Test bank advanced accounting 10e by beams chapter 12

On May 1, 20X3, Emu Corporation purchased merchandise from a Danish firm for 198,000 Danish krone when the spot rate for krone was 5.200 krone per dollar.. What entry did Cassowary make

Chapter 12 Test Bank FOREIGN CURRENCY CONCEPTS AND TRANSACTIONS

Multiple Choice Questions

LO1

1 On May 1, 20X3, Emu Corporation purchased merchandise from a

Danish firm for 198,000 Danish krone when the spot rate for krone was 5.200 krone per dollar The account payable was denominated in krone Emu settled the account on September 1 when the spot rate for krone was 5.345 krone per dollar How much cash will Emu have to disburse to settle the account?

2 Cassowary Corporation’s balance sheet at December 31, 20X3

included a $20,400 account receivable from Quail Corporation of Australia The account receivable was denominated as 30,000 Australian dollars (A$) What entry did Cassowary make on January 16, 20X3 when the account receivable was collected and the exchange rate for A$ was $.67?

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LO2

3 The exchange rates between the Australian dollar and the US

dollar were as follows:

Jun 1 1$AUS = $.71US

Jul 1 1$AUS = $.73US

Aug 1 1$AUS = $.79US

Sep 1 1$AUS = $.83US

This chart shows a

a strengthening Australian Dollar which makes it less

expensive for Americans to buy Australian goods

b weakening Australian dollar which makes it less expensive for Americans to buy Australian goods

c strengthening Australian dollar which makes it more

expensive for Americans to buy Australian goods

d weakening Australian dollar which makes it more expensive for Americans to buy Australian goods

LO2

4 Which of the following factors will affect the spread between

spot and forward rates?

a The current cross rate between two currencies

b The length of time for the forward contract

c The currency denominated as the domestic currency

d All of the above will affect the spread

LO2

5 A US importer that purchased merchandise from a South Korean

firm would be exposed to a net exchange gain on the unpaid balance if the

Use the following information for Questions 6 and 7

On November 1, 20X3, Magpie Corporation sold merchandise to William Tell Corporation, a Swiss firm Magpie measured and recorded the account receivable from the sale at $78,000 William Tell paid for this account on November 30, 20X3 Spot rates for Swiss francs on November 1 and November 30, respectively, were $0.80 and $0.78

LO3

6 If the sale of the merchandise was denominated in francs, the

November 30 entry to record the receipt of payment from William Tell included a

a credit to Accounts Receivable for $76,050

b credit to Exchange Gain for $1,950

c debit to Cash for $78,000

d debit to Exchange Loss for $1,950

LO3

7 If the sale of merchandise is denominated in dollars, the

November 30 entry to record receipt of the payment from William Tell included a

a debit to Cash for $78,000

b debit to Cash for $76,050

c credit to Exchange Gain for $1,950

d credit to Accounts Receivable for $76,050

LO3

8 On December 5, 20X3, Goose Corporation, a US firm, bought

inventory items from Grebes Corporation of Norway for 1,000,000 Norwegian krone when the spot rate for krone was $0.168 At Goose’s December 31, year-end, the spot rate was $0.167 On January 4, 20X4, Goose purchased 1,000,000 krone for $167,500 and paid the invoice How much gain or (loss) did Goose report

in its 20X3 and 20X4, respectively, income statements?

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Use the following information for Questions 9 and 10

10 What is the final amount of the loan payable that Duck showed

on its books, in dollars, just before it repaid the loan?

