Complete Test Bank Ch12 Foreign Currency & Hedging Risk

Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Chapter Number: 12

Question Type: Multiple Choice

1) A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a:

a) hedge of a net investment in a foreign entity.

b) hedge of an exposed asset or liability position.

c) hedge of an identifiable foreign currency commitment.

d) contract acquired to speculate in the movement of exchange rates.

Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Hard

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

2) The discount or premium on a forward contract entered into as a hedge of an exposed asset or liability position should be:

a) included as a separate component of stockholders’ equity.

b) amortized over the life of the forward contract.

c) deferred and included in the measurement of related foreign currency transaction.

d) none of these.

Question Title: Test Bank (Multiple Choice) Question 02

Difficulty: Hard

Learning Objective: 7 Identify some of the common situations in which a forward exchange contract can be used as a hedge.

Section Reference: 12.4

3) An indirect exchange rate quotation is one in which the exchange rate is quoted:

a) in terms of how many units of the domestic currency can be converted into one unit of foreign currency.

b) for the immediate delivery of currencies exchanged.

c) in terms of how many units of the foreign currency can be converted into one unit of domestic currency.

d) for the future delivery of currencies exchanged.

Question Title: Test Bank (Multiple Choice) Question 03

Difficulty: Easy

Learning Objective: 3 Understand some of the more common foreign currency transactions.

Section Reference: 12.1

4) A transaction gain is recorded when there is an:

a) importing transaction and the exchange rate increases.

b) exporting transaction and the exchange rate increases.

c) exporting transaction and the exchange rate decreases.

d) none of these.

Question Title: Test Bank (Multiple Choice) Question 04

Difficulty: Medium

Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage.

Section Reference: 12.3

5) During 2017, a U.S. company purchased inventory from a foreign supplier. The transaction was denominated in the local currency of the seller. The direct exchange rate increased from the date of the transaction to the balance sheet date. The exchange rate decreased from the balance sheet date to the settlement date in 2018. For the years 2017 and 2018, transaction gains or losses should be recognized as:

a) 2017, gain; 2018, gain

b) 2017, gain; 2018, loss

c) 2017, loss; 2018 loss

d) 2017, loss; 2018, gain

Question Title: Test Bank (Multiple Choice) Question 05

Difficulty: Medium

Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage.

Section Reference: 12.3

6) A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to:

a) hedge a net investment in a foreign entity.

b) hedge an identifiable foreign currency commitment.

c) speculate in foreign currency.

d) none of these.

Question Title: Test Bank (Multiple Choice) Question 06

Difficulty: Easy

Learning Objective: 5 Describe a forward exchange contract.

Section Reference: 12.3

7) On November 1, 2017, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $500,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were:

The entry to record the forward contract is

a) FCU Receivable, 350,000; Premium on Forward Contract, 15,000; Dollars Payable, 365,000

b) Dollars Receivable, 365,000; Discount on Forward Contract, 15,000; FCU Payable, 350,000

c) FCU Receivable, 365,000; Discount on Forward Contract, 15,000; Dollars Payable, 350,000

d) Dollars Receivable, 350,000; Discount on Forward Contract, 15,000; FCU Payable, 365,000

Question Title: Test Bank (Multiple Choice) Question 07

Difficulty: Medium

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

8) On November 1, 2017, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $450,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were:

What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain or loss was recorded as a result of the adjustment?

a) Receivable Balance, $319,500; Gain/Loss Recorded, $9,000 gain

b) Receivable Balance, $319,500; Gain/Loss Recorded, $9,000 loss

c) Receivable Balance, $333,000; Gain/Loss Recorded, $4,500 gain

d) Receivable Balance, $333,000; Gain/Loss Recorded, $18,000 gain

Question Title: Test Bank (Multiple Choice) Question 08

Difficulty: Medium

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

9) A transaction gain or loss at the settlement date is:

a) a change in the exchange rate quoted by a foreign exchange trader.

b) synonymous with the translation of foreign currency financial statements into dollars.

c) the difference between the recorded dollar amount of an account receivable denominated in a foreign currency and the amount of dollars received.

d) the difference between the buying and selling rate quoted by a foreign exchange trader at the settlement date.

Question Title: Test Bank (Multiple Choice) Question 09

Difficulty: Easy

Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage.

Section Reference: 12.3

10) From the viewpoint of a U.S. company, a foreign currency transaction is a transaction:

a) measured in a foreign currency.

b) denominated in a foreign currency.

c) measured in U.S. currency.

d) denominated in U.S. currency.

