ACC 401 Week 8 Quiz - Strayer

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Quiz 7 Chapter 11 and 12

Chapter 11

International Financial Reporting Standards

Multiple Choice—Conceptual

1. The goals of the International Accounting Standards Committee include all of the following excepta. To improve international accounting.b. To formulate a single set of auditing standards to be applied in all

countries.c. To promote global acceptance of its standards.d. To harmonize accounting practices between countries.

2. Which of the following is true about the FASB after the mandatory adoption of IFRS by US companies?a. The FASB will serve in an advisory capacity to the IASB.b. The FASB will remain the designated standard-setter for US companies,

but incorporate IFRS into US GAAP.c. The role of the FASB post-IFRS adoption has not been determined.d. The FASB will cease to exist.

3. Milestones in the transition plan for mandatory adoption of IFRS by US companies include all of the following except:a. Improvements in accounting standards.b. Limited early adoption of IFRS in an effort to enhance comparability for

US investorsc. Mandatory use of IFRS by US entities.d. All of the above are milestones in the transition plan for mandatory

adoption of IFRS by US companies.

4. The roles of the IASC Foundation includea. establishing global standards for financial reporting.b. coordinating the filing requirements of stock exchange regulatory

agencies.c. financing IASB operations.d. all of the above are roles of the IASC Foundation.

5. Which of the following statements is true regarding the IASC?a. The IASC is a public-sector, not-for-profit organization.b. The IASC is accountable to an international securities regulator.

c. The IASC is a stand-alone, private-sector organization.d. The IASC funds the operations of the IASB through filing fees paid to

national securities regulators.

6. . Concerns of the SEC with regard to the mandatory adoption of IFRS by US entities include all of the following except:a. the extent to which the standard-setting process addresses emerging issues

in a timely manner.b. the security and stability of IASC funding.c. the enhancement of IASB independence through a system of voluntary

contributions from firms in the accounting profession.d. the degree to which due process is integrated into the standard-setting

process .

7. . Under the staged transition to mandatory adoption of IFRS being considered by the SEC,a. large, accelerated filers would begin IFRS filings for fiscal years

beginning on or after December 31, 2011.b. non-accelerated filers would begin IFRS filings for fiscal years beginning

on or after December 31, 2015.c. large non-accelerated filers would have until fiscal years beginning on or

after December 15, 2017 to adopt IFRS.d. smaller reporting companies would begin IFRS filings for fiscal years

beginning on or after December 15, 2016..

8. In order to complete its first IFRS filing, including three years of audited financial statements, according to the staged transition to mandatory adoption of IFRS considered by the SEC, a large accelerated filer would need to adopt IFRS beginning in fiscal yeara. 2011.b. 2012.c. 2013.d. 2014.

9. Benefits of the FASB Accounting Standards Codification (ASC) include all of the following excepta. increases the independence of the FASB.b. aids in the convergence of US GAAP with IFRS.c. reduces time and effort required to research accounting issues.d. clearly distinguishes between authoritative and non-authoritative guidance.

10. SFAS No.162, the Accounting Standards Codification, is directed toa. auditors.b. Boards of Directors.c. securities regulators.d. entities.

11. IFRS and US GAAP differ with regard to financial statement presentation in all of the following except

a. IFRS generally requires that assets be listed in order of increasing liquidity while US GAAP requires that assets be listed in order of decreasing liquidity.

b. US GAAP requires expenses to be listed by function while IFRS requires expenses to be listed by nature.

c. IFRS prohibits extraordinary items which are allowed by US GAAP.d. IFRS requires two years of comparative income statements while under

US GAAP, three years of income statements are required.

12. The major difference between IFRS and US GAAP in accounting for inventories is thata. US GAAP prohibits the use of specific identification.b. IFRS requires the use of the LIFO cost flow assumption.c. US GAAP prohibits the use of the LIFO cost flow assumptiond. US GAAP allows the use of the LIFO cost flow assumption.

13. One difference between IFRS and GAAP in valuing inventories is thata. IFRS, but not GAAP, allows reversals so that inventories written down

under lower-of-cost-or-market can be written back up to the original cost .b. GAAP defines market value as replacement cost where IFRS defines

market as the selling price.c. GAAP strictly adheres to the historical cost concept and does not allow for

write-downs of inventory values while IFRS embraces fair value.d. IFRS, but not GAAP, requires that inventories be valued at the lower of

cost or market.

