TEST BANK FOREIGN CURRENCY TRANSACTIONS AND HEDGING 9TH EDITION

TEST BANKFOREIGN CURRENCY TRANSACTIONS AND HEDGING 9TH EDITION TEST BANK FOREIGN CURRENCY TRANSACTIONS AND HEDGING MULTIPLE CHOICE 1. Topic: Valuation of forward contracts LO 3 A U.S. company invests in a forward purchase contract for 100,000,000 yen with a purchase price of $0.009/yen, for delivery in 45 days. The spot rate at the time the contract is initiated is $0.0085/yen. At the end of the accounting year, the forward contract is still outstanding. The year-end spot rate is $0.0088/yen. The year-end forward rate for delivery at the contract date is $0.0092/yen. How is the forward contract reported on the U.S. company’s balance sheet? a. $20,000 asset b. $20,000 liability c. $30,000 asset d. $30,000 liability ANS: a ($0.0092 - $0.009) x 100,000,000 = $20,000 2. Topic: Cash flow hedge LO 6 On August 1, a U.S. company enters into a forward contract, in which it agrees to buy 1,000,000 euros from a bank at a rate of $1.115 on December 1. Changes in the value of the forward contract will be reported in other comprehensive income on the balance sheet in which one of the following situations? a. The U.S. company has receivables denominated in euros, with payment to be received on December 1. b. The U.S. company sold merchandise to a customer in Belgium on August 1, and expects payment of 1,000,000 euros on December 1. c. The U.S. company plans to sell merchandise to a customer in Belgium on August 1, with payment of 1,000,000 euros expected on December 1. d. The U.S. company plans to purchase merchandise from a supplier in Belgium, with payment of 1,000,000 euros expected to be paid on December 1. ANS: d ©Cambridge Business Publishers, 2010 2 Advanced Accounting, 1st Edition Use the following information on the U.S. dollar value of the euro to answer questions 3 – 7 below: Spot rate Forward rate for April 30, 2011 delivery October 30, 2010 $ 1.25 $ 1.30 December 31, 2010 1.28 1.32 April 30, 2011 1.26 1.26 On October 30, 2010, a company enters a forward contract to sell €100,000 on April 30, 2011. The company’s accounting year ends December 31. 3. Topic: Hedge of export transaction LO 4 The forward contract hedges an outstanding €100,000 account receivable due on April 30. What is the net effect on income in 2010 and 2011? a. $1,000 gain $4,000 gain b. $1,000 loss $4,000 gain c. $3,000 gain $6,000 gain d. $2,000 loss $6,000 gain ANS: a 2010: Gain on receivable, ($1.28 - $1.25) x €100,000 = $3,000 Loss on forward, ($1.32 - $1.30) x €100,000 = $2,000 Net gain $1,000 2011: Loss on receivable, ($1.28 - $1.26) x €100,000 = $2,000 Gain on forward, ($1.32 - $1.26) x €100,000 = $6,000 Net gain $4,000 ©Cambridge Business Publishers, 2010 Test Bank, Chapter 7 3 4. Topic: Hedge of firm commitment LO 5 The forward contract hedges a sales order for €100,000, received October 30. The sale was made and the €100,000 collected on April 30, 2011. Sales revenue recorded on April 30 is: a. $126,000 b. $122,000 c. $130,000 d. $124,000 ANS: c (€100,000 x $1.26) + ($1.30 - $1.26) x €100,000 = $130,000 5. Topic: Hedge of firm commitment LO 5 The forward contract hedges a sales order for €100,000, received October 30. The sale was made and the €100,000 collected on April 30, 2011. The net effect on 2010 income is: a. No effect b. $2,000 loss c. $3,000 gain d. $1,000 gain ANS: a The gain on the firm commitment and loss on the forward contract are ($1.32 - $1.30) x €100,000 = $2,000, and they offset for a zero effect on 2010 income. ©Cambridge Business Publishers, 2010 4 Advanced Accounting, 1st Edition 6. Topic: Hedge of forecasted transaction LO 6 The forward contract hedges a forecasted sale for €100,000, expected at the end of April 2011. The net effect on 2010 income is: a. No effect b. $2,000 loss c. $3,000 gain d. $1,000 gain ANS: a The loss on the forward contract is reported in other comprehensive income. 