CH 12

Package Title: Test Bank Questions
Course Title: Advanced Accounting, 6e

Chapter Number: 12
Question Type: Multiple Choice
1) A discount or premium on a forward contract is deferred and included in the measurement of the related
foreign currency transaction if the contract is classified as a:
a) hedge of a net investment in a foreign entity.

b) hedge of an exposed asset or liability position.
c) hedge of an identifiable foreign currency commitment.
d) contract acquired to speculate in the movement of exchange rates.
Answer: c
Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Hard
Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash
flow hedges.
Section Reference: 12.4
2) The discount or premium on a forward contract entered into as a hedge of an exposed asset or liability
position should be:
a) included as a separate component of stockholders’ equity.

b) amortized over the life of the forward contract.
c) deferred and included in the measurement of related foreign currency transaction.
d) none of these.
Answer: b

Difficulty: Hard
Learning Objective: 7 Identify some of the common situations in which a forward exchange contract can be
used as a hedge.
3) An indirect exchange rate quotation is one in which the exchange rate is quoted:
a) in terms of how many units of the domestic currency can be converted into one unit of foreign currency.
b) for the immediate delivery of currencies exchanged.
c) in terms of how many units of the foreign currency can be converted into one unit of domestic currency.
d) for the future delivery of currencies exchanged.
Answer: c
Difficulty: Easy
Learning Objective: 3 Understand some of the more common foreign currency transactions.
4) A transaction gain is recorded when there is an:
a) importing transaction and the exchange rate increases.

b) exporting transaction and the exchange rate increases.
c) exporting transaction and the exchange rate decreases.
d) none of these.
Answer: b

Difficulty: Medium
Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and
explain the steps used to translate foreign currency transactions for each stage.
5) During 2017, a U.S. company purchased inventory from a foreign supplier. The transaction was
denominated in the local currency of the seller. The direct exchange rate increased from the date of the
transaction to the balance sheet date. The exchange rate decreased from the balance sheet date to the
settlement date in 2018. For the years 2017 and 2018, transaction gains or losses should be recognized as:
a) 2017, gain; 2018, gain

b) 2017, gain; 2018, loss
c) 2017, loss; 2018 loss
d) 2017, loss; 2018, gain
Answer: d

Difficulty: Medium
6) A transaction gain or loss is reported currently in the determination of income if the purpose of the
forward contract is to:
a) hedge a net investment in a foreign entity.

b) hedge an identifiable foreign currency commitment.
c) speculate in foreign currency.
d) none of these.
Answer: c
Difficulty: Easy
Learning Objective: 5 Describe a forward exchange contract.
7) On November 1, 2017, American Company sold inventory to a foreign customer. The account will be
settled on March 1 with the receipt of $500,000 foreign currency units (FCU). On November 1, American
also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign
currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were:
Date Per Unit of Foreign Currency

November 1 $0.73
December 31 0.71
March 1 0.74
The entry to record the forward contract is
a) FCU Receivable, 350,000; Premium on Forward Contract, 15,000; Dollars Payable, 365,000
b) Dollars Receivable, 365,000; Discount on Forward Contract, 15,000; FCU Payable, 350,000
c) FCU Receivable, 365,000; Discount on Forward Contract, 15,000; Dollars Payable, 350,000
d) Dollars Receivable, 350,000; Discount on Forward Contract, 15,000; FCU Payable, 365,000
Answer: d

Difficulty: Medium
flow hedges.
8) On November 1, 2017, American Company sold inventory to a foreign customer. The account will be
settled on March 1 with the receipt of $450,000 foreign currency units (FCU). On November 1, American
also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign
currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were:

November 1 $0.73
December 31 0.71
March 1 0.74
What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain
or loss was recorded as a result of the adjustment?
a) Receivable Balance, $319,500; Gain/Loss Recorded, $9,000 gain

b) Receivable Balance, $319,500; Gain/Loss Recorded, $9,000 loss
c) Receivable Balance, $333,000; Gain/Loss Recorded, $4,500 gain
d) Receivable Balance, $333,000; Gain/Loss Recorded, $18,000 gain
Answer: b

Difficulty: Medium
flow hedges.
9) A transaction gain or loss at the settlement date is:
a) a change in the exchange rate quoted by a foreign exchange trader.

