Test bank with answers for advanced accounting 3e by jeter chapter 12

A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a: a.. A transaction

Chapter 12 Accounting for Foreign Currency Transactions And Hedging Foreign Exchange Risk

Multiple Choice

1 A discount or premium on a forward contract is deferred and included in the measurement of the

related foreign currency transaction if the contract is classified as a:

a hedge of a net investment in a foreign entity

b hedge of an exposed asset or liability position

c hedge of an identifiable foreign currency commitment

d contract acquired to speculate in the movement of exchange rates

2 The discount or premium on a forward contract entered into as a hedge of an exposed asset or

liability position should be:

a included as a separate component of stockholders‟ equity

b amortized over the life of the forward contract

c deferred and included in the measurement of related foreign currency transaction

d none of these

3 An indirect exchange rate quotation is one in which the exchange rate is quoted:

a in terms of how many units of the domestic currency can be converted into one unit of foreign currency

b for the immediate delivery of currencies exchanged

c in terms of how many units of the foreign currency can be converted into one unit of domestic currency

d for the future delivery of currencies exchanged

4 A transaction gain is recorded when there is an:

a importing transaction and the exchange rate increases

b exporting transaction and the exchange rate increases

c exporting transaction and the exchange rate decreases

d none of these

5 During 2011, a U.S company purchased inventory from a foreign supplier The transaction was

denominated in the local currency of the seller The direct exchange rate increased from the date of the transaction to the balance sheet date The exchange rate decreased from the balance sheet date to the settlement date in 2012 For the years 2011 and 2012, transaction gains or losses should be recognized as:

6 A transaction gain or loss is reported currently in the determination of income if the purpose of the

forward contract is to:

a hedge a net investment in a foreign entity

b hedge an identifiable foreign currency commitment

c speculate in foreign currency

d none of these

7 On November 1, 2011, American Company sold inventory to a foreign customer The account will

be settled on March 1 with the receipt of $500,000 foreign currency units (FCU) On November 1, American also entered into a forward contract to hedge the exposed asset The forward rate is $0.70 per unit of foreign currency American has a December 31 fiscal year-end Spot rates on relevant dates were:

8 On November 1, 2011, American Company sold inventory to a foreign customer The account will

be settled on March 1 with the receipt of $450,000 foreign currency units (FCU) On November 1, American also entered into a forward contract to hedge the exposed asset The forward rate is $0.70 per unit of foreign currency American has a December 31 fiscal year-end Spot rates on relevant dates were:

9 A transaction gain or loss at the settlement date is:

a a change in the exchange rate quoted by a foreign exchange trader

b synonymous with the translation of foreign currency financial statements into dollars

c the difference between the recorded dollar amount of an account receivable denominated in a foreign currency and the amount of dollars received

d the difference between the buying and selling rate quoted by a foreign exchange trader at the settlement date

10 From the viewpoint of a U.S company, a foreign currency transaction is a transaction:

a measured in a foreign currency

b denominated in a foreign currency

c measured in U.S currency

d denominated in U.S currency

11 The exchange rate quoted for future delivery of foreign currency is the definition of a(n):

a direct exchange rate

b indirect exchange rate

c spot rate

d forward exchange rate

12 A transaction loss would result from:

a an increase in the exchange rate applicable to an asset denominated in a foreign currency

b a decrease in the exchange rate applicable to a liability denominated in a foreign currency

c the import of merchandise when the transaction is denominated in a foreign currency

d a decrease in the exchange rate applicable to an asset denominated in a foreign currency

13 The forward exchange rate quoted for the remaining term of a forward contract is used to account

for the contract when the forward contract:

a extends beyond one year or the current operating cycle

b is a hedge of an identifiable foreign currency commitment

c is a hedge of an exposed net liability position

d was acquired to speculate in foreign currency

14 A transaction gain or loss on a forward contract entered into as a hedge of an identifiable foreign

currency commitment may be:

a included as a separate item in the stockholders‟ equity section of the balance sheet

b recognized currently in the determination of net income

c deferred and included in the measurement of the related foreign currency transaction

d none of these

15 Craiger, Inc a U.S corporation, bought machine parts from Reinsch Company of Germany on

March 1, 2011, for 70,000 marks, when the spot rate for marks was $0.5395 Craiger‟s year-end was March 31, 2011, when the spot rate for marks was $0.5445 Craiger bought 70,000 marks and paid the invoice on April 20, 2011, when the spot rate was $0.5495 How much should be shown in Craiger‟s income statements as foreign exchange (transaction) gain or loss for the years ended March 31, 2011 and 2012?

