Sie sind auf Seite 1von 135

Chapter 09

Foreign Currency Transactions and Hedging Foreign Exchange


Risk

Multiple Choice Questions

1. Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April
8, 2013. Pigskin received payment of 35,000 British pounds on May 8, 2013. The
exchange rate was 1 = $1.54 on April 8 and 1 = 1.43 on May 8. What amount of
foreign exchange gain or loss should be recognized? (round to the nearest dollar)

A. $10,500 loss
B. $10,500 gain
C. $1,750 loss
D. $3,850 loss
E. No gain or loss should be recognized.

2. Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of
10,000 British pounds to be received in sixty days. The pertinent exchange rates
were as follows:

For what amount should Sales be credited on December 1?

A. $5,500.
B. $16,949.
C. $18,182.
D. $17,241.
E. $16,667.

9-1
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3. Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of
10,000 British pounds to be received in sixty days. The pertinent exchange rates
were as follows:

What amount of foreign exchange gain or loss should be recorded on December 31?

A. $300 gain.
B. $300 loss.
C. $0.
D. $941 loss.
E. $941 gain.

4. Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of
10,000 British pounds to be received in sixty days. The pertinent exchange rates
were as follows:

What amount of foreign exchange gain or loss should be recorded on January 30?

A. $1,516 gain.
B. $1,516 loss.
C. $575 loss.
D. $500 loss.
E. $500 gain.

9-2
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5. Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May
8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is
Brisco's fiscal year-end. The pertinent exchange rates were as follows:

For what amount should Brisco's Accounts Payable be credited on May 8?

A. $2,500,000.
B. $2,440,000.
C. $1,600,000.
D. $1,639,344.
E. $1,666,667.

6. Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May
8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is
Brisco's fiscal year-end. The pertinent exchange rates were as follows:

How much Foreign Exchange Gain or Loss should Brisco record on May 31?

A. $2,520,000 gain.
B. $20,000 gain.
C. $20,000 loss.
D. $80,000 gain.
E. $80,000 loss.

9-3
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
7. Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May
8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is
Brisco's fiscal year-end. The pertinent exchange rates were as follows:

How much U.S. $ will it cost Brisco to finally pay the payable on June 7?

A. $1,666,667.
B. $2,440,000.
C. $2,520,000.
D. $2,500,000.
E. $2,400,000.

8. On June 1, CamCo received a signed agreement to sell inventory for 500,000. The
sale would take place in 90 days. CamCo immediately signed a 90-day forward
contract to sell the yen as soon as they are received. The spot rate on June 1 was 1
= $.004167, and the 90-day forward rate was 1 = $.00427. At what amount would
CamCo record the Forward Contract on June 1?

A. $2,083.
B. $0.
C. $2,110.
D. $2,532.
E. $2,135.

9. Belsen purchased inventory on December 1, 2012. Payment of 200,000 stickles was


to be made in sixty days. Also on December 1, Belsen signed a contract to purchase
200,000 in sixty days. The spot rate was 1 = .35714, and the 60-day forward rate
was 1 = $.38462. On December 31, the spot rate was 1 = .34483 and the 30-day
forward rate was 1 = .38168. Assume an annual interest rate of 12% and a fair
value hedge. The present value for one month at 12% is .9901.
In the journal entry to record the establishment of a forward exchange contract, at
what amount should the Forward Contract account be recorded on December 1?

A. $71,428.
B. $76,924.
C. $588.
D. $582.
E. $0, since there is no cost, there is no value for the contract at this date.

9-4
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10. Meisner Co. ordered parts costing 100,000 for a foreign supplier on May 12 when the
spot rate was $.24 per stickle. A one-month forward contract was signed on that date
to purchase 100,000 at a forward rate of $.25 per stickle. On June 12, when the
parts were received and payment was made, the spot rate was $.28 per stickle. At
what amount should inventory be reported?

A. $0.
B. $28,000.
C. $24,000.
D. $25,000.
E. $2,000.

11. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2013, with payment of 10 million Korean won to be received on January 15, 2014. The
following exchange rates applied:

Assuming a forward contract was not entered into, what would be the net impact on
Car Corp.'s 2013 income statement related to this transaction?

A. $500 (gain).
B. $500 (loss).
C. $200 (gain).
D. $200 (loss).
E. $- 0 -

9-5
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
12. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2013, with payment of 10 million Korean won to be received on January 15, 2014. The
following exchange rates applied:

Assuming a forward contract was entered into, the foreign currency was originally
sold in the foreign currency market on December 16, 2013 at a

A. forward contract discount $600.


B. forward contract premium $600.
C. forward contract discount $980.
D. forward discount premium $980.
E. There is no premium or discount because the fair value of the contract is zero.

13. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2013, with payment of 10 million Korean won to be received on January 15, 2014. The
following exchange rates applied:

Assuming a forward contract was entered into, at what amount should the forward
contract be recorded at December 31, 2013? Assume an annual interest rate of 12%
and a fair value hedge. The present value for one month at 12% is .9901.

A. $200.
B. $295.
C. $495.
D. $500.
E. $9,300.

9-6
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
14. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2013, with payment of 10 million Korean won to be received on January 15, 2014. The
following exchange rates applied:

Assuming a forward contract was entered into, how would the forward contract be
reflected on Car's December 31, 2013 balance sheet?

A. Forward contract (asset).


B. Forward contract (liability).
C. Foreign currency (asset).
D. Foreign currency (liability).
E. Foreign exchange (liability).

9-7
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
15. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2013, with payment of 10 million Korean won to be received on January 15, 2014. The
following exchange rates applied:

Assuming a forward contract was entered into, what would be the net impact on Car
Corp.'s 2013 income statement related to this transaction? Assume an annual
interest rate of 12% and a fair value hedge. The present value for one month at 12%
is .9901.

A. $700 (gain).
B. $700 (loss).
C. $300 (gain).
D. $300 (loss).
E. $297 (gain).

9-8
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
16. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2013, with payment of 10 million Korean won to be received on January 15, 2014. The
following exchange rates applied:

Assuming a forward contract was entered into on December 16, what would be the
net impact on Car Corp.'s 2014 income statement related to this transaction?

A. $500 (gain).
B. $303 (gain).
C. $300 (gain).
D. $300 (loss).
E. $0.

17. Mills Inc. had a receivable from a foreign customer that is due in the local currency of
the customer (stickles). On December 31, 2012, this receivable for 200,000 was
correctly included in Mills' balance sheet at $132,000. When the receivable was
collected on February 15, 2013, the U.S. dollar equivalent was $144,000. In Mills'
2013 consolidated income statement, how much should have been reported as a
foreign exchange gain?

A. $0.
B. $36,000.
C. $48,000.
D. $10,000.
E. $12,000.

18. A spot rate may be defined as

A. The price a foreign currency can be purchased or sold today.


B. The price today at which a foreign currency can be purchased or sold in the future.
C. The forecasted future value of a foreign currency.
D. The U.S. dollar value of a foreign currency.
E. The Euro value of a foreign currency.

9-9
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
19. The forward rate may be defined as

A. The price a foreign currency can be purchased or sold today.


B. The price today at which a foreign currency can be purchased or sold in the future.
C. The forecasted future value of a foreign currency.
D. The U.S. dollar value of a foreign currency.
E. The Euro value of a foreign currency.

20. Which statement is true regarding a foreign currency option?

A. A foreign currency option gives the holder the obligation to buy or sell foreign
currency in the future.
B. A foreign currency option gives the holder the obligation only sell foreign currency
in the future.
C. A foreign currency option gives the holder the obligation to only buy foreign
currency in the future.
D. A foreign currency option gives the holder the right but not the obligation to buy or
sell foreign currency in the future.
E. A foreign currency option gives the holder the obligation to buy or sell foreign
currency in the future at the spot rate on the future date.

21. 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.

22. 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.

9-10
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
23. 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.

24. 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.

25. 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.

26. 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.

9-11
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
27. 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

28. 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.

29. 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.

30. 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.

9-12
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
31. On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put option with a
strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is
designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at December 1, 2013.

A. $6,000.
B. $4,500.
C. $3,000.
D. $7,500.
E. $1,500.

32. On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put option with a
strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is
designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at December 31, 2013.

A. $6,000.
B. $4,500.
C. $3,000.
D. $7,500.
E. $1,500.

9-13
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
33. On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put option with a
strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is
designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at February 1, 2014.

A. $6,000.
B. $4,500.
C. $3,000.
D. $7,500.
E. $1,500.

34. On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put option with a
strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is
designated as a cash flow hedge. Relevant exchange rates follow:

Compute the U.S. dollars received on February 1, 2014.

A. $138,000.
B. $136,500.
C. $145,500.
D. $141,000.
E. $142,500.

9-14
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
35. 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.

36. 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.

37. Alpha Inc., a U.S. company, had a receivable from a customer that was denominated
in Mexican pesos. On December 31, 2012, this receivable for 75,000 pesos was
correctly included in Alpha's balance sheet at $8,000. The receivable was collected
on March 2, 2013, 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, 2013?