b) synonymous with the translation of foreign currency financial statements into dollars.
c) the difference between the recorded dollar amount of an account receivable denominated in a foreign
currency and the amount of dollars received.
d) the difference between the buying and selling rate quoted by a foreign exchange trader at the settlement
date.
Answer: c

Difficulty: Easy
10) From the viewpoint of a U.S. company, a foreign currency transaction is a transaction:
a) measured in a foreign currency.

b) denominated in a foreign currency.
c) measured in U.S. currency.
d) denominated in U.S. currency.
Answer: b

Difficulty: Easy
Learning Objective: 1 Distinguish between the terms “measured” and “denominated.”
11) The exchange rate quoted for future delivery of foreign currency is the definition of a(n):
a) direct exchange rate.

b) indirect exchange rate.
c) spot rate.
d) forward exchange rate.
Answer: d

Difficulty: Easy
Learning Objective: 5 Describe a forward exchange contract.
12) A transaction loss would result from:
a) an increase in the exchange rate applicable to an asset denominated in a foreign currency.

b) a decrease in the exchange rate applicable to a liability denominated in a foreign currency.
c) the import of merchandise when the transaction is denominated in a foreign currency.
d) a decrease in the exchange rate applicable to an asset denominated in a foreign currency.
Answer: d

Difficulty: Easy
13) The forward exchange rate quoted for the remaining term of a forward contract is used to account for the
contract when the forward contract:
a) extends beyond one year or the current operating cycle.

b) is a hedge of an identifiable foreign currency commitment.
c) is a hedge of an exposed net liability position.
d) was acquired to speculate in foreign currency.
Answer: d

Difficulty: Hard
Learning Objective: 3 Understand some of the more common foreign currency transactions.
14) A transaction gain or loss on a forward contract entered into as a hedge of an identifiable foreign
currency commitment may be:
a) included as a separate item in the stockholders’ equity section of the balance sheet.
b) recognized currently in the determination of net income.
c) deferred and included in the measurement of the related foreign currency transaction.
d) none of these.
Answer: c

Difficulty: Medium
flow hedges.
15) Greco, Inc. a U.S. corporation, bought machine parts from Franco Company of Germany on March 1,
2017, for 70,000 marks, when the spot rate for marks was $0.5395. Greco’s year-end was March 31, 2017,
when the spot rate for marks was $0.5445. Greco bought 70,000 marks and paid the invoice on April 20,
2017, when the spot rate was $0.5495. How much should be shown in Greco’s income statements as foreign
exchange (transaction) gain or loss for the years ended March 31, 2017 and 2018?
a) 2017, $0; 2018, $0

b) 2017, $0; 2018, $350 loss
c) 2017, $350 loss; 2018, 0
d) 2017, $350 loss; 2018, $350 loss
Answer: d

Difficulty: Medium
16) With respect to disclosure requirements for fair value measurements, which of the following is NOT one
of the three levels in the hierarchy of classifying fair value measurements?
a) a reconciliation of beginning and ending balances

b) significant unobservable inputs
c) significant other observable inputs
d) quoted prices in active markets for identical assets or liabilities
Answer: a

Difficulty: Medium
flow hedges.
17) Montana Corporation a U.S. company, contracted to purchase foreign goods. Payment in foreign
currency was due one month after delivery. Between the delivery date and the time of payment, the
exchange rate changed in Montana’s favor. The resulting gain should be reported in the financial statements
as a(n):
a) component of other comprehensive income.

b) component of income from continuing operations.
c) extraordinary income.
d) deferred income.
Answer: b

Difficulty: Easy
Learning Objective: 3 Understand some of the more common foreign currency transactions., 4 Identify three
stages of concern to accountants for foreign currency transactions, and explain the steps used to translate
foreign currency transactions for each stage.
18) Madison Paving Company purchased equipment for 350,000 British pounds from a supplier in London
on July 7, 2017. Payment in British pounds is due on Sept. 7, 2017. The exchange rates to purchase one
pound is as follows:
July 7 August 31, (year end) September 7

Spot-rate 2.08 2.05 2.04
30-day rate 2.07 2.03 --
60-day rate 2.06 1.99 --
On its August 31, 2017 income statement, what amount should Madison Paving report as a foreign exchange
transaction gain:
a) $14,000.
b) $7,000.
c) $10,500.
d) $0.
Answer: c