16 A forward exchange contract is transacted at a discount if the current forward rate is:

a less than the expected spot rate

b more than the expected spot rate

c less than the current spot rate

d more than the current spot rate

17 Stuart Corporation a U.S company, contracted to purchase foreign goods Payment in foreign

currency was due one month after delivery Between the delivery date and the time of payment, the exchange rate changed in Stuart‟s favor The resulting gain should be reported in the financial statements as a(n):

a component of other comprehensive income

b component of income from continuing operations

c extraordinary income

d deferred income

18 Jackson Paving Company purchased equipment for 350,000 British pounds from a supplier in

London on July 7, 2011 Payment in British pounds is due on Sept 7, 2011 The exchange rates to purchase one pound is as follows:

July 7 August 31, (year end) September 7

19 On September 1, 2011, Swash Plating Company entered into two forward exchange contracts to

purchase 250,000 euros each in 90 days The relevant exchange rates are as follows:

Forward Rate

The first forward contract was to hedge a purchase of inventory on September 1, payable on

December 1 On September 30, what amount of foreign currency transaction loss should Swash Plating report in income?

a $0

b $2,500

c $5,000

d $10,000

20 On September 1, 2011, Swash Plating Company entered into two forward exchange contracts to

purchase 250,000 euros each in 90 days The relevant exchange rates are as follows:

21 On November 1, 2011, Prism Company sold inventory to a foreign customer The account will be

settled on March 1 with the receipt of 250,000 foreign currency units (FCU) On November 1, Prism also entered into a forward contract to hedge the exposed asset The forward rate is $0.90 per unit of foreign currency Prism has a December 31 fiscal year-end Spot rates on relevant dates were:

22 On November 1, 2011, National Company sold inventory to a foreign customer The account will be

settled on March 1 with the receipt of 200,000 foreign currency units (FCU) On November 1, National also entered into a forward contract to hedge the exposed asset The forward rate is $0.80 per unit of foreign currency National has a December 31 fiscal year-end Spot rates on relevant dates were:

23 Caldron Company purchased equipment for 375,000 British pounds from a supplier in London on

July 3, 2011 Payment in British pounds is due on Sept 3, 2011 The exchange rates to purchase one pound is as follows:

July 3 August 31, (year end) September 3

On its August 31, 2011, income statement, what amount should Caldron report as a foreign

exchange transaction gain:

a $18,750

b $3,750

c $11,250

d $0

24 On April 1, 2011, Trent Company entered into two forward exchange contracts to purchase 300,000

euros each in 90 days The relevant exchange rates are as follows:

Forward Rate Spot rate For Aug 1, 2011

The first forward contract was to hedge a purchase of inventory on April 1, payable on December 1

On April 30, what amount of foreign currency transaction loss should Trent report in income?

a $0

b $3,000

c $9,000

d $12,000

25 On April 1, 2011, Trent Company entered into two forward exchange contracts to purchase 300,000

euros each in 90 days The relevant exchange rates are as follows:

Forward Rate Spot rate For Aug 1, 2011

Problems

12-1 On November 1, 2010, Dorsey Company sold inventory to a company in England The sale was for

600,000 British pounds and payment will be received on February 1, 2011 On November 1, Dorsey entered into a forward contract to sell 600,000 British pounds on February 1 at the forward rate of

$1.65 Spot rates for the British pound are as follows:

Compute each of the following:

1 The dollars to be received on February 1, 2011, from selling the 600,000 pounds to the exchange

dealer

2 The dollars that would have been received from the account receivable if Dorsey had not hedged the

sale contract with the forward contract

3 The discount or premium on the forward contract

4 The transaction gain or loss on the exposed asset related to the sale in 2010 and 2011

5 The transaction gain or loss on the forward contract in 2010 and 2011

6 The amount of the discount or premium on the forward contract amortized in 2010 and 2011 12-2 On December 1, 2010, Derrick Corporation agreed to purchase a machine to be manufactured by a

company in Brazil The purchase price is 1,150,000 Brazilian reals To hedge against fluctuations in the exchange rate, Derrick entered into a forward contract on December 1 to buy 1,150,000 reals on April 1, the agreed date of machine delivery, for $0.375 per real The following exchange rates were quoted:

12-3 Colony Corp., a U.S corporation, entered into a contract on November 1, 2010, to sell two

machines to Crown Company, for 95,000 foreign currency units (FCU) The machines were to be delivered and the amount collected on March 1, 2011

In order to hedge its commitment, Colony entered into a forward contract for 95,000 FCU delivery

on March 1, 2011 The forward contract met all conditions for hedging an identifiable foreign currency commitment

Selected exchange rates for FCU at various dates were as follows:

Forward rate for delivery on March 1, 2011 1.2980

Forward rate for delivery on March 1, 2011 1.3150

Required:

Prepare all journal entries relative to the above on the books of Colony Corp on the following dates:

1 November 1, 2010

2 Year-end adjustments on December 31, 2010

3 March 1, 2011 (Include all adjustments related to the forward contract.)

12-4 On October 1, 2010, Nance Company purchased inventory from a foreign customer for 750,000 units

of foreign currency (FCU) due on January 31, 2011 Simultaneously, Nance entered into a forward contract for 750,000 units of FC for delivery on January 31, 2011, at the forward rate of $0.75 Payment was made to the foreign customer on January 31, 2011 Spot rates on October 1, December

31, and January 31, were $0.72, $0.73, and $0.76, respectively Nance amortizes all premiums and discounts on forward contracts and closes its books on December 31

Required:

A Prepare all journal entries relative to the above to be made by Nance on October 1, 2010

B Prepare all journal entries relative to the above to be made by Nance on December 31, 2010

C Compute the transaction gain or loss on the forward contract that would be recorded in 2011

Indicate clearly whether the amount is a gain or loss

12-5 On October 1, 2010, Kline Company shipped equipment to a foreign customer for a foreign currency (FC) price of FC 3,000,000 due on January 31, 2011 All revenue realization criteria were satisfied and accordingly the sale was recorded by Kline Company on October 1 Simultaneously, Kline entered into a forward contract to sell 3,000,000 FCU on January 31, 2011 for $1,200,000 Payment was received from the foreign customer on January 31, 2011 Spot rates on October 1, December 31, and January 31 were $0.42, $0.425, and $0.435, respectively Kline amortizes all premiums and discounts on forward contracts and closes its books on December 31

Required:

Prepare all journal entries relative to the above to be made by Kline during 2010 and 2011

12-6 On July 15, Worth, Inc purchased 88,500,000 yen worth of parts from a Tokyo company paying

20% down, and the balance is due in 90 days Interest is payable at a rate of 8% on the unpaid balance The exchange rate on July 15, was $1.00 = 118 Japanese yen On October 13, the exchange rate was $1.00 = 114 Japanese yen

Required:

Prepare journal entries to record the purchase and payment of this foreign currency transaction in U.S dollars

12-7 On November 1, 2010, Bisk Corporation, a calendar-year U.S Corporation, invested in a

speculative contract to purchase 700,000 euros on January 31, 2011, from a German brokerage firm Bisk agreed to buy 700,000 euros at a fixed price of $1.46 per euro The brokerage firm agreed to send 700,000 euros to Bisk on January 31, 2011 The spot rates for euros are:

November 1, 2010 1 euro = 1.45 December 31, 2010 1 euro = 1.43 January 31, 2011 1 euro = 1.44

Required:

Prepare the journal entries that Bisk would record on November 1, December 31, and January 31

12-8 Consider the following information:

1 On November 1, 2011, a U.S firm contracts to sell equipment (with an asking price of 500,000 pesos) in Mexico The firm will take delivery and will pay for the equipment on February 1,

Short Answer

1 Accounting for a foreign currency transaction involves the terms measured and denominated Describe

a foreign currency transaction and distinguish between the terms measured and denominated

2 There are a number of business situations in which a firm may acquire a forward exchange contract Identify three common situations in which a forward exchange contract can be used as a hedge

Short Answer Questions from the Textbook

1 Define currency exchange rates and distinguish between “direct” and “indirect” quotations

2 Explain why a firm is exposed to an added risk when it enters into a transaction that is to be settled

in a foreign currency

3 Name the three stages of concern to the accountant in accounting for import–export transactions

Briefly explain the accounting for each stage

4 How should a transaction gain or loss be reported that is related to an unsettled receivable recorded

when the firm‟s inventory was exported?

5 A U.S firm carried a receivable for 100,000 yen Assuming that the direct exchange rate declined

from $.009 at the date of the transaction to $.006at the balance sheet date, compute the transaction gain or loss What balance would be reported for the receivable in the firm‟s balance sheet?

6 Explain what is meant by the “two-transaction method” in recording exporting or importing

trans-actions What support is given for this method?

7 Describe a forward exchange contract

8 Explain the effects on income from hedging a foreign currency exposed net asset position or net

liability position

9 What criteria must be satisfied for a foreign currency transaction to be considered a hedge of an

identifiable foreign currency commitment?

10 The FASB classifies forward contracts as those acquired for the purpose of hedging and those

acquired for the purpose of speculation What main differences are there in accounting for these two classifications?

11 How are foreign currency exchange gains and losses from hedging a forecasted transaction handled?

12 What is a put option, and how might it be used to hedge a forecasted transaction?

13 Define a derivative instrument, and describe the keystones identified by the FASB for the

ac-counting for such instruments

14 Differentiate between forward-based derivatives and option-based derivatives