A. $1,100 loss.
B. $1,100 gain.
C. $6,900 loss.
D. $6,900 gain.
E. $8,000 gain.

9-15
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
38. On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from
a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value
of the loan was as follows:

How much foreign exchange gain or loss should be included in Shannon's 2012
income statement?

A. $3,000 gain.
B. $3,000 loss.
C. $6,000 gain.
D. $6,000 loss.
E. $7,000 gain.

39. On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from
a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value
of the loan was as follows:

How much foreign exchange gain or loss should be included in Shannon's 2013
income statement?

A. $1,000 gain.
B. $1,000 loss.
C. $2,000 gain.
D. $2,000 loss.
E. $8,000 loss.

9-16
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
40. On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from
a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value
of the loan was as follows:

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?

A. Option A
B. Option B
C. Option C
D. Option D
E. Option E

9-17
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
41. Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia
and a euro payable resulting from imports from Italy. Frankfurter recorded foreign
exchange loss related to both its ruble receivable and euro payable. Did the foreign
currencies increase or decrease in dollar value from the date of the transaction to the
settlement date?

A. Option A
B. Option B
C. Option C
D. Option D
E. Option E

42. Parker Corp., a U.S. company, had the following foreign currency transactions during
2013:

(1.) Purchased merchandise from a foreign supplier on July 5, 2013 for the U.S. dollar
equivalent of $80,000 and paid the invoice on August 3, 2013 at the U.S. dollar
equivalent of $82,000.
(2.) On October 1, 2013 borrowed the U.S. dollar equivalent of $872,000 evidenced
by a non-interest-bearing note payable in euros on October 1, 2013. The U.S. dollar
equivalent of the note amount was $860,000 on December 31, 2013, and $881,000
on October 1, 2014.

What amount should be included as a foreign exchange gain or loss from the two
transactions for 2013?

A. $2,000 loss.
B. $2,000 gain.
C. $10,000 gain.
D. $14,000 loss.
E. $14,000 gain.

9-18
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
43. Parker Corp., a U.S. company, had the following foreign currency transactions during
2013:

(1.) Purchased merchandise from a foreign supplier on July 5, 2013 for the U.S. dollar
equivalent of $80,000 and paid the invoice on August 3, 2013 at the U.S. dollar
equivalent of $82,000.
(2.) On October 1, 2013 borrowed the U.S. dollar equivalent of $872,000 evidenced
by a non-interest-bearing note payable in euros on October 1, 2013. The U.S. dollar
equivalent of the note amount was $860,000 on December 31, 2013, and $881,000
on October 1, 2014.

What amount should be included as a foreign exchange gain or loss from the two
transactions for 2014?

A. $9,000 loss.
B. $9,000 gain.
C. $11,000 loss.
D. $21,000 loss.
E. $21,000 gain.

44. Winston Corp., a U.S. company, had the following foreign currency transactions
during 2013:

(1.) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S.
dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar
equivalent of $54,000.
(2.) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced
by a non-interest-bearing note payable in euros on October 15, 2013. The U.S. dollar
equivalent of the note amount was $295,000 on December 31, 2013, and $299,000
on October 15, 2014.

What amount should be included as a foreign exchange gain or loss from the two
transactions for 2013?

A. $9,000 loss.
B. $9,000 gain.
C. $11,000 loss.
D. $13,000 gain.
E. $14,000 gain.

9-19
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
45. Winston Corp., a U.S. company, had the following foreign currency transactions
during 2013:

(1.) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S.
dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar
equivalent of $54,000.
(2.) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced
by a non-interest-bearing note payable in euros on October 15, 2013. The U.S. dollar
equivalent of the note amount was $295,000 on December 31, 2013, and $299,000
on October 15, 2014.

What amount should be included as a foreign exchange gain or loss from the two
transactions for 2014?

A. $1,000 loss.
B. $1,000 gain.
C. $2,000 loss.
D. $4,000 gain.
E. $4,000 loss.

46. Williams Inc., a U.S. company, has a Japanese yen account receivable resulting from
an export sale on March 1 to a customer in Japan. The exporter signed a forward
contract on March 1 to sell yen and designated it as a cash flow hedge of a
recognized receivable. The spot rate was $.0094, and the forward rate was $.0095.
Which of the following did the U.S. exporter report in net income?

A. Discount revenue.
B. Premium revenue.
C. Discount expense.
D. Premium expense.
E. Both discount revenue and premium expense.

47. Larson Company, a U.S. company, has an India rupee account receivable resulting
from an export sale on September 7 to a customer in India. Larson signed a forward
contract on September 7 to sell rupees and designated it as a cash flow hedge of a
recognized receivable. The spot rate was $.023, and the forward rate was $.021.
Which of the following did the U.S. exporter report in net income?

A. Discount revenue.
B. Premium revenue.
C. Discount expense.
D. Premium expense.
E. Both discount revenue and premium expense.

9-20
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
48. Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign
supplier on July 7 when the spot rate was $.025 per rupee. A one-month forward
contract was signed on that date to purchase 100,000 rupee at a rate of $.027. The
forward contract is properly designated as a fair value hedge of the 100,000 rupee
firm commitment. On August 7, when the parts are received, the spot rate is $.028.
At what amount should the parts inventory be carried on Primo's books?

A. $2,000.
B. $2,100.
C. $2,500.
D. $2,700.
E. $2,800.

49. Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts
from a foreign supplier on July 7 when the spot rate was $.025 per baht. A one-month
forward contract was signed on that date to purchase 1,000,000 bahts at a rate of
$.027. The forward contract is properly designated as a fair value hedge of the
1,000,000 baht firm commitment. On August 7, when the parts are received, the spot
rate is $.028. What is the amount of accounts payable that will be paid at this date?

A. $20,000.
B. $20,100.
C. $25,000.
D. $27,000.
E. $28,000.

9-21
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
50. On December 1, 2013, Joseph Company, a U.S. company, entered into a three-month
forward contract to purchase 50,000 pesos on March 1, 2014, as a fair value hedge of
a foreign currency denominated account payable. The following U.S. dollar per peso
exchange rates apply:

Joseph's incremental borrowing rate is 12 percent. The present value factor for two
months at an annual interest rate of 12 percent is .9803. Which of the following is
included in Joseph's December 31, 2013 balance sheet for the forward contract?

A. $5,146.58 asset.
B. $5,146.58 liability.
C. $500.00 liability.
D. $490.15 asset.
E. $490.15 liability.

51. On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a


French customer in three months, denominating the transaction in euros. On April 1,
the spot rate is $1.41 per euro, and Quality enters into a three-month forward
contract cash flow hedge to sell 400,000 euros at a rate of $1.36. At the end of three
months, the spot rate is $1.37 per euro, and Quality delivers the merchandise,
collecting 400,000 euros. What are the effects on net income from these
transactions?

A. $16,000 Discount Expense plus a $12,000 positive Adjustment to Net Income when
the merchandise is delivered.
B. $16,000 Discount Expense plus a $12,000 negative Adjustment to Net Income
when the merchandise is delivered.
C. $16,000 Discount Expense plus a $20,000 negative Adjustment to Net Income
when the merchandise is delivered.
D. $16,000 Discount Expense plus a $20,000 positive Adjustment to Net Income when
the merchandise is delivered.
E. $16,000 Discount Expense plus an $16,000 positive Adjustment to Net Income
when the merchandise is delivered.

9-22
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
52. Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a
price of 250,000 pounds, with delivery and payment to be made on October 24. On
July 24, Woolsey purchased a three-month put option for 250,000 British pounds and
designated this option as a cash flow hedge of a forecasted foreign currency
transaction expected to be completed in late October. The following exchange rates
apply:

What amount will Woolsey include as an option expense in net income for the period
July 24 to October 24?

A. $4,000.
B. $5,000.
C. $10,000.
D. $12,000.
E. $14,000.

53. Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a
price of 250,000 pounds, with delivery and payment to be made on October 24. On
July 24, Woolsey purchased a three-month put option for 250,000 British pounds and
designated this option as a cash flow hedge of a forecasted foreign currency
transaction expected to be completed in late October. The following exchange rates
apply:

What amount will Woolsey include as Adjustment to Net Income for the period ended
October 31?

A. $6,000 positive.
B. $6,000 negative.
C. $10,000 positive.
D. $10,000 negative.
E. $14,000 positive.

9-23
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
54. Atherton Inc., a U.S. company, expects to order goods from a foreign supplier at a
price of 100,000 lira, with delivery and payment to be made on April 17. On January
17, Atherton purchased a three-month call option on 100,000 lira and designated this
option as a cash flow hedge of a forecasted foreign currency transaction. The
following exchange rates apply:

What amount will Atherton include as an option expense in net income for the period
January 17 to April 17?