Question Title: Test Bank (Multiple Choice) Question 10

Difficulty: Easy

Learning Objective: 1 Distinguish between the terms “measured” and “denominated.”

Section Reference: 12.2

11) The exchange rate quoted for future delivery of foreign currency is the definition of a(n):

a) direct exchange rate.

b) indirect exchange rate.

c) spot rate.

d) forward exchange rate.

Question Title: Test Bank (Multiple Choice) Question 11

Difficulty: Easy

Learning Objective: 5 Describe a forward exchange contract.

Section Reference: 12.3

12) A transaction loss would result from:

a) an increase in the exchange rate applicable to an asset denominated in a foreign currency.

b) a decrease in the exchange rate applicable to a liability denominated in a foreign currency.

c) the import of merchandise when the transaction is denominated in a foreign currency.

d) a decrease in the exchange rate applicable to an asset denominated in a foreign currency.

Question Title: Test Bank (Multiple Choice) Question 12

Difficulty: Easy

Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage.

Section Reference: 12.3

13) The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract:

a) extends beyond one year or the current operating cycle.

b) is a hedge of an identifiable foreign currency commitment.

c) is a hedge of an exposed net liability position.

d) was acquired to speculate in foreign currency.

Question Title: Test Bank (Multiple Choice) Question 13

Difficulty: Hard

Learning Objective: 3 Understand some of the more common foreign currency transactions.

Section Reference: 12.4

14) A transaction gain or loss on a forward contract entered into as a hedge of an identifiable foreign currency commitment may be:

a) included as a separate item in the stockholders’ equity section of the balance sheet.

b) recognized currently in the determination of net income.

c) deferred and included in the measurement of the related foreign currency transaction.

d) none of these.

Question Title: Test Bank (Multiple Choice) Question 14

Difficulty: Medium

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

15) Greco, Inc. a U.S. corporation, bought machine parts from Franco Company of Germany on March 1, 2017, for 70,000 marks, when the spot rate for marks was $0.5395. Greco’s year-end was March 31, 2017, when the spot rate for marks was $0.5445. Greco bought 70,000 marks and paid the invoice on April 20, 2017, when the spot rate was $0.5495. How much should be shown in Greco’s income statements as foreign exchange (transaction) gain or loss for the years ended March 31, 2017 and 2018?

a) 2017, $0; 2018, $0

b) 2017, $0; 2018, $350 loss

c) 2017, $350 loss; 2018, 0

d) 2017, $350 loss; 2018, $350 loss

Question Title: Test Bank (Multiple Choice) Question 15

Difficulty: Medium

Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage.

Section Reference: 12.3

16) With respect to disclosure requirements for fair value measurements, which of the following is NOT one of the three levels in the hierarchy of classifying fair value measurements?

a) a reconciliation of beginning and ending balances

b) significant unobservable inputs

c) significant other observable inputs

d) quoted prices in active markets for identical assets or liabilities

Question Title: Test Bank (Multiple Choice) Question 16

Difficulty: Medium

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

17) Montana Corporation a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after delivery. Between the delivery date and the time of payment, the exchange rate changed in Montana’s favor. The resulting gain should be reported in the financial statements as a(n):

a) component of other comprehensive income.

b) component of income from continuing operations.

c) extraordinary income.

d) deferred income.

Question Title: Test Bank (Multiple Choice) Question 17

Difficulty: Easy

Learning Objective: 3 Understand some of the more common foreign currency transactions., 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage.

Section Reference: 12.2

18) Madison Paving Company purchased equipment for 350,000 British pounds from a supplier in London on July 7, 2017. Payment in British pounds is due on Sept. 7, 2017. The exchange rates to purchase one pound is as follows:

On its August 31, 2017 income statement, what amount should Madison Paving report as a foreign exchange transaction gain:

a) $14,000.

b) $7,000.

c) $10,500.

d) $0.

Question Title: Test Bank (Multiple Choice) Question 18

Difficulty: Medium

Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage.

Section Reference: 12.3

19) On September 1, 2017, Mudd Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:

The first forward contract was to hedge a purchase of inventory on September 1, payable on December 1. On September 30, what amount of foreign currency transaction loss should Mudd Plating report in income?

a) $0.

b) $2,500.

c) $5,000.

d) $10,000.

