AACSB: Knowledge Application
AACSB: Diversity
49. Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts from a foreign
supplier on July 7 when the spot rate was $.025 per baht. A one-month forward contract was signed on
that date to purchase 1,000,000 bahts at a rate of $.027. The forward contract is properly designated as a
fair value hedge of the 1,000,000 baht firm commitment. On August 7, when the parts are received, the
spot rate is $.028. What is the amount of accounts payable that will be paid at this date?
A) $20,000.
B) $20,100.
C) $25,000.
D) $27,000.
E) $28,000.
50. On December 1, 2018, Joseph Company, a U.S. company, entered into a three-month forward contract
to purchase 50,000 pesos on March 1, 2019, as a fair value hedge of a foreign currency denominated
account payable. The following U.S. dollar per peso exchange rates apply:
Forward Rate
Date
Spot Rate
(Mar.1, 2019)
December 1, 2018
$0.092
$0.105
December 31, 2018
$0.090
$0.095
March 1, 2019
$0.089
N/A
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, 2018
balance sheet for the forward contract?
A) $5,146.58 asset.
B) $5,146.58 liability.
C) $ 500.00 liability.
D) $ 490.15 asset.
E) $ 490.15 liability.
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
Feedback: $0.105 – $0.095 = ($0.01) × MP50,000 = ($500.00) × .9803 = ($490.15) Liability
[QUESTION]
51. On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a French customer in
three months, denominating the transaction in euros. On April 1, the spot rate is $1.41 per euro, and
Quality enters into a three-month forward contract cash flow hedge to sell 400,000 euros at a rate of
$1.36. At the end of three months, the spot rate is $1.37 per euro, and Quality delivers the merchandise,
collecting 400,000 euros. What are the effects on net income from these transactions?
A) $20,000 Discount Expense plus a $12,000 positive Adjustment to Net Income when the merchandise
is delivered.
B) $20,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise
is delivered.
C) $20,000 Discount Expense plus a $20,000 negative Adjustment to Net Income when the merchandise
is delivered.
D) $20,000 Discount Expense plus a $16,000 positive Adjustment to Net Income when the merchandise
is delivered.
E) $20,000 Discount Expense plus a $20,000 positive Adjustment to Net Income when the merchandise is
delivered.
52. What amount will Woolsey include as an option expense in net income for the period July 24 to
October 24?
A) $ 4,000.
B) $ 5,000.
C) $10,000.
D) $12,000.
E) $14,000.
53. What amount will Woolsey include as Adjustment to Net Income for the period ended October 31?
A) $ 6,000 positive.
B) $ 6,000 negative.
C) $10,000 positive.
D) $10,000 negative.
E) $14,000 positive.
54. Atherton, Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000
lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three–
month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign
currency transaction. The following exchange rates apply:
Option Strike Price $ 4.34
Option Cost $5,000
January 17 Spot Rate $ 4.34
April 17 Spot Rate $ 4.26
What amount will Atherton include as an option expense in net income for the period January 17 to April
17?
A) $4,000
B) $4,260
C) $4,340
D) $5,000
E) $5,260
55. What was the impact on Mosby’s 2018 net income as a result of this fair value hedge of a firm
commitment?
A) $1,760.60 decrease.
B) $1,960.60 decrease.
C) $1,000.00 decrease.
D) $1,760.60 increase.
E) $1,960.60 increase.
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AACSB: Analytical Thinking
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
Feedback: $.094 – $.095 = ($.001) × MP 2,000,000 = ($2,000) × .9803 = ($1,960.60) Loss on Firm
Commitment
$3,200 – $3,000 = $200 Option Value Increase
($1,960.60) Loss on Firm Commitment + $200 Option Value Increase = ($1,760.60) Reduction in 2018
Net Income
[QUESTION]
REFER TO: 09-09
56. What was the impact on Mosby’s 2019 net income as a result of this fair value hedge of a firm
commitment?
A) $ 1,800.00 decrease.
B) $ 2,500.00 increase.
C) $ 2,500.00 decrease.
D) $188,760.60 increase.
E) $188,760.60 decrease.
57. What was the overall result of having entered into this hedge of exposure to foreign exchange risk?
A) $0
B) $9,000 net loss on the option.
C) $9,000 net gain on the option.
D) $2,000 net gain on the option.
E) $2,000 net loss.
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AICPA: FN Measurement
Feedback: $.095 – $.089 = $.006 × MP 2,000,000 = $12,000 Gain from Hedge – $3,000 Cost of Option =
$9,000 Net Gain on Option
REFERENCE: 09-10
On March 1, 2018, 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, 2019.
On March 1, 2018, Mattie purchased a put option giving it the right to sell 200,000 British pounds on
March 1, 2019 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, 2018. The
following spot exchange rates apply:
Date
Spot Rate
March 1, 2018
$1.90
December 31, 2018
$1.89
March 1, 2019
$1.84
Mattie’s incremental borrowing rate is 12 percent, and the present value factor for two months at a 12
percent annual rate is .9803.
[QUESTION]
REFER TO: 09-10
58. What was the net impact on Mattie’s 2018 income as a result of this fair value hedge of a firm
commitment?
A) $1,800.00 decrease.
B) $1,760.60 decrease.
C) $2,240.40 decrease.
D) $1,660.40 increase.
E) $2,240.60 increase.
59. What was the net impact on Mattie’s 2019 income including the 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.
60. 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.
