yen } = \text { CDN\$1.156 } \
\hline \text { December 31, 2016:} & 1 \text { Yen } = \text { CDN } \$ 1.1626 \
\hline \text { March 1, 2017: } & 1 \text { Yen } = \text { CDN } \$ 1.1750 \
\hline
\end{array}$$ The two-month forward rate on December 31, 2016 was 1Yen = CDN$1.1800.
-Prepare any and all journal entries arising from this transaction.

Accepted Answer

The answer of Canada Corp. sells raw lumber to a...

Question 10

Prepare the 2016 journal entries to record the above transactions. In addition, prepare any adjusting journal entries that you deem necessary.

Accepted Answer

The answer of Prepare the 2016 journal entries to record...

Question 11

Canada Corp. sells raw lumber to a number of countries around the world. On December 1, 2016 the company shipped some lumber to a client in Japan. The selling price was established at 500,000 Yen with payment to be received on March 1, 2017.
On December 3, 2016 the company entered into a hedge with a Canadian Bank at the 90 day forward rate of 1 Yen = CDN$1.185. The forward contract was designated as a fair value hedge of the receivable from the Japanese customer.
Canada Corp received the payment from its Japanese client on March 1, 2017. Canada Corp's year end is on December 31.
Selected spot rates were as follows: $$\begin{array} { | l | l | } 
\hline \text { December 1, 2016: } & 1 \text { Yen } = \text { CDN\$1.156 } \
\hline \text { December 3, 2016: } & 1 \text { Yen } = \text { CDN\$1.156 } \
\hline \text { December 31, 2016:} & 1 \text { Yen } = \text { CDN } \$ 1.1626 \
\hline \text { March 1, 2017: } & 1 \text { Yen } = \text { CDN } \$ 1.1750 \
\hline
\end{array}$$ The two-month forward rate on December 31, 2016 was 1Yen = CDN$1.1800.
-Prepare the journal entries to record the receipt of the 500,000 Yen on March 1, 2017, assuming that Canada Corp did not enter into a hedge transaction in December 2016.

Accepted Answer

The answer of Canada Corp. sells raw lumber to a...

Question 12

Canada Corp. sells raw lumber to a number of countries around the world. On December 1, 2016 the company shipped some lumber to a client in Japan. The selling price was established at 500,000 Yen with payment to be received on March 1, 2017.
On December 3, 2016 the company entered into a hedge with a Canadian Bank at the 90 day forward rate of 1 Yen = CDN$1.185. The forward contract was designated as a fair value hedge of the receivable from the Japanese customer.
Canada Corp received the payment from its Japanese client on March 1, 2017. Canada Corp's year end is on December 31.
Selected spot rates were as follows: $$\begin{array} { | l | l | } 
\hline \text { December 1, 2016: } & 1 \text { Yen } = \text { CDN\$1.156 } \
\hline \text { December 3, 2016: } & 1 \text { Yen } = \text { CDN\$1.156 } \
\hline \text { December 31, 2016:} & 1 \text { Yen } = \text { CDN } \$ 1.1626 \
\hline \text { March 1, 2017: } & 1 \text { Yen } = \text { CDN } \$ 1.1750 \
\hline
\end{array}$$ The two-month forward rate on December 31, 2016 was 1Yen = CDN$1.1800.
-Prepare a partial Balance Sheet for Canada Corp on December 31, 2016 showing the account receivable from the Japanese client as well as the accounts associated with the hedge.

Accepted Answer

The answer of Canada Corp. sells raw lumber to a...

Question 13

On January 1, 2014, GRL Inc. purchased, in U.S. Funds $500,000 of Bonds of the OBY Company. On that date, the Bonds were trading at par. These Bonds pay 10% interest annually each December 31. The Bonds mature on December 31, 2016. The following exchange rates were applicable between 2014 and 2016. The rates indicate the cost (in Canadian dollars) of purchasing 1 U.S. dollar:
 $$\begin{array} { | l | l | } 
\hline \text { January } 1,2014 & \text { CDN } \$ 1.4666 \
\hline \text { Average rate for } 2014 & \text { CDN } \$ 1.4570 \
\hline \text { December } 31,2014 & \text { CDN } \$ 1.4726 \
\hline \text { Auerage rate for } 2015 & \text { CDN } \$ 1.4600 \
\hline \text { December } 31,2015 & \text { CDN } \$ 1.4426 \
\hline \text { Average rate for } 2016 & \text { CDN } \$ 1.4500 \
\hline \text { December } 31,2016 & \text { CDN } \$ 1.4575 \
\hline
\end{array}$$
-Prepare GRL's journal entries for each of 2014, 2015 and 2016.