Question Title: Test Bank (Multiple Choice) Question 19

Difficulty: Medium

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

20) On September 1, 2017, Mudd Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:

The second forward contract was strictly for speculation. On September 30, 2017, what amount of foreign currency transaction gain should Mudd Plating report in income?

a) $0.

b) $2,500.

c) $5,000.

d) $10,000.

Question Title: Test Bank (Multiple Choice) Question 20

Difficulty: Medium

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

21) On November 1, 2017, Cone Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of 250,000 foreign currency units (FCU). On November 1, Cone also entered into a forward contract to hedge the exposed asset. The forward rate is $0.90 per unit of foreign currency. Cone has a December 31 fiscal year-end. Spot rates on relevant dates were:

The entry to record the forward contract is

a) FCU Receivable, 225,000; Premium on Forward Contract, 7,500; Dollars Payable, 232,500

b) Dollars Receivable, 232,500; Discount on Forward Contract, 7,500; FCU Payable, 225,000

c) FCU Receivable, 232,500; Discount on Forward Contract, 7,500; Dollars Payable, 225,000

d) Dollars Receivable, 225,000; Discount on Forward Contract, 7,500; FCU Payable, 232,500

Question Title: Test Bank (Multiple Choice) Question 21

Difficulty: Medium

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

22) On November 1, 2017, National Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of 200,000 foreign currency units (FCU). On November 1, National also entered into a forward contract to hedge the exposed asset. The forward rate is $0.80 per unit of foreign currency. National has a December 31 fiscal year-end. Spot rates on relevant dates were:

What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain or loss was recorded as a result of the adjustment?

a) Receivable Balance, $170,000; Gain/Loss Recorded, $4,000 gain

b) Receivable Balance, $162,000; Gain/Loss Recorded, $4,000 loss

c) Receivable Balance, $168,000; Gain/Loss Recorded, $2,000 gain

d) Receivable Balance, $164,000; Gain/Loss Recorded, $2,000 loss

Question Title: Test Bank (Multiple Choice) Question 22

Difficulty: Medium

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

23) Kettle Company purchased equipment for 375,000 British pounds from a supplier in London on July 3, 2017. Payment in British pounds is due on Sept. 3, 2017. The exchange rates to purchase one pound is as follows:

On its August 31, 2017, income statement, what amount should Kettle report as a foreign exchange transaction gain:

a) $18,750.

b) $3,750.

c) $11,250.

d) $0.

Question Title: Test Bank (Multiple Choice) Question 23

Difficulty: Medium

Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage.

Section Reference: 12.3

24) On April 1, 2017, Manatee Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days. The relevant exchange rates are as follows:

The first forward contract was to hedge a purchase of inventory on April 1, payable on December 1. On April 30, what amount of foreign currency transaction loss should Manatee report in income?

a) $0.

b) $3,000.

c) $9,000.

d) $12,000.

Question Title: Test Bank (Multiple Choice) Question 24

Difficulty: Medium

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

25) On April 1, 2017, Manatee Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days. The relevant exchange rates are as follows:

The second forward contract was strictly for speculation. On April 30, 2017, what amount of foreign currency transaction gain should Manatee report in income.

a) $0.

b) $3,000.

c) $9,000.

d) $12,000.

Question Title: Test Bank (Multiple Choice) Question 25

Difficulty: Medium

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

Question Type: Essay

26) Accounting for a foreign currency transaction involves the terms measured and denominated. Describe a foreign currency transaction and distinguish between the terms measured and denominated.

Question Title: Test Bank (Essay) Question 26

Difficulty: Medium

Learning Objective: 1 Distinguish between the terms “measured” and “denominated.”, 2 Describe what is meant by a foreign currency transaction.

Section Reference: 12.2

27) There are a number of business situations in which a firm may acquire a forward exchange contract. Identify three common situations in which a forward exchange contract can be used as a hedge.

• foreign currency transaction.
• unrecognized firm commitment (a fair value hedge)
• foreign-currency-denominated “forecasted” transaction (a cash flow hedge).
• net investment in foreign operations.

Question Title: Test Bank (Essay) Question 27

Difficulty: Medium

Learning Objective: 5 Describe a forward exchange contract., 7 Identify some of the common situations in which a forward exchange contract can be used as a hedge.

Section Reference: 12.3, 12.4

28) On November 1, 2016, Jagged Company sold inventory to a company in England. The sale was for 600,000 British pounds and payment will be received on February 1, 2017. On November 1, Jagged entered into a forward contract to sell 600,000 British pounds on February 1 at the forward rate of $1.65. Spot rates for the British pound are as follows:

November 1 $1.61

December 31 1.67

February 1 1.62

Jagged has a December 31 fiscal year-end.