Difficulty: Medium
19) On September 1, 2017, Mudd Plating Company entered into two forward exchange contracts to purchase
250,000 euros each in 90 days. The relevant exchange rates are as follows:
Spot rate Forward Rate For Dec. 1, 2017

September 1, 2017 1.46 1.47
September 30, 2017 (year-end) 1.50 1.48
The first forward contract was to hedge a purchase of inventory on September 1, payable on December 1.
On September 30, what amount of foreign currency transaction loss should Mudd Plating report in income?
a) $0.
b) $2,500.
c) $5,000.
d) $10,000.
Answer: d

Difficulty: Medium
flow hedges.
20) On September 1, 2017, Mudd Plating Company entered into two forward exchange contracts to purchase
250,000 euros each in 90 days. The relevant exchange rates are as follows:
Spot rate Forward Rate For Dec. 1, 2017

September 1, 2017 1.46 1.47
September 30, 2017 (year-end) 1.50 1.48
The second forward contract was strictly for speculation. On September 30, 2017, what amount of foreign
currency transaction gain should Mudd Plating report in income?
a) $0.
b) $2,500.
c) $5,000.
d) $10,000.
Answer: b

Difficulty: Medium
flow hedges.
21) On November 1, 2017, Cone Company sold inventory to a foreign customer. The account will be settled
on March 1 with the receipt of 250,000 foreign currency units (FCU). On November 1, Cone also entered
into a forward contract to hedge the exposed asset. The forward rate is $0.90 per unit of foreign currency.
Cone has a December 31 fiscal year-end. Spot rates on relevant dates were:

November 1 $0.93
December 31 0.91
March 1 0.94
The entry to record the forward contract is
a) FCU Receivable, 225,000; Premium on Forward Contract, 7,500; Dollars Payable, 232,500
b) Dollars Receivable, 232,500; Discount on Forward Contract, 7,500; FCU Payable, 225,000
c) FCU Receivable, 232,500; Discount on Forward Contract, 7,500; Dollars Payable, 225,000
d) Dollars Receivable, 225,000; Discount on Forward Contract, 7,500; FCU Payable, 232,500
Answer: d

Difficulty: Medium
flow hedges.
22) On November 1, 2017, National Company sold inventory to a foreign customer. The account will be
settled on March 1 with the receipt of 200,000 foreign currency units (FCU). On November 1, National also
entered into a forward contract to hedge the exposed asset. The forward rate is $0.80 per unit of foreign
currency. National has a December 31 fiscal year-end. Spot rates on relevant dates were:

November 1 $0.83
December 31 0.81
March 1 0.84
What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain
or loss was recorded as a result of the adjustment?
a) Receivable Balance, $170,000; Gain/Loss Recorded, $4,000 gain

b) Receivable Balance, $162,000; Gain/Loss Recorded, $4,000 loss
c) Receivable Balance, $168,000; Gain/Loss Recorded, $2,000 gain
d) Receivable Balance, $164,000; Gain/Loss Recorded, $2,000 loss
Answer: b

Difficulty: Medium
flow hedges.
23) Kettle Company purchased equipment for 375,000 British pounds from a supplier in London on July 3,
2017. Payment in British pounds is due on Sept. 3, 2017. The exchange rates to purchase one pound is as
follows:
July 3 August 31, (year end) September 3

Spot-rate 1.58 1.55 1.54
30-day rate 1.57 1.53 --
60-day rate 1.56 1.49 --
On its August 31, 2017, income statement, what amount should Kettle report as a foreign exchange
transaction gain:
a) $18,750.
b) $3,750.
c) $11,250.
d) $0.
Answer: c
Difficulty: Medium
24) On April 1, 2017, Manatee Company entered into two forward exchange contracts to purchase 300,000
euros each in 90 days. The relevant exchange rates are as follows:
Spot rate Forward Rate For Aug. 1, 2017

April 1, 2017 1.16 1.17
April 30, 2017 (year-end) 1.20 1.18
The first forward contract was to hedge a purchase of inventory on April 1, payable on December 1. On
April 30, what amount of foreign currency transaction loss should Manatee report in income?
a) $0.
b) $3,000.
c) $9,000.
d) $12,000.
Answer: d