A. $4,000
B. $4,260
C. $4,340
D. $5,000
E. $5,260

55. On May 1, 2013, Mosby Company received an order to sell a machine to a customer
in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and
payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put
option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of
$190,000. Mosby properly designates the option as a fair value hedge of the peso
firm commitment. The option cost $3,000 and had a fair value of $3,200 on
December 31, 2013. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent, and the present value factor for
two months at a 12 percent annual rate is .9803.

What was the impact on Mosby's 2013 net income as a result of this fair value hedge
of a firm commitment?

A. $1,760.60 decrease.
B. $1,960.60 decrease.
C. $1,000.00 decrease.
D. $1,760.60 increase.
E. $1,960.60 increase.

9-24
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
56. On May 1, 2013, Mosby Company received an order to sell a machine to a customer
in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and
payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put
option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of
$190,000. Mosby properly designates the option as a fair value hedge of the peso
firm commitment. The option cost $3,000 and had a fair value of $3,200 on
December 31, 2013. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent, and the present value factor for
two months at a 12 percent annual rate is .9803.

What was the impact on Mosby's 2014 net income as a result of this fair value hedge
of a firm commitment?

A. $1,800.00 decrease.
B. $2,500.00 increase.
C. $2,500.00 decrease.
D. $188,760.60 increase.
E. $188,760.60 decrease.

9-25
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
57. On May 1, 2013, Mosby Company received an order to sell a machine to a customer
in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and
payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put
option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of
$190,000. Mosby properly designates the option as a fair value hedge of the peso
firm commitment. The option cost $3,000 and had a fair value of $3,200 on
December 31, 2013. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent, and the present value factor for
two months at a 12 percent annual rate is .9803.

What was the overall result of having entered into this hedge of exposure to foreign
exchange risk?

A. $0
B. $9,000 net loss on the option.
C. $9,000 net gain on the option.
D. $2,000 net gain on the option.
E. $2,000 net loss.

9-26
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
58. On March 1, 2013, Mattie Company received an order to sell a machine to a customer
in England at a price of 200,000 British pounds. The machine was shipped and
payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put
option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of
$380,000. Mattie properly designates the option as a fair hedge of the pound firm
commitment. The option cost $2,000 and had a fair value of $2,200 on December 31,
2013. The following spot exchange rates apply:

Mattie's incremental borrowing rate is 12 percent, and the present value factor for
two months at a 12 percent annual rate is .9803.

What was the net impact on Mattie's 2013 income as a result of this fair value hedge
of a firm commitment?

A. $1,800.00 decrease.
B. $1,760.60 decrease.
C. $2,240.40 decrease.
D. $1,660.40 increase.
E. $2,240.60 increase.

9-27
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
59. On March 1, 2013, Mattie Company received an order to sell a machine to a customer
in England at a price of 200,000 British pounds. The machine was shipped and
payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put
option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of
$380,000. Mattie properly designates the option as a fair hedge of the pound firm
commitment. The option cost $2,000 and had a fair value of $2,200 on December 31,
2013. The following spot exchange rates apply:

Mattie's incremental borrowing rate is 12 percent, and the present value factor for
two months at a 12 percent annual rate is .9803.

What was the net impact on Mattie's 2014 income as a result of this fair value hedge
of a firm commitment?

A. $379,760.60 decrease.
B. $8,360.60 increase.
C. $8,360.60 decrease.
D. $4,390.40 decrease.
E. $379,760.60 increase.

9-28
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
60. On March 1, 2013, Mattie Company received an order to sell a machine to a customer
in England at a price of 200,000 British pounds. The machine was shipped and
payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put
option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of
$380,000. Mattie properly designates the option as a fair hedge of the pound firm
commitment. The option cost $2,000 and had a fair value of $2,200 on December 31,
2013. The following spot exchange rates apply:

Mattie's incremental borrowing rate is 12 percent, and the present value factor for
two months at a 12 percent annual rate is .9803.

What was the net increase or decrease in cash flow from having purchased the
foreign currency option to hedge this exposure to foreign exchange risk?

A. $0
B. $10,000 increase.
C. $10,000 decrease.
D. $20,000 increase.
E. $20,000 decrease.

9-29
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
61. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a
British supplier on February 1, 2014, at a price of 100,000 British pounds. On October
1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a
strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a
forecasted foreign currency transaction. On December 31, 2013, the option has a fair
value of $1,600. The following spot exchange rates apply:

What journal entry should Eagle prepare on October 1, 2013?

A. Option A
B. Option B
C. Option C
D. Option D
E. Option E

9-30
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
62. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a
British supplier on February 1, 2014, at a price of 100,000 British pounds. On October
1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a
strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a
forecasted foreign currency transaction. On December 31, 2013, the option has a fair
value of $1,600. The following spot exchange rates apply:

What journal entry should Eagle prepare on December 31, 2013?

A. Option A
B. Option B
C. Option C
D. Option D
E. Option E

9-31
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
63. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a
British supplier on February 1, 2014, at a price of 100,000 British pounds. On October
1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a
strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a
forecasted foreign currency transaction. On December 31, 2013, the option has a fair
value of $1,600. The following spot exchange rates apply:

What is the amount of option expense for 2014 from these transactions?

A. $1,000.
B. $1,600.
C. $2,500.
D. $2,600.
E. $0.

64. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a
British supplier on February 1, 2014, at a price of 100,000 British pounds. On October
1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a
strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a
forecasted foreign currency transaction. On December 31, 2013, the option has a fair
value of $1,600. The following spot exchange rates apply:

What is the amount of Adjustment to Accumulated Other Comprehensive Income for


2014 from these transactions?

A. $1,000.
B. $1,600.
C. $1,800.
D. $2,000.
E. $2,600.

9-32
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
65. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a
British supplier on February 1, 2014, at a price of 100,000 British pounds. On October
1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a
strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a
forecasted foreign currency transaction. On December 31, 2013, the option has a fair
value of $1,600. The following spot exchange rates apply:

What is the amount of Cost of Goods Sold for 2014 as a result of these transactions?

A. $200,000.
B. $195,000.
C. $201,000.
D. $202,600.
E. $203,000.

66. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a
British supplier on February 1, 2014, at a price of 100,000 British pounds. On October
1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a
strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a
forecasted foreign currency transaction. On December 31, 2013, the option has a fair
value of $1,600. The following spot exchange rates apply:

What is the 2014 effect on net income as a result of these transactions?

A. $195,000
B. $201,600
C. $201,000
D. $202,600
E. $203,000

9-33
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Essay Questions

67. Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty days.
Briefly describe a hedging transaction Yelton could engage in to reduce its risk of
unfavorable exchange rates.

68. Where can you find exchange rates between the U.S. dollar and most foreign
currencies?

69. What is meant by the spot rate?

9-34
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
70. How is the fair value of a Forward Contract determined by U.S. GAAP?

71. What is the major assumption underlying the one-transaction perspective?

72. What is the purpose of a hedge of foreign exchange risk?

73. How does a foreign currency forward contract differ from a foreign currency option?

9-35
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
74. What factors create a foreign exchange gain?

75. What happens when a U.S. company purchases goods denominated in a foreign
currency and the foreign currency depreciates?

76. What happens when a U.S. company purchases goods denominated in a foreign
currency and the foreign currency appreciates?

9-36
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
77. What happens when a U.S. company sells goods denominated in a foreign currency
and the foreign currency depreciates?

78. What happens when a U.S. company sells goods denominated in a foreign currency
and the foreign currency appreciates?

Short Answer Questions

9-37
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
79. Gaw Produce Company purchased inventory from a Japanese company on December
18, 2013. Payment of 4,000,000 yen () was due on January 18, 2014. Exchange
rates between the dollar and the yen were as follows:

Required:

Prepare all journal entries for Gaw Produce Co. in connection with the purchase and
payment.

9-38
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
80. Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September
15, 2013, for 100,000 stickles. Payment was received on October 15, 2013. The
following exchange rates applied:

Required:

Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming
that the company closes its books on September 30 to prepare interim financial
statements.

9-39
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
81. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

Prepare all journal entries in U.S. dollars along with any December 31, 2013 adjusting
entries. Coyote uses a perpetual inventory system.

9-40
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
82. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 balance sheet for Inventory?

9-41
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
83. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 income statement for Cost of goods
sold?

9-42
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
84. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 income statement for Sales?

9-43
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
85. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 balance sheet for Accounts
receivable?

9-44
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
86. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 balance sheet for Accounts
payable?

9-45
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
87. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

The beginning balance of cash was 50,000 pesos on January 1, 2013, translated at 1
peso = $.18. What amount will Coyote Corp. report in its 2013 balance sheet for
Cash?

9-46
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
88. On November 10, 2013, King Co. sold inventory to a customer in a foreign country.
King agreed to accept 96,000 local currency units (LCU) in full payment for this
inventory. Payment was to be made on February 1, 2014. On December 1, 2013, King
entered into a forward exchange contract wherein 96,000 LCU would be delivered to
a currency broker in two months. The two month forward exchange rate on that date
was 1 LCU = $.30. Any contract discount or premium is amortized using the straight-
line method. The spot rates and forward rates on various dates were as follows:

The company's borrowing rate is 12%. The present value factor for one month is .
9901.