Required:

Compute each of the following:

1. The dollars to be received on February 1, 2017, from selling the 600,000 pounds to the exchange dealer.

2. The dollars that would have been received from the account receivable if Jagged had not hedged the sale contract with the forward contract.

3. The discount or premium on the forward contract.

4. The transaction gain or loss on the exposed asset related to the sale in 2016 and 2017.

5. The transaction gain or loss on the forward contract in 2016 and 2017.

6. The amount of the discount or premium on the forward contract amortized in 2016 and 2017.

1. Dollars received = 600,000 × $1.65 = $990,000

2. Dollars received = 600,000 × $1.62 = $972,000

3. Premium on forward contract = ($1.65 - $1.61) × 600,000 = $24,000

4. 2016 transaction gain = ($1.67 - $1.61) × 600,000 = $36,000

2017 transaction loss = ($1.67 - $1.62) × 600,000 = $(30,000)

5. 2016 transaction loss = ($1.67 - $1.61) × 600,000 = ($36,000)

2017 transaction gain = ($1.67 - $1.62) × 600,000 = $30,000

6. Premium amortized in 2016 = $24,000 × 2/3 = $16,000

Premium amortized in 2017 = $24,000 × 1/3 = $8,000

Question Title: Test Bank (Problem) Question 12-1

Difficulty: Medium

Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage., 5 Describe a forward exchange contract., 6 Explain the use of forward contracts as a hedge of an unrecognized firm commitment., 7 Identify some of the common situations in which a forward exchange contract can be used as a hedge., 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.3, 12.4

29) On December 1, 2016, Dorn Corporation agreed to purchase a machine to be manufactured by a company in Brazil. The purchase price is 1,150,000 Brazilian reals. To hedge against fluctuations in the exchange rate, Dorn entered into a forward contract on December 1 to buy 1,150,000 reals on April 1, the agreed date of machine delivery, for $0.375 per real. The following exchange rates were quoted:

Forward Rate

Date Spot Rate (Delivery on 4/1)

December 1 0.390 0.375

December 31 0.370 0.373

April 1 0.385 --

Required:

Prepare journal entries necessary for Dorn during 2016 and 2017 to account for the transactions described above.

2016

Dec. 1 FC Receivable from Exchange Dealer 448,500

Deferred Transaction Adjustment 17,250

Dollars Payable to Exchange Dealer 431,250

Dec. 31 Deferred Transaction Adjustment 23,000

FC Receivable from Exchange Dealer 23,000

($0.39 - $0.37) × 1,150,000)

2017

Apr. 1 FC Receivable from Exchange Dealer 17,250

Deferred Transaction Adjustment 17,250

($0.385 - $0.370) × 1,150,000)

Investment in Foreign Currency 442,750

FC Receivable from Exchange Dealer 442,750

Dollars Payable to Exchange Dealer 431,250

Cash 431,250

Machine 442,750

Investment in Foreign Currency 442,750

Deferred Transaction Adjustment 11,500

Machine 11,500

Question Title: Test Bank (Problem) Question 12-2

Difficulty: Hard

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

30) Imperial Corp., a U.S. corporation, entered into a contract on November 1, 2016, to sell two machines to Crown Company, for 95,000 foreign currency units (FCU). The machines were to be delivered and the amount collected on March 1, 2017.

In order to hedge its commitment, Imperial entered into a forward contract for 95,000 FCU delivery on March 1, 2017. The forward contract met all conditions for hedging an identifiable foreign currency commitment.

Selected exchange rates for FCU at various dates were as follows:

November 1, 2016 – Spot rate $1.3076

Forward rate for delivery on March 1, 2017 1.2980

December 31, 2016 – Spot rate 1.3060

Forward rate for delivery on March 1, 2017 1.3150

March 1, 2017 – Spot rate 1.2972

Required:

Prepare all journal entries relative to the above on the books of Imperial Corp. on the following dates:

1. November 1, 2016.

2. Year-end adjustments on December 31, 2016.

3. March 1, 2017. (Include all adjustments related to the forward contract.)

1. November 1, 2016

Dollars Receivable from Exchange Dealer 123,310

Deferred Transaction Adjustment 912

FC Payable to Exchange Dealer 124,222

($1.2980 × 95,000 = $123,310)

[($1.3076 - $1.2980) × 95,000 = $912)

