Chapter 10—Foreign Currency Transactions Key
1. When an economic transaction is denominated in a currency other than the entity’s domestic currency, the
entity must establish a
2. The best definition for direct quotes would be “direct quotes measure
3. A bank dealing in foreign currency tells you that the foreign currency will buy you $.80 US dollars. The bank
has given you
5. The forward rate in a forward contract
6. A forward exchange contract is being transacted at a premium if the current forward rate is
7. Which of the following factors influences the spread between forward and spot rates?
8. 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?
9. A transaction involving foreign currency will most likely result in gains and losses to the reporting entity if
the
10. 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
11. 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
12. Foreign currency transactions not involving a hedge should be accounted for using
13. A U.S. firm has purchased, for 50,000 FC, 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 of the equipment if the two-transaction method is used?
14. In a credit transaction resulting in an exposed asset or liability, gains and losses on foreign currency
transactions should be recognized:
15. A U.S. manufacturer has sold computer services to a foreign firm, billed the firm and later received 200,000
foreign currency units (FC). 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?
16. 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
17. 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?
18. 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?
19. A United States based company that has not hedged an exposed asset position would experience an
exchange gain if
20. Which of the following does not represent an exchange risk on an exposed position to a company
transacting business with a foreign vendor?
21. The purpose of a hedge on an identifiable commitment where the U.S. company is selling goods is to:
22. A derivative:
23. The two distinguishing characteristics of a derivative are
24. The time value of an option is the difference between the
25. Which is true of foreign currency forward contracts and foreign currency options?
Foreign currency forward contracts Foreign currency options
26. A fair value hedge may include hedges against the change in the fair value of all but:
27. To qualify for fair value hedge accounting, a company must document all but:
28. Exchange gains and losses on a forward exchange contract that covers the same time period as the
transaction which it provides a fair value hedge for should be recognized as
29. Gains and losses resulting from a derivative instrument used for a cash flow hedge are recognized in current
earnings:
30. 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 (fiscal year end)
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?
31. 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 firm’s fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%. What is the recorded
value of the Forward Contract on 6/1/X2?
32. 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 firm’s fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%. What is the value of
the Forward Contract on 6/30/X2?
33. 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 recorded amount of the Forward Contract on November 30, 20X5?
34. 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. The discount rate is 8% and 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 is the net amount of the gains or losses recognized in the financial statements for the year ended December 31, 20×5?
35. 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 December 31, 20X5?
36. On 6/1/X2, an American firm purchased 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 acquired an option for $1,500 to purchase 100,000
Canadian dollars for delivery on 8/1/X2. The strike price for the option was $0.685. The exchange rates were as
follows:
Spot
Option value
6/1/X2
1 CD = $0.68
$1,500
6/30/X2
1 CD = $0.70
$2,500
8/1/X2
1 CD = $0.73
$4,500
The American firm’s fiscal year end is June 30, 20X2. What is the net gain or loss recognized in the financial statements for the year ended June 30,
20X2?
37. On 6/1/X2, an American firm purchased 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 acquired an option for $1,500 to purchase 100,000
Canadian dollars for delivery on 8/1/X2. The strike price for the option was $0.685. The exchange rates were as
follows:
Spot
Option value
6/1/X2
1 CD = $0.68
$1,500
6/30/X2
1 CD = $0.70
$2,500
8/1/X2
1 CD = $0.73
$4,500
The entry to settle the option will include:
38. On 6/1/X2, an American firm sold inventory costing 100,000 Euro from a Dutch firm with payment to be
received on 8/1/X2. Also on 6/1/X2, the American firm acquired an option for $1,500 to sell 100,000 Euro on
8/1/X2. The strike price for the option was $1.21. The exchange rates were as follows:
Spot
Option value
6/1/X2
1 CD = $1.20
$1,500
6/30/X2
1 CD = $1.19
$1,800
8/1/X2
1 CD = $1.15
$6,000
The American firm’s fiscal year end is June 30, 20X2. What is the net gain or loss recognized in the financial statements for the year ended June 30,
20X2?
39. 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)?
40. 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 at that time. On November 30, 20X3,
Happ signed an agreement with a foreign exchange broker to buy 100,000 British pounds on January 31, 20X4.
Exchange rates to purchase 1 British pound are as follows:
Nov. 30, 20X3
Dec. 31, 20X3
Jan. 31, 20X4
Spot
$1.65
$1.62
$1.59
30 day
$1.64
$1.59
$1.60
60 day
$1.63
$1.56
$1.58
Because of this commitment hedge, Happ, Inc. will record the merchandise at what value when it arrives in January?
41. 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%. What is the value of Forward Contract on 6/30?
42. 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 and
payment will take place 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
1FC = $0.57
1FC = $0.56
8/1/X3
1FC = $0.55
1FC = $0.55
Discount rate is 12%. What is the amount in the Firm Commitment account on 6/30/X3?
43. Which of the following statements is true concerning forward contracts classified as hedges of an
identifiable foreign currency commitment?
44. Which of the following is not true concerning the accounting for hedges of forecasted transactions using an
option?
45. 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
46. The accounting treatment given a cash flow hedge of a forecasted transaction continues unless:
47. 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?
