Advanced Accounting 10th Edition Test Bank – Fischer -paul m

Advanced Accounting 10th Edition Test Bank – Fischer -paul m

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Advanced Accounting 10th Edition Test Bank – Fischer -paul m

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Advanced Accounting 10th Edition Test Bank – Fischer -paul m

Advanced Accounting 10th Edition Test Bank – Fischer -paul m

Sample

Chapter 10—Foreign Currency Transactions

 

MULTIPLE CHOICE

  1. The best definition for direct quotes would be “direct quotes measure
a. how much foreign currency must be exchanged to receive 1 domestic currency.”
b. current or spot rates.”
c. how much domestic currency must be exchanged to receive 1 foreign currency.”
d. exchange rates at a future point in time.”

 

ANS:  C                    DIF:    E                    OBJ:   10-2

 

  1. A U.S. company purchases medical lab equipment from a Japanese company. The Japanese company requires payment in Japanese yen. In this transaction, the yen would be referred to as the
a. domestic currency for the U.S. company.
b. denominated currency.
c. purchasing currency.
d. selling currency.

 

ANS:  B                    DIF:    M                   OBJ:   10-2

 

  1. A U.S. company that has purchased inventory from a German vendor would be exposed to a net exchange gain on the unpaid balance if the
a. amount to be paid was denominated in dollars.
b. dollar weakened relative to the Euro and the Euro was the denominated currency.
c. dollar strengthened relative to the Euro and the Euro was the denominated currency.
d. U.S. company purchased a forward contract to buy Euros.

 

ANS:  C                    DIF:    M                   OBJ:   10-2

 

  1. A U.S. company that has sold its product to a German firm would be exposed to a net exchange gain on the unpaid receivable if the
a. amount to be paid was denominated in dollars.
b. dollar weakened relative to the Euro and the Euro was the denominated currency.
c. dollar strengthened relative to the Euro and the Euro was the denominated currency.
d. U.S. company purchased a forward contract to buy Euros.

 

ANS:  B                    DIF:    M                   OBJ:   10-2

 

  1. A bank dealing in foreign currency tells you that the foreign currency will buy you $.80 US dollars. The bank has given you
a. a direct quote.
b. an indirect quote.
c. the official (fixed) rate.
d. a forward rate.

 

ANS:  A                    DIF:    E                    OBJ:   10-2

 

  1. When an economic transaction is denominated in a currency other than the entity’s domestic currency, the entity must establish a
a. domestic rate.
b. hedge rate.
c. rate of currency change.
d. rate of exchange.

 

ANS:  D                    DIF:    E                    OBJ:   10-2

  1. A forward exchange contract is being transacted at a premium if the current forward rate is
a. less than the expected spot rate.
b. greater than the expected spot rate.
c. less than the current spot rate.
d. greater than the current spot rate.

 

 

ANS:  D                    DIF:    M                   OBJ:   10-2

 

  1. Which of the following factors influences the spread between forward and spot rates?
a. which currency is denominated as the domestic currency
b. the length of the forward exchange contract
c. the current cross rate between the two currencies
d. all are factors that may influence the spread

 

 

ANS:  B                    DIF:    M                   OBJ:   10-2

 

  1. Foreign currency transactions not involving a hedge should be accounted for using
a. the one-transaction method.
b. the two-transaction method.
c. a hybrid of the one- and two-transaction methods.
d. either the one- or the two-transaction method (allowed by the FASB).

 

 

ANS:  B                    DIF:    E                    OBJ:   10-3

 

  1. A transaction involving foreign currency will most likely result in gains and losses to the reporting entity if the
a. forward exchange contract is selling at a premium.
b. transaction is denominated and measured in the reporting entity’s currency.
c. transaction takes place in a country with a tiered monetary system.
d. transaction is denominated in a foreign currency and measured in the reporting entity’s currency.

 

 

ANS:  D                    DIF:    M                   OBJ:   10-3

 

  1. Given the following information for a 90 day contract:

 

  US Dollars   FC 
Value Today 3,750 5,000
Interest Rate 4% 7%
3 months interest 37.50 87.50
Value in 3 months ?? ??
The spot rate today is 1 FC = .75    

 

What will be the forward rate?

a. 1FC = .75 US Dollars
b. 1FC = .57 US Dollars
c. 1FC = .745 US Dollars
d. 1FC = .70 US Dollars

 

 

ANS:  C

US Value in 3 months = 3,750 + 37.50 = 3,787.50

FC Value in 3 months = 5,000 + 87.50 = 5,087.50

Fwd rate  3,787.50 ÷ 5,087.50 = .745

DIF:    D                    OBJ:   10-2

  1. A U.S. firm has purchased, for 50,000 FCs, an electric generator from a foreign firm. The exchange rates were 1 FC = $0.80 on the delivery date and 1 FC = $0.76 when the payable was paid. What is the final recorded value if the two-transaction method is used?
a. $40,000
b. $38,000
c. $42,000
d. $50,000

 

 

ANS:  A                    DIF:    M                   OBJ:   10-3

 

  1. A U.S. manufacturer has sold computer services to a foreign firm and received 200,000 foreign currency units (FCs). The exchange rates were 1 FC = $.75 on the date of the sale and 1 FC = $.80 when the receivable was settled. On the transaction date, the settlement exchange rate is estimated to be 1 FC = $.72. By the settlement date, what is the total exchange gain or loss recorded for the transaction if the two-transaction method is used?
a. $10,000 exchange gain
b. $6,000 exchange loss
c. $10,000 exchange loss
d. no gain or loss

 

 

ANS:  A                    DIF:    M                   OBJ:   10-3

 

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

 

12/15 1FC = $0.60 US Dollars
12/31 1FC = $0.65 US Dollars
1/15 1FC = $0.63 US Dollars

 

a. loss of $4,000
b. loss of $1,600
c. gain of $2,400
d. gain of $4,000

 

 

ANS:  D                    DIF:    M                   OBJ:   10-3

 

  1. Which of the following does not represent an exchange risk on an exposed position to a company transacting business with a foreign vendor?
a. transaction is denominated in foreign currency, settled at a future date
b. firm commitment to purchase inventory to be paid for in foreign currency
c. Forecasted foreign currency transaction with a high probability of occurrence
d. firm commitment to purchase inventory denominated in U.S. dollars

 

 

ANS:  D                    DIF:    E                    OBJ:   10-4

 

  1. Exchange gains and losses on a forward exchange contract that covers the same time period as the transaction which it provides a hedge for should be recognized as
a. an extraordinary item.
b. part of the original sales transaction.
c. income from continuing operations.
d. income from continuing operations, but only if material.