($1.3076 × 95,000 = $124,222)

2. December 31, 2016

FC Payable to Exchange Dealer 152

Deferred Transaction Adjustment 152

[($1.3076 - $1.3060) × 95,000 = $152]

3. March 1, 2017

FC Payable to Exchange Dealer 836

Deferred Transaction Adjustment 836

[($1.3060 - $1.2972) × 95,000 = $836]

Investment in Foreign Currency 123,234

Sales 123,234

($1.2972 × 95,000 = $123,234)

FC Payable to Exchange Dealer 123,234

Investment in Foreign Currency 123,234

($1.2972 × 95,000 = $123,234)

Cash 123,310

Dollars Receivable from Exchange Dealer 123,310

($1.2980 × 95,000 = $123,310)

Deferred Transaction Adjustment 76

Sales 76

[($1.2980 - $1.2972) × 95,000 = $76]

Question Title: Test Bank (Problem) Question 12-3

Difficulty: Hard

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

31) On October 1, 2016, Philly Company purchased inventory from a foreign customer for 750,000 units of foreign currency (FCU) due on January 31, 2017. Simultaneously, Philly entered into a forward contract for 750,000 units of FC for delivery on January 31, 2017, at the forward rate of $0.75. Payment was made to the foreign customer on January 31, 2017. Spot rates on October 1, December 31, and January 31, were $0.72, $0.73, and $0.76, respectively. Philly amortizes all premiums and discounts on forward contracts and closes its books on December 31.

Required:

A. Prepare all journal entries relative to the above to be made by Philly on October 1, 2016.

B. Prepare all journal entries relative to the above to be made by Philly on December 31, 2016.

C. Compute the transaction gain or loss on the forward contract that would be recorded in 2017. Indicate clearly whether the amount is a gain or loss.

A. October 1

Purchases 540,000

Accounts Payable 540,000

($0.72 × 750,000 = $540,000)

FC Receivable from Exchange Dealer 540,000

Premium on Forward Contract 22,500

Dollars Payable to Exchange Dealer 562,500

($0.72 × 750,000 = $540,000)

($0.75 - $0.72) × 750,000 = $22,500)

($0.75 × 750,000 = $562,500)

B. December 31

Transaction Loss 7,500

Accounts Payable 7,500

[($0.73 - $0.72) × 750,000 = $7,500]

FC Receivable from Exchange Dealer 7,500

Transaction Gain 7,500

[($0.73 - $0.72) × 750,000 = $7,500]

Amortization Expense 16,875

Premium on Forward Contract 16,875

[($0.75 - $0.72) × 750,000 × (3/4) = $16,875]

C. Value of FC receivable – January 31

$0.76 × 750,000 $570,000

Carrying value – December 31 547,500

Transaction gain $ 22,500

Question Title: Test Bank (Problem) Question 12-4

Difficulty: Hard

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

32) On October 1, 2016, Kill Company shipped equipment to a foreign customer for a foreign currency (FC) price of FC 3,000,000 due on January 31, 2017. All revenue realization criteria were satisfied and accordingly the sale was recorded by Kill Company on October 1. Simultaneously, Kill entered into a forward contract to sell 3,000,000 FCU on January 31, 2017 for $1,200,000. Payment was received from the foreign customer on January 31, 2017. Spot rates on October 1, December 31, and January 31 were $0.42, $0.425, and $0.435, respectively. Kill amortizes all premiums and discounts on forward contracts and closes its books on December 31.

Required:

Prepare all journal entries relative to the above to be made by Kill during 2016 and 2017.

October 1

Accounts Receivable 1,260,000

Sales 1,260,000

Dollars Receivable from Exchange Dealer 1,200,000

Discount on Forward Contract 60,000

FC Payable to Exchange Dealer 1,260,000

December 31

Accounts Receivable 15,000

Transaction Gain 15,000

(3,000,000 × 0.425) = 1,275,000 – 1,260,000

Transaction 15,000

FC Payable to Exchange Dealer 15,000

Amortization Expense (60,000 × 3/4) 45,000

Discount on Forward Contract 45,000

January 31

Accounts Receivable 30,000

Transaction Gain 30,000

($3,000,000 × 0.435) = $1,305,000 – $1,275,000

Transaction Loss 30,000

FC Payable to Exchange Dealer 30,000

Investment in FC 1,305,000

Accounts Receivable 1,305,000

Cash 1,200,000

FC Payable to Exchange Dealer 1,305,000

Dollars Receivable from Exchange Dealer 1,200,000

Investment in FC 1,305,000

Amortization Expense 15,000

Discount on Forward Contract 15,000

Question Title: Test Bank (Problem) Question 12-5

Difficulty: Hard

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

33) On July 15, Pinta, Inc. purchased 88,500,000 yen Pinta of parts from a Tokyo company paying 20% down, and the balance is due in 90 days. Interest is payable at a rate of 8% on the unpaid balance. The exchange rate on July 15, was $1.00 = 118 Japanese yen. On October 13, the exchange rate was $1.00 = 114 Japanese yen.