48. On 6/1/X2, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian
firm to be paid for on 9/1/X2. Also on 6/1/X2, the American firm entered into a forward contract to purchase
100,000 Canadian dollars for delivery on 9/1/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 = $0.75
1 CD = $0.76
9/1/X2
1 CD = $0.78
1 CD = $0.78
The American firm’s fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%. The transaction
qualifies as for accounting as a cash flow hedge. What is the amount that will be recognized in earnings in the year ended 6/30/X2?
49. 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 = $0.75
1 CD = $0.76
8/1/X2
1 CD = $0.78
1 CD = $0.78
The American firm’s fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%. The transaction
qualifies as for accounting as a cash flow hedge. What is the total amount that will be recognized in other comprehensive income in the year ended
6/30/X2?
50. 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.
July 1
Computer (75,000 x .25)
18,750
Accounts Payable
18,750
Aug. 1
Accounts Payable
18,750
Exchange Gain
1,500
Cash (75,000 x .23)
17,250
51. On September 15, 20X2, Wall Company, a U.S. firm, purchased a piece of equipment from a foreign firm
for 500,000 FC. Payment for the equipment was to be made in FC 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.
Nov. 1
Equipment (500,000 x .30)
150,000
Accounts Payable
150,000
Dec. 31
Exchange Loss [500,000 x (.33 – .30)]
15,000
Accounts Payable
15,000
Jan. 15
Accounts Payable (150,000 + 15,000)
165,000
Exchange Gain
7,500
Cash (500,000 x .315)
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
52. On November 1, 20X1, DEMO Corp., a U.S. firm, sold merchandise to a foreign firm for 60,000 FC.
DEMO will be paid on January 31, 20X2, in FC. 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.
Nov. 1
Accounts Receivable (60,000 x .50)
30,000
Sales
30,000
Dec. 31
Accounts Receivable [60,000 x (.55 – .50)]
3,000
Exchange Gain
3,000
Jan. 31
Cash (60,000 x .53)
31,800
Exchange Loss
1,200
Accounts Receivable (30,000 + 3,000)
33,000
53. On January 1, 20X1, a U.S. firm bought a truck from a foreign firm for 10,000 FC, to be paid on March 1 in
FC. 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 FC 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. Ignore the split between spot gain/loss and time value.
54. 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
March 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
$0.63
4/30/X9
$0.66
$0.66
Required:
Prepare the journal entries to record the transactions through April 30, 20X9. March 31 is the fiscal period end. Ignore the split between spot
gain/loss and time value.
Mar. 1
Inventory (80,000 x .69)
55,200
Accounts Payable
55,200
Memo: Company acquires a forward contract to buy
80,000 FC at a forward rate of $.65
Mar. 31
Accounts Payable [80,000 x (.61 – .69)]
6,400
Exchange Gain
6,400
Loss on Contract [80,000 x (.63 – .65)]
1,600
Forward Contract
1,600
Apr. 30
Forward Contract [80,000 x (.66 – .63)]
2,400
Gain on Contract
2,400
Foreign Currency (80,000 x .66)
52,800
Forward Contract (2,400 – 1,600)
800
Cash (80,000 x .65)
52,000
Accounts Payable (55,200 – 6,400)
48,800
Exchange Loss
4,000
Foreign Currency (80,000 x .66)
52,800
55. Remle Corporation is a U.S. corporation that sold merchandise a foreign manufacturer on March 1, 20X9
for 200,000 foreign currency units. The funds will be received on April 30, 20X9. On March 1, 20X9 Wolters
also entered into a forward contract to sell 200,000 foreign currency units on April 30, 20X9. Remle has a
March 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
$0.63
4/30/X9
$0.66
$0.66
Required:
Prepare the journal entries to record the transactions through April 30, 20X9. March 31 is the fiscal period end. Ignore the split between spot
gain/loss and time value and Cost of Goods Sold.
Mar. 1
Accounts Receivable (200,000 x .69)
138,000
Sales
138,000
Memo: Company acquires a forward contract to sell
200,000 FC at a forward rate of $.65
Mar. 31
Exchange Loss [200,000 x (.61 – .69)]
16,000
Accounts Receivable
16,000
Forward Contract [200,000 x (.63 – .65)]
4,000
Gain on Contract
4,000
Apr. 30
Loss on Contract [200,000 x (.66 – .63)]
6,000
Forward Contract
6,000
Foreign Currency (200,000 x .66)
132,000
Exchange Loss
10,000
Accounts Receivable (138,000 – 16,000)
122,000
Cash (200,000 x .65)
130,000
Forward Contract (6,000 – 4,000)
2,000
Foreign Currency (200,000 x .66)
132,000
56. 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.
1
2
3
No Loan
or Hedge
Loan
Hedge
Exchange gain on accounts payable
$4,500
$ 4,500
$ 4,500
Gain on euros
3,000
Interest expense (150,000 x .11 x 1/12 x .62)
(853)
Loss on loan
(3,000)
Loss on hedge
(7,500)
$4,500
$ 3,647
$(3,000)
than attempted to hedge or borrow.