Difficulty: Medium
flow hedges.
25) On April 1, 2017, Manatee Company entered into two forward exchange contracts to purchase 300,000
euros each in 90 days. The relevant exchange rates are as follows:
Spot rate Forward Rate For Aug. 1, 2017

April 1, 2017 1.16 1.17
April 30, 2017 (year-end) 1.20 1.18
The second forward contract was strictly for speculation. On April 30, 2017, what amount of foreign
currency transaction gain should Manatee report in income.
a) $0.
b) $3,000.
c) $9,000.
d) $12,000.
Answer: b

Difficulty: Medium
flow hedges.
Question Type: Essay
26) Accounting for a foreign currency transaction involves the terms measured and denominated. Describe a
foreign currency transaction and distinguish between the terms measured and denominated.
Answer: A foreign currency transaction is a transaction that requires settlement in a foreign currency, not in
U.S. dollars. Transactions are normally measured and recorded in terms of the currency in which the
reporting entity prepares its financial statements. Assets and liabilities are denominated in a currency if their
amounts are fixed in terms of that currency.
Question Title: Test Bank (Essay) Question 26

Difficulty: Medium
Learning Objective: 1 Distinguish between the terms “measured” and “denominated.”, 2 Describe what is
meant by a foreign currency transaction.
27) There are a number of business situations in which a firm may acquire a forward exchange contract.
Identify three common situations in which a forward exchange contract can be used as a hedge.
Answer: Forward exchange contracts can be used as a hedge of a (an):

 foreign currency transaction.
 unrecognized firm commitment (a fair value hedge)
 foreign-currency-denominated “forecasted” transaction (a cash flow hedge).
 net investment in foreign operations.
Question Title: Test Bank (Essay) Question 27

Difficulty: Medium
Learning Objective: 5 Describe a forward exchange contract., 7 Identify some of the common situations in
which a forward exchange contract can be used as a hedge.
Section Reference: 12.3, 12.4
28) On November 1, 2016, Jagged Company sold inventory to a company in England. The sale was for
600,000 British pounds and payment will be received on February 1, 2017. On November 1, Jagged entered
into a forward contract to sell 600,000 British pounds on February 1 at the forward rate of $1.65. Spot rates
for the British pound are as follows:
November 1 $1.61
December 31 1.67
February 1 1.62
Jagged has a December 31 fiscal year-end.

Required:
Compute each of the following:
1. The dollars to be received on February 1, 2017, from selling the 600,000 pounds to the exchange dealer.
2. The dollars that would have been received from the account receivable if Jagged had not hedged the sale
contract with the forward contract.
3. The discount or premium on the forward contract.
4. The transaction gain or loss on the exposed asset related to the sale in 2016 and 2017.
5. The transaction gain or loss on the forward contract in 2016 and 2017.
6. The amount of the discount or premium on the forward contract amortized in 2016 and 2017.
Answer:
1. Dollars received = 600,000 × $1.65 = $990,000
2. Dollars received = 600,000 × $1.62 = $972,000
3. Premium on forward contract = ($1.65 - $1.61) × 600,000 = $24,000
4. 2016 transaction gain = ($1.67 - $1.61) × 600,000 = $36,000
2017 transaction loss = ($1.67 - $1.62) × 600,000 = $(30,000)
5. 2016 transaction loss = ($1.67 - $1.61) × 600,000 = ($36,000)
2017 transaction gain = ($1.67 - $1.62) × 600,000 = $30,000
6. Premium amortized in 2016 = $24,000 × 2/3 = $16,000

Premium amortized in 2017 = $24,000 × 1/3 = $8,000
Question Title: Test Bank (Problem) Question 12-1

Difficulty: Medium
explain the steps used to translate foreign currency transactions for each stage., 5 Describe a forward
exchange contract., 6 Explain the use of forward contracts as a hedge of an unrecognized firm commitment.,
7 Identify some of the common situations in which a forward exchange contract can be used as a hedge., 9
Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.
Section Reference: 12.3, 12.4
29) On December 1, 2016, Dorn Corporation agreed to purchase a machine to be manufactured by a

company in Brazil. The purchase price is 1,150,000 Brazilian reals. To hedge against fluctuations in the
exchange rate, Dorn entered into a forward contract on December 1 to buy 1,150,000 reals on April 1, the
agreed date of machine delivery, for $0.375 per real. The following exchange rates were quoted:
Forward Rate
Date Spot Rate (Delivery on 4/1)
December 1 0.390 0.375
December 31 0.370 0.373
April 1 0.385 --
Required:
Prepare journal entries necessary for Dorn during 2016 and 2017 to account for the transactions described
above.
Answer:
2016
Dec. 1 FC Receivable from Exchange Dealer 448,500
Deferred Transaction Adjustment 17,250
Dollars Payable to Exchange Dealer 431,250
Dec. 31 Deferred Transaction Adjustment 23,000