(A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal
entries relating to the transaction and the forward contract.
(B.) Compute the effect on 2013 net income.
(C.) Compute the effect on 2014 net income.

9-47
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
89. On November 10, 2013, King Co. sold inventory to a customer in a foreign country.
King agreed to accept 96,000 local currency units (LCU) in full payment for this
inventory. Payment was to be made on February 1, 2014. On December 1, 2013, King
entered into a forward exchange contract wherein 96,000 LCU would be delivered to
a currency broker in two months. The two month forward exchange rate on that date
was 1 LCU = $.30. Any contract discount or premium is amortized using the straight-
line method. The spot rates and forward rates on various dates were as follows:

The company's borrowing rate is 12%. The present value factor for one month is .
9901.

(A.) Assume this hedge is designated as a fair value hedge. Prepare the journal
entries relating to the transaction and the forward contract.
(B.) Compute the effect on 2013 net income.
(C.) Compute the effect on 2014 net income.

9-48
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
90. On October 1, 2013, Jarvis Co. sold inventory to a customer in a foreign country,
denominated in 100,000 local currency units (LCU). Collection is expected in four
months. On October 1, 2013, a forward exchange contract was acquired whereby
Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2014) and receive
$78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows:

The company's borrowing rate is 12%. The present value factor for one month is .
9901.
Any discount or premium on the contract is amortized using the straight-line method.

Assuming this is a cash flow hedge; prepare journal entries for this sales transaction
and forward contract.

9-49
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
91. On October 1, 2013, Jarvis Co. sold inventory to a customer in a foreign country,
denominated in 100,000 local currency units (LCU). Collection is expected in four
months. On October 1, 2013, a forward exchange contract was acquired whereby
Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2014) and receive
$78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows:

The company's borrowing rate is 12%. The present value factor for one month is .
9901.
Any discount or premium on the contract is amortized using the straight-line method.

Assuming this is a fair value hedge; prepare journal entries for this sales transaction
and forward contract.

9-50
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
92. On October 31, 2012, Darling Company negotiated a two-year 100,000 franc loan
from a foreign bank at an interest rate of 3 percent per year. Interest payments are
made annually on October 31, and the principal will be repaid on October 31, 2014.
Darling prepares U.S.-dollar financial statements and has a December 31 year-end.
Prepare all journal entries related to this foreign currency borrowing assuming the
following:

9-51
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
93. For each of the following situations, select the best answer concerning accounting for
foreign currency transactions:

(G) Results in a foreign exchange gain.


(L) Results in a foreign exchange loss.
(N) No foreign exchange gain or loss.

_____1. Export sale by a U.S. company denominated in dollars, foreign currency of


buyer appreciates.
_____2. Export sale by a U.S. company denominated in foreign currency, foreign
currency of buyer appreciates.
_____3. Import purchase by a U.S. company denominated in foreign currency, foreign
currency of buyer appreciates.
_____4. Import purchase by a U.S. company denominated in dollars, foreign currency
of buyer appreciates.
_____5. Import purchase by a U.S. company denominated in foreign currency, foreign
currency of buyer depreciates.
_____6. Import purchase by a U.S. company denominated in dollars, foreign currency
of buyer depreciates.
_____7. Export sale by a U.S. company denominated in dollars, foreign currency of
buyer depreciates.
_____8. Export sale by a U.S. company denominated in foreign currency, foreign
currency of buyer depreciates.

9-52
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Chapter 09 Foreign Currency Transactions and Hedging Foreign
Exchange Risk Answer Key

Multiple Choice Questions

1. Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on


April 8, 2013. Pigskin received payment of 35,000 British pounds on May 8, 2013.
The exchange rate was 1 = $1.54 on April 8 and 1 = 1.43 on May 8. What
amount of foreign exchange gain or loss should be recognized? (round to the
nearest dollar)

A. $10,500 loss
B. $10,500 gain
C. $1,750 loss
D. $3,850 loss
E. No gain or loss should be recognized.

$1.43 - $1.54 = ($.11) 35,000 = ($3,850) Loss

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-53
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
2. Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment
of 10,000 British pounds to be received in sixty days. The pertinent exchange rates
were as follows:

For what amount should Sales be credited on December 1?

A. $5,500.
B. $16,949.
C. $18,182.
D. $17,241.
E. $16,667.

December 1st Spot Rate $1.7241 10,000 = $17,241 Sales Revenue

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-54
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3. Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment
of 10,000 British pounds to be received in sixty days. The pertinent exchange rates
were as follows:

What amount of foreign exchange gain or loss should be recorded on December


31?

A. $300 gain.
B. $300 loss.
C. $0.
D. $941 loss.
E. $941 gain.

$1.8182 - $1.7241 = $.0941 10,000 Gain

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-55
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
4. Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment
of 10,000 British pounds to be received in sixty days. The pertinent exchange rates
were as follows:

What amount of foreign exchange gain or loss should be recorded on January 30?

A. $1,516 gain.
B. $1,516 loss.
C. $575 loss.
D. $500 loss.
E. $500 gain.

$1.6666 - $1.8182 = ($.1516) 10,000 = ($1,516) Loss

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-56
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
5. Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on
May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31
is Brisco's fiscal year-end. The pertinent exchange rates were as follows:

For what amount should Brisco's Accounts Payable be credited on May 8?

A. $2,500,000.
B. $2,440,000.
C. $1,600,000.
D. $1,639,344.
E. $1,666,667.

$1.25 FC 2,000,000 = $2,500,000 A/P

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-57
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
6. Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on
May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31
is Brisco's fiscal year-end. The pertinent exchange rates were as follows:

How much Foreign Exchange Gain or Loss should Brisco record on May 31?

A. $2,520,000 gain.
B. $20,000 gain.
C. $20,000 loss.
D. $80,000 gain.
E. $80,000 loss.

$1.26 - $1.25 = ($.01) FC 2,000,000 = ($20,000) Loss

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-58
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
7. Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on
May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31
is Brisco's fiscal year-end. The pertinent exchange rates were as follows:

How much U.S. $ will it cost Brisco to finally pay the payable on June 7?

A. $1,666,667.
B. $2,440,000.
C. $2,520,000.
D. $2,500,000.
E. $2,400,000.

$1.20 FC 2,000,000 = FC 2,400,000 A/P

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

8. On June 1, CamCo received a signed agreement to sell inventory for 500,000. The
sale would take place in 90 days. CamCo immediately signed a 90-day forward
contract to sell the yen as soon as they are received. The spot rate on June 1 was
1 = $.004167, and the 90-day forward rate was 1 = $.00427. At what amount
would CamCo record the Forward Contract on June 1?

A. $2,083.
B. $0.
C. $2,110.
D. $2,532.
E. $2,135.

Forward Contract Not Recorded at Date of Sale

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply

9-59
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Difficulty: 2 Medium
Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can
be used to hedge foreign exchange risk.
Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm
commitments.

9. Belsen purchased inventory on December 1, 2012. Payment of 200,000 stickles


was to be made in sixty days. Also on December 1, Belsen signed a contract to
purchase 200,000 in sixty days. The spot rate was 1 = .35714, and the 60-day
forward rate was 1 = $.38462. On December 31, the spot rate was 1 = .34483
and the 30-day forward rate was 1 = .38168. Assume an annual interest rate of
12% and a fair value hedge. The present value for one month at 12% is .9901.
In the journal entry to record the establishment of a forward exchange contract, at
what amount should the Forward Contract account be recorded on December 1?

A. $71,428.
B. $76,924.
C. $588.
D. $582.
E. $0, since there is no cost, there is no value for the contract at this date.

Forward Contract Not Recorded at Date of Sale

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

10. Meisner Co. ordered parts costing 100,000 for a foreign supplier on May 12 when
the spot rate was $.24 per stickle. A one-month forward contract was signed on
that date to purchase 100,000 at a forward rate of $.25 per stickle. On June 12,
when the parts were received and payment was made, the spot rate was $.28 per
stickle. At what amount should inventory be reported?

A. $0.
B. $28,000.
C. $24,000.
D. $25,000.
E. $2,000.

$.28 100,000 = $28,000

AACSB: Analytic

9-60
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

11. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December
16, 2013, with payment of 10 million Korean won to be received on January 15,
2014. The following exchange rates applied:

Assuming a forward contract was not entered into, what would be the net impact
on Car Corp.'s 2013 income statement related to this transaction?