On November 2, 20X5, Swan Corporation entered into a 90-day contract

to sell 220,000 kiwis in a transaction accounted for as speculation The spot rate for kiwis on November 2 was $0.74 and the current quotation for 90-day futures was $0.68 On December 31, 20X3, the spot rate was $0.78 and the quotation for 30-day futures was $0.35

13 Under which of the following situations must a discount on a

forward contract be amortized to income over the life of the contract?

a If the contract is a hedge of a net asset position

b If the contract is a speculation in currency

c If the contract is a hedge of a foreign currency

commitment

d Under none of the above would a discount on a forward contract be amortized to income over the life of the contract

LO4

14 A forward exchange contract is transacted at a discount if the

current forward rate is

a less than the current spot rate

b more than the current spot rate

c less than the expected spot rate

d more than the expected spot rate

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c It requires no net settlement

d It will be represented as an asset or liability on the financial statements

b An importer will want to hedge his foreign denominated accounts payable and will purchase forward contracts to hedge an exposed net liability position

c An exporter will want to hedge his foreign denominated accounts receivable and will purchase forward contracts to hedge an exposed net liability position

d An exporter will want to hedge his foreign denominated accounts payable and will purchase forward contracts to hedge an exposed net liability position

LO6

18 Which of the following techniques can be used to measure hedge

effectiveness?

a Critical term analysis

b Contribution margin analysis

c Present value analysis

c Cash flow hedge

d Hedge of net investment in a foreign subsidiary

LO7

20 If a financial instrument is classified as a cash flow hedge,

then

a its gains or losses are represented in the income statement

if a year-end occurs before the settlement date

b it is classified as a held-to-maturity asset

c it does not require a notational amount

d its gains or losses are represented in the balance sheet if

a year-end occurs before the settlement date

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LO2

Exercise 1

On September 1, 20X5, Cormorant Company purchased merchandise from

Osaka Company of Japan for 20,000,000 yen payable on October 1, 20X5

The spot rate for yen was $0.0079 on September 1 and the spot rate

was $0.0077 on October 1

Required:

1 Did the exchange rate strength or weaken from September to October

and what are the implications for Cormorant’s business?

2 What journal entry did Cormorant record on September 1, 20X5?

3 What journal entry did Cormorant record on October 1, 20X5?

LO3

Exercise 2

On October 15, 20X5, Ibis Corporation, a French company, ordered

merchandise listed on the Internet for 20,000 Euros from Spoonbill

Corporation, a US corporation, which immediately accepted the order

The Euro rate was $1.20 US on October 15 On November 15, 20X5

Spoonbill shipped the goods and billed Ibis the purchase price of

20,000 Euros when the Euro rate was $1.30 US Ibis paid the bill on

December 10, 20X5 Three days later Spoonbill exchanged the 20,000

Euros for US dollars when the Euro rate was $1.28US

Required:

Compute the foreign currency gains or losses on the December 31, 20X5

financial statements and show your calculations

LO3

Exercise 3

On November 1, 20X3, the Penguin Corporation, a US corporation, purchased

an extruding machine from Shearwater Corporation, a UK company The purchase price was $10,000 and Penguin agreed to pay in pounds on February

1, 20X4 Both corporations are on a calendar year accounting period Assume that the spot rates for the British pound on November 1, 20X3, December 31, 20X3, and February 1, 20X4, are $1.60, $1.62, and $1.66, respectively Required:

Record the November 1, December 31, and February 1 transactions in the

General Journals of Penguin Corporation and Shearwater Corporation If no entry is required on a particular date, indicate “No entry” in the General Journal

LO4

Exercise 4

On November 1, 20X3, Petrel Corporation, a calendar-year US corporation, invested in a purely speculative contract to purchase 1 million yen on January 30, 20X4, from the Karoke Trading Company, a Japanese brokerage firm Petrel agreed to purchase 1,000,000 yen from Karoke at a fixed price of $0.0100 per yen Karoke agreed to transmit 1,000,000 yen to Petrel on February 1, 20X4 The spot rates for yen are:

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LO7

Exercise 6

0n June 1, 20X5, Stork Industries purchases an option contract for

$5,000 on 10,000 gallons of aviation gas to minimize its purchasing cost price exposure At the time, the market price is $2.50 per gallon and the option price of $2 per gallon will expire 6 months later Stork can exercise the option at its discretion When Stork prepares quarter reports on June 30, the option is worth $4.50 and Stork is still holding it

On August 1, Stork exercises the option when the gas market price is

$5.00 per gallon and purchases 40,000 gallons of gas On August 15, Stork uses all of the gas on a charter flight

The relevant exchange rates are of dollars per pound:

(for Feb 1, 20X6) November 1, 20X5 1.32 1.35

Required:

1.What journal entry did Pelican record on November 1, 20X5?

