Chapter 09
Chapter 09
B. $0
9. Belsen purchased inventory on December 1, 2008. Payment of 200,000 stickles was
to be made in sixty days. Also on December 1, Belsen signed a contract to purchase
200,000 in sixty days. The spot rate was $1 = 2.80 and the 60-day forward rate was
$1 = 2.60. On December 31, the spot rate was $1 = 2.90 and the 30-day forward rate
was $1 = 2.62. Assume an annual interest rate of 12% and a fair value hedge. The
present value for one month at 12% is .9901.
In the journal entry to record the establishment of a forward exchange contract, at what
amount should the Forward Contract account be recorded on December 1?
E. $0, since there is no cost, there is no value for the contract at this date
10. Meisner Co. ordered parts costing 100,000 for a foreign supplier on May 12 when
the spot rate was $.24 per stickle. A one-month forward contract was signed on that
date to purchase 100,000 at a forward rate of $.25 per stickle. On June 12, when the
parts were received and payment was made, the spot rate was $.28 per stickle. At what
amount should inventory be reported?
B. $28,000
Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2008, with payment of 10 million Korean won to be received on January 15, 2009. The
following exchange rates applied:
Date
Spot
Forward
December 16, 2008
$.00090 $.00098
December 31, 2008
$.00092 $.00093
January 15, 2009 $.00095 $.00095
11. Assuming a forward contract was not entered into, what would be the net impact on
Car Corp.'s 2008 income statement related to this transaction?
C. $200 gain
12. Assuming a forward contract was entered into, what would be the net impact on Car
Corp.'s 2008 income statement related to this transaction? Assume an annual interest
rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.
E. $295.05 loss
13. Assuming a forward contract was entered into on December 16, what would be the
net impact on Car Corp.'s 2009 income statement related to this transaction?
A. $500 gain
14. Mills Inc. had a receivable from a foreign customer that is due in the local currency
of the customer (stickles). On December 31, 2008, this receivable for 200,000 was
correctly included in Mills' balance sheet at $132,000. When the receivable was
collected on February 15, 2009, the U.S. dollar equivalent was $144,000. In Mills' 2009
consolidated income statement, how much should have been reported as a foreign
exchange gain?
E. $12,000
15. A spot rate may be defined as
A. The price a foreign currency can be purchased or sold today
16. The forward rate may be defined as
B. The price today at which a foreign currency can be purchased or sold in the future
17. Which statement is true regarding a foreign currency option?
D. A foreign currency option gives the holder the right but not the obligation to buy or
sell foreign currency in the future
18. A U.S. company sells merchandise to a foreign company denominated in U.S.
dollars. Which of the following statements is true?
C. No foreign exchange gain or loss will result
19. A U.S. company sells merchandise to a foreign company denominated in the foreign
currency. Which of the following statements is true?
A. If the foreign currency appreciates, a foreign exchange gain will result
20. A U.S. company buys merchandise from a foreign company denominated in U.S.
dollars. Which of the following statements is true?
C. No foreign exchange gain or loss will result
21. A U.S. company buys merchandise from a foreign company denominated in the
foreign currency. Which of the following statements is true?
D. If the foreign currency appreciates, a foreign exchange loss will result
22. SFAS 133 provides guidance for hedges of all the following sources of foreign
exchange risk except
E. Deferred foreign currency gains and losses
23. All of the following data may be needed to determine the fair value of a forward
contract at any point in time except
C. The future spot rate
Forward
$.97
$.05
$.95
$.04
$.03
29. Compute the value of the foreign currency option at December 1, 2007.
D. $7,500
30. Compute the value of the foreign currency option at December 31, 2007.
A. $6,000
31. Compute the value of the foreign currency option at February 1, 2008.
B. $4,500
E. $4,000 loss
44. 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?
B. Premium revenue
45. 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?
B. Premium revenue
46. 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?
E. $2,800
47. 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 onemonth 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?
E. $28,000
48. On December 1, 2009, Joseph Company, a U.S. company, entered into a threemonth forward contract to purchase 50,000 pesos on March 1, 2010. The following U.S.
dollar per peso exchange rates apply:
Date
Spot
December 1, 2009
December 31, 2009
March 1, 2010
$.089
$.092
$.090
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, 2009 balance sheet for the forward contract?
E. $490.15 liability
49. On April 1, Quality Corporation, a U.S. company, expects to order merchandise from
a German supplier in three months, denominating the transaction in euros. On April 1,
the spot rate is $1.19 per euro and Quality enters into a three-month forward contract
to purchase 400,000 euros at a rate of $1.20. At the end of three months, the spot rate
is $1.21 per euro and Quality orders and receives the merchandise, paying 400,000
euros. What are the effects on net income from these transactions?
