Chapter 9 Key

ch7 Key

1. Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2008. Pigskin received payment of 35,000 British pounds on May 8, 2008. The exchange rate was $1 = £0.65 on April 8 and $1 = £0.70 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. $3,846 loss E. No gain or loss should be recognized

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Norton Co., a U.S. corporation, sold inventory on December 1, 2008, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

Hoyle - Chapter 07

2. 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


3. 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. 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


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:

Hoyle - Chapter 07

5. 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. 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


7. How much US $ 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 contract 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 = ×240 and the 90-day forward rate was $1 = ×234. At what amount would CamCo record the Forward Contract on June 1? A. $2,083 B. $0 C. $2,110 D. $2,532 E. $2,137


9. Belsen purchased inventory on December 1, 2008. 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 = §2.80 and the 60-day forward rate was $1 = §2.60. On December 31, the spot rate was $1 = §2.90 and the 30-day forward rate was $1 = §2.62. 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. $71,428.57 B. $76,923.08 C. $5,549.51 D. $587.20 E. $0, since there is no cost, there is no value for the contract at this date


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. $24,200 D. $25,000 E. $2,000


Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2008, with payment of 10 million Korean won to be received on January 15, 2009. The following exchange rates applied:

Hoyle - Chapter 07

11. Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2008 income statement related to this transaction? A. $500 (gain) B. $500 (loss) C. $200 (gain) D. $200 (loss) E. $- 0 -


12. Assuming a forward contract was entered into, what would be the net impact on Car Corp.'s 2008 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. $295.05 (loss)


13. Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2009 income statement related to this transaction? A. $500 (gain) B. $100 (loss) C. $200 (gain) D. $200 (loss) E. $0


14. Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2008, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2009, the U.S. dollar equivalent was $144,000. In Mills' 2009 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


15. 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


16. 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


17. 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


18. 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


19. 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


20. 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


21. 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


22. SFAS 133 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


23. 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


24. 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


25. A company has a discount on a forward contract for an asset. How is the discount recognized over the life of the contract? A. It is charged to a deferred credit B. It is charged to a deferred asset C. It is charged to accumulated other comprehensive income D. It increases sales E. It decreases sales


26. A speculative derivative would be similar to which type of hedge? A. An option designated as a cash flow hedge B. An option designated as a fair value hedge C. A forward contract designated as a cash flow hedge D. A forward contract designated as a fair value hedge E. A speculative option not designated


27. 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 purchases or sales 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


28. 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. Hedge of a foreign currency denominated asset D. Forward cash flow hedges of a forecasted transaction E. Forward contracts used to hedge a foreign currency denominated liability


On December 1, 2007, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Spain for 150,000 euro. Payment is due on February 1, 2008. Keenan entered into a forward exchange contract on December 1, 2007, to deliver 150,000 euro on February 1, 2008 for $.97. Keenan chose to use a foreign currency option to hedge this foreign currency asset designated as a cash flow hedge. Relevant exchange rates follow:

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29. Compute the value of the foreign currency option at December 1, 2007. A. $6,000 B. $4,500 C. $3,000 D. $7,500 E. $1,500


30. Compute the value of the foreign currency option at December 31, 2007. A. $6,000 B. $4,500 C. $3,000 D. $7,500 E. $1,500


31. Compute the value of the foreign currency option at February 1, 2008. A. $6,000 B. $4,500 C. $3,000 D. $7,500 E. $1,500


32. Compute the U.S. dollars received on February 1, 2008. A. $138,000 B. $136,500 C. $145,500 D. $141,000 E. $142,500


33. 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


34. When a U.S. company purchases parts from a foreign company, which of the following will result in no foreign exchange gain or loss? A. The transaction is denominated in U.S. dollars B. The transaction resulted in an extraordinary gain C. The transaction resulted in an extraordinary loss 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


35. Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in pesos. On December 31, 2008, this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000. The receivable was collected on March 2, 2009, 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, 2009? A. $1,100 loss B. $1,100 gain C. $6,900 loss D. $6,900 gain E. $8,000 gain


On April 1, 2007, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign lender by signing an interest-bearing note due April 1, 2008. The dollar value of the loan was as follows:

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36. How much foreign exchange gain or loss should be included in Shannon's 2007 income statement? A. $3,000 gain B. $3,000 loss C. $6,000 gain D. $6,000 loss E. $7,000 gain


37. How much foreign exchange gain or loss should be included in Shannon's 2008 income statement? A. $1,000 gain B. $1,000 loss C. $2,000 gain D. $2,000 loss E. $8,000 loss


38. 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. A above B. B above C. C above D. D above E. E above


39. 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?



