44. Winston Corp., a U.S. company, had the following foreign currency
transactions during 2011:
(1.) Purchased merchandise from a foreign supplier on July 16, 2011 for the U.S.
dollar equivalent of $47,000 and paid the invoice on August 3, 2011 at the U.S.
dollar equivalent of $54,000.
(2.) On October 15, 2011 borrowed the U.S. dollar equivalent of $315,000
evidenced by a non-interest-bearing note payable in euros on October 15, 2011.
The U.S. dollar equivalent of the note amount was $295,000 on December 31,
2011, and $299,000 on October 15, 2012.
What amount should be included as a foreign exchange gain or loss from the two
transactions for 2011?
45. Winston Corp., a U.S. company, had the following foreign currency
transactions during 2011:
(1.) Purchased merchandise from a foreign supplier on July 16, 2011 for the U.S.
dollar equivalent of $47,000 and paid the invoice on August 3, 2011 at the U.S.
dollar equivalent of $54,000.
(2.) On October 15, 2011 borrowed the U.S. dollar equivalent of $315,000
evidenced by a non-interest-bearing note payable in euros on October 15, 2011.
The U.S. dollar equivalent of the note amount was $295,000 on December 31,
2011, and $299,000 on October 15, 2012.
What amount should be included as a foreign exchange gain or loss from the two
transactions for 2012?
46. 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?
47. 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?
48. 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?
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?
50. On December 1, 2011, Joseph Company, a U.S. company, entered into a
three-month forward contract to purchase 50,000 pesos on March 1, 2012, as a
fair value hedge of a foreign currency denominated account payable. 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, 2011 balance sheet for the
forward contract?
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?
52. Woolsey Corporation, a U.S. company, expects to sell goods to a British
customer 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 put option for 250,000
British pounds and designated this option as a cash flow hedge of a forecasted
foreign currency transaction expected to be completed in late October. The
following exchange rates apply:
What amount will Woolsey include as an option expense in net income for the
period July 24 to October 24?
53. Woolsey Corporation, a U.S. company, expects to sell goods to a British
customer 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 put option for 250,000
British pounds and designated this option as a cash flow hedge of a forecasted
foreign currency transaction expected to be completed in late October. The
following exchange rates apply:
What amount will Woolsey include as Adjustment to Net Income for the period
ended October 31?
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:
What amount will Atherton include as an option expense in net income for the
period January 17 to April 17?
55. On May 1, 2011, 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, 2012. On May 1, 2011, Mosby
purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2012
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, 2011. 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.
What was the impact on Mosby’s 2011 net income as a result of this fair value
hedge of a firm commitment?
56. On May 1, 2011, 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, 2012. On May 1, 2011, Mosby
purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2012
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, 2011. 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.
What was the impact on Mosby’s 2012 net income as a result of this fair value
hedge of a firm commitment?
57. On May 1, 2011, 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, 2012. On May 1, 2011, Mosby
purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2012
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, 2011. 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.
What was the overall result of having entered into this hedge of exposure to
foreign exchange risk?
58. On March 1, 2011, 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, 2012. On March 1, 2011, Mattie
purchased a put option giving it the right to sell 200,000 British pounds on March
1, 2012 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, 2011. 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.
What was the net impact on Mattie’s 2011 income as a result of this fair value
hedge of a firm commitment?
59. On March 1, 2011, 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, 2012. On March 1, 2011, Mattie
purchased a put option giving it the right to sell 200,000 British pounds on March
1, 2012 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, 2011. 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.
What was the net impact on Mattie’s 2012 income as a result of this fair value
hedge of a firm commitment?
60. On March 1, 2011, 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, 2012. On March 1, 2011, Mattie
purchased a put option giving it the right to sell 200,000 British pounds on March
1, 2012 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, 2011. 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.
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?
61. On October 1, 2011, Eagle Company forecasts the purchase of inventory
from a British supplier on February 1, 2012, at a price of 100,000 British pounds.
On October 1, 2011, 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,
2011, the option has a fair value of $1,600. The following spot exchange rates
apply:
What journal entry should Eagle prepare on October 1, 2011?
62. On October 1, 2011, Eagle Company forecasts the purchase of inventory
from a British supplier on February 1, 2012, at a price of 100,000 British pounds.
On October 1, 2011, 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,
2011, the option has a fair value of $1,600. The following spot exchange rates
apply:
What journal entry should Eagle prepare on December 31, 2011?