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Chapter 07
Foreign Currency Transactions and Hedging Foreign Exchange Risk
Multiple Choice Questions
1.
Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2013.
Pigskin received payment of 35,000 British pounds on May 8, 2013. The exchange rate was
≤1 = $1.54 on April 8 and ≤1 = 1.43 on May 8. What amount of
foreign exchange gain or loss
should be recognized? (
round to the nearest dollar
)
A.
$10,500 loss
B.
$10,500 gain
C.
$1,750 loss
D.
$3,850 loss
E.
No gain or loss should be recognized.
2.
Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000
British pounds to be received in sixty days. The pertinent exchange rates were as follows:
For what amount should
Sales
be credited on December 1?
A.
$5,500.
B.
$16,949.
C.
$18,182.
D.
$17,241.
E.
$16,667.
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3.
Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000
British pounds to be received in sixty days. The pertinent exchange rates were as follows:
What amount of
foreign exchange gain or loss
should be recorded on December 31?
A.
$300 gain.
B.
$300 loss.
C.
$0.
D.
$941 loss.
E.
$941 gain.
4.
Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000
British pounds to be received in sixty days. The pertinent exchange rates were as follows:
What amount of
foreign exchange gain or loss
should be recorded on January 30?
A.
$1,516 gain.
B.
$1,516 loss.
C.
$575 loss.
D.
$500 loss.
E.
$500 gain.
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5.
Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8.
Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco’s fiscal
year-end. The pertinent exchange rates were as follows:
For what amount should Brisco’s
Accounts Payable
be credited on May 8?
A.
$2,500,000.
B.
$2,440,000.
C.
$1,600,000.
D.
$1,639,344.
E.
$1,666,667.
6.
Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8.
Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco’s fiscal
year-end. The pertinent exchange rates were as follows:
How much
Foreign Exchange Gain or Loss
should Brisco record on May 31?
A.
$2,520,000 gain.
B.
$20,000 gain.
C.
$20,000 loss.
D.
$80,000 gain.
E.
$80,000 loss.
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7.
Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8.
Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco’s fiscal
year-end. The pertinent exchange rates were as follows:
How much U.S. $ will it cost Brisco to finally pay the payable on June 7?
A.
$1,666,667.
B.
$2,440,000.
C.
$2,520,000.
D.
$2,500,000.
E.
$2,400,000.
8.
On June 1, CamCo received a signed agreement to sell inventory for ×500,000. The sale
would take place in 90 days. CamCo immediately signed a 90-day forward contract to sell the
yen as soon as they are received. The spot rate on June 1 was ×1 = $.004167, and the 90-
day forward rate was ×1 = $.00427. At what amount would CamCo record the Forward
Contract on June 1?
A.
$2,083.
B.
$0.
C.
$2,110.
D.
$2,532.
E.
$2,135.
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9.
Belsen purchased inventory on December 1, 2012. Payment of 200,000 stickles was to be
made in sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in
sixty days. The spot rate was §1 = .35714, and the 60–day forward rate was §1 = $.38462.
On December 31, the spot rate was §1 = .34483 and the 30-day forward rate was §1 =
.38168. Assume an annual interest rate of 12% and a fair value hedge. The present value for
one month at 12% is .9901.
In the journal entry to record the establishment of a forward exchange contract, at what
amount should the
Forward Contract
account be recorded on December 1?
A.
$71,428.
B.
$76,924.
C.
$588.
D.
$582.
E.
$0, since there is no cost, there is no value for the contract at this date.
10.
Meisner Co. ordered parts costing §100,000 for a foreign supplier on May 12 when the spot
rate was $.24 per stickle. A one-month forward contract was signed on that date to purchase
§100,000 at a forward rate of $.25 per stickle. On June 12, when the parts were received and
payment was made, the spot rate was $.28 per stickle. At what amount should inventory be
reported?
A.
$0.
B.
$28,000.
C.
$24,000.
D.
$25,000.
E.
$2,000.
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11.
Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013,
with payment of 10 million Korean won to be received on January 15, 2014. The following
exchange rates applied:
Assuming a forward contract was not entered into, what would be the net impact on Car
Corp.’s 2013 income statement related to this transaction?
A.
$500 (gain).
B.
$500 (loss).
C.
$200 (gain).
D.
$200 (loss).
E.
$- 0 –
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12.
Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013,
with payment of 10 million Korean won to be received on January 15, 2014. The following
exchange rates applied:
Assuming a forward contract was entered into, the foreign currency was originally sold in the
foreign currency market on December 16, 2013 at a
A.
forward contract discount $600.
B.
forward contract premium $600.
C.
forward contract discount $980.
D.
forward discount premium $980.
E.
There is no premium or discount because the fair value of the contract is zero.
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13.
Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013,
with payment of 10 million Korean won to be received on January 15, 2014. The following
exchange rates applied:
Assuming a forward contract was entered into, at what amount should the forward contract
be recorded at December 31, 2013? Assume an annual interest rate of 12% and a fair value
hedge. The present value for one month at 12% is .9901.
A.
$200.
B.
$295.
C.
$495.
D.
$500.
E.
$9,300.
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14.
Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013,
with payment of 10 million Korean won to be received on January 15, 2014. The following
exchange rates applied:
Assuming a forward contract was entered into, how would the forward contract be reflected
on Car’s December 31, 2013 balance sheet?
A.
Forward contract (asset).
B.
Forward contract (liability).
C.
Foreign currency (asset).
D.
Foreign currency (liability).
E.
Foreign exchange (liability).
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15.
Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013,
with payment of 10 million Korean won to be received on January 15, 2014. The following
exchange rates applied:
Assuming a forward contract was entered into, what would be the net impact on Car Corp.’s
2013 income statement related to this transaction? Assume an annual interest rate of 12%
and a fair value hedge. The present value for one month at 12% is .9901.
A.
$700 (gain).
B.
$700 (loss).
C.
$300 (gain).
D.
$300 (loss).
E.
$297 (gain).
7-11
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16.
Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013,
with payment of 10 million Korean won to be received on January 15, 2014. The following
exchange rates applied:
Assuming a forward contract was entered into on December 16, what would be the net
impact on Car Corp.’s 2014 income statement related to this transaction?
A.
$500 (gain).
B.
$303 (gain).
C.
$300 (gain).
D.
$300 (loss).
E.
$0.
17.
Mills Inc. had a receivable from a foreign customer that is due in the local currency of the
customer (stickles). On December 31, 2012, this receivable for §200,000 was correctly
included in Mills’ balance sheet at $132,000. When the receivable was collected on February
15, 2013, the U.S. dollar equivalent was $144,000. In Mills’ 2013 consolidated income
statement, how much should have been reported as a foreign exchange gain?
A.
$0.
B.
$36,000.
C.
$48,000.
D.
$10,000.
E.
$12,000.
18.
A spot rate may be defined as
A.
The price a foreign currency can be purchased or sold today.
B.
The price today at which a foreign currency can be purchased or sold in the future.
C.
The forecasted future value of a foreign currency.
D.
The U.S. dollar value of a foreign currency.
E.
The Euro value of a foreign currency.
19.
The forward rate may be defined as
A.
The price a foreign currency can be purchased or sold today.
B.
The price today at which a foreign currency can be purchased or sold in the future.
C.
The forecasted future value of a foreign currency.
D.
The U.S. dollar value of a foreign currency.
E.
The Euro value of a foreign currency.
20.
Which statement is true regarding a foreign currency option?
the future.
foreign currency in the future.
the future at the spot rate on the future date.
