Difficulty: 2 Medium
Blooms: Analyze
83. What happens when a U.S. company purchases goods denominated in a foreign currency and the
foreign currency appreciates?
84. What happens when a U.S. company sells goods denominated in a foreign currency and the foreign
currency depreciates?
85. What happens when a U.S. company sells goods denominated in a foreign currency and the foreign
currency appreciates?
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 9-37
[QUESTION]
86. Gaw Produce Company purchased inventory from a Japanese company on December 18, 2018.
Payment of 4,000,000 yen (¥) was due on January 18, 2019. 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.
87. Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2018, for
100,000 stickles. Payment was received on October 15, 2018. The following exchange rates applied:
Exchange
Date
Rate
December 18, 2018
¥1 = $.0080
December 31, 2018
¥1 = $.0082
January 18, 2019
¥1 = $.0083
Exchange
Date
Rate
September 15, 2018
§1 = $.48
September 30, 2018
§1 = $.50
October 15, 2018
§1 = $.44
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.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 9-39
Exchange
Date
Rate
March 1, 2018
$.20 = 1 peso
May 1, 2018
$.22 = 1 peso
August 1, 2018
$.23 = 1 peso
September 1, 2018
$.24 = 1 peso
December 31, 2018
$.25 = 1 peso
[QUESTION]
REFER TO: 09-12
88. Prepare all journal entries in U.S. dollars along with any December 31, 2018 adjusting entries. Coyote
uses a perpetual inventory system.
2018
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 9-40
AICPA: BB Global
AICPA: FN Measurement
[QUESTION]
REFER TO: 09-12
89. What amount will Coyote Corp. report in its 2018 balance sheet for Inventory?
90. What amount will Coyote Corp. report in its 2018 income statement for Cost of goods sold?
91. What amount will Coyote Corp. report in its 2018 income statement for Sales?
92. What amount will Coyote Corp. report in its 2018 balance sheet for Accounts receivable?
93. What amount will Coyote Corp. report in its 2018 balance sheet for Accounts payable?
94. The beginning balance of cash was 50,000 pesos on January 1, 2018, translated at 1 peso = $.18.
What amount will Coyote Corp. report in its 2018 balance sheet for Cash?
Date
Rate Description
Exchange Rate
November 10, 2018
Spot Rate
$.35 = 1 LCU
December 1, 2018
Spot Rate
$.32 = 1 LCU
2-Month Forward Rate
$.30 = 1 LCU
December 31, 2018
Spot Rate
$.29 = 1 LCU
1-Month Forward Rate
$.28 = 1 LCU
February 1, 2019
Spot Rate
$.27 = 1 LCU
The company’s borrowing rate is 12%. The present value factor for one month is .9901.
[QUESTION]
REFER TO: 09-13
95. (A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal entries relating to the
transaction and the forward contract.
(B.) Compute the effect on 2018 net income.
(C.) Compute the effect on 2019 net income.
Accounts receivable
Sales
No entry
Foreign exchange loss
5,760
Accounts receivable
5,760
Forward contract
1,901
AOCI
1,901
5,760
Gain on forward contract
5,760
Discount expense
AOCI
960
Accounts receivable
1,920
Forward contract
979
AOCI
979
AOCI
1,920
Gain on forward contract
1,920
Discount expense
9604
AOCI
960
4[96,000 × ($.32 – $.30) /2] for 2nd of 2 mos.
Foreign currency
25,920
Accounts receivable
25,920
Cash
28,800
Forward contract
2,880
Foreign currency
25,920
B.
Sales
$ 33,600
Foreign exchange loss
( 5,760)
Gain on forward contract
5,760
Discount expense
( 960)
Increase
$ 32,640
C.
Foreign exchange loss
$( 1,920)
Gain on forward contract
1,920
Discount expense
( 960)
Decrease
$( 960)
Learning Objective: 09-07
Topic: Hedge–Forward contract–FC denominated asset
Difficulty: 3 Hard
Blooms: Analyze
Blooms: Apply
AACSB: Knowledge Application
AACSB: Analytical Thinking
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
[QUESTION]
REFER TO: 09-13
96. (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 2018 net income.
(C.) Compute the effect on 2019 net income.
A.
