Chapter 11 – MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS AND
FINANCIAL INSTRUMENTS
11-8
E11-1
LO 11-1
15 min.
E
Exchange Rates
The direct exchange rates are given and students must compute indirect
exchange rates and determine the amount of currency required to purchase
goods.
E11-2
LO 11-1
15 min.
E
Changes in Exchange Rates
An analysis is required to determine exchange rates and to determine foreign
currency gain or loss for an individual traveling in a foreign country.
E11-3
LO 11-2
20 min.
E
Basic Understanding of Foreign Exposure
Students must analyze the effects of changes in foreign exchange rates, both
direct and indirect rates.
E11-4
LO 11-2
20 min.
E
Account Balances
T-accounts are required to analyze export and import transactions at the date of
the transaction, the year-end adjustments, and the settlement date.
E11-5
LO 11-2
20 min.
M
Determining Year-End Account Balances for Import and Export
Transactions
Students must determine year-end balances for import and export transactions
affecting accounts receivable, accounts payable, and foreign currency transaction
gain or loss for four separate cases.
E11-6
LO 11-2
20 min.
E
Transactions with Foreign Companies
Two transactions must be analyzed and journal entries prepared, first assuming
the transactions are denominated in U.S. dollars, and then assuming the
transactions are denominated in the applicable local currency unit.
E11-7
LO 11-2
10 min.
E
Foreign Purchase Transaction
Journal entries are required as of the date of the transaction, the year-end
adjustment, and the settlement date.
E11-8
LO 11-2
30 min.
M
Adjusting Entries for Foreign Currency Balances
Pre-adjusted balances in foreign currency denominated accounts payable and
accounts receivable are provided. Students must prepare adjusting journal entries
and date of settlement entries.
E11-9
LO 11-3
25 min.
M
Purchase with Forward Exchange Contract
Journal entries are required for a foreign currency payable that is hedged with a
forward exchange contract. Entries are required at date of transaction and
settlement date.
Chapter 11 – MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS AND
FINANCIAL INSTRUMENTS
11-9
E11-10
LO 11-3
25 min.
M
Purchase with Forward Exchange Contract and Intervening Fiscal Year-
End
Students must provide journal entries for a hedged foreign currency payable.
Entries are required at date of transaction, end of fiscal period, and settlement
date.
E11-11
LO 11-2
20 min.
E
Foreign Currency Transactions [AICPA Adapted]
Seven multiple-choice questions on foreign currency payable and receivable
transactions.
E11-12
LO 11-2
20 min.
M
Sale in Foreign Currency
Journal entries are required for a foreign currency denominated receivable.
Dollar weakens between transaction date and end of year, and dollar strengthens
between end of year and settlement date in next year.
E11-13
LO 11-3
35 min.
M
Sale with Forward Exchange Contract
Journal entries are required on the date of the transaction and the settlement date
for a foreign currency payable. The company enters into a forward contract to
manage its exposed foreign currency receivable. The forward contract is not
designated as a hedge.
E11-14
LO 11-2
25 min.
M
Foreign Currency Transactions [AICPA Adapted]
Seven multiple-choice questions requiring students to compute the foreign
currency transaction gain or loss for selected transactions.
E11-15
LO 11-3
20 min.
M
Sale with Forward Contract and Fiscal Year-End
Journal entries are required for an export transaction. The company enters into a
60-day forward contract to manage exposure. The forward contract is not
designated as a hedge. Entries are required at the date of the transaction, the
fiscal year-end, and the settlement date.
E11-16A
LO 11-3
40 min.
H
Hedge of a Purchase (Commitment without and with Time Value of Money
Considerations)
Students are required to prepare journal entries for a hedge of a foreign currency
commitment at the transaction date, the end of the fiscal year, and finally the
settlement date.
E11-17
LO 11-3
20 min.
E
Gain or Loss on Speculative Forward Exchange Contract
Students prepare schedules to show the effects of a speculative forward
exchange contract on income before taxes for two years.
E11-18
LO 11-3
35 min.
M
Speculation in a Foreign Currency
Journal entries are required for a speculative forward exchange contract in
which the company obtains a foreign currency receivable forward contract.
E11-19
LO 11-2,
LO 11-3
15 min.E
Forward Exchange Transactions [AICPA Adapted]
Five multiple-choice questions on forward exchange transactions cover hedging,
forward exchange commitments, and speculation.
Chapter 11 – MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS AND
FINANCIAL INSTRUMENTS
11–10
P11-20
LO 11-2,
LO 11-3
20 min.
M
Multiple-Choice Questions on Foreign Currency Transactions
Five multiple-choice questions on a hedged foreign currency payable. Questions
focus on elements of journal entries that would be made.
P11-21
LO 11-2,
LO 11-3
40 min.
M
Foreign Sales
Journal entries are required for foreign sales, the use of a forward exchange
contract, and the settlements.
P11-22
LO 11-2,
LO 11-3
60 min.
H
Foreign Currency Transactions
Students must make journal entries for a series of foreign currency transactions,
some of which are hedged with forward exchange contracts. Both transaction
date and settlement date entries are required. Settlement dates are in the same
fiscal period as transaction dates.
P11-23A
LO 11-3
60 min.