 

 

ANS:  C                    DIF:    E                    OBJ:   10-5

  1. On August 1, 20X1, an American firm purchased a machine costing 200,000,000 yen from a Japanese firm to be paid for on October 1, 20X1. Also on August 1, 20X1, the American firm entered into a contract to purchase 200,000,000 yen to be delivered on October 1, 20X1, at a forward rate of 1 Yen = $0.00783. The exchange rates were as follows:
       Spot    
August 1, 20X1 1 Yen = $0.00781
August 31, 20X1 1 Yen = $0.00777
October 1, 20X1 1 Yen = $0.00779

 

Which of the following statements is incorrect concerning the accounting treatment of these transactions?

a. The machine’s final recorded value was $1,558,000.
b. The beginning balance in the accounts payable was $1,562,000.
c. An exchange gain on the accounts payable of $4,000 was recognized on October 1, 20X1.
d. The value of the accounts payable just before payment, on October 1, 20X1, was $1,558,000.

 

 

ANS:  A                    DIF:    M                   OBJ:   10-3 | 10-5

 

Scenario 10-1

On 6/1/X2, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/X2. Also on 6/1/X2, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 8/1/X2. The exchange rates were as follows:

  Spot Forward
6/1/X2 1 CD = $0.73 1 CD = $0.74
6/30/X2 1 CD = $0.70 1 CD = $0.75
8/1/X2 1 CD = $0.68 1 CD = $0.68

 

The American firms fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%.

 

  1. Refer to Scenario 10-1. What is the value of the Forward Contract Receivable-FC on 6/1/X2?
a. $73,000
b. $74,000
c. $68,000
d. $70,000

 

 

ANS:  B                    DIF:    D                   OBJ:   10-5

 

  1. Refer to Scenario 10-1. What is the value of the Forward Contract Receivable-FC on 6/30/X2?
a. $75,000
b. $75,693
c. $74,693
d. $74,993

 

 

ANS:  D

Original value of Forward Contract Receivable-FC 100,000 ´ .74 = 74,000
Current (6/30) value of the Fwd Contract Rec-FC 100,000 ´ .75 = 75,000
Increase in value of Forward Contract Receivable 1,000
Value of Receivable, discounted at 8%, n  1 1,000 – (1,000 ´ [.08 ÷ 12]) = 993
Value of receivable 74,000 + 993 = 74,993

 

DIF:    D                    OBJ:   10-5

  1. The purpose of a hedge on an identifiable commitment where the U.S. company is selling goods is to:
a. fix the basis of sales revenue to the date of the commitment
b. eliminate all exchange gains/losses from the date of commitment to the date of settlement
c. fix the basis of cost of goods sold to the date of commitment
d. eliminate any exchange gains/losses from the transaction date to the settlement date

 

 

ANS:  A                    DIF:    M                   OBJ:   10-4

 

  1. Which of the following statements is not true regarding forward contracts that cover periods of time different from the settlement period (transaction date to the settlement date)?
a. If the forward contract expires before the settlement date, the gain or loss will partially offset the gain or loss on the foreign currency transaction.
b. If the forward contract expires after the settlement date, post-settlement date gains and losses are not recognized as components of current operating income.
c. Premium and discount are amortized over the life of the contract.
d. All of these statements are true.

 

 

ANS:  B                    DIF:    M                   OBJ:   10-4

 

Scenario 10-2

On 4/1/X3, a U.S. Company commits to sell a piece of equipment to a French customer. At that time, the U.S. company enters into a forward contract to sell foreign currency on 8/1/X3 (120 days). Delivery will take place 7/1/X3 with payment due on 8/1/X3. The fiscal year end for the company is 6/30/X3. The sales price of the equipment is 200,000 Euros. Various exchange rates are as follows:

  Spot Forward
4/1/X3 1FC = $0.60 1FC = $0.58
6/30/X3 and 7/1/X3 1FC = $0.58 1FC = $0.56
8/1/X3 1FC = $0.55 1FC = $0.55

Discount rate is 12%.

 

  1. Refer to Scenario 10-2. What is the amount in the Firm Commitment account on 6/30/X3?
a. 4,000 debit
b. 8,000 debit
c. 4,000 credit
d. 10,000 credit

 

 

ANS:  C

On 4/1:

Forward Contract Receivable – Dollars 116,000  
     Forward Contract Payable-FC   116,000

 

On 6/30, fiscal year end, the value of the commitment has changed.

4/1 200,000 ´ .60 = 120,000 value of the sales revenue
6/30 200,000 ´ .58 = 116,000 value of the sale revenue

Loss on commitment (debit) results in a credit to Firm Commitment

DIF:    D                    OBJ:   10-5

 

  1. Refer to Scenario 10-2. What is the value of Forward Contract Payable-FC on 6/30?
a. 112,000
b. 112,040
c. 116,000
d. none of the above

 

ANS:  B

Fwd value 4/1 200,000 ´ 0.58 116,000
Fwd value 6/30 200,000 ´ 0.56 112,000
Decrease in Fair Value of Payable   4,000
PV of change: 4,000 ÷ 1.01   3,960
[n  1; i  (.12 ÷ 12) = .01]    

 

Current value of fwd contract = 116,000 – 3,960 = 112,040

 

DIF:    D                    OBJ:   10-5

 

  1. Which of the following statements is true concerning forward contracts classified as hedges of an identifiable foreign currency commitment?
a. Forward contracts used as hedges cannot exceed the foreign currency commitment.
b. Forward contracts cannot extend for a time period after the transaction date of the commitment.
c. The gain or loss traceable to the time period after the transaction date of the commitment should not be deferred.
d. None of these statements is true.

 

 

ANS:  C                    DIF:    M                   OBJ:   10-4

 

  1. Which of the following is not true concerning the accounting for hedges of forecasted transactions using an option?
a. An intrinsic value must be calculate throughout the hedge period
b. The accounting requires revaluing the market value of the option
c. The option fixes the value of the transaction to the date of the commitment.
d. All of these statements are true.

 

 

ANS:  C                    DIF:    E                    OBJ:   10-4

 

  1. The accounting treatment given a cash flow hedge of a forecasted transaction continues unless:
a. The hedging relationship is no longer highly effective based on management policies.
b. The derivative instrument is sold, terminated, or exercised.
c. The derivative instrument is no longer designated as a hedge on a forecasted transaction.
d. all of these statements are true.

 

 

ANS:  D                    DIF:    M                   OBJ:   10-5

 

  1. A United States based company that has not hedged an exposed asset position would experience an exchange gain if
a. forward rates increased.
b. forward rates decreased.
c. spot rates increased.
d. spot rates decreased.

 

 

ANS:  C                    DIF:    E                    OBJ:   10-5

 

  1. In the accounting for forward exchange contracts, gains and losses are measured using either spot or forward rates. Which of the following statements concerning measurement of gains and losses is true?
a. The gains or losses in a hedge on an exposed asset will use the spot rate for the asset and the forward rate for the forward contract.
b. The gains or losses in a speculative hedge will use the forward rate throughout the contract.
c. The gains or losses in a hedge on an identifiable commitment will use the spot rate for the commitment and the forward rate for the forward contract.
d. All of these statements are true.

 

 

ANS:  B                    DIF:    M                   OBJ:   10-5

 

  1. The time value of an option is the difference between the
a. premium paid and its current rate.
b. premium paid and its intrinsic value.
c. exercise price and its current rate.
d. call option price and the put option price.