14. In accounting for research and development costs.a. the general rule under both US GAAP and IFRS is that research and

development costs should be expensed as incurred .b. IFRS generally expenses all research and development costs while US

GAAP expenses research costs as incurred but capitalizes development costs once technological and economic feasibility has been demonstrated.

c. US GAAP generally expenses all research and development costs while IFRS expenses research costs as incurred but capitalizes development costs once technological and economic feasibility has been demonstrated.

d. both US GAAP and IFRS expense research costs as incurred but capitalize development costs once technological and economic feasibility has been demonstrated.

.15. Property, plant and equipment are valued at

a. historical cost under both IFRS and US GAAP.b. historical cost or revalued amounts under both IFRS and US GAAP.c. revalued amounts under IFRS.d. historical cost under US GAAP while IFRS allows the assets to be valued

at either historical cost or revalued amounts.

16. The amount of a long-lived asset impairment loss is generally determined by comparinga. the asset’s carrying amount and its fair value under US GAAP.b. the asset’s carrying amount and its discounted future cash flows less cost

to sell under IFRS.c. the asset’s carrying amount and its undiscounted future cash flows under

US GAAP.d. the asset’s carrying amount and its undiscounted future cash flows less

disposal cost under IFRS.

17. In accounting for liabilities, IFRS interprets “probable” asa. likely.b. more likely than not.c. somewhat possible.d. possible and not remote.

18. Accounting under IFRS and US GAAP is similar for all of the following topics excepta. changes in estimates.b. related party transactions.c. research and development costs.d. changes in methods.

Use the following information to answer the next three questions.

On January 1, 2010, AirFrance purchases an airplane for €14,400,000. The components of the airplane and their useful lives are as follows:

Component Cost Useful lifeFrame €7,200,000 24 yearsEngine 4,800,000 20 yearsOther 2,400,000 10 years

AirFrance uses the straight-line method of depreciation. The asset is assumed to have no salvage value.

19. Under IFRS, the entry to record the acquisition of the airplane would includea. a debit to Asset/ Airplane of €14,400,000.b. a debit to Asset/ Airplane frame of €14,400,000.c. a debit to Asset/ Airplane engine of €4,800,000.d. cannot be determined from the information given.

20. Under US GAAP, the entry to record depreciation expense on the asset at December 31, 2011 will includea. a credit to accumulated depreciation of €1,200,000.b. a debit to depreciation expense of €1,440,000c. a debit to depreciation expense of €800,000.d. a credit to accumulated depreciation of €600,000.

21. Under IFRS, the entry to record depreciation expense on the asset at December 31, 2011 will include a credit to accumulated depreciation ofa. €1,440,000.b. €1,200,000c. €800,000.d. €600,000.

22. Accounting terminology that differs between IFRS and US GAAP include all of the following excepta. the use by IFRS of “turnover” for revenue.b. the use by IFRS of “share premium” for additional paid-in-capital.c. the use by IFRS of “other capital reserves” for retained earnings.d. the use by IFRS of “issued capital” for common stock.

23. New terminology introduced under the joint IFRS- US GAAP Customer Consideration (Allocation) Model includes all of the following excepta. revenue recognition voids.b. contract rights.c. net contract asset/ liability.d. performance obligations.

24. Under IFRS, the criteria to determine whether a lease should be capitalized includea. the present value of the minimum lease payments is 90% or more of the

fair value of the asset at the inception of the lease.b. the term of the lease is 75% or more of the economic life of the asset.c. the term of the lease is equal to substantially all of the economic life of the

asset.d. the present value of the minimum lease payments is equal to substantially

all of the fair value of the asset at the inception of the lease.

Use the following information to answer the next three questions.

Bellingham Electronics Inc. offers one model of laptop computer for £1000 and a two-year warranty for £250. The retailer, as part of a Boxing Day promotion, offers a limited-time offer for the laptop, including delivery and the two-year warranty for £1,180. The cost of the computer to Bellingham is £700. Any warranty repairs are assumed to be done ratably over time. Bellingham accounts for transactions using the customer consideration model.