11/10/18
Accounts receivable
Sales
12/01/18
No entry
12/31/18
Foreign exchange loss
5,760
Accounts receivable
5,760
Forward contract
1,901
Gain on forward contract
1,901
02/01/19
Foreign exchange loss
1,920
Accounts receivable
1,920
Forward contract
979
Gain on forward contract
979
Foreign currency
25,920
Accounts receivable
25,920
Cash
28,800
Forward contract
2,880
Foreign currency
25,920
Learning Objective: 09-07
Topic: Hedge–Forward contract–FC denominated asset
Difficulty: 3 Hard
Blooms: Analyze
Blooms: Apply
AACSB: Knowledge Application
AACSB: Analytical Thinking
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
REFERENCE: 09-14
On October 1, 2018, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000
local currency units (LCU). Collection is expected in four months. On October 1, 2018, a forward
exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February
1, 2019) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows:
Date
Rate Description
Exchange Rate
October 1, 2018
Spot Rate
$.83= 1 LCU
December 31, 2018
Spot Rate
$.85 = 1 LCU
1-Month Forward Rate
$.80 = 1 LCU
February 1, 2019
Spot Rate
$.86 = 1 LCU
The company’s borrowing rate is 12%. The present value factor for one month is .9901.
Any discount or premium on the contract is amortized using the straight-line method.
[QUESTION]
REFER TO: 09-14
97. Assuming this is a cash flow hedge; prepare journal entries for this sales transaction and forward
contract.
Accounts receivable
Sales
Foreign exchange gain
2,000
1,980
Forward contract
1,980
Loss on forward contract
2,000
AOCI
2,000
Discount expense
AOCI
3,750
Accounts receivable
1,000
Foreign exchange gain
1,000
6,020
Forward contract
6,020
Loss on forward contract
1,000
AOCI
1,000
Discount expense
1,2504
AOCI
1,250
4[100,000 × ($.83 – $.78) × 1/4] for 1 of 4
months
Foreign currency
86,000
Accounts receivable
86,000
Cash
78,000
Forward contract
8,000
Foreign currency
86,000
Learning Objective: 09-07
Topic: Hedge–Forward contract–FC denominated asset
Difficulty: 3 Hard
Blooms: Analyze
Blooms: Apply
AACSB: Knowledge Application
AACSB: Analytical Thinking
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
[QUESTION]
REFER TO: 09-14
98. Assuming this is a fair value hedge; prepare journal entries for this sales transaction and forward
contract.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 9-47
Learning Objective: 09-07
Topic: Hedge–Forward contract–FC denominated asset
Difficulty: 3 Hard
Blooms: Analyze
Blooms: Apply
AACSB: Knowledge Application
AACSB: Analytical Thinking
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
[QUESTION]
99. On October 31, 2017, 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, 2019. 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:
Franc Rate
October 31, 2017
$0.50
December 31, 2017
$0.52
October 31, 2018
$0.60
December 31, 2018
$0.62
Date
Spot
Value
Change
Forward
Adjustment
10/1/18
$.83
$83,000
$.78
12/31/18
$.85
$85,000
+$2,000
$.80
–
$1,980
1
2/1/19
$.86
$86,000
+ 1,000
$.86
–
$6,020
2
1
[(.80
–
.78)100,000] × 0.9901 = 1,980
2
[(.78
–
.86)100,000]
× 1,980 = 6,020
10/1/18
Accounts receivable
83,000
Sales
83,000
12/31/18
Accounts receivable
2,000
Foreign exchange gain
2,000
Loss on forward contract
1,980
Forward contract
1,980
2/1/19
Accounts receivable
1,000
Foreign exchange gain
1,000
Loss on forward contract
6,020
Forward contract
6,020
Foreign currency
86,000
Accounts receivable
86,000
Cash
78,000
Forward contract
8,000
Foreign currency
86,000
October 31, 2019
$0.75
the spot rate
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Education.
Page 9-49
accrued at 12/31/18.
Note payable (franc)
62,000
Foreign exchange loss
13,000
Cash [100,000 francs × $.75]
75,000
To record payment of the 100,000 franc note.
Learning Objective: 09-03
Topic: Foreign currency borrowing
Difficulty: 3 Hard
Blooms: Analyze
Blooms: Apply
AACSB: Knowledge Application
AACSB: Analytical Thinking
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
[QUESTION]
100. For each of the following situations, select the best answer concerning accounting for foreign
currency transactions:
(G) Results in a foreign exchange gain.
(L) Results in a foreign exchange loss.
(N) 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 seller
appreciates.
_____4. Import purchase by a U.S. company denominated in dollars, foreign currency of seller
appreciates.
_____5. Import purchase by a U.S. company denominated in foreign currency, foreign currency of seller
depreciates.
_____6. Import purchase by a U.S. company denominated in dollars, foreign currency of seller
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.