Accepted Answer

The answer of On January 1, 2014, GRL Inc. purchased,...

Question 14

IAS 39 Financial Instruments: Recognition and Measurement on speculative forward exchange contracts requires that the contract be:
A) revalued using spot rates throughout its life with any gains or losses to be deferred and amortized as they occur.
B) revalued at fair value throughout its life with any gains or losses to be deferred and amortized as they occur.
C) valued using spot rates throughout its life with any gains or losses to be taken into income as they occur.
D)revalued at fair value throughout its life with any gains or losses to be taken into income as they occur.

Accepted Answer

IAS 39 requires that speculative forward exchange contracts be revalued at fair value throughout their life, with any gains or losses recognized in profit or loss as they occur.

Question 15

What is the amount of the forward contract in Canadian dollars?
A) $70,500.
B) $70,950.
C) $71,850.
D)$72,000.

Accepted Answer

The answer of What is the amount of the forward...

Question 16

What is the amount of the premium on this contract?
A) CDN$1,500.
B) $450.
C) $900.
D)Nil.

Accepted Answer

The answer of What is the amount of the premium...

Question 17

What amount (in Canadian dollars) did North pay to its American supplier for the purchase of the inventory?
A) $686,700.
B) $694,500.
C) $697,500.
D)$703,500.

Accepted Answer

The answer of What amount (in Canadian dollars) did North...

Question 18

What is the required adjustment to ABC's accounts receivable at year-end as a result of this transaction?
A) CDN$450 decrease.
B) CDN$900 increase.
C) CDN$450 increase.
D)Nil.

Accepted Answer

The transaction results in ABC's accounts receivable increasing by CDN$450 (CDN$900 sales reduced by the payment of CDN$450). As a result, the required adjustment to ABC's accounts receivable at year-end is a CDN$450 increase.

Question 19

What amount (in Canadian dollars) should ABC expect to receive from its bank on May 1, 2016?
A) $70,500.
B) $70,950.
C) $71,850.
D)$72,000.

Accepted Answer

The answer of What amount (in Canadian dollars) should ABC...

Question 20

Prairie Dog Inc. borrowed US$10,000,000 on January 1, 2014 at an annual rate of 8%. The loan is due December 31, 2017 and interest is payable annually each December 31. The exchange rates on selected dates throughout the life of the loan are shown below: $$\begin{array} { | l | l | } 
\hline \text { January } 1,2014 & \text { CDN } \$ 1.4416 \
\hline \text { December } 31,2014 & \text { CDN } \$ 1.4325 \
\hline \text { December } 31,2015 & \text { CDN } \$ 1.4675 \
\hline \text { December } 31,2016 & \text { CDN } \$ 1.4436 \
\hline \text { December } 31,2017 & \text { CDN } \$ 1.4625 \
\hline
\end{array}$$ Assume that the average annual exchange rate was equal to the December 31S1U1P1stS1S1P0 spot rates.
-Calculate the exchange gains or losses that would be reported in the net income of the company for each year over the life of the loan.

Accepted Answer

The answer of Prairie Dog Inc. borrowed US$10,000,000 on January...

Quiz 10: Foreign Currency Transactions

What is the required adjustment to the carrying value of the forward contract at the company's year-end?

In which of the following situations is a gain or loss recorded on a commitment assets or liability which would not otherwise be recorded?

Prepare the December 31, 2016 Balance Sheet Presentation of the Receivable from the American client and the accounts associated with the hedge.

Which of the following provides the best hedge against exchange variations in the value of a stream of income in a foreign currency where the payments are expected to occur in equal amounts over a period of five years?

Which of the following statements is NOT correct?

Prepare the 2016 journal entries to record the above transactions. In addition, prepare any adjusting journal entries that you deem necessary.

IAS 39 Financial Instruments: Recognition and Measurement on speculative forward exchange contracts requires that the contract be:

What is the amount of the forward contract in Canadian dollars?

What is the amount of the premium on this contract?

What amount (in Canadian dollars) did North pay to its American supplier for the purchase of the inventory?

What is the required adjustment to ABC's accounts receivable at year-end as a result of this transaction?

What amount (in Canadian dollars) should ABC expect to receive from its bank on May 1, 2016?