 

 

ANS:  B                    DIF:    M                   OBJ:   10-5

 

  1. The two distinguishing characteristics of a financial instrument are
a. one or more options and one or more exchange rates.
b. one or more underlyings and one or more notional amounts.
c. cash flows and economic exchange.
d. a per share price and a quantity.

 

 

ANS:  B                    DIF:    M                   OBJ:   10-2

 

  1. Hugh, Inc. purchased merchandise for 300,000 FC from a British vendor on November 30, 20X3. Payment in British pounds is due January 31, 20X4. Exchange rates to purchase 1 FC is as follows:
  Nov. 30, 20X3 Dec. 31, 20X3
Spot $1.65 $1.62
30 day $1.64 $1.59
60 day $1.63 $1.56

In the December 31, 20X3 income statement, what amount should Hugh report as foreign exchange gain from this transaction?

a. $12,000
b. $9,000
c. $6,000
d. $0

 

 

ANS:  B                    DIF:    M                   OBJ:   10-3

 

  1. Wild, Inc. sold merchandise for 500,000 FC to a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. Exchange rates to purchase 1 foreign currency unit are as follows:
  Nov. 30, 20X5 Dec. 31, 20X5 Jan. 31, 20X6
Spot $1.49 $1.45 $1.44
30 day $1.48 $1.43 $1.43
60 day $1.46 $1.41 $1.42

In the year in which the sale was made, 20X5, what amount should Wild report as foreign exchange gain/loss from this transaction?

a. $25,000
b. $20,000
c. $5,000
d. $0

 

ANS:  B                    DIF:    M                   OBJ:   10-3

  1. Pile, Inc. purchased merchandise for 500,000 FC from a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. On the same day, Pile signed an agreement with a foreign exchange broker to buy 500,000 FC on January 31, 20X6. Exchange rates to purchase 1 FC are as follows:

 

  Nov. 30, 20X5 Dec. 31, 20X5 Jan. 31, 20X6
Spot $1.49 $1.45 $1.44
30 day $1.48 $1.43 $1.43
60 day $1.46 $1.41 $1.42

 

What will be the adjustment to the account payable included in the journal entry record on November 30, 20X5?

a. $20,000 debit
b. $20,000 credit
c. $30,000 debit
d. $0

 

 

ANS:  A                    DIF:    M                   OBJ:   10-5

 

  1. Larson, Inc. sold merchandise for 600,000 FC to a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. On the same day, Larson signed an agreement with a foreign exchange broker to sell 600,000 FC on January 31, 20X6. Exchange rates to purchase 1 FC are as follows:

 

  Nov. 30, 20X5 Dec. 31, 20X5 Jan. 31, 20X6
Spot $1.49 $1.46 $1.43
30 day $1.48 $1.43 $1.44
60 day $1.47 $1.40 $1.42

 

What will be the amount of the Forward Contract Receivable-Dollars on November 30, 20X5?

a. $894,000
b. $888,000
c. $882,000
d. $858,000

 

 

ANS:  C                    DIF:    D                   OBJ:   10-5

 

  1. Happ, Inc. agreed to purchase merchandise from a British vendor on November 30, 20X3. The goods will arrive on January 31, 20X4 and payment of 100,000 British pounds is due February 28, 20X4. On November 30, 20X3, Happ signed an agreement with a foreign exchange broker to buy 100,000 British pounds on February 28, 20X4. Exchange rates to purchase 1 British pound are as follows:

 

  Nov. 30, 20X3 Dec. 31, 20X3 Jan. 31, 20X4 Feb. 28, 20X4
Spot $1.65 $1.62 $1.59 $1.57
30 day $1.64 $1.59 $1.60 $1.59
60 day $1.63 $1.56 $1.58 $1.58

 

Because of this commitment hedge, Happ, Inc. will record the merchandise at what value when it arrives in January?

a. $165,000
b. $164,000
c. $160,000
d. $159,000

 

 

ANS:  A                    DIF:    M                   OBJ:   10-5

  1. In a hedge of a forecasted transaction, gains or losses on derivative instruments prior to the occurrence of the actual transaction should be reported as
a. a component of stockholders’ equity.
b. a component of other comprehensive income.
c. an extraordinary item.
d. income from continuing operations.

 

 

ANS:  B                    DIF:    M                   OBJ:   10-5

 

  1. Current disclosure requires users of hedging instruments to provide information about all of the following except
a. objectives of using hedging instruments.
b. descriptions of various types of hedges entered into.
c. the original cost of entering into the derivative instrument hedge.
d. how gains and losses are recognized in earnings or other comprehensive income.

 

 

ANS:  C                    DIF:    M                   OBJ:   10-5

 

PROBLEM

 

  1. On September 15, 20X2, Wall Company, a U.S. firm, purchased a piece of equipment from a foreign firm for 500,000 FCs. Payment for the equipment was to be made in FCs on January 15, 20X3. The spot rates on selected dates were as follows:

 

Date Spot Rate
9/15/X2 1 FC = $0.30
12/31/X2 1 FC = $0.33
1/15/X3 1 FC = $0.315

 

 

Required:

 

a. Assuming that the US Corp. has a December 31 year end, prepare the necessary journal entries to account for the series of transactions involving the purchase.
   
b. Prepare all the necessary journal entries assuming that the US Corp. will be paying for the equipment in U.S. dollars.

 

 

ANS:

a. Nov. 1    
  Equipment 150,000  
       Accounts Payable   150,000
       
  Dec. 31    
  Exchange Loss 15,000  
       Accounts Payable   15,000
       
  Jan. 15    
  Accounts Payable 165,000  
       Exchange Gain   7,500
       Cash   157,500
       
b. Nov. 1    
  Equipment 150,000  
       Accounts Payable   150,000
       
  Dec. 31    
  No entry    
       
  Jan. 15    
  Accounts Payable 150,000  
       Cash   150,000

 

 

DIF:    M                   OBJ:   10-3

 

  1. On November 1, 20X1, DEMO Corp., a U.S. firm, sold merchandise to a foreign firm for 60,000 FCs. DEMO will be paid on January 31, 20X2, in FCs. The spot rates on selected dates were as follows:

 

Date Spot Rate
November 1, 20X1 1 FC = $0.50
December 31, 20X1 1 FC = $0.55
January 31, 20X2 1 FC = $0.53

 

Required:

 

Assuming that DEMO has a December 31 year end, prepare the necessary journal entries to account for the series of transactions involving the sale.

 

ANS:

Nov. 1    
Accounts Receivable 30,000  
     Sales   30,000
     
Dec. 31    
Accounts Receivable 3,000  
     Exchange Gain   3,000
     
Jan. 31    
Cash 31,800  
Exchange Loss 1,200  
     Accounts Receivable   33,000

 

 

DIF:    M                   OBJ:   10-3

 

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

 

Required:

 

Make the necessary journal entries for the U.S. firm on July 1 and August 1.