7. Topic: Hedge of forecasted transaction LO 6 The forward contract hedges a forecasted sale for €100,000, expected at the end of April 2011. The sale takes place on April 30, 2011, €100,000 is collected, and the forward contract is closed. Which statement is true, concerning the sale on April 30, 2011? a. The $1,000 total loss on the forward contract is reclassified from other comprehensive income as an adjustment to sales revenue. b. The $4,000 total gain on the forward contract is reclassified from other comprehensive income as an adjustment to sales revenue. c. The 2011 $6,000 gain on the forward contract is recognized as a hedging gain on the 2011 income statement. d. The 2010 $2,000 loss on the forward contract is recognized as a hedging loss on the 2010 income statement. ANS: b The total gain on the forward contract is ($1.30 - $1.26) x €100,000 = $4,000. Changes in the value of the forward are reported in other comprehensive income until the hedged forecasted transaction is reported in income. In this case, the forecasted transaction results in sales revenue, reported in 2011. ©Cambridge Business Publishers, 2010 Test Bank, Chapter 7 5 8. Topic: Export transaction LO 2 On May 20, 2012, when the spot rate is $1.30/€, a company sells merchandise to a customer in Italy. The spot rate is $1.31/€ on June 30, the company’s year-end. Payment of €100,000 is received on July 30, 2012, when the spot rate is $1.28/€. What is the effect on fiscal 2012 and 2013 income? Fiscal 2012 Fiscal 2013 a. $1,000 exchange loss $3,000 exchange gain b. $1,000 exchange gain $3,000 exchange loss c. No effect $2,000 exchange loss d. No effect $2,000 exchange gain ANS: b Fiscal 2012 exchange gain = ($1.31 - $1.30) x €100,000 = $1,000 Fiscal 2013 exchange loss = ($1.31 - $1.28) x €100,000 = $3,000 9. Topic: Import transaction LO 2 On May 20, 2012, when the spot rate is $1.30/€, a company purchases merchandise from a supplier in Italy. The spot rate is $1.31/€ on June 30, the company’s year-end. Payment of €100,000 is made on July 30, 2012, when the spot rate is $1.28/€. What is the effect on fiscal 2012 and 2013 income? Fiscal 2012 Fiscal 2013 a. $1,000 exchange loss $3,000 exchange gain b. $1,000 exchange gain $3,000 exchange loss c. No effect $2,000 exchange loss d. No effect $2,000 exchange gain ANS: a Fiscal 2012 exchange loss = ($1.31 – $1.30) x €100,000 = $1,000 Fiscal 2013 exchange gain = ($1.31 – $1.28) x €100,000 = $3,000 ©Cambridge Business Publishers, 2010 6 Advanced Accounting, 1st Edition Data for questions 10 and 11 are as follows: On September 8, the Sealy Company purchased cotton at an invoice price of €20,000, when the exchange rate was $1.32/€. Payment was to be made on November 8. On November 8, Sealy purchased the €20,000 for $1.30/€, and paid the invoice. 10. Topic: Import transaction LO 2 The cotton should be valued in Sealy's inventory at: a. $20,000 b. $25,600 c. $26,000 d. $26,400 ANS: d €20,000 x $1.32 = $26,400 11. Topic: Import transaction LO 2 The exchange gain or loss recognized by Sealy as a result of this transaction is: a. No gain or loss b. $400 gain c. $400 loss d. $1,667 gain ANS: b €20,000 x ($1.32 - $1.30) = $400 gain ©Cambridge Business Publishers, 2010 Test Bank, Chapter 7 7 Data for questions 12 and 13 are as follows: On June 5, Teneco Corporation sold merchandise at an invoice price of €100,000, when the exchange rate was $1.36/€. Payment was to be received on August 16. On August 16, the customer paid the €100,000. The exchange rate on that date was $1.39/€. 12. Topic: Export transaction LO 2 The sale should be reported on Teneco's books at: a. $136,000 b. $139,000 c. $ 73,530 d. $ 71,942 ANS: a €100,000 x $1.36 = $136,00