A. $500 (gain).
B. $500 (loss).
C. $200 (gain).
D. $200 (loss).
E. $- 0 -

$.00090 - $.00092 = ($.00002) $10,000,000 = ($200) Loss

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-61
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
12. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December
16, 2013, with payment of 10 million Korean won to be received on January 15,
2014. The following exchange rates applied:

Assuming a forward contract was entered into, the foreign currency was originally
sold in the foreign currency market on December 16, 2013 at a

A. forward contract discount $600.


B. forward contract premium $600.
C. forward contract discount $980.
D. forward discount premium $980.
E. There is no premium or discount because the fair value of the contract is zero.

$.00098 - $.00092 = $.00006 $10,000,000 = $600 Premium

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.

9-62
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
13. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December
16, 2013, with payment of 10 million Korean won to be received on January 15,
2014. The following exchange rates applied:

Assuming a forward contract was entered into, at what amount should the forward
contract be recorded at December 31, 2013? Assume an annual interest rate of
12% and a fair value hedge. The present value for one month at 12% is .9901.

A. $200.
B. $295.
C. $495.
D. $500.
E. $9,300.

$.00098 - $.00093 = $.00005 .9901 $10,000,000 = $495

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

9-63
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
14. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December
16, 2013, with payment of 10 million Korean won to be received on January 15,
2014. The following exchange rates applied:

Assuming a forward contract was entered into, how would the forward contract be
reflected on Car's December 31, 2013 balance sheet?

A. Forward contract (asset).


B. Forward contract (liability).
C. Foreign currency (asset).
D. Foreign currency (liability).
E. Foreign exchange (liability).

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Evaluate
Difficulty: 2 Medium
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

9-64
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
15. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December
16, 2013, with payment of 10 million Korean won to be received on January 15,
2014. The following exchange rates applied:

Assuming a forward contract was entered into, what would be the net impact on
Car Corp.'s 2013 income statement related to this transaction? Assume an annual
interest rate of 12% and a fair value hedge. The present value for one month at
12% is .9901.

A. $700 (gain).
B. $700 (loss).
C. $300 (gain).
D. $300 (loss).
E. $297 (gain).

$.00098 - $.00095 = $.00003 .9901 $10,000,000 = $297 Gain

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

9-65
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
16. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December
16, 2013, with payment of 10 million Korean won to be received on January 15,
2014. The following exchange rates applied:

Assuming a forward contract was entered into on December 16, what would be the
net impact on Car Corp.'s 2014 income statement related to this transaction?

A. $500 (gain).
B. $303 (gain).
C. $300 (gain).
D. $300 (loss).
E. $0.

($.00090 - $.00095 = $.00005) - ($.00093 - $.00095 = $.00002) = $.00003/.9901


$10,000,000 = $303 Gain

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

9-66
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
17. Mills Inc. had a receivable from a foreign customer that is due in the local currency
of the customer (stickles). On December 31, 2012, this receivable for 200,000
was correctly included in Mills' balance sheet at $132,000. When the receivable
was collected on February 15, 2013, the U.S. dollar equivalent was $144,000. In
Mills' 2013 consolidated income statement, how much should have been reported
as a foreign exchange gain?

A. $0.
B. $36,000.
C. $48,000.
D. $10,000.
E. $12,000.

$144,000 - $132,000 = $12,000 Gain

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

18. A spot rate may be defined as

A. The price a foreign currency can be purchased or sold today.


B. The price today at which a foreign currency can be purchased or sold in the
future.
C. The forecasted future value of a foreign currency.
D. The U.S. dollar value of a foreign currency.
E. The Euro value of a foreign currency.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.

9-67
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
19. The forward rate may be defined as

A. The price a foreign currency can be purchased or sold today.


B. The price today at which a foreign currency can be purchased or sold in the
future.
C. The forecasted future value of a foreign currency.
D. The U.S. dollar value of a foreign currency.
E. The Euro value of a foreign currency.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.

20. Which statement is true regarding a foreign currency option?

A. A foreign currency option gives the holder the obligation to buy or sell foreign
currency in the future.
B. A foreign currency option gives the holder the obligation only sell foreign
currency in the future.
C. A foreign currency option gives the holder the obligation to only buy foreign
currency in the future.
D. A foreign currency option gives the holder the right but not the obligation to
buy or sell foreign currency in the future.
E. A foreign currency option gives the holder the obligation to buy or sell foreign
currency in the future at the spot rate on the future date.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.

9-68
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
21. 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.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Evaluate
Difficulty: 1 Easy
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

22. 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.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Evaluate
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

23. 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.

AACSB: Analytic

9-69
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Evaluate
Difficulty: 1 Easy
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

24. 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.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Evaluate
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

25. 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.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can
be used to hedge foreign exchange risk.

9-70
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
26. 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.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can
be used to hedge foreign exchange risk.

27. 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

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can
be used to hedge foreign exchange risk.

9-71
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
28. 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.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

29. 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.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can
be used to hedge foreign exchange risk.

30. 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.

AACSB: Diversity

9-72
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can
be used to hedge foreign exchange risk.

31. On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put
option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency
option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at December 1, 2013.

A. $6,000.
B. $4,500.
C. $3,000.
D. $7,500.
E. $1,500.

$.05 C$150,000 = $7,500

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

9-73
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
32. On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put
option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency
option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at December 31, 2013.

A. $6,000.
B. $4,500.
C. $3,000.
D. $7,500.
E. $1,500.

$.04 C$150,000 = $6,000

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

9-74
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
33. On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put
option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency
option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at February 1, 2014.

A. $6,000.
B. $4,500.
C. $3,000.
D. $7,500.
E. $1,500.

$.03 C$150,000 = $4,500

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

9-75
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
34. On December 1, 2013, 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, 2014. Keenan purchased a foreign currency put
option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency
option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the U.S. dollars received on February 1, 2014.

A. $138,000.
B. $136,500.
C. $145,500.
D. $141,000.
E. $142,500.

Strike Price $.97 C$150,000 = $145,500

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

35. 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.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.

9-76
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
36. 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.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

37. Alpha Inc., a U.S. company, had a receivable from a customer that was
denominated in Mexican pesos. On December 31, 2012, this receivable for 75,000
pesos was correctly included in Alpha's balance sheet at $8,000. The receivable
was collected on March 2, 2013, 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, 2013?

A. $1,100 loss.
B. $1,100 gain.
C. $6,900 loss.
D. $6,900 gain.
E. $8,000 gain.

$6,900 - $8,000 = ($1,100) Loss

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-77
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
38. On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros
from a foreign bank by signing an interest-bearing note due April 1, 2013. The
dollar value of the loan was as follows:

How much foreign exchange gain or loss should be included in Shannon's 2012
income statement?

A. $3,000 gain.
B. $3,000 loss.
C. $6,000 gain.
D. $6,000 loss.
E. $7,000 gain.

$97,000 - $103,000 = ($6,000) Loss

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

9-78
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
39. On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros
from a foreign bank by signing an interest-bearing note due April 1, 2013. The
dollar value of the loan was as follows:

How much foreign exchange gain or loss should be included in Shannon's 2013
income statement?

A. $1,000 gain.
B. $1,000 loss.
C. $2,000 gain.
D. $2,000 loss.
E. $8,000 loss.

$103,000 - $105,000 = ($2,000) Loss

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

9-79
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
40. On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros
from a foreign bank by signing an interest-bearing note due April 1, 2013. The
dollar value of the loan was as follows:

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?

A. Option A
B. Option B
C. Option C
D. Option D
E. Option E

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-80
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
41. Frankfurter Company, a U.S. company, had a ruble receivable from exports to
Russia and a euro payable resulting from imports from Italy. Frankfurter recorded
foreign exchange loss related to both its ruble receivable and euro payable. Did
the foreign currencies increase or decrease in dollar value from the date of the
transaction to the settlement date?

A. Option A
B. Option B
C. Option C
D. Option D
E. Option E

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-81
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
42. Parker Corp., a U.S. company, had the following foreign currency transactions
during 2013:

(1.) Purchased merchandise from a foreign supplier on July 5, 2013 for the U.S.
dollar equivalent of $80,000 and paid the invoice on August 3, 2013 at the U.S.
dollar equivalent of $82,000.
(2.) On October 1, 2013 borrowed the U.S. dollar equivalent of $872,000 evidenced
by a non-interest-bearing note payable in euros on October 1, 2013. The U.S.
dollar equivalent of the note amount was $860,000 on December 31, 2013, and
$881,000 on October 1, 2014.

What amount should be included as a foreign exchange gain or loss from the two
transactions for 2013?

A. $2,000 loss.
B. $2,000 gain.
C. $10,000 gain.
D. $14,000 loss.
E. $14,000 gain.

[$80,000 - $82,000 = ($2,000) Loss] + [$872,000 - $860,000 = $12,000 Gain] =


$10,000 Gain

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.
Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

9-82
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
43. Parker Corp., a U.S. company, had the following foreign currency transactions
during 2013:

(1.) Purchased merchandise from a foreign supplier on July 5, 2013 for the U.S.
dollar equivalent of $80,000 and paid the invoice on August 3, 2013 at the U.S.
dollar equivalent of $82,000.
(2.) On October 1, 2013 borrowed the U.S. dollar equivalent of $872,000 evidenced
by a non-interest-bearing note payable in euros on October 1, 2013. The U.S.
dollar equivalent of the note amount was $860,000 on December 31, 2013, and
$881,000 on October 1, 2014.