 

ANS:

July 1    
Computer 18,750  
     Accounts Payable   18,750
     
Aug. 1    
Accounts Payable 18,750  
     Exchange Gain   1,500
     Cash   17,250

 

 

DIF:    E                    OBJ:   10-3

 

  1. On January 1, 20X1, a U.S. firm bought a truck from a foreign firm for 10,000 FCs, to be paid on March 1 in FCs. The spot rate was 1 FC = $1.25 on January 1 and 1 FC = $1.265 on March 1. To protect themselves from exchange rate changes, the U.S. firm entered into a forward exchange contract on January 1 to buy FCs on March 1 for $1.28.

 

Required:

 

Make all the necessary journal entries to record the transactions for the U.S. firm on January 1 and March 1.

 

ANS:

Jan. 1    
Truck 12,500  
     Accounts Payable   12,500
     
Fwd Contract Receivable-FC 12,800  
     Fwd Contract Payable-$   12,800
     
Mar. 1    
Fwd Contract Payable-$ 12,800  
     Cash   12,800
     
Investment in FCs 12,650  
     Exchange Loss 150  
     Fwd Contract Receivable-FC   12,800
     
Accounts Payable 12,500  
Exchange Loss 150  
     Investment in FCs   12,650

 

 

DIF:    E                    OBJ:   10-3 | 10-5

 

  1. For a hedge on an exposed position, describe the process of valuing the forward contract as of the fiscal period end date.

 

ANS:

a. Calculate the fair value of the forward contract:
       Original Fwd Value of Contract
       Current Fwd Value of Contract
       Change gain (loss) in forward value
   
b. Calculate the present value of the change:
       Change in forward value discounted at a rate of interest÷12 periods, for
       n = number of months until settlement
   
c. Calculate the change in present value:
       Current Present value of contract
       Prior Present value of contract
       Change in Present Value
   
d. Split the change in present value between the gain/(loss) on spot values and the changes in time value

 

 

DIF:    M                   OBJ:   10-5

 

  1. Wolters Corporation is a U.S. corporation that purchased 50,000 chocolate bars from a foreign manufacturer on March 1, 20X9 for 80,000 foreign currency units, to be paid on April 30, 20X9. On March 1, 20X9 Wolters also entered into a forward contract to purchase 80,000 foreign currency units on April 30, 20X9. Wolters has a December 31 year end.

 

Exchange rates are as follows:

 

Date Spot Rate Forward Rate
3/1/X9 $0.69 $0.65
3/31/X9 $0.61 $0.65
4/30/X9 $0.66 $0.66

 

Required:

 

Prepare the journal entries to record the transactions through April 30, 20X9. March 31 is NOT a fiscal period end. Ignore the split between spot gain/loss and time value.

 

ANS:

Mar. 1    
Inventory 55,200  
     Accounts Payable   55,200
     
Fwd Contract Receivable-FC 52,000  
     Fwd Contract Payable-$   52,000
     
Apr. 30    
Accounts Payable 55,200  
     Investment in FC   52,800
     Exchange Gain   2,400
     
Investment in FC 52,800  
     Fwd Contract Receivable   52,000
     Exchange Gain   800

 

 

DIF:    M                   OBJ:   10-3 | 10-5

 

  1. Rex Corporation, a U.S. firm with a calendar accounting year, agreed to buy a specially made truck from a Japanese firm for delivery on January 31, 20X2 with payment due on 2/28/X2. On the same date the agreement was signed, November 1, 20X1, a forward contract due on February 28, 20X2, was also signed to purchase 1,000,000 yen, the contract price of the truck. Exchange rates were as follows:
Date Spot Rate Forward Rate
11/1/X1 $0.0076 $0.0078
12/31/X1 $0.0081 $0.0080
1/31/X2 $0.0084 $0.0083
2/28/X2 $0.0085 $0.0085

Discount rate = 8%

 

Required:

 

Prepare the journal entries needed to properly reflect the purchase and forward contract through the end of the fiscal year.

 

ANS:

Nov. 1    
Fwd Contract Receivable-FC 7,800  
     Fwd Contract Payable-$   7,800
     
Dec. 31    
Loss on Firm Commitment 500  
     Firm Commitment   500
     
Fwd Contract Receivable-FC 500  
     Unrealized Gain on Contract   500
     
Unrealized Loss on Contract 302.67  
     Fwd Contract Receivable-FC   302.67
     
  11/1 12/31
Notional amount 1,000,000 1,000,000
Spot Rate .0076 .0081
Fwd Rate-Remain .0078 .0080
Fwd Rate-Original   .0078
     
Fair Value of Fwd Contract    
     
Original Value   7,800.00
Current Value     8,000.00
Change; gain (loss) in value of Fwd Contract Rec       200.00
PV of change (n = 1, .08/12)   197.33
Prior PVof change           0
Change in PV   197.33
Change gain (loss) in spot rates   500.00
Change in time value   302.67

 

 

DIF:    M                   OBJ:   10-3 | 10-5

 

  1. On January 1, 20X1, a domestic firm agrees to sell goods to a foreign customer, with delivery to be made on March 1, 20X1. The goods, valued at 50,000 FCs, are to be paid for 30 days after delivery. On January 1, 20X1, the domestic firm purchased a 90-day forward contract to sell 50,000 FCs. Exchange rates on selected dates are as follows:
Date Spot Rate Fwd Rate
1/1/X1 1 FC = $1.00 1FC = $0.99
3/1/X1 1 FC = $0.98 1FC = $0.97
4/1/X1 1 FC = $0.96 1FC = $0.96

Discount rate = 10%

Required:

Prepare the journal entries needed to properly reflect the sales transaction and the forward exchange contract. The forward contract meets the conditions necessary to be classified as a hedge on an identifiable foreign currency commitment. Include the table to calculate the split between exchange gains or losses on the contract due to changes in spot rates and the changes in time value.

ANS:

Jan. 1    
Fwd Contract Receivable-$ 49,500  
     Fwd Contract Payable-FC   49,500
     
Mar. 1    
Loss on Firm Commitment 1,000  
     Firm Commitment   1,000
     
Fwd Contract Payable-FC 1,000  
     Unrealized Gain on Contract   1,000
     
Unrealized Loss on Contract 8.33  
     Fwd Contract Payable-FC   8.33
     
Accounts Receivable 49,000  
Firm Commitment 1,000  
     Sales   50,000
     
Apr. 1    
Inv in Foreign Currency 48,000  
Exchange Loss 1,000  
     Accounts Receivable   49,000
     
Fwd Contract Payable-FC 1,000  
     Unrealized Gain on Contract   1,000
     
Unrealized Exchange Loss 491.67  
     Fwd Contract Payable-FC   491.67
     
Fwd Contract Payable-FC 48,000  
     Inv in Foreign Currency   48,000
     
Cash 49,500  
     Fwd Contract Rec-$   49,500

 