FC Receivable from Exchange Dealer 23,000
($0.39 - $0.37) × 1,150,000)
2017
Apr. 1 FC Receivable from Exchange Dealer 17,250
($0.385 - $0.370) × 1,150,000)
Investment in Foreign Currency 442,750


Cash 431,250
Machine 442,750

Machine 11,500

Difficulty: Hard
Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow
hedges.
30) Imperial Corp., a U.S. corporation, entered into a contract on November 1, 2016, to sell two machines to
Crown Company, for 95,000 foreign currency units (FCU). The machines were to be delivered and the
amount collected on March 1, 2017.
In order to hedge its commitment, Imperial entered into a forward contract for 95,000 FCU delivery on
March 1, 2017. The forward contract met all conditions for hedging an identifiable foreign currency
commitment.
Selected exchange rates for FCU at various dates were as follows:
November 1, 2016 – Spot rate $1.3076

Forward rate for delivery on March 1, 2017 1.2980
December 31, 2016 – Spot rate 1.3060
Forward rate for delivery on March 1, 2017 1.3150
March 1, 2017 – Spot rate 1.2972
Required:
Prepare all journal entries relative to the above on the books of Imperial Corp. on the following dates:
1. November 1, 2016.
2. Year-end adjustments on December 31, 2016.
3. March 1, 2017. (Include all adjustments related to the forward contract.)
Answer:
1. November 1, 2016
Dollars Receivable from Exchange Dealer 123,310
Deferred Transaction Adjustment 912
FC Payable to Exchange Dealer 124,222
($1.2980 × 95,000 = $123,310)
[($1.3076 - $1.2980) × 95,000 = $912)
($1.3076 × 95,000 = $124,222)
2. December 31, 2016

FC Payable to Exchange Dealer 152
[($1.3076 - $1.3060) × 95,000 = $152]
3. March 1, 2017
FC Payable to Exchange Dealer 836
[($1.3060 - $1.2972) × 95,000 = $836]

Sales 123,234
($1.2972 × 95,000 = $123,234)

($1.2972 × 95,000 = $123,234)
Cash 123,310
($1.2980 × 95,000 = $123,310)

Sales 76
[($1.2980 - $1.2972) × 95,000 = $76]

Difficulty: Hard
hedges.
31) On October 1, 2016, Philly Company purchased inventory from a foreign customer for 750,000 units of
foreign currency (FCU) due on January 31, 2017. Simultaneously, Philly entered into a forward contract for
750,000 units of FC for delivery on January 31, 2017, at the forward rate of $0.75. Payment was made to the
foreign customer on January 31, 2017. Spot rates on October 1, December 31, and January 31, were $0.72,
$0.73, and $0.76, respectively. Philly amortizes all premiums and discounts on forward contracts and closes
its books on December 31.
Required:
A. Prepare all journal entries relative to the above to be made by Philly on October 1, 2016.
B. Prepare all journal entries relative to the above to be made by Philly on December 31, 2016.
C. Compute the transaction gain or loss on the forward contract that would be recorded in 2017. Indicate
clearly whether the amount is a gain or loss.
Answer:
A. October 1
Purchases 540,000
Accounts Payable 540,000
($0.72 × 750,000 = $540,000)

Premium on Forward Contract 22,500
($0.72 × 750,000 = $540,000)
($0.75 - $0.72) × 750,000 = $22,500)
($0.75 × 750,000 = $562,500)
B. December 31
Transaction Loss 7,500
[($0.73 - $0.72) × 750,000 = $7,500]

Transaction Gain 7,500
[($0.73 - $0.72) × 750,000 = $7,500]
Amortization Expense 16,875

Premium on Forward Contract 16,875
[($0.75 - $0.72) × 750,000 × (3/4) = $16,875]
C. Value of FC receivable – January 31