H
Comprehensive Problem: Four Uses of Forward Exchange Contracts
without and with Time Value of Money Considerations
Journal entries are required for alternative uses of forward exchange contracts:
(1) a hedge of an exposed foreign currency position, (2) a hedge of a foreign
currency commitment, (3) a hedge of an anticipated foreign currency transaction,
and (4) a speculation.
P11-24
LO 11-2,
LO 11-3
35 min.
M
Foreign Purchases and Sales Transactions and Hedging
This two-part problem includes a number of foreign exchange transactions,
several of which are hedged with forward exchange contracts. Students are
asked to prepare journal entries and then to determine the income statement
effects of the transactions.
P11-25
LO 11-1,
LO 11-2
40 min.
M
Understanding Foreign Currency Transactions
Students must work with incomplete data and answer a variety of questions
about the account balances and the exchange rates that must have existed at the
time of various transactions.
P11-26
LO 11-1,
LO 11-2,
LO 11-3
20 min.
M
Matching Key Terms
Fifteen terms are presented for which students must select the best description or
explanation of each term.
Chapter 11 – MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS AND
FINANCIAL INSTRUMENTS
11–11
P11-27B
LO 11-3
15 min.
M
Multiple -Choice Questions on Derivatives and Hedging Activities
Six multiple-choice questions dealing with derivatives and hedging activities
must be answered.
P11-28B
LO 11-3
25 min.
M
A Cash Flow Hedge: Use of an Option to Hedge an Anticipated Purchase
An entity is utilizing a call option as a price-risk-hedging device. Students must
prepare journal entries to record the option purchase, the year-end adjusting entry
for the change in time and intrinsic value, the expiration of the time value of the
option, the sale of the option, the purchase of the commodity, and the sale of the
commodity.
P11-29B
LO 11-3
25 min.
M
A Fair Value Hedge: Use of an Option to Hedge Available-for-Sale
Securities
An entity purchases a put option to hedge available-for-sale securities. Students
must prepare the journal entries to record the purchase of the securities and the
put options, the change in the intrinsic and time value of the options, the
revaluation of the securities, the exercise of the put potion, and the sale of the
securities.
P11-30B
LO 11-3
30 min.
M
Matching Key Terms
Fifteen items must be matched with fifteen descriptions or explanations.
P11-31
LO 11-2,
LO 11-3
35
H
Determining Financial Statements Amounts
Students must determine the appropriate financial statement amounts for four
independent transactions.
Chapter 11 – MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS AND
FINANCIAL INSTRUMENTS
11–12
OTHER RESOURCES
CHANGES IN EXCHANGE RATES:
Direct Exchange Rate = ($U.S. / 1 FCU)
1. IF DIRECT EXCHANGE RATE INCREASES
(More U.S. dollars are needed to acquire one unit of foreign currency)
Implications:
Dollar weakens relative to foreign currency
Imports become more expensive to U.S.
U.S. exports become less expensive to foreign country
2. IF DIRECT EXCHANGE RATE DECREASES
(Fewer U.S. dollars are needed to acquire one unit of foreign currency)
Implications:
Dollar strengthens relative to foreign currency
Imports become less expensive to U.S.
U.S. exports become more expensive to foreign country
Chapter 11 – MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS AND
FINANCIAL INSTRUMENTS
11–13
FOREIGN EXCHANGE RATES:
Dollars ($) and Euros ( )
DIRECT
($1 / EU)
INDIRECT (EU
/ $1)
7/1/X8
$1.167
EU 0.855
12/31/X8
1.176
0.850
12/31/X9
1.156
0.865
Dollar weakens 7/1 to 12/31/X8
Dollar strengthens 12/31/X8 to 12/31/X9
Company holds 20,000 Euros (EU):
(Must revalue account denominated in foreign
currency units to equivalent U.S. dollar value)
FOREIGN CURRENCY UNITS (EU)
7/1/X8
20,000 x 1.167
=
$23,340
12/31/X8
20,000 x 1.176
=
$23,520
Gain: $180
12/31/X9
20,000 x 1.156
=
$23,120
Loss: $400
Financial Statement Amounts:
Balance Sheet:
12/31/X8: Asset: $23,520
12/31/X9: Asset: $23,120
Income Statement, year ended
12/31/X8: Other income or loss: Gain: $180
12/31/X9: Other income or loss: Loss: $400
Chapter 11 – MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS AND
FINANCIAL INSTRUMENTS
11–14
FORWARD EXCHANGE CONTRACTS
1. HEDGE OF AN EXPOSED POSITION
Spot rate
Gain (or loss) on forward exchange contract offsets loss (or gain) on exposed position
2. HEDGE OF AN UNRECOGNIZED FOREIGN CURRENCY
COMMITMENT
Value forward exchange contract at fair value
Gain or loss on financial instrument component of commitment is offset
against loss or gain on forward exchange contract
Adjust basis of hedged item for gain or loss on financial instrument
component of commitment
3. HEDGING A FORECASTED FOREIGN CURRENCY TRANSACTION: CASH FLOW
HEDGE
Fair value is recognized for derivative contract
Change in fair value of hedging instrument recognized in other comprehensive income
An amount equal to the foreign exchange gain or loss from the hedged transaction is
reclassified from other comprehensive income to current income
4. SPECULATION
Current forward rate for remaining term
Exchange gain or loss included in current period income