Question 1

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, a...

Question 2

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 3

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 4

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 converting the foreign currency back into dollars. This will result in a foreign exchange gain.

Question 5

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: $\begin{array}{|l|c|c|}
\hline {\text { Date }} & \text { Spot Rate } &  \text { Option Premium } \
\hline \text { December 1,2011 } & \$ .97 &  \$ .05 \
\hline \text { December 31,2011 } & \$ .95 & \$ .04 \
\hline \text { February 1,2012 } & \$ .94 & \$ .03 \
\hline
\end{array}$
-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, 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

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 answer of Which of the following approaches is used...

Question 8

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 to manage foreign currency risk in future sales or purchases. The purpose of hedge accounting is to match the gains or losses on the hedging instrument with the losses or gains on the underlying exposure being hedged. Therefore, hedge accounting is used for future sales or purchases. Choice A and B are incorrect because hedges of foreign currency firm commitments are not limited to future sales or purchases only. Choice C is incorrect because hedges of current sales or purchases are not firm commitments, they are already existing positions. Choice E is incorrect because hedging is not speculative, it is a risk management tool.

Question 9

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 transaction is denominated in U.S. dollars, there is no exposure to foreign exchange risk and hence, no foreign exchange gain or loss will result.

Question 10

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

Angela recorded a foreign exchange gain on the euro receivable, indicating the euro increased in dollar value. The gain on the pound payable indicates the pound decreased in dollar value.

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

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: $\begin{array}{|l|c|c|}
\hline {\text { Date }} & \text { Spot Rate } &  \text { Option Premium } \
\hline \text { December 1,2011 } & \$ .97 &  \$ .05 \
\hline \text { December 31,2011 } & \$ .95 & \$ .04 \
\hline \text { February 1,2012 } & \$ .94 & \$ .03 \
\hline
\end{array}$
-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 fair value of the option is calculated as the intrinsic value plus the time value. On December 31, 2011, the intrinsic value is (strike price - spot rate) x amount in CAD = ($0.97 - $0.95) x 150,000 CAD = $3,000. The time value is the option premium on December 31, 2011, which is $0.04 x 150,000 CAD = $6,000. Therefore, the fair value is $3,000 + $6,000 = $9,000. However, the intrinsic value is already included in the premium, so the fair value is $6,000.

Question 13

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 foreign exchange gain or loss is calculated as the difference between the exchange rate at the time the receivable was recorded and the exchange rate at the time the receivable was collected. In this case, Alpha recorded the receivable at an exchange rate that implied a value of $8,000 for 75,000 pesos, or $0.1067 per peso ($1 ÷ $0.1067 = 9.37 pesos). When the receivable was collected, the exchange rate had changed so that 75,000 pesos were worth only $6,900, or $0.092 per peso ($1 ÷ $0.092 = 10.87 pesos). Therefore, Alpha will record a foreign exchange loss of ($0.092 - $0.1067) × 75,000 pesos = $1,100.

Question 14

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, a...

Question 15

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 sale is denominated in U.S. dollars, it is not subject to foreign exchange fluctuations. Therefore, no foreign exchange gain or loss will result.

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: $\begin{array}{|l|c|c|}
\hline {\text { Date }} & \text { Spot Rate } &  \text { Option Premium } \
\hline \text { December 1,2011 } & \$ .97 &  \$ .05 \
\hline \text { December 31,2011 } & \$ .95 & \$ .04 \
\hline \text { February 1,2012 } & \$ .94 & \$ .03 \
\hline
\end{array}$
-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, a...

Question 17

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 need to exchange currencies and thus no foreign exchange gain or loss.

Question 18

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: $\begin{array}{|l|c|c|}
\hline {\text { Date }} & \text { Spot Rate } &  \text { Option Premium } \
\hline \text { December 1,2011 } & \$ .97 &  \$ .05 \
\hline \text { December 31,2011 } & \$ .95 & \$ .04 \
\hline \text { February 1,2012 } & \$ .94 & \$ .03 \
\hline
\end{array}$
-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, a...

Question 19

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

U.S. GAAP does not provide specific guidance for hedges of deferred foreign currency gains and losses.

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

The fair value of a forward contract can be determined by comparing the forward rate to the current forward rate for a contract that matures on the same date. The discount rate and the company's incremental borrowing rate may also be needed to determine the fair value. However, the future spot rate cannot be known for certain and cannot be used to determine the fair value of a forward contract.

Quiz 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

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

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

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.

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

Which of the following statements is true concerning hedge accounting?

A U.S. company buys merchandise from 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 sells merchandise to a foreign company denominated in U.S. dollars. 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?

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

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