Parker Corp., a U.S. company, had the following foreign currency transactions during 2009: (1.) Purchased merchandise from a foreign supplier on July 5, 2009 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2009 at the U.S. dollar equivalent of $82,000. (2.) On October 1, 2009 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2009. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2009 and $881,000 on October 1, 2010.

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40. What amount should be included as a foreign exchange gain or loss from the two transactions for 2009? A. $2,000 loss B. $2,000 gain C. $10,000 gain D. $14,000 loss E. $14,000 gain


41. What amount should be included as a foreign exchange gain or loss from the two transactions for 2010? A. $9,000 loss B. $9,000 gain C. $11,000 loss D. $21,000 loss E. $21,000 gain


Winston Corp., a U.S. company, had the following foreign currency transactions during 2008: (1.) Purchased merchandise from a foreign supplier on July 16, 2008 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2008 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2008 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2008. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2008 and $299,000 on October 15, 2009.

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42. What amount should be included as a foreign exchange gain or loss from the two transactions for 2008? A. $9,000 loss B. $9,000 gain C. $11,000 loss D. $13,000 gain E. $14,000 gain


43. What amount should be included as a foreign exchange gain or loss from the two transactions for 2009? A. $1,000 loss B. $1,000 gain C. $2,000 loss D. $4,000 gain E. $4,000 loss


44. 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 a discount revenue and a premium expense


45. 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 a discount revenue and a premium expense


46. 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


47. 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


48. On December 1, 2009, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2010. 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, 2009 balance sheet for the forward contract? A. $5,146.58 asset B. $5,146.58 liability C. $500 liability D. $490.15 asset E. $490.15 liability


49. On April 1, Quality Corporation, a U.S. company, expects to order merchandise from a German supplier in three months, denominating the transaction in euros. On April 1, the spot rate is $1.19 per euro and Quality enters into a three-month forward contract to purchase 400,000 euros at a rate of $1.20. At the end of three months, the spot rate is $1.21 per euro and Quality orders and receives the merchandise, paying 400,000 euros. What are the effects on net income from these transactions? A. $4,000 Discount Expense plus a $4,000 negative Adjustment to Net Income when the merchandise is received B. $4,000 Discount Expense plus an $8,000 negative Adjustment to Net Income when the merchandise is received C. $4,000 Premium Expense plus a $4,000 negative Adjustment to Net Income when the merchandise is received D. $8,000 Premium Expense plus a $4,000 positive Adjustment to Net Income when the merchandise is received E. $8,000 Discount Expense plus an $8,000 positive Adjustment to Net Income when the merchandise is received


50. On August 31, Ram Corporation, a U.S. company, expects to order merchandise from a German supplier in three months, denominating the transaction in euros. On August 31, the spot rate is $1.19 per euro and Quality enters into a three-month forward contract to purchase 600,000 euros at a rate of $1.20. At the end of three months, the spot rate is $1.21 per euro and Ram orders and receives the merchandise, paying 600,000 euros. What are the effects on net income from these transactions? A. $6,000 Discount Expense plus a $6,000 negative Adjustment to Net Income when the merchandise is sold B. $6,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise is sold C. $6,000 Premium Expense plus a $6,000 negative Adjustment to Net Income when the merchandise is sold D. $12,000 Premium Expense plus a $6,000 positive Adjustment to Net Income when the merchandise is sold E. $12,000 Discount Expense plus an $12,000 positive Adjustment to Net Income when the merchandise is sold


51. Woolsey Corporation, a U.S. company, expects to order goods from a British supplier 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 call option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply:

What amount will Woolsey include as an option expense in net income during the period July 24 to October 24? A. $4,000 B. $5,000 C. $10,000 D. $12,000 E. $14,000


52. 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 during the period January 17 to April 17? A. $4,000 B. $4,260 C. $4,340 D. $5,000 E. $5,260


On May 1, 2007, 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, 2008. On May 1, 2007, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2008 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, 2007. 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.

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53. What was the net impact on Mosby's 2007 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


54. What was the net impact on Mosby's 2008 income as a result of this fair value hedge of a firm commitment? A. $1,760.60 decrease B. $2,500 increase C. $2,500 decrease D. $188,760.60 increase E. $188,760.60 decrease


55. 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. $9,000 decrease C. $9,000 increase D. $2,000 increase E. $2,000 decrease


On March 1, 2007, 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, 2008. On March 1, 2007, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2008 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, 2007. 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.

