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Exam 10: Foreign Currency Transactions

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Question 31

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On 6/1/X2, an American firm purchased inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/X2. Also on 6/1/X2, the American firm acquired an option for $1,500 to purchase 100,000 Canadian dollars for delivery on 8/1/X2. The strike price for the option was $0.685. The exchange rates were as follows: The American firm's fiscal year end is June 30, 20X2. What is the net gain or loss recognized in the financial statements for the year ended June 30, 20X2?

A) $2,000 loss
B) $1,000 loss
C) $0
D) $1,000 gain

E) B) and C)
F) C) and D)

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Question 32

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A U.S. Corp. purchased a computer from a French firm on July 1, 20X5, when a Euro cost $0.25. The U.S. firm will be required to pay the French manufacturer 75,000 Euros on August 1, 20X5, when the Euro costs $0.23. Required: Make the necessary journal entries for the U.S. firm on July 1 and August 1.

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Question 33

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The purpose of a hedge on an identifiable commitment where the U.S. company is selling goods is to:

Foreign currency transactions not involving a hedge should be accounted for using

When an economic transaction is denominated in a currency other than the entity's domestic currency, the entity must establish a

To qualify for fair value hedge accounting, a company must document all but:

Lion Corporation, a U.S. firm, entered into several foreign currency transactions during the year. Determine the effect of each transaction on net income for that current accounting year only. Lion has a June 30 year end. Required: a.On January 15, Lion sold $30,000 (Canadian) in merchandise to a Canadian firm, to be paid for on February 15 in Canadian dollars. Canadian dollars were worth $0.85 (U.S.) on January 15 and $0.82 (U.S.) on February 15. b.On June 1, Lion purchased and received a computer costing 100,000 euros from a German firm. Lion paid for the computer on August 1. On June 1, to reduce exchange risks, Lion purchased a contract to buy 100,000 marks in 60 days. Exchange rates are as follows: Discount rate = 6% c.On June 1, Lion sold merchandise to a customer for 100,000 FC and purchased an option to sell 100,000 FC in 60 days to hedge the receivable. The option sold for a premium of $6,500 and a strike price of $1.20. The value of the option 6/30 was $12,500. The spot rate on June 1 was $1.19 and $1.25 on June 30.

Pile, Inc. purchased merchandise for 500,000 FC from a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. On the same day, Pile signed an agreement with a foreign exchange broker to buy 500,000 FC on January 31, 20X6. Exchange rates to purchase 1 FC are as follows: What will be the adjustment to the account payable included in the journal entry record on December 31, 20X5?

Happ, Inc. agreed to purchase merchandise from a British vendor on November 30, 20X3. The goods will arrive on January 31, 20X4 and payment of 100,000 British pounds is due at that time. On November 30, 20X3, Happ signed an agreement with a foreign exchange broker to buy 100,000 British pounds on January 31, 20X4. Exchange rates to purchase 1 British pound are as follows: Because of this commitment hedge, Happ, Inc. will record the merchandise at what value when it arrives in January?

On August 1, 20X1, an American firm purchased a machine costing 200,000,000 yen from a Japanese firm to be paid for on October 1, 20X1. Also on August 1, 20X1, the American firm entered into a contract to purchase 200,000,000 yen to be delivered on October 1, 20X1, at a forward rate of 1 Yen = $0.00783. The exchange rates were as follows: Which of the following statements is incorrect concerning the accounting treatment of these transactions?

On 6/1/X2, an American firm sold inventory costing 100,000 Euro from a Dutch firm with payment to be received on 8/1/X2. Also on 6/1/X2, the American firm acquired an option for $1,500 to sell 100,000 Euro on 8/1/X2. The strike price for the option was $1.21. The exchange rates were as follows: The American firm's fiscal year end is June 30, 20X2. What is the net gain or loss recognized in the financial statements for the year ended June 30, 20X2?

Zerlie's Imports purchased automotive parts from a German firm on July 1, 20X1. The parts cost 150,000 Euros to be paid for on August 15. To pay for the parts, Zerlie's Imports borrowed 150,000 euros from a German bank on July 16. The loan bears an 11% interest rate to be repaid on August 15 in euros. Another option would have been for Zerlie's to have hedged the purchase with a forward exchange contract on July 1 to buy 150,000 euros at a forward rate of $0.67. Exchange rates were as follows: Required: a.Compute the effect on net income assuming the following:(1)Zerlie did not borrow to pay for the transaction or hedge the transaction on July 1.(2)Zerlie borrowed from the German bank on July 16.(3)Zerlie hedged the full purchase on July 1.** ignore present values and discount rates b.Determine which of these three alternatives would have been the best for Zerlie under the situation described.

A U.S. manufacturer has sold goods to a foreign firm for a sale price of 80,000 FC on 12/15/X1. The invoice is due 1/15/X2. The U.S. Firm fiscal year is 12/31/X1. Given the following exchange rates, what gain or loss would the U.S. firm record on 12/31? 12/15 1FC = $0.60 US Dollars 12/31 1FC = $0.65 US Dollars 1/15 1FC = $0.63 US Dollars

Wolters Corporation is a U.S. corporation that purchased 50,000 chocolate bars from a foreign manufacturer on March 1, 20X9 for 80,000 foreign currency units, to be paid on April 30, 20X9. On March 1, 20X9 Wolters also entered into a forward contract to purchase 80,000 foreign currency units on April 30, 20X9. Wolters has a March 31 year end. Exchange rates are as follows: Required: Prepare the journal entries to record the transactions through April 30, 20X9. March 31 is the fiscal period end. Ignore the split between spot gain/loss and time value.

On September 15, 20X2, Wall Company, a U.S. firm, purchased a piece of equipment from a foreign firm for 500,000 FC. Payment for the equipment was to be made in FC on January 15, 20X3. The spot rates on selected dates were as follows: Required: a.Assuming that the US Corp. has a December 31 year end, prepare the necessary journal entries to account for the series of transactions involving the purchase. b.Prepare all the necessary journal entries assuming that the US Corp. will be paying for the equipment in U.S. dollars.

Larson, Inc. sold merchandise for 600,000 FC to a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. On the same day, Larson signed an agreement with a foreign exchange broker to sell 600,000 FC on January 31, 20X6. The discount rate is 8% and exchange rates to purchase 1 FC are as follows: What is the net amount of the gains or losses recognized in the financial statements for the year ended December 31, 20x5?

Blue & Green, Inc. sold merchandise for 100,000 FC to a foreign vendor on December 1, 20X5. Payment in FC is due January 31, 20X6. On December 1, 20X5, Blue & Green purchased an option for $500 to sell 100,000 FC at $1.45 on January 30, 20X6. Exchange rates to sell 1 FC are as follows: Fiscal Year End is 12/31. Required: Prepare the journal entries for December 1 through January 31 related to the events described above. Ignore Cost of Goods Sold.

In a hedge of a forecasted transaction, gains or losses on derivative instruments prior to the occurrence of the actual transaction should be reported as

The time value of an option is the difference between the

A U.S. manufacturer has sold computer services to a foreign firm, billed the firm and later received 200,000 foreign currency units (FC) . The exchange rates were 1 FC = $.75 on the date of the sale and 1 FC = $.80 when the receivable was settled. On the transaction date, the settlement exchange rate is estimated to be 1 FC = $.72. By the settlement date, what is the total exchange gain or loss recorded for the transaction if the two-transaction method is used?