What amount should be included as a foreign exchange gain or loss from the two
transactions for 2014?

A. $9,000 loss.
B. $9,000 gain.
C. $11,000 loss.
D. $21,000 loss.
E. $21,000 gain.

$860,000 - $881,000 = ($21,000) Loss

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

9-83
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
44. Winston Corp., a U.S. company, had the following foreign currency transactions
during 2013:

(1.) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S.
dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S.
dollar equivalent of $54,000.
(2.) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000
evidenced by a non-interest-bearing note payable in euros on October 15, 2013.
The U.S. dollar equivalent of the note amount was $295,000 on December 31,
2013, and $299,000 on October 15, 2014.

What amount should be included as a foreign exchange gain or loss from the two
transactions for 2013?

A. $9,000 loss.
B. $9,000 gain.
C. $11,000 loss.
D. $13,000 gain.
E. $14,000 gain.

[$47,000 - $54,000 = ($7,000) Loss] + [$315,000 - $295,000 = $20,000 Gain] =


$13,000 Gain

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.
Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

9-84
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
45. Winston Corp., a U.S. company, had the following foreign currency transactions
during 2013:

(1.) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S.
dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S.
dollar equivalent of $54,000.
(2.) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000
evidenced by a non-interest-bearing note payable in euros on October 15, 2013.
The U.S. dollar equivalent of the note amount was $295,000 on December 31,
2013, and $299,000 on October 15, 2014.

What amount should be included as a foreign exchange gain or loss from the two
transactions for 2014?

A. $1,000 loss.
B. $1,000 gain.
C. $2,000 loss.
D. $4,000 gain.
E. $4,000 loss.

$295,000 - $299,000 = ($4,000) Loss

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

46. Williams Inc., a U.S. company, has a Japanese yen account receivable resulting
from an export sale on March 1 to a customer in Japan. The exporter signed a
forward contract on March 1 to sell yen and designated it as a cash flow hedge of a
recognized receivable. The spot rate was $.0094, and the forward rate was $.0095.
Which of the following did the U.S. exporter report in net income?

A. Discount revenue.
B. Premium revenue.
C. Discount expense.
D. Premium expense.
E. Both discount revenue and premium expense.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation

9-85
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.

47. Larson Company, a U.S. company, has an India rupee account receivable resulting
from an export sale on September 7 to a customer in India. Larson signed a
forward contract on September 7 to sell rupees and designated it as a cash flow
hedge of a recognized receivable. The spot rate was $.023, and the forward rate
was $.021. Which of the following did the U.S. exporter report in net income?

A. Discount revenue.
B. Premium revenue.
C. Discount expense.
D. Premium expense.
E. Both discount revenue and premium expense.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

48. Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign
supplier on July 7 when the spot rate was $.025 per rupee. A one-month forward
contract was signed on that date to purchase 100,000 rupee at a rate of $.027.
The forward contract is properly designated as a fair value hedge of the 100,000
rupee firm commitment. On August 7, when the parts are received, the spot rate is
$.028. At what amount should the parts inventory be carried on Primo's books?

A. $2,000.
B. $2,100.
C. $2,500.
D. $2,700.
E. $2,800.

$.028 100,000 = $2,800

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply

9-86
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Difficulty: 2 Medium
Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm
commitments.

49. Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand
bahts from a foreign supplier on July 7 when the spot rate was $.025 per baht. A
one-month forward contract was signed on that date to purchase 1,000,000 bahts
at a rate of $.027. The forward contract is properly designated as a fair value
hedge of the 1,000,000 baht firm commitment. On August 7, when the parts are
received, the spot rate is $.028. What is the amount of accounts payable that will
be paid at this date?

A. $20,000.
B. $20,100.
C. $25,000.
D. $27,000.
E. $28,000.

$.028 1,000,000 = $28,000

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm
commitments.

9-87
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
50. On December 1, 2013, Joseph Company, a U.S. company, entered into a three-
month forward contract to purchase 50,000 pesos on March 1, 2014, as a fair
value hedge of a foreign currency denominated account payable. The following
U.S. dollar per peso exchange rates apply:

Joseph's incremental borrowing rate is 12 percent. The present value factor for two
months at an annual interest rate of 12 percent is .9803. Which of the following is
included in Joseph's December 31, 2013 balance sheet for the forward contract?

A. $5,146.58 asset.
B. $5,146.58 liability.
C. $500.00 liability.
D. $490.15 asset.
E. $490.15 liability.

$0.105 - $0.095 = ($0.01) MP50,000 = ($500.00) .9803 = ($490.15) Liability

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

9-88
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
51. On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a
French customer in three months, denominating the transaction in euros. On April
1, the spot rate is $1.41 per euro, and Quality enters into a three-month forward
contract cash flow hedge to sell 400,000 euros at a rate of $1.36. At the end of
three months, the spot rate is $1.37 per euro, and Quality delivers the
merchandise, collecting 400,000 euros. What are the effects on net income from
these transactions?

A. $16,000 Discount Expense plus a $12,000 positive Adjustment to Net Income


when the merchandise is delivered.
B. $16,000 Discount Expense plus a $12,000 negative Adjustment to Net Income
when the merchandise is delivered.
C. $16,000 Discount Expense plus a $20,000 negative Adjustment to Net Income
when the merchandise is delivered.
D. $16,000 Discount Expense plus a $20,000 positive Adjustment to Net Income
when the merchandise is delivered.
E. $16,000 Discount Expense plus an $16,000 positive Adjustment to Net Income
when the merchandise is delivered.

[$1.41 - $1.37 = $.04 400,000 = $16,000 Discount] & [$1.41 - $1.36 = $.05
400,000 = $20,000 Adjustment at Delivery]

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign
currency transactions.

9-89
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
52. Woolsey Corporation, a U.S. company, expects to sell goods to a British customer
at a price of 250,000 pounds, with delivery and payment to be made on October
24. On July 24, Woolsey purchased a three-month put option for 250,000 British
pounds and designated this option as a cash flow hedge of a forecasted foreign
currency transaction expected to be completed in late October. The following
exchange rates apply:

What amount will Woolsey include as an option expense in net income for the
period July 24 to October 24?

A. $4,000.
B. $5,000.
C. $10,000.
D. $12,000.
E. $14,000.

Cost of the Option Contract $4,000

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign
currency transactions.

9-90
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
53. Woolsey Corporation, a U.S. company, expects to sell goods to a British customer
at a price of 250,000 pounds, with delivery and payment to be made on October
24. On July 24, Woolsey purchased a three-month put option for 250,000 British
pounds and designated this option as a cash flow hedge of a forecasted foreign
currency transaction expected to be completed in late October. The following
exchange rates apply:

What amount will Woolsey include as Adjustment to Net Income for the period
ended October 31?

A. $6,000 positive.
B. $6,000 negative.
C. $10,000 positive.
D. $10,000 negative.
E. $14,000 positive.

$2.17 - $2.13 = $.04 250,000 = $10,000 Positive Adjustment

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign
currency transactions.

9-91
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
54. Atherton Inc., a U.S. company, expects to order goods from a foreign supplier at a
price of 100,000 lira, with delivery and payment to be made on April 17. On
January 17, Atherton purchased a three-month call option on 100,000 lira and
designated this option as a cash flow hedge of a forecasted foreign currency
transaction. The following exchange rates apply:

What amount will Atherton include as an option expense in net income for the
period January 17 to April 17?

A. $4,000
B. $4,260
C. $4,340
D. $5,000
E. $5,260

Cost of the Option Contract $5,000

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign
currency transactions.

9-92
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
55. On May 1, 2013, Mosby Company received an order to sell a machine to a
customer in Canada at a price of 2,000,000 Mexican pesos. The machine was
shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby
purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014
at a price of $190,000. Mosby properly designates the option as a fair value hedge
of the peso firm commitment. The option cost $3,000 and had a fair value of
$3,200 on December 31, 2013. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent, and the present value factor for
two months at a 12 percent annual rate is .9803.

What was the impact on Mosby's 2013 net income as a result of this fair value
hedge of a firm commitment?

A. $1,760.60 decrease.
B. $1,960.60 decrease.
C. $1,000.00 decrease.
D. $1,760.60 increase.
E. $1,960.60 increase.

$.094 - $.095 = ($.001) MP2,000,000 = ($2,000) .9803 = ($1,960.60) Loss on


Firm Commitment
$3,200 - $3,000 = $200 Option Value Increase
($1,960.60) Loss on Firm Commitment + $200 Option Value Increase =
($1,760.60) Reduction in 2013 Net Income

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm
commitments.