  1/1 3/1 4/1
# of FC 50,000 50,000 50,000
Spot Rate 1.00 .98 .96
Fwd Rate-Remain .99 .97 .96
Fwd Rate-Original   .99 .99
       
Fair Value of Fwd Contract:      
     Original   49,500 49,500
     Current   48,500 48,000
Change-Gain (loss) in Fwd Value   1,000 1,500
       
Present Value of Change:      
     n = 1, i = .10/12   991.67  
     n = 0, i = .10/12     1,500
Change in Value:      
     Current Present Value   991.67 1,500.00
     Prior Present Value               0    991.67
Change in Present Value   991.67 508.33
Change due to spot rate-Gain(loss)   1,000.00 1,000.00
Change in time-Gain(loss)   (8.33) (491.67)

 

 

DIF:    D                    OBJ:   10-3 | 10-5

 

  1. Wolters Corporation is a U.S. corporation that purchased 50,000 chocolate bars from a foreign manufacturer on 6/1/X9 for 80,000 foreign currency units, to be paid on 9/1/X9. On 6/1/X9 Wolters also entered into a forward contract to purchase 80,000 foreign currency units on 9/1/X9. Wolters has a July 31 year end.

 

Exchange rates are as follows:

 

Date Spot Rate Fwd Rate
6/1/X9 $0.64 $0.645
7/31/X9 $0.66 $0.68
9/1/X9 $0.69 $0.69

Discount rate = 12%

 

Required:

 

Make the necessary journal entries for Wolters for the period June 1 through September 1, 20X9.

 

ANS:

June 1    
Inventory 51,200  
     Accounts Payable   51,200
     
Fwd Contract Receivable-FC 51,600  
     Fwd Contract Payable-$   51,600
     
July 31    
Exchange Loss 1,600  
     Accounts Payable   1,600
     
Fwd Contract Receivable-FC 1,600  
     Unrealized Gain on Contract   1,600
     
Fwd Contract Receivable-FC 1,172  
     Unrealized Gain on Contract   1,172
     
Sept. 1    
Accounts Payable 52,800  
Exchange Loss 2,400  
     Investment in FC   55,200
     
Fwd Contract Receivable-FC 2,400  
     Unrealized Gain on Contract   2,400
     
Unrealized Exchange Loss 1,572  
     Fwd Contract Receivable-FC   1,572
     
Investment in FC 55,200  
     Forward Contract Receivable – FC   55,200
     
Fwd Contract Payable-$ 51,600  
     Cash   51,600

 

  6/1 7/31 9/1
# of FC 80,000 80,000 80,000
Spot Rate .64 .66 .69
Fwd Rate-Remain .645 .68 .69
Fwd Rate-Original   .645 .645
       
Fair Value of Fwd Contract:      
     Original   51,600 51,600
     Current   54,400 55,200
Change-Gain(loss) in Fwd Value     2,800   3,600
       
Present Value of Change:      
     n  1, i  .12/12   2,772  
     n  0, i  12/12     3,600
Change in Value:      
     Current Present Value   2,772 3,600
     Prior Present Value          0  2,772
Change in Present Value   2,772 828
Change due to spot rate-Gain(loss)   1,600  2,400
Change in time-Gain(loss)   1,172 (1,572)

 

 

DIF:    D                    OBJ:   10-3 | 10-5

 

  1. Lion Corporation, a U.S. firm, entered into several foreign currency transactions during the year. Determine the effect of each transaction on net income for that current accounting year only. Bear has a June 30 year end.

Required:

a. On January 15, Lion sold $30,000 (Canadian) in merchandise to a Canadian firm, to be paid for on February 15 in Canadian dollars. Canadian dollars were worth $0.85 (U.S.) on January 15 and $0.82 (U.S.) on February 15.

 

b. On June 1, Lion purchased and received a computer costing 100,000 euros from a German firm. Bear paid for the computer on August 1. On June 1, to reduce exchange risks, Lion purchased a contract to buy 100,000 marks in 60 days. Exchange rates are as follows:

 

  Spot Forward
6/1 $0.53 $0.60
6/30 $0.54 $0.58

 

Discount rate = 6%

 

c. On June 1, Lion purchased an option to sell 100,000 FC in 60 days to hedge a forecasted sale to a customer. The option sold for a premium of $6,500 and a strike price of $1.20. The value of the option 6/30 was $12,500. The spot rate on June 1 was $1.19 and $1.25 on June 30.

 

 

ANS:

a. Exchange loss on sale: $900
   
b. Exchange loss on exposed payable $(1,000)
  Unrealized gain on forward contract 1,000
  Loss on time value   (2,990)
  Net loss $(2,990)
   
  The value of the Forward Contract Receivable-FC on 6/30 is 58,000 compared to 60,000 on 6/1, a loss in value of 2,000. The present value of that change is 1,990 (n = 1, i = .06/12) The difference between the present value of the loss and the gain on the spots results in a loss from time value of 2,990 (1,990 loss – 1,000 gain)
   
c. 6/30
  Intrinsic Value: 100,000 FC ´ (1.25 – 1.20) = 5,000 reported in Other Comprehensive income. The remaining increase in value of the option of 1,000 (12,500 – 6,500 = 6,000 total increase in value) is a gain.

 

 

DIF:    M                   OBJ:   10-5

 

  1. On November 1, 20X1, a U.S. company purchased inventory from a foreign supplier for 100,000 FCs, with payment to be made on January 31, 20X2, in FCs. To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on November 1 to purchase 100,000 FCs on January 31, 20X2. The U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply:

 

Date Spot Rate Fwd Rate
11/1/X1 $0.15 $0.13
12/31/X1 $0.16 $0.14
1/31/X2 $0.165 $0.165

Discount rate = 12%

 

Required:

 

Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 20X1, and January 31, 20X2.

 

ANS:

Nov. 1    
Inventory 15,000  
     Accounts Payable   15,000
     
Fwd Contract Receivable-FC 13,000  
     Fwd Contract Payable-$   13,000
     
Dec. 31    
Exchange Loss 1,000  
     Accounts Payable   1,000
     
Fwd Contract Receivable-FC 1,000  
     Unrealized Gain on Contract   1,000
     
Unrealized Loss on Contract 10  
     Fwd Contract Receivable-FC   10
     
Jan. 31    
Accounts Payable 16,000  
Exchange Loss 500  
     Inv in FC   16,500
     
Fwd Contract Receivable-FC 500  
     Unrealized Gain on Contract   500
     
Fwd Contract Receivable-FC 2,010  
     Unrealized Gain on Contract   2,010
     
Inv in FC 16,500  
     Fwd Contract Receivable-FC   16,500
     
Fwd Contract Payable-$ 13,000  
     Cash   13,000

 

  11/1 12/31 1/31
# of FC 100,000 100,000 100,000
Spot Rate .15 .16 .165
Fwd Rate-Remain .13 .14 .165
Fwd Rate-Original   .13 .13
       
Fair Value of Fwd Contract:      
     Original   13,000 13,000
     Current     14,000 16,500
Change-Gain (loss) in Fwd Value   1,000 3,500
       