$0.76 × 750,000 $570,000
Carrying value – December 31 547,500
Transaction gain $ 22,500

Difficulty: Hard
hedges.
32) On October 1, 2016, Kill Company shipped equipment to a foreign customer for a foreign currency (FC)
price of FC 3,000,000 due on January 31, 2017. All revenue realization criteria were satisfied and
accordingly the sale was recorded by Kill Company on October 1. Simultaneously, Kill entered into a
forward contract to sell 3,000,000 FCU on January 31, 2017 for $1,200,000. Payment was received from the
foreign customer on January 31, 2017. Spot rates on October 1, December 31, and January 31 were $0.42,
$0.425, and $0.435, respectively. Kill amortizes all premiums and discounts on forward contracts and closes
its books on December 31.
Required:
Prepare all journal entries relative to the above to be made by Kill during 2016 and 2017.
Answer:
October 1
Accounts Receivable 1,260,000
Sales 1,260,000
Dollars Receivable from Exchange Dealer 1,200,000

Discount on Forward Contract 60,000
FC Payable to Exchange Dealer 1,260,000
December 31
Accounts Receivable 15,000
(3,000,000 × 0.425) = 1,275,000 – 1,260,000
Transaction 15,000
Amortization Expense (60,000 × 3/4) 45,000

January 31
Accounts Receivable 30,000
($3,000,000 × 0.435) = $1,305,000 – $1,275,000

Investment in FC 1,305,000
Accounts Receivable 1,305,000
Cash 1,200,000
FC Payable to Exchange Dealer 1,305,000
Dollars Receivable from Exchange Dealer 1,200,000
Amortization Expense 15,000


Difficulty: Hard
hedges.
33) On July 15, Pinta, Inc. purchased 88,500,000 yen Pinta of parts from a Tokyo company paying 20%
down, and the balance is due in 90 days. Interest is payable at a rate of 8% on the unpaid balance. The
exchange rate on July 15, was $1.00 = 118 Japanese yen. On October 13, the exchange rate was $1.00 = 114
Japanese yen.
Required:
Prepare journal entries to record the purchase and payment of this foreign currency transaction in U.S.
dollars.
Answer:
July 15 Purchases 750,000
Cash 150,000
(88,500,000 yen / 118)
Oct. 13 Accounts Payable 600,000

Cash 621,053
(70,800,000 yen / 114)
Interest Expense 12,421

Cash 12,421
(70,800,000 yen × (90/360) × 8% = 1,416,000 yen / 114 = 12,421)

Difficulty: Medium
Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain
the steps used to translate foreign currency transactions for each stage.
34) On November 1, 2016, Platte Corporation, a calendar-year U.S. Corporation, invested in a speculative
contract to purchase 700,000 euros on January 31, 2017, from a German brokerage firm. Platte agreed to buy
700,000 euros at a fixed price of $1.46 per euro. The brokerage firm agreed to send 700,000 euros to Platte
on January 31, 2017. The spot rates for euros are:
November 1, 2016 1 euro = 1.45
December 31, 2016 1 euro = 1.43
January 31, 2017 1 euro = 1.44
Required:
Prepare the journal entries that Platte would record on November 1, December 31, and January 31.
Answer:
Nov. 1, 2016 FC Receivable from Exchange Dealer 1,022,000
Dollars Payable to Exchange Dealer 1,022,000
(700,000 × $1.46)
Dec. 31, 2016 Transaction Loss 14,000

(700,000 × ($1.44 – $1.46))
Jan. 31, 2017 Dollars Payable to Exchange Dealer 1,022,000

Cash 1,022,000
FC Receivable from Exchange Dealer 1,008,000
Cash 1,008,000

Difficulty: Medium
hedges.
35) Consider the following information:
1. On November 1, 2017, a U.S. firm contracts to sell equipment (with an asking price of 500,000 pesos) in
Mexico. The firm will take delivery and will pay for the equipment on February 1, 2018.
2. On November 1, 2017, the company enters into a forward contract to sell 500,000 pesos for $0.0948 on
February 1, 2018.
3. Spot rates and the forward rates for February 1, 2018, settlement were as follows (dollars per peso):
Forward Rate
Spot Rate for 2/1/18
November 1, 2017 $0.0954 $0.0948
Balance sheet date (12/31/17) 0.0949 0.0944
February 1, 2018 0.0947
4. On February 1, the equipment was sold for 500,000 pesos. The cost of the equipment was $20,000.
Required:
Prepare all journal entries needed on November 1, December 31, and February 1 to account for the forward
contract, the firm commitment, and the transaction to sell the equipment.
Answer:
Nov. 1 Dollars Receivable from Exchange Dealer (500,000 × $0.0948) 47,400
Dec. 31 FC Payable from Exchange Dealer 200