C. $4,000 Premium Expense plus a $4,000 negative Adjustment to Net Income when the
merchandise is received
50. On August 31, Ram Corporation, a U.S. company, expects to order merchandise
from a German supplier in three months, denominating the transaction in euros. On
August 31, the spot rate is $1.19 per euro and Quality enters into a three-month forward
contract to purchase 600,000 euros at a rate of $1.20. At the end of three months, the
spot rate is $1.21 per euro and Ram orders and receives the merchandise, paying
600,000 euros. What are the effects on net income from these transactions?
C. $6,000 Premium Expense plus a $6,000 negative Adjustment to Net Income when the
merchandise is sold
51. Woolsey Corporation, a U.S. company, expects to order goods from a British supplier
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 call option for 250,000 British pounds and
designated this option as a cash flow hedge of a forecasted foreign currency
transaction. The following exchange rates apply:
Option strike price
$2.17
Option cost
$4,000
July 24 spot rate $2.17
October 24 spot rate
$2.13
What amount will Woolsey include as an option expense in net income during the period
July 24 to October 24?
A. $4,000
52. 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
Spot rate
$0.095
$0.094
$0.089
Mosby's incremental borrowing rate is 12 percent and the present value factor for two
months at a 12 percent annual rate is .9803.
53. What was the net impact on Mosby's 2007 income as a result of this fair value
hedge of a firm commitment?
A. $1,760.60 decrease
54. What was the net impact on Mosby's 2008 income as a result of this fair value
hedge of a firm commitment?
D. $188,760.60 increase
55. 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?
C. $9,000 increase
60. What journal entry should Eagle prepare on December 31, 2007?
D. D above
Option expense $200
Foreigh Curency Option $200
61. What is the amount of option expense for 2008 from these transactions?
B. $1,600
62. What is the amount of Adjustment to Accumulated Other Comprehensive Income
for 2008 from these transactions?
A. $1,000
63. What is the amount of Cost of Goods Sold for 2008 as a result of these transactions?
C. $201,000
64. What is the 2008 effect on net income as a result of these transactions?
B. $201,600
Essay Questions
65. Yelton Co. just sold inventory for 80,000 lira, which Yelton will collect in sixty days.
Briefly describe a hedging transaction Yelton could engage in to reduce its risk of
unfavorable exchange rates.
Yelton could sign a forward exchange contract to sell the lira in 60 days after they are
received. Alternatively, Yelton could purchase an option to sell the lira in 60 days after
they are received.66. Where can you find exchange rates between the U.S. dollar and
most foreign currencies?
Foreign exchange rates are published in the Wall Street Journal, major U.S. newspapers
and several Internet sites.
67. What is meant by the spot rate?
The spot rate is the price at which a foreign currency can be purchased or sold today.
68. How is the fair value of a Forward Contract determined under SFAS 133?
The fair value of a Forward Contract is determined by comparing the difference between
the contracted forward rate and the currently available forward rate for contracts
expiring on the same date. On the initial date of the contract, this would result in a fair
value of $0. As time passes, the currently available forward rate will likely fluctuate
relative to the "fixed" contracted forward rate, creating a difference that must be
accounted for as a gain or loss on the forward contract. A contract with a net gain over
its life is recorded on the balance sheet as a Forward Contract Asset. A contract with a
net loss over its life is recorded on the balance sheet as a Forward Contract Liability.
69. What is the major assumption underlying the one-transaction perspective?
The one-transaction perspective assumes that an export sale is not complete until the
foreign currency receivable has been collected and converted into U.S. dollars.
70. What is meant by the term hedging?
"Hedging is the process of eliminating exposure to foreign exchange risk so as to avoid
potential losses from fluctuations in exchange rates. In addition to avoiding possible
losses, companies hedge foreign currency transactions and commitments to introduce
an element of certainty into the future cash flows resulting from foreign currency
activities. Hedging involves establishing a price today at which foreign currency can be
sold or purchased at a future date".
71. How does a foreign currency forward contract differ from a foreign currency option?
"Whereas the owner of a foreign currency option can choose whether to exercise the
option and exchange one currency for another or not, a party to a foreign currency
forward contract is obligated to deliver one currency in exchange for another at a
specified future date".
72. What factors create a foreign exchange gain?
"Foreign exchange gains and losses are created by two factors: having foreign currency
exposures (foreign currency receivables and payables) and changes in exchange rates".
73. What happens when a U.S. company purchases goods denominated in a foreign
currency and the foreign currency depreciates?
The event results in a foreign exchange gain.
74. What happens when a U.S. company purchases goods denominated in a foreign
currency and the foreign currency appreciates?
The event results in a foreign exchange loss.
75. What happens when a U.S. company sells goods denominated in a foreign currency
and the foreign currency depreciates?
The event results in a foreign exchange loss.
76. What happens when a U.S. company sells goods denominated in a foreign currency
and the foreign currency appreciates?
The event results in a foreign exchange gain.