Present Value of Change:      
     n = 1, i = .12/12   990  
     n = 2, i = .12/12     3,500
Change in Value:      
     Current Present Value   990 3,500
     Prior Present Value            0     990
Change in Present Value   990 2,510
Change due to spot rate-Gain (loss)      1,000     500
Change in time-Gain (loss)   (10) 2,010

 

 

DIF:    M                   OBJ:   10-3 | 10-5

  1. On November 1, 20X1, a U.S. company sold merchandise to a foreign firm for 100,000 FCs with payment to be made on January 31, 20X2, in FCs. To hedge against fluctuations in exchange rates, the firm entered into a forward exchange contract on December 1, 20X1 to sell 100,000 FCs on January 31, 20X2. The U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply:
Date Spot Rate Fwd Rate
11/1/X1 $0.15  
12/1/X1 $0.155 $0.17
12/31/X1 $0.16 $0.175
1/31/X2 $0.165 $0.165

Discount rate = 10%

Required:

Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 20X1, and January 31, 20X2.

ANS:

Nov. 1    
Accounts Receivable 15,000  
     Sales   15,000
     
Dec. 1    
Accounts Receivable 500  
     Exchange Gain   500
     
Fwd Contract Receivable-$ 17,000  
     Fwd Contract Payable-FC   17,000
     
Dec. 31    
Accounts Receivable 500  
     Exchange Gain   500
     
Unrealized Loss on Contract 500  
     Fwd Contract Payable-FC   500
     
Fwd Contract Payable-FC 4  
     Unrealized Gain on Contract   4
     
Jan. 31    
Inv in FC 16,500  
     Accounts Receivable   16,000
     Exchange Gain   500
     
Unrealized Loss on Contract 500  
     Fwd Contract Payable-FC   500
     
Fwd Contract Payable-FC 1,496  
     Unrealized Exchange Gain   1,496
     
Fwd Contract Payable-FC 16,500  
     Inv in Foreign Currency   16,500
     
Cash 17,000  
     Fwd Contract Receivable-$   17,000

 

  12/1 12/31 1/31
# of FC 100,000 100,000 100,000
Spot Rate .155 .16 .165
Fwd Rate-Remain .17 .175 .165
Fwd Rate-Original   .17 .17
       
Fair Value of Fwd Contract:      
     Original   17,000 17,000
     Current   17,500 16,500
Change-Gain (loss) in Fwd Value   (500) 500
       
Present Value of Change:      
     n = 1, i = .10/12   (496)  
     n = 2, i = .10/12     500
Change in Value:      
     Current Present Value   (496) 500
     Prior Present Value        0  (496)
Change in Present Value   (496) 996
Change due to spot rate-Gain (loss)   (500)  (500)
Change in time-Gain (loss)   4 1,496

 

 

DIF:    M                   OBJ:   10-3 | 10-5

 

  1. Zerlie’s Imports purchased automotive parts from a German firm on July 1, 20X1. The parts cost 150,000 Euros to be paid for on August 15. To pay for the parts, Zerlie’s Imports borrowed 150,000 euros from a German bank on July 16. The loan bears an 11% interest rate to be repaid on August 15 in euros.

 

Another option would have been for Zerlie’s to have hedged the purchase with a forward exchange contract on July 1 to buy 150,000 euros at a forward rate of $0.67. Exchange rates were as follows:

 

Date Spot Rate
July 1, 20X1 1 M = $0.65
July 16, 20X1 1 M = $0.60
August 15, 20X1 1 M = $0.62

 

Required:

 

a. Compute the effect on net income assuming the following:  
     
    (1) Zerlie did not borrow to pay for the transaction or hedge the transaction on July 1.
    (2) Zerlie borrowed from the German bank on July 16.
    (3) Zerlie hedged the full purchase on July 1.
    ** ignore present values and discount rates
     
b. Determine which of these three alternatives would have been the best for Zerlie under the situation described.  

 

 

ANS:

      1 2 3
  a.   No Loan    
      or Hedge Loan Hedge
    Exchange gain on accounts payable $4,500 $ 4,500 $ 4,500
    Gain on euros   3,000  
    Interest expense   (853)  
    Loss on loan   (3,000)  
    Loss on hedge     (4,500)
    Premium on hedge                          (3,000)
      $4,500 $ 3,647 $(3,000)
     
b. Zerlie would have been better off if he had exposed his liability to the market rather than attempted to hedge or borrow.  

 

 

DIF:    D                    OBJ:   10-3 | 10-4 | 10-5

 

  1. Bulldog Enterprise, a U.S. firm, agreed on February 1, 20X1, to buy gears from a Mexican firm for 75,000 pesos. Delivery is scheduled for April 1, 20X1, with payment due on May 1, 20X1. On February 1, 20X1, Bulldog also acquired a forward contract to buy 75,000 pesos on May 1, 20X1. (The gears represent inventory to the U.S. firm.) There are no fiscal period ends.

 

Required:

 

Prepare the journal entries necessary for Bulldog Enterprise to record this activity. Assume that the following exchange rates existed:

 

Date Spot Rate Forward Rate
February 1, 20X1 1 peso = $0.223 1 peso = $0.227
April 1, 20X1 1 peso = $0.228 1 peso = $0.230
May 1, 20X1 1 peso = $0.226 1 peso = $0.226

Discount rate  15%

 

ANS:

Feb. 1    
Fwd Contract Receivable-$ 17,025  
     Fwd Contract Payable-FC   17,025
     
Apr. 1    
Loss on Firm Commitment 375  
     Firm Commitment   375
     
Fwd Contract Receivable-FC 375  
     Unrealized Gain on Contract   375
     
Unrealized Loss on Contract 153  
     Fwd Contract Payable-FC   153
     
Inventory 16,725  
Firm Commitment 375  
     Accounts Payable   17,100
     
May 1    
Accounts Payable 17,100  
     Inv in FC   16,950
     Exchange Gain   150
     
Unrealized Loss on Contract 150  
     Fwd Contract Receivable-FC   150
     
Unrealized Loss on Contract 147  
     Fwd Contract Receivable-FC   147
     
Inv in FC 16,950  
     Fwd Contract Receivable-FC   16,950
     
Fwd Contract Payable-$ 17,025  
     Cash   17,025

 

  2/1 4/1 5/1
# of FC 75,000 75,000 75,000
Spot Rate .223 .228 .226
Fwd Rate-Remain .227 .230 .226
Fwd Rate-Original   .227 .227
       
Fair Value of Fwd Contract:      
     Original   17,025 17,025
     Current   17,250 16,950
Change-Gain (loss) in Fwd Value   225 (75)
       
Present Value of Change:      
     n = 1, i = .15/12   222  
     n = 0, i = .15/12     (75)
Change in Value:      
     Current Present Value   222 (75)
     Prior Present Value        0  222
Change in Present Value   222 (297)
Change due to spot rate-Gain (loss)    375 (150)
Change in time-Gain (loss)   (153) (147)

 

 

DIF:    D                    OBJ:   10-3 | 10-5

 

  1. On November 1, 20X8 Desket, Inc. a U.S. company agreed to sell goods to a foreign buyer for 200,000 FC. The goods were to be shipped on December 1 with payment to be received January 31, 20X9.