Foreign Exchange Gain 200
[(500,000 × ($0.0948 - $0.0944)]
Foreign Exchange Loss 200

Firm Commitment 200
[(500,000 × ($0.0948 - $0.0944)]
Feb. 1 Foreign Exchange Loss 150

FC Payable from Exchange Dealer 150
[(500,000 × ($0.0944 - $0.0947)]
Firm Commitment 150

Foreign Exchange Gain 150
[(500,000 × ($0.0944 - $0.0947)]
Investment in FC 47,350
Firm Commitment 50
Sales (500,000 × $0.0948) 47,400
Cash 47,400
Investment in FC 47,350
Cost of Goods Sold 20,000

Inventory 20,000

Difficulty: Hard
hedges.

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Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Question Type: Multiple Choice

a) hedge of a net investment in a foreign entity.

Question Title: Test Bank (Multiple Choice) Question 01

a) included as a separate component of stockholders’ equity.

Question Title: Test Bank (Multiple Choice) Question 02

4) A transaction gain is recorded when there is an:

a) importing transaction and the exchange rate increases.

Question Title: Test Bank (Multiple Choice) Question 04

a) 2017, gain; 2018, gain

Question Title: Test Bank (Multiple Choice) Question 05

a) hedge a net investment in a foreign entity.

Date Per Unit of Foreign Currency

The entry to record the forward contract is

Question Title: Test Bank (Multiple Choice) Question 07

Date Per Unit of Foreign Currency

a) Receivable Balance, $319,500; Gain/Loss Recorded, $9,000 gain

Question Title: Test Bank (Multiple Choice) Question 08

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

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

Question Title: Test Bank (Multiple Choice) Question 09

a) measured in a foreign currency.

Question Title: Test Bank (Multiple Choice) Question 10

a) direct exchange rate.

Question Title: Test Bank (Multiple Choice) Question 11

12) A transaction loss would result from:

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

Question Title: Test Bank (Multiple Choice) Question 12

a) extends beyond one year or the current operating cycle.

Question Title: Test Bank (Multiple Choice) Question 13

Question Title: Test Bank (Multiple Choice) Question 14

a) 2017, $0; 2018, $0

Question Title: Test Bank (Multiple Choice) Question 15

a) a reconciliation of beginning and ending balances

Question Title: Test Bank (Multiple Choice) Question 16

a) component of other comprehensive income.

Question Title: Test Bank (Multiple Choice) Question 17

July 7 August 31, (year end) September 7

Question Title: Test Bank (Multiple Choice) Question 18

Spot rate Forward Rate For Dec. 1, 2017

Question Title: Test Bank (Multiple Choice) Question 19

Spot rate Forward Rate For Dec. 1, 2017

Question Title: Test Bank (Multiple Choice) Question 20

Date Per Unit of Foreign Currency

The entry to record the forward contract is

Question Title: Test Bank (Multiple Choice) Question 21

Date Per Unit of Foreign Currency

a) Receivable Balance, $170,000; Gain/Loss Recorded, $4,000 gain

Question Title: Test Bank (Multiple Choice) Question 22

July 3 August 31, (year end) September 3

Spot rate Forward Rate For Aug. 1, 2017

Question Title: Test Bank (Multiple Choice) Question 24

Spot rate Forward Rate For Aug. 1, 2017

Question Title: Test Bank (Multiple Choice) Question 25

Question Type: Essay

Question Title: Test Bank (Essay) Question 26

Answer: Forward exchange contracts can be used as a hedge of a (an):

Question Title: Test Bank (Essay) Question 27

Jagged has a December 31 fiscal year-end.

3. The discount or premium on the forward contract.

2. Dollars received = 600,000 × $1.62 = $972,000

3. Premium on forward contract = ($1.65 - $1.61) × 600,000 = $24,000