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Page 9-28
February 1, 2019
$2.01
[QUESTION]
REFER TO: 09-11
61. What journal entry should Eagle prepare on October 1, 2018?
Cash
1,800
Foreign Currency Option
1,800
Forward Contract
1,800
Cash
1,800
Foreign Currency Option
1,800
Gain on Foreign Currency
1,800
Loss on Foreign Currency
1,800
Cash
1,800
Foreign Currency Option
1,800
Cash
1,800
62. What journal entry should Eagle prepare on December 31, 2018?
A)
Foreign Currency Option
200
Cash
200
B)
Foreign Currency Option
200
Option Revenue
200
C)
Foreign Currency Option
400
Option Revenue
400
D)
Option Expense
200
Foreign Currency Option
200
E)
Option Expense
400
Foreign Currency Option
400
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Page 9-29
AICPA: BB Global
AICPA: FN Measurement
[QUESTION]
REFER TO: 09-11
63. What is the amount of option expense for 2019 from these transactions?
A) $1,000.
B) $1,600.
C) $2,500.
D) $2,600.
E) $ 0.
64. What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2019 from these
transactions?
A) $1,000.
B) $1,600.
C) $1,800.
D) $2,000.
E) $2,600.
65. What is the amount of Cost of Goods Sold for 2019 as a result of these transactions?
A) $200,000.
B) $195,000.
C) $201,000.
D) $202,600.
E) $203,000.
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Learning Objective: 09-09
Topic: Hedge–Option–Forecasted FC transaction
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
Feedback: £100,000 × $2.00 Strike Price = $200,000 + $1,000 AOCI Adjustment = $201,000 COGS
[QUESTION]
REFER TO: 09-11
66. What is the 2019 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
67. Which is a true statement regarding the fundamental requirement of accounting for derivatives?
A) Derivatives are reported on the balance sheet only as an asset.
B) Derivatives are reported on the balance sheet only as a liability.
C) Changes in derivative cost basis are recorded in the asset value.
D) Changes in derivative fair value are included in comprehensive income.
E) Changes in derivative cost basis are recorded in the liability value.
68. Authoritative literature provides guidance for hedges of the following sources of foreign exchange
risk.
I. Recognized foreign currency denominated assets and liabilities.
II. Unrecognized foreign currency firm commitments.
III. Forecasted foreign currency denominated transactions.
A) I only
B) I and II
C) II only
D) II and III
E) I, II, and III
69. All of the following data points are needed to determine the fair value of a forward contract (at any
point), 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 forward rate for a contract that has the same duration as the forward contract entered into.
D) A discount rate which is typically the company’s incremental borrowing rate.
E) A future rate which is typically the company’s incremental borrowing rate.
70. For speculative derivatives, the change in the fair value of the derivative must be:
A) Utilized to adjust the derivative asset.
B) Recognized immediately as a gain or loss in net income.
C) Recognized as a loss in other comprehensive income.
D) Recognized as a gain in other comprehensive income.
E) Recognized as a gain or loss in net income at a later date.
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Page 9-32
Feedback:
[QUESTION]
71. Which of the following is not a condition of accounting for hedge derivatives?
A) The derivative is minimally effective in offsetting changes in the cash flows or fair value related to the
hedged item.
B) The derivative is properly documented as a hedge.
C) The derivative is used to hedge a cash flow exposure to foreign exchange risk.
D) The derivative is highly effective in offsetting changes in the cash flows or fair value related to the
hedged item.
E) The derivative is used to hedge a fair value exposure to foreign exchange risk.
72. To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability
at initiation date requires which of the following?
A) 1. Recognize the transaction (sale or purchase) and foreign currency denominated asset or liability 2.
Recognize option as an asset (purchase price is fair value)
B) 1. No entry related to the firm commitment (zero value) 2. No entry related to forward contract (zero
fair value)
C) 1. Recognize the transaction (sale or purchase) and foreign currency denominated asset or liability 2.
No entry related to forward contract (zero fair value)
D) 1. Recognize the transaction (sale or purchase) 2. Recognize the option as a liability
E) 1. None. No journal entry is required.
73. To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability
at the balance sheet date
4. Transfer from AOCI to net income (as discount expense or premium revenue) the current period’s
amortization of discount or premium
B) 1. Adjust hedged asset or liability to fair value, with counterpart (change in fair value) reported as
foreign exchange gain or loss in net income and 2. Adjust option to fair value (either an asset or zero
value), with counterpart (change in fair value) reported as gain or loss in net income
C) 1. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair
value) reported as gain or loss in net income and 2. Adjust firm commitment to fair value (based on
change in forward rate), with counterpart (change in fair value) reported as gain or loss in net income
D) 1. Adjust hedged asset, with counterpart (change in fair value) reported as a foreign exchange gain in
net income and 2. Adjust forward contract to fair value (either an asset or a liability), with counterpart
(change in fair value) reported as a gain or loss in net income
E) 1. None. No journal entry is required.
74. Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty days. Briefly
describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.
75. Where can you find exchange rates between the U.S. dollar and most foreign currencies?
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AICPA: FN Measurement
[QUESTION]
76. What is meant by the spot rate?
77. How is the fair value of a Forward Contract determined by U.S. GAAP?
78. What are the two separate transactions that require recording under the two-transaction perspective?
79. What is the purpose of a hedge of foreign exchange risk?
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Page 9-35
an element of certainty into the future cash flows resulting from foreign currency activities by
establishing a price today at which foreign currency can be sold or purchased at a future date.
Learning Objective: 09-04
Topic: Derivatives―Types and uses
Difficulty: 2 Medium
Blooms: Understand
AACSB: Reflective Thinking
AACSB: Diversity
AACSB: Communication
AICPA: BB Global
AICPA: FN Risk Analysis
[QUESTION]
80. How does a foreign currency forward contract differ from a foreign currency option?
81. What factors create a foreign exchange gain?
82. What happens when a U.S. company purchases goods denominated in a foreign currency and the
foreign currency depreciates?