The hedging contract, signed on November 1, 20X8, called for the sale of 200,000 FC on January 31, 20X9. Assume the December 31 is fiscal year end. Exchange rates are as follows:

  Spot Rate Fwd Rate
11/1/X8 $0.66 $0.69
12/1/X8 $0.67 $0.68
12/31/X8 $0.65 $0.66

Discount rate = 12%

Required:

Prepare all necessary entries through December 31, 20X8 for the commitment hedge and sale.

ANS:

Nov. 1    
Fwd Contract Receivable-$ 138,000  
     Fwd Contract Payable-FC   138,000
     
Dec. 1    
Firm Commitment 2,000  
     Gain on Firm Commitment   2,000
     
Unrealized Loss on Contract 2,000  
     Fwd Contract Payable-FC   2,000
     
Fwd Contract Payable-FC 3,980  
     Unrealized Gain on Contract   3,980
     
Accounts Receivable 134,000  
     Firm Commitment   2,000
     Sales   132,000
     
Dec. 31    
Exchange Loss 4,000  
     Accounts Receivable   4,000
     
Fwd Contract Payable-FC 4,000  
     Unrealized Gain on Contract   4,000
     
Fwd Contract Payable-FC 20  
     Unrealized Gain on Contract   20

 

  11/1 12/1 12/31
# of FC 200,000 200,000 200,000
Spot Rate .66 .67 .65
Fwd Rate-Remain .69 .68 .66
Fwd Rate-Original   .69 .69
       
Fair Value of Fwd Contract:      
     Original   138,000 138,000
     Current   136,000 132,000
Change-Gain (loss) in Fwd Value   2,000 6,000
       
Present Value of Change:      
     n  1, i  .12/12   1,980  
     n  0, i  .12/12     6,000
Change in Value:      
     Current Present Value   1,980 6,000
     Prior Present Value           0     1,980
Change in Present Value   1,980 4,020
Change due to spot rate-Gain (loss)    (2,000)     4,000
Change in time-Gain (loss)   3,980 20

 

 

DIF:    D                    OBJ:   10-3 | 10-5

 

  1. Red & Blue Company, a U.S. corporation, agreed to purchase merchandise from a British vendor on January 1, 20X4. The goods will be shipped on January 31, 20X4 and payment of 200,000 British pounds is due February 28, 20X4. On January 1, USA signed an agreement with a foreign exchange broker to buy 200,000 British pounds on February 28, 20X4. Exchange rates to purchase 1 British pound are as follows:
  Spot Rate Fwd Rate
1/1/X4 $1.65 $1.63
1/31/X4 $1.62 $1.605
2/28/X4 $1.59 $1.59

Discount Rate = 15%

 

Required:

 

Journalize these transactions.

 

ANS:

Jan. 1    
Fwd Contract Receivable-FC 326,000  
     Fwd Contract Payable-$   326,000
     
Jan. 31    
Firm Commitment 6,000  
     Gain on Firm Commitment   6,000
     
Unrealized Loss on Contract 6,000  
     Fwd Contract Receivable-FC   6,000
     
Fwd Contract Receivable-FC 1,062  
     Unrealized Gain on Contract   1,062
     
Inventory 330,000  
     Firm Commitment   6,000
     Accounts Payable   324,000
     
Feb. 28    
Fwd Contract Payable-$ 324,000  
     Cash   324,000
     
Accounts Payable 324,000  
     Inv in FC   318,000
     Exchange Gain   6,000
     
Unrealized Loss on Contract 6,000  
     Fwd Contract Receivable-FC   6,000
     
Fwd Contract Receivable-FC 2,938  
     Unrealized Gain   2,938

 

  1/1 1/31 2/28
# of FC 200,000 200,000 200,000
Spot Rate 1.65 1.62 1.59
Fwd Rate-Remain 1.63 1.605 1.59
Fwd Rate-Original   1.63 1.63
       
Fair Value of Fwd Contract:      
     Original   326,000 326,000
     Current   321,000 318,000
Change-Gain (loss) in Fwd Value   (5,000) (8,000)
       
Present Value of Change:      
     N = 1, i = .15/12   4,938  
     N = 0, i = .15/12     8,000
Change in Value:      
     Current Present Value   (4,938) (8,000)
     Prior Present Value           0  (4,938)
Change in Present Value   (4,938) (3,062)
Change due to spot rate-Gain (loss)    (6,000)  (6,000)
Change in time-Gain (loss)   1,062 2,938

 

 

DIF:    D                    OBJ:   10-3 | 10-5

 

  1. On January 1, 20X4, Branson Company, a U.S. corporation, purchased lab equipment from a Japanese vendor for 1,000,000 FC. The 1,000,000 FC is to be paid on March 31, 20X4. On February 1 the company purchased a forward contract to buy foreign currency which would expire on March 31, 20X4. The contract was to purchase 1,000,000 FC.

 

Exchange Rates are as follows:

 

Date Spot Rate Fwd Rate
1/1/X4 $0.018 $0.011
2/1/X4 $0.014 $0.011
3/31X4 $0.013 $0.013

Discount rate = 15%

 

Required:

 

Prepare the entries to record the transactions.

 

ANS:

Jan. 1    
Equipment 18,000  
     Accounts Payable   18,000
     
Feb. 1    
Accounts Payable 4,000  
     Exchange Gain   4,000
     
Fwd Contract Receivable-FC 11,000  
     Fwd Contract Payable-$   11,000
     
Mar. 31    
Dollars due to Broker 11,000  
     Cash   11,000
     
Accounts Payable 14,000  
     Inv in FC   13,000
     Exchange Gain   1,000
     
Unrealized Loss on Contract 1,000  
     Fwd Contract Receivable-FC   1,000
     
Fwd Contract Receivable-FC 3,000  
     Unrealized Gain on Contract   3,000
     
Inv in FC 13,000  
     Fwd Contract Receivable-FC   13,000

 

  1/1 2/1 3/31
# of FC 1,000,000 1,000,000 1,000,000
Spot Rate 0.018 0.014 0.013
Fwd Rate-Remain 0.011 0.011 0.013
Fwd Rate-Original   0.011 0.011
       
Fair Value of Fwd Contract:      
     Original   11,000 11,000
     Current   11,000 13,000
Change-Gain (loss) in Fwd Value   0 2,000
       
Present Value of Change:      
     n = 1, i = .15/12   0  
     n = 0, i = .15/12     2,000
Change in Value:      
     Current Present Value   0 2,000
     Prior Present Value            0         0
Change in Present Value   0 2,000
Change due to spot rate-Gain (loss)            0  (1,000)
Change in time-Gain (loss)   0 3,000

 

 

DIF:    M                   OBJ:   10-3 | 10-5

 

  1. Blue & Green, Inc. purchased merchandise for 100,000 FC from a foreign vendor on December 1, 20X5. Payment in FC is due January 31, 20X6. On December 1, 20X5, Blue & Green signed an agreement with a foreign exchange broker to buy 100,000 FC on January 30, 20X6. Exchange rates to purchase 1 FC are as follows:

 

Date Spot Rate Fwd Rate
12/1/X5 $1.45 $1.40
12/31/X5 $1.43 $1.35
1/31/X6 $1.41 $1.41

Fiscal Year End is 12/31; Discount rate = 12%

 

Required:

 

Prepare the journal entries for December 1 through January 31 related to the events described above.