Required:

Prepare journal entries to record the purchase and payment of this foreign currency transaction in U.S. dollars.

July 15 Purchases 750,000

Accounts Payable 600,000

Cash 150,000

(88,500,000 yen / 118)

Oct. 13 Accounts Payable 600,000

Transaction Loss 21,053

Cash 621,053

(70,800,000 yen / 114)

Interest Expense 12,421

Cash 12,421

(70,800,000 yen × (90/360) × 8% = 1,416,000 yen / 114 = 12,421)

Question Title: Test Bank (Problem) Question 12-6

Difficulty: Medium

Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage.

Section Reference: 12.3

34) On November 1, 2016, Platte Corporation, a calendar-year U.S. Corporation, invested in a speculative contract to purchase 700,000 euros on January 31, 2017, from a German brokerage firm. Platte agreed to buy 700,000 euros at a fixed price of $1.46 per euro. The brokerage firm agreed to send 700,000 euros to Platte on January 31, 2017. The spot rates for euros are:

November 1, 2016 1 euro = 1.45

December 31, 2016 1 euro = 1.43

January 31, 2017 1 euro = 1.44

Required:

Prepare the journal entries that Platte would record on November 1, December 31, and January 31.

Nov. 1, 2016 FC Receivable from Exchange Dealer 1,022,000

Dollars Payable to Exchange Dealer 1,022,000

(700,000 × $1.46)

Dec. 31, 2016 Transaction Loss 14,000

FC Receivable from Exchange Dealer 14,000

(700,000 × ($1.44 – $1.46))

Jan. 31, 2017 Dollars Payable to Exchange Dealer 1,022,000

Investment in FC 1,008,000

Cash 1,022,000

FC Receivable from Exchange Dealer 1,008,000

Cash 1,008,000

Investment in FC 1,008,000

Question Title: Test Bank (Problem) Question 12-7

Difficulty: Medium

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4

35) Consider the following information:

1. On November 1, 2017, a U.S. firm contracts to sell equipment (with an asking price of 500,000 pesos) in Mexico. The firm will take delivery and will pay for the equipment on February 1, 2018.

2. On November 1, 2017, the company enters into a forward contract to sell 500,000 pesos for $0.0948 on February 1, 2018.

3. Spot rates and the forward rates for February 1, 2018, settlement were as follows (dollars per peso):

Forward Rate

Spot Rate for 2/1/18

November 1, 2017 $0.0954 $0.0948

Balance sheet date (12/31/17) 0.0949 0.0944

February 1, 2018 0.0947

4. On February 1, the equipment was sold for 500,000 pesos. The cost of the equipment was $20,000.

Required:

Prepare all journal entries needed on November 1, December 31, and February 1 to account for the forward contract, the firm commitment, and the transaction to sell the equipment.

Nov. 1 Dollars Receivable from Exchange Dealer (500,000 × $0.0948) 47,400

FC Payable to Exchange Dealer 47,400

Dec. 31 FC Payable from Exchange Dealer 200

Foreign Exchange Gain 200

[(500,000 × ($0.0948 - $0.0944)]

Foreign Exchange Loss 200

Firm Commitment 200

[(500,000 × ($0.0948 - $0.0944)]

Feb. 1 Foreign Exchange Loss 150

FC Payable from Exchange Dealer 150

[(500,000 × ($0.0944 - $0.0947)]

Firm Commitment 150

Foreign Exchange Gain 150

[(500,000 × ($0.0944 - $0.0947)]

Investment in FC 47,350

Firm Commitment 50

Sales (500,000 × $0.0948) 47,400

Cash 47,400

FC Payable to Exchange Dealer 47,350

Investment in FC 47,350

Dollars Receivable from Exchange Dealer 47,400

Cost of Goods Sold 20,000

Inventory 20,000

Question Title: Test Bank (Problem) Question 12-8

Difficulty: Hard

Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 12.4