2.What journal entry did Pelican record on December 1, 20X5?

3.What journal entry did Pelican record on February 1, 20X6 if the purchase was made?

LO8

Exercise 8

On November 1, 20X3, Darter Corporation, a US corporation, purchased from Jacana Corporation, a Mexican company, some machinery that cost 1,000,000 pesos The invoice was payable in pesos on January 30, 20X4 To hedge against rapid changes in the peso, Darter entered into

a forward exchange contract on November 1, 20X3 with AB Trader & Company, a US brokerage and investment firm The contract specified that AB Trader would sell 1,000,000 pesos to Darter at $0.102 per peso for settlement on January 30, 20X4

Assume that all three companies are subject to the same accounting standards and have December 31st year-ends The spot rates for pesos

on November 1, December 31, and January 30, are $0.100, $0.098, and

$0.107, respectively The 30-day forward rate for pesos on December

31, 20X3 is $0.101

Required:

Record General Journal entries for Darter Corporation on November 1, December 31, and January 30 If no entry is required on a particular date, indicate “No entry” in the General Journal

to hedge its exposed liability position The account payable to Seoul

is due on January 30, 20X4 The exchange rates on December 31, 20X3and January 30, 20X4 were $1 = 730W, and $1 = 700W, respectively Gannet agreed to pay Seoul in won Tokyo held the deposit in won but will remit dollars back to Gannet on January 30th

Assume that Gannet, Seoul and Tokyo are subject to the same accounting standards and have December 31 year-ends

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LO8

Exercise 10

On November 1, 20X5, US Frigatebird Company sold an airplane worth $1 million Australian dollars to Australian company Heron Inc to be delivered on February 1, 20X6 in Sydney In order hedge foreign exchange, Frigatebird entered into a 90 day forward contract on the same day for the amount of the sale at 73 US per Australian dollar The relevant exchange rates are of US dollars per Australian dollar:

1.What journal entry did Frigatebird record on November 1, 20X5?

2.What journal entry did Frigatebird record on December 1, 20X5?

3.What journal entry did Frigatebird record on February 1, 20X6 if the purchase was made?

SOLUTIONS

Multiple Choice Questions

1 a (198,000 krone/5.345 krone per dollar) = $37,043.97

2 b 30,000 x 67 = 20,100; $20,100 - $20,400 = $300 loss

3 c

4 b

5 c

6 d $78,000/.80 dollars per franc = 97,500

$78,000/.78 dollars per franc = 100,000

Difference in dollars (2,500) x 78 = $ (1,950)

7 b $97,500 francs (from 6 above) x 78 = $76,050

8 d Account payable, Dec 05, 20X3

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A $1,042 foreign exchange loss

Spoonbill’s General Journal

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Penguin’s General Journal

Shearwater’s General Journal

11/01/X1 Accounts Receivable: Penguin 6,250

12/31/X1 No entry

Accounts Receivable: Penguin 6,250

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Exercise 6

Stork’s General Journal

6/01/X5 Aviation gas contract option 5,000

6/30/X5 Aviation gas contract option 20,000

Other comprehensive income 20,000

rate

1.32x200,000(1+r)3=1.35x200,000 r=0.007519

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Exercise 8

Darter’s General Journal

Accounts Payable:Jacana(pesos) Cash-pesos

107,000102,000

107,000

107,000102,000

107,000

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01/30/X2 Accounts Payable: Seoul 857,143

02/01/X6 Exchange rate loss 67,510