 

ANS:

20X5    
Dec. 1    
Inventory 145,000  
     Accounts Payable   145,000
     
Fwd Contract Receivable-FC 140,000  
     Fwd Contract Payable-$   140,000
     
Dec. 31    
Accounts Payable 2,000  
     Exchange gain   2,000
     
Unrealized Loss on Contract 2,000  
     Fwd Contract Receivable-FC   2,000
     
Unrealized Loss on Contract 2,950  
     Fwd Contract Receivable-FC   2,950
     
Jan. 31    
Accounts Payable 143,000  
     Inv In FC   141,000
     Exchange Gain   2,000
     
Unrealized Loss on Contract 2,000  
     Fwd Contract Receivable-FC   2,000
     
Fwd Contract Receivable-FC 7,950  
     Unrealized Gain on Contract   7,950
     
Inv in FC 141,000  
     Fwd Contract Receivable-FC   141,000

 

  12/1 12/31 1/31
# of FC 100,000 100,000 100,000
Spot Rate 1.45 1.43 1.41
Fwd Rate-Remain 1.40 1.35 1.41
Fwd Rate-Original   1.40 1.40
       
Fair Value of Fwd Contract:      
     Original   140,000 140,000
     Current   135,000 141,000
Change-Gain (loss) in Fwd Value   (5,000) 1,000
       
Present Value of Change:      
     n = 1, i = .12/12   4,950  
     n = 0, i = .12/12     1,000
Change in Value:      
     Current Present Value   (4,950) 1,000
     Prior Present Value           0  (4,950)
Change in Present Value   (4,950) 5,950
Change due to spot rate-Gain (loss)    (2,000)  (2,000)
Change in time-Gain (loss)   (2,950) 7,950

 

 

DIF:    M                   OBJ:   10-3 | 10-5

  1. On 7/1, a company forecasts the purchase of 10,000 units of inventory from a foreign vendor. The forecasted cost is estimated to be 150,000 FC. It is estimated inventory will be delivered 11/1. Also, on 7/1, the company purchased a call option to buy 150,000 FC at a strike price of $0.60 anytime during October. An option premium of $1,000.
  July 1 July 31 August 31 October 1
Spot $0.58 $0.61 $0.63 $0.635
FV of Option $1,000 $1,400 $2,400 $2,600

 

Required:

 

Prepare the journal entries required through 10/1.

 

ANS:

7/1    
Inv in Call Option 1,000  
     Cash   1,000
     
7/31    
Inv in Call Option 400  
Unrealized Loss on Option 1,100  
     OCI (.61 – .60) ´ 150,000   1,500
     
8/31    
Inv in Call Option 1,000  
Unrealized Loss on Option 2,000  
     OCI (.63 – .61) ´ 150,000   3,000
     
10/1    
Inv in Call Option 200  
Unrealized Loss on Option 550  
     OCI (.635 – .63) ´ 150,000   750
     
Cash 2,600  
     Investment in Call Option   2,600
     
Inventory 95,250  
     Cash   95,250

 

 

DIF:    M                   OBJ:   10-5

 

  1. On November 1, 20X2, a calendar-year investor purchased a 90-day forward contract to buy 1,000 FCs at a forward rate of 1 FC = $1.01, when the spot rate was 1 FC = $1.00. On December 31, 20X2, the forward rate for a 30-day forward contract was 1 FC = $1.02. On February 1, 20X3, when the spot rate was 1 FC = $1.03, the investor paid the broker and received the foreign currency.

Required:

Prepare the entries necessary to record this information. Ignore the present value calculations.

ANS:

20X2    
Nov. 1    
Fwd Contract Receivable-FC 1,010  
     Fwd Contract Payable-$   1,010
     
Dec. 31    
Fwd Contract Receivable-FC 10  
     Unrealized Gain on Contract   10
     
20X3    
Feb. 1    
Fwd Contract Payable-$ 1,010  
     Cash   1,010
     
Foreign Currency 1,030  
     Fwd Contract Receivable-FC   1,020
     Exchange Gain   10

 

 

DIF:    M                   OBJ:   10-3 | 10-5

ESSAY

  1. Differentiate between the following monetary systems: floating system, controlled float system and tiered system.

 

ANS:

In a floating rate system, supply and demand primarily define currency exchange rate. In a controlled float system, the exchange rate is established and maintained by a nation’s central bank. In a tiered system, a country establishes special exchange rates for certain transactions.

 

DIF:    E                    OBJ:   10-1

 

  1. Describe the disclosures required by the FASB of firms using derivatives as foreign currency hedges.

 

ANS:

The FASB requires four basic disclosures:

 

(1) The objectives of using hedging instruments and the strategies for achieving the objective.
   
(2) A description of the various types of hedges such as fair value hedges and cash flow hedges.
   
(3) A description of the entity’s risk management policy for hedging types along with a description of the types of transactions which are hedged.
   
(4) Detailed information regarding: the amount of gains/losses on hedges, where gains/losses are recognized-earnings or other comprehensive income, when gains/losses appearing in other comprehensive income will be recognized in earnings, where gains/losses recognized in earnings appear in the income statement, and gains/losses recognized due to a hedge no longer qualifying for hedge accounting.

 

 

DIF:    M                   OBJ:   10-5

  1. Explain how the risks differ for holders and writers of foreign exchange options. Additionally, describe the difference between American and European options. Finally, how is the intrinsic value of an option calculated?

ANS:

For a holder of an option, the total risk is limited to the premium paid and applicable brokerage fees, while the option writer has unlimited risk associated with exchange rate fluctuations which are not offset by the premium charged. “American” options can be exercised any time during the option period, whereas “European” options can only be exercised at maturity. The intrinsic value of an option represents the difference between the exercise price and the spot price.

 

DIF:    E                    OBJ:   10-4

 

  1. Describe the risks and uncertainty a U.S. company faces when purchasing goods from a foreign corporation and settling the transaction in the foreign currency.

 

ANS:

Given that rates of exchange vary over time, there is uncertainty about how many U.S. dollars will be needed at settlement. Additionally, because exchange rates change over time, the U.S. company may need more dollars to settle the purchase, exposing the company to business risk.

 

DIF:    E                    OBJ:   10-4

Advanced Accounting 10th Edition Test Bank – Fischer -paul m

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