9-93
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
56. On May 1, 2013, Mosby Company received an order to sell a machine to a
customer in Canada at a price of 2,000,000 Mexican pesos. The machine was
shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby
purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014
at a price of $190,000. Mosby properly designates the option as a fair value hedge
of the peso firm commitment. The option cost $3,000 and had a fair value of
$3,200 on December 31, 2013. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent, and the present value factor for
two months at a 12 percent annual rate is .9803.

What was the impact on Mosby's 2014 net income as a result of this fair value
hedge of a firm commitment?

A. $1,800.00 decrease.
B. $2,500.00 increase.
C. $2,500.00 decrease.
D. $188,760.60 increase.
E. $188,760.60 decrease.

[$190,000 Sales Revenue] - [$3,000 Cost of Option] + [$1,760.60 Adjustment from


2013 Net Income] = $188,760.60 Increase to 2014 Net Income

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm
commitments.

9-94
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
57. On May 1, 2013, Mosby Company received an order to sell a machine to a
customer in Canada at a price of 2,000,000 Mexican pesos. The machine was
shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby
purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014
at a price of $190,000. Mosby properly designates the option as a fair value hedge
of the peso firm commitment. The option cost $3,000 and had a fair value of
$3,200 on December 31, 2013. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent, and the present value factor for
two months at a 12 percent annual rate is .9803.

What was the overall result of having entered into this hedge of exposure to
foreign exchange risk?

A. $0
B. $9,000 net loss on the option.
C. $9,000 net gain on the option.
D. $2,000 net gain on the option.
E. $2,000 net loss.

$.095 - $.089 = $.006 MP2,000,000 = $12,000 Gain from Hedge - $3,000 Cost of
Option = $9,000 Net Gain on Option

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm
commitments.

9-95
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
58. On March 1, 2013, Mattie Company received an order to sell a machine to a
customer in England at a price of 200,000 British pounds. The machine was
shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie
purchased a put option giving it the right to sell 200,000 British pounds on March
1, 2014 at a price of $380,000. Mattie properly designates the option as a fair
hedge of the pound firm commitment. The option cost $2,000 and had a fair value
of $2,200 on December 31, 2013. The following spot exchange rates apply:

Mattie's incremental borrowing rate is 12 percent, and the present value factor for
two months at a 12 percent annual rate is .9803.

What was the net impact on Mattie's 2013 income as a result of this fair value
hedge of a firm commitment?

A. $1,800.00 decrease.
B. $1,760.60 decrease.
C. $2,240.40 decrease.
D. $1,660.40 increase.
E. $2,240.60 increase.

$1.89 - $1.90 = ($.001) 200,000 = ($2,000) .9803 = ($1,960.60) Loss on


Firm Commitment
$2,200 - $2,000 = $200 Option Value Increase
($1,960.60) Loss on Firm Commitment + $200 Option Value Increase =
($1,760.60) Reduction in 2013 Net Income

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm
commitments.

9-96
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
59. On March 1, 2013, Mattie Company received an order to sell a machine to a
customer in England at a price of 200,000 British pounds. The machine was
shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie
purchased a put option giving it the right to sell 200,000 British pounds on March
1, 2014 at a price of $380,000. Mattie properly designates the option as a fair
hedge of the pound firm commitment. The option cost $2,000 and had a fair value
of $2,200 on December 31, 2013. The following spot exchange rates apply:

Mattie's incremental borrowing rate is 12 percent, and the present value factor for
two months at a 12 percent annual rate is .9803.

What was the net impact on Mattie's 2014 income as a result of this fair value
hedge of a firm commitment?

A. $379,760.60 decrease.
B. $8,360.60 increase.
C. $8,360.60 decrease.
D. $4,390.40 decrease.
E. $379,760.60 increase.

[$380,000 Sales Revenue] - [$2,000 Cost of Option] + [$1,760.60 Adjustment from


2013 Net Income] = $379,760.60 Increase to 2014 Net Income

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm
commitments.

9-97
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
60. On March 1, 2013, Mattie Company received an order to sell a machine to a
customer in England at a price of 200,000 British pounds. The machine was
shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie
purchased a put option giving it the right to sell 200,000 British pounds on March
1, 2014 at a price of $380,000. Mattie properly designates the option as a fair
hedge of the pound firm commitment. The option cost $2,000 and had a fair value
of $2,200 on December 31, 2013. The following spot exchange rates apply:

Mattie's incremental borrowing rate is 12 percent, and the present value factor for
two months at a 12 percent annual rate is .9803.

What was the net increase or decrease in cash flow from having purchased the
foreign currency option to hedge this exposure to foreign exchange risk?

A. $0
B. $10,000 increase.
C. $10,000 decrease.
D. $20,000 increase.
E. $20,000 decrease.

$1.90 - $1.84 = $.06 200,000 = $12,000 Cash Flow from Hedge - $2,000 Cost
of Option = $10,000 Increase in Cash Flow

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm
commitments.

9-98
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
61. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a
British supplier on February 1, 2014, at a price of 100,000 British pounds. On
October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000
pounds with a strike price of $2.00 per pound. The option is considered to be a
cash flow hedge of a forecasted foreign currency transaction. On December 31,
2013, the option has a fair value of $1,600. The following spot exchange rates
apply:

What journal entry should Eagle prepare on October 1, 2013?

A. Option A
B. Option B
C. Option C
D. Option D
E. Option E

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign
currency transactions.

9-99
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
62. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a
British supplier on February 1, 2014, at a price of 100,000 British pounds. On
October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000
pounds with a strike price of $2.00 per pound. The option is considered to be a
cash flow hedge of a forecasted foreign currency transaction. On December 31,
2013, the option has a fair value of $1,600. The following spot exchange rates
apply:

What journal entry should Eagle prepare on December 31, 2013?

A. Option A
B. Option B
C. Option C
D. Option D
E. Option E

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign
currency transactions.

9-100
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
63. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a
British supplier on February 1, 2014, at a price of 100,000 British pounds. On
October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000
pounds with a strike price of $2.00 per pound. The option is considered to be a
cash flow hedge of a forecasted foreign currency transaction. On December 31,
2013, the option has a fair value of $1,600. The following spot exchange rates
apply:

What is the amount of option expense for 2014 from these transactions?

A. $1,000.
B. $1,600.
C. $2,500.
D. $2,600.
E. $0.

Option Expense is the Balance Sheet Fair Value of the Option for 2014 = $1,600

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign
currency transactions.

9-101
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
64. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a
British supplier on February 1, 2014, at a price of 100,000 British pounds. On
October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000
pounds with a strike price of $2.00 per pound. The option is considered to be a
cash flow hedge of a forecasted foreign currency transaction. On December 31,
2013, the option has a fair value of $1,600. The following spot exchange rates
apply:

What is the amount of Adjustment to Accumulated Other Comprehensive Income


for 2014 from these transactions?

A. $1,000.
B. $1,600.
C. $1,800.
D. $2,000.
E. $2,600.

$2.01 - $2.00 = $.01 100,000 = $1,000 Adjustment to AOCI for 2014

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign
currency transactions.

9-102
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
65. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a
British supplier on February 1, 2014, at a price of 100,000 British pounds. On
October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000
pounds with a strike price of $2.00 per pound. The option is considered to be a
cash flow hedge of a forecasted foreign currency transaction. On December 31,
2013, the option has a fair value of $1,600. The following spot exchange rates
apply:

What is the amount of Cost of Goods Sold for 2014 as a result of these
transactions?

A. $200,000.
B. $195,000.
C. $201,000.
D. $202,600.
E. $203,000.

100,000 $2.00 Strike Price = $200,000 + $1,000 AOCI Adjustment = $201,000


COGS

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign
currency transactions.

9-103
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
66. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a
British supplier on February 1, 2014, at a price of 100,000 British pounds. On
October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000
pounds with a strike price of $2.00 per pound. The option is considered to be a
cash flow hedge of a forecasted foreign currency transaction. On December 31,
2013, the option has a fair value of $1,600. The following spot exchange rates
apply:

What is the 2014 effect on net income as a result of these transactions?

A. $195,000
B. $201,600
C. $201,000
D. $202,600
E. $203,000

[100,000 $2.00 Strike Price = $200,000] + [$1,600 Fair Value of the Option in
2014] = $201,600

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign
currency transactions.

Essay Questions

9-104
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
67. Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty
days. Briefly describe a hedging transaction Yelton could engage in to reduce its
risk of unfavorable exchange rates.

Yelton could sign a forward exchange contract to sell the euros in 60 days, after
they are received. Alternatively, Yelton could purchase an option to sell the euros
in 60 days, after they are received.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.

68. Where can you find exchange rates between the U.S. dollar and most foreign
currencies?

Foreign exchange rates are published in the Wall Street Journal, major U.S.
newspapers, and several Internet sites.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.

69. What is meant by the spot rate?

The spot rate is the price at which a foreign currency can be purchased or sold
today.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign
exchange risk.