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56. What was the net impact on Mattie's 2007 income as a result of this fair value hedge of a firm commitment? A. $1,660.40 decrease B. $1,760.60 decrease C. $2,240.40 decrease D. $1,660.40 increase E. $2,240.60 increase


57. What was the net impact on Mattie's 2008 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


58. 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


On October 1, 2007, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2008, at a price of 100,000 British pounds. On October 1, 2007, 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, 2007, the option has a fair value of $1,600. The following spot exchange rates apply:

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59. What journal entry should Eagle prepare on October 1, 2007?



60. What journal entry should Eagle prepare on December 31, 2007?



61. What is the amount of option expense for 2008 from these transactions? A. $1,000 B. $1,600 C. $2,500 D. $2,600 E. $0


62. What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2008 from these transactions? A. $1,000 B. $1,600 C. $1,800 D. $2,000 E. $2,600


63. What is the amount of Cost of Goods Sold for 2008 as a result of these transactions? A. $200,000 B. $195,000 C. $201,000 D. $202,600 E. $203,000


64. What is the 2008 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


65. Yelton Co. just sold inventory for 80,000 lira, 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 lira in 60 days after they are received. Alternatively, Yelton could purchase an option to sell the lira in 60 days after they are received. Difficulty: Easy


66. 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. Difficulty: Easy


67. What is meant by the spot rate?

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


68. How is the fair value of a Forward Contract determined under SFAS 133?

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. Difficulty: Medium


69. 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. Difficulty: Easy


70. What is meant by the term hedging?

"Hedging is the process of eliminating exposure to foreign exchange risk so as to avoid potential losses from 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. Hedging involves establishing a price today at which foreign currency can be sold or purchased at a future date." Difficulty: Medium


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

"Whereas the owner of a foreign currency option can choose whether to exercise the option and exchange one currency for another or not, a party to a foreign currency forward contract is obligated to deliver one currency in exchange for another at a specified future date." Difficulty: Medium


72. 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." Difficulty: Medium


73. 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. Difficulty: Medium


74. 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. Difficulty: Medium


75. 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. Difficulty: Medium


76. 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. Difficulty: Medium


77. Gaw Produce Co. purchased inventory from a Japanese company on December 18, 2009. Payment of ×400,000 was due on January 18, 2010. 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.

Difficulty: Medium


78. Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2009, for 100,000 stickles. Payment was received on October 15, 2009. 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.

Difficulty: Medium


Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2009. The appropriate exchange rates during 2009 were as follows:

The appropriate exchange rates during 2009 were as follows:

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79. Prepare all journal entries in U.S. dollars along with any December 31, 2009 adjusting entries. Coyote uses a perpetual inventory system.

Difficulty: Medium


80. What amount will Coyote Corp. report on its 2009 financial statements for Inventory?

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


81. What amount will Coyote Corp. report on its 2009 financial statements for Cost of Goods Sold?

Cost of Goods Sold (60,000 pesos x $.20 x 60%): $7,200. Difficulty: Medium


82. What amount will Coyote Corp. report on its 2009 financial statements for Sales?

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


83. What amount will Coyote Corp. report on its 2009 financial statements for Accounts Receivable?

Accounts Receivable ((54,000 - 48,000 pesos) x $.25): $1,500. Difficulty: Medium


84. What amount will Coyote Corp. report on its 2009 financial statements for Accounts Payable?

Accounts Payable ((60,000 - 36,000 pesos) x $.25): $6,000. Difficulty: Medium


85. The beginning balance of cash was 50,000 pesos on January 1, 2009, translated at $.18 = $1. What amount will Coyote Corp. report on its 2009 financial statements for Cash?

Cash (50,000 pesos x $.18) + (48,000 pesos x $.23) - (36,000 pesos x $.24)): $2,400. Difficulty: Medium


On November 10, 2008, 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, 2009. On December 1, 2008, 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. 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.

Hoyle - Chapter 07

86. (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 2008 net income. (C.) Compute the effect on 2009 net income.

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

Difficulty: Hard


87. (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 2008 net income. (C.) Compute the effect on 2009 net income.

Difficulty: Hard


On October 1, 2009, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2010) 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.

Hoyle - Chapter 07

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

Difficulty: Hard


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

Difficulty: Hard


90. On October 31, 2008, 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, 2010. 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:

Difficulty: Hard


91. For each of the following situations, select the best answer concerning accounting for foreign currency transactions: (A) Results in a foreign exchange gain. (B) Results in a foreign exchange loss. (C) 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) C; (2) A; (3) B; (4) C; (5) A; (6) C; (7) C; (8) B Difficulty: Hard


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Chapter 9 Key