9-105
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
70. How is the fair value of a Forward Contract determined by U.S. GAAP?

The fair value of a Forward Contract is determined by comparing the difference


between the contracted forward rate and the currently available forward rate for
contracts expiring on the same date. On the initial date of the contract, this would
result in a fair value of $0. As time passes, the currently available forward rate will
likely fluctuate relative to the "fixed" contracted forward rate, creating a difference
that must be accounted for as a gain or loss on the forward contract. A contract
with a net gain over its life is recorded on the balance sheet as a Forward Contract
Asset. A contract with a net loss over its life is recorded on the balance sheet as a
Forward Contract Liability.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can
be used to hedge foreign exchange risk.

71. What is the major assumption underlying the one-transaction perspective?

The one-transaction perspective assumes that an export sale is not complete until
the foreign currency receivable has been collected and converted into U.S. dollars.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-106
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
72. What is the purpose of a hedge of foreign exchange risk?

Hedge of foreign exchange risk is a strategy to limit exposure to the effect of


unfavorable changes in the value of foreign currencies that are caused by
fluctuations in exchange rates. In addition to avoiding possible losses, companies
hedge foreign currency transactions and commitments to introduce an element of
certainty into the future cash flows resulting from foreign currency activities by
establishing a price today at which foreign currency can be sold or purchased at a
future date.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can
be used to hedge foreign exchange risk.

73. How does a foreign currency forward contract differ from a foreign currency
option?

A foreign currency forward contract obligates the parties to deliver one currency in
exchange for another at a specified future date. On the other hand, the owner of a
foreign currency option can choose whether to exercise the option and exchange
one currency for another or not.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

74. What factors create a foreign exchange gain?

Foreign exchange gains and losses are created by two factors: having foreign
currency exposures (foreign currency receivables and payables) and changes in
exchange rates.

AACSB: Diversity

9-107
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

75. What happens when a U.S. company purchases goods denominated in a foreign
currency and the foreign currency depreciates?

The event results in a foreign exchange gain.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

76. What happens when a U.S. company purchases goods denominated in a foreign
currency and the foreign currency appreciates?

The event results in a foreign exchange loss.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

77. What happens when a U.S. company sells goods denominated in a foreign
currency and the foreign currency depreciates?

The event results in a foreign exchange loss.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Understand

9-108
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

78. What happens when a U.S. company sells goods denominated in a foreign
currency and the foreign currency appreciates?

The event results in a foreign exchange gain.

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

Short Answer Questions

9-109
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
79. Gaw Produce Company purchased inventory from a Japanese company on
December 18, 2013. Payment of 4,000,000 yen () was due on January 18, 2014.
Exchange rates between the dollar and the yen were as follows:

Required:

Prepare all journal entries for Gaw Produce Co. in connection with the purchase
and payment.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-110
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
80. Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on
September 15, 2013, for 100,000 stickles. Payment was received on October 15,
2013. The following exchange rates applied:

Required:

Prepare all journal entries for Old Colonial Corp. in connection with this sale
assuming that the company closes its books on September 30 to prepare interim
financial statements.

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-111
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
81. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in
a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

Prepare all journal entries in U.S. dollars along with any December 31, 2013
adjusting entries. Coyote uses a perpetual inventory system.

AACSB: Analytic

9-112
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

82. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in
a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 balance sheet for Inventory?

Inventory (60,000 pesos $.20 40%): $4,800

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-113
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
83. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in
a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 income statement for Cost of
goods sold?

Cost of goods sold (60,000 pesos $.20 60%): $7,200

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-114
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
84. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in
a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 income statement for Sales?

Sales (54,000 pesos $.22): $11,880

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-115
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
85. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in
a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 balance sheet for Accounts
receivable?

Accounts receivable ((54,000 - 48,000 pesos) $.25): $1,500

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-116
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
86. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in
a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 balance sheet for Accounts
payable?

Accounts payable ((60,000 - 36,000 pesos) $.25): $6,000

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-117
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
87. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in
a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

The beginning balance of cash was 50,000 pesos on January 1, 2013, translated at
1 peso = $.18. What amount will Coyote Corp. report in its 2013 balance sheet for
Cash?

Cash (50,000 pesos $.18) + (48,000 pesos $.23) - (36,000 pesos $.24):
$11,400

AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-118
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
9-119
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
88. On November 10, 2013, King Co. sold inventory to a customer in a foreign country.
King agreed to accept 96,000 local currency units (LCU) in full payment for this
inventory. Payment was to be made on February 1, 2014. On December 1, 2013,
King entered into a forward exchange contract wherein 96,000 LCU would be
delivered to a currency broker in two months. The two month forward exchange
rate on that date was 1 LCU = $.30. Any contract discount or premium is
amortized using the straight-line method. The spot rates and forward rates on
various dates were as follows:

The company's borrowing rate is 12%. The present value factor for one month is .
9901.

(A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal
entries relating to the transaction and the forward contract.
(B.) Compute the effect on 2013 net income.
(C.) Compute the effect on 2014 net income.

1
[(.30 - .28) 96,000] .9901 = 1,901
2
[(.30 - .27) 96,000] = 2,880 - 1,901 = 979

9-120
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
9-121
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

9-122
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
9-123
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
89. On November 10, 2013, King Co. sold inventory to a customer in a foreign country.
King agreed to accept 96,000 local currency units (LCU) in full payment for this
inventory. Payment was to be made on February 1, 2014. On December 1, 2013,
King entered into a forward exchange contract wherein 96,000 LCU would be
delivered to a currency broker in two months. The two month forward exchange
rate on that date was 1 LCU = $.30. Any contract discount or premium is
amortized using the straight-line method. The spot rates and forward rates on
various dates were as follows:

The company's borrowing rate is 12%. The present value factor for one month is .
9901.

(A.) Assume this hedge is designated as a fair value hedge. Prepare the journal
entries relating to the transaction and the forward contract.
(B.) Compute the effect on 2013 net income.
(C.) Compute the effect on 2014 net income.

9-124
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

9-125
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
9-126
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
90. On October 1, 2013, Jarvis Co. sold inventory to a customer in a foreign country,
denominated in 100,000 local currency units (LCU). Collection is expected in four
months. On October 1, 2013, a forward exchange contract was acquired whereby
Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2014) and
receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as
follows:

The company's borrowing rate is 12%. The present value factor for one month is .
9901.
Any discount or premium on the contract is amortized using the straight-line
method.

Assuming this is a cash flow hedge; prepare journal entries for this sales
transaction and forward contract.

1
[(.80 - .78) 100,000] .9901 = 1,980
2
[(.78 - .86) 100,000] - 1,980 = 6,020

9-127
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

9-128
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
9-129
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
91. On October 1, 2013, Jarvis Co. sold inventory to a customer in a foreign country,
denominated in 100,000 local currency units (LCU). Collection is expected in four
months. On October 1, 2013, a forward exchange contract was acquired whereby
Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2014) and
receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as
follows:

The company's borrowing rate is 12%. The present value factor for one month is .
9901.
Any discount or premium on the contract is amortized using the straight-line
method.

Assuming this is a fair value hedge; prepare journal entries for this sales
transaction and forward contract.

9-130
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency
denominated assets and liabilities.

9-131
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
9-132
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
92. On October 31, 2012, Darling Company negotiated a two-year 100,000 franc loan
from a foreign bank at an interest rate of 3 percent per year. Interest payments are
made annually on October 31, and the principal will be repaid on October 31,
2014. Darling prepares U.S.-dollar financial statements and has a December 31
year-end. Prepare all journal entries related to this foreign currency borrowing
assuming the following:

In US dollars:

9-133
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
AACSB: Analytic
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard

9-134
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

93. For each of the following situations, select the best answer concerning accounting
for foreign currency transactions:

(G) Results in a foreign exchange gain.


(L) Results in a foreign exchange loss.
(N) No foreign exchange gain or loss.

_____1. Export sale by a U.S. company denominated in dollars, foreign currency of


buyer appreciates.
_____2. Export sale by a U.S. company denominated in foreign currency, foreign
currency of buyer appreciates.
_____3. Import purchase by a U.S. company denominated in foreign currency,
foreign currency of buyer appreciates.
_____4. Import purchase by a U.S. company denominated in dollars, foreign
currency of buyer appreciates.
_____5. Import purchase by a U.S. company denominated in foreign currency,
foreign currency of buyer depreciates.
_____6. Import purchase by a U.S. company denominated in dollars, foreign
currency of buyer depreciates.
_____7. Export sale by a U.S. company denominated in dollars, foreign currency of
buyer depreciates.
_____8. Export sale by a U.S. company denominated in foreign currency, foreign
currency of buyer depreciates.

(1) N; (2) G; (3) L; (4) N; (5) G; (6) N; (7) N; (8) L

AACSB: Diversity
AACSB: Reflective thinking
AICPA BB: Global
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective;
accrual approach.

9-135
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.