In the first twelve months following the sale, Bellingham incurred £980 of costs servicing the computers under warranty.

25. Bellingham sells ten laptops to Bertram Inc. under the limited-time promotion. Upon delivery of the laptops to Bertram, Bellingham will recognize revenue of a. £9,300.

b. £9,440c. £10,000.d. £11,800.

26. In the first twelve months following the sale, Bellingham would reduce the Contract liability – warranty account bya. £784.b. £980c. £1,180.d. £1,380.

27. In the first twelve months, Bellingham would record warranty expense of a. £784.b. £980c. £1,180.d. £1,380.

28. Significant differences between IFRS and Chinese GAAP include all of the following excepta. Chinese GAAP allows the use of LIFO while IFRS prohibits it.b. Chinese GAAP has different related party disclosure requirements.c. Chinese GAAP follows the cost principle while IFRS allows for

revaluations and recoveries of impairment losses.d. Chinese GAAP uses the equity method of accounting for jointly controlled

entities while IFRS also allows proportionate consolidation.

29. All of the following are options for non-US companies who wish to list securities on a US exchange excepta. The company can use either IFRS or their local GAAP.b. If a company uses their local GAAP they must reconcile net income and

shareholders’ equity or fully disclose all financial information required of US companies.

c. If a company uses their local GAAP they must reconcile net income and shareholders’ equity and fully disclose all financial information required of US companies

d. The company must file a form 20-F with the SEC.

30. All of the following are true regarding American Depository Receipts (ADRs) except a. Most ADRs are unsponsored, meaning that the DR bank creates a DR

program without a formal agreement with the issuing non-US company.b. An ADR is a derivative instrument traded in the US that usually represents

a fixed number of publicly traded shares of a non-US company.c. ADRs are denominated in US dollars.d. A Level 1 sponsored ADR is the easiest way for a non-US company to

access US markets.

Exercise from the Textbook

Exercise 11-1

Component Depreciation SMC Company purchases a building for $100,000. Included in this cost are $12,000 for electrical systems and $15,000 for the roof. The building is expected to have a 40 year useful life, but the electrical system will last for 20 years and the roof will last 15 years.

Required: Part A: Assuming that straight-line depreciation is used, compute depreciation expense assuming that U.S. GAAP is used.

Part B: Assuming that straight line depreciation is used, compute depreciation expense for year one assuming IFRS is used (assume component depreciation).

Problem from the Textbook

Problem 11-4

Prepare a statement of financial position using the proposed new format as described in the chapter.

Questions from the Textbook

1. As mentioned in Chapter 1, the project on business combinations was the first of several joint projects undertaken by the FASB and the IASB in their move to converge standards globally. Nonetheless, complete convergence has not yet occurred, and there are those who believe it to be a poor idea. Discuss the reasons for and against global convergence.

2. In recent months, virtually every topic that has come to the attention of the standard setters has been undertaken as a joint effort of the FASB and the IASB rather than as an individual effort by one of the two boards. List and discuss some of the joint projects that fall into this category.

3. What is the rationale for the harmonization of international accounting standards?

4. Why is the SEC, once so reluctant to accept IAS, now very willing to allow firms using IFRS to is-sue securities in the U.S. stock market without reconciling to U.S. GAAP?

5. Discuss the types of ADRs that non-U.S. companies might use to access the U.S. markets.

6. Describe the attitude of the FASB toward the IASB (International Accounting Standards Board).

7. How does the FASB view its role in the development of an international accounting system? Currently, two members of the IASB board were affiliated with the FASB. Comment on what effect this might have on the likelihood that the U.S. standard setters will accept the new IASB statements, if any?

8. List some of the major differences in accounting between IFRS and U.S. GAAP.

Business Ethics Question from the Textbook

A vice president of marketing for your company has been charged with embezzling nearly $100,000 from the company. The vice president allegedly submitted fraudulent vendor invoices in order to receive payments. As the vice president of marketing for the company, the vice president is authorized to approve the payment of invoices submitted by third-party vendors who did work for the company. After the activities were uncovered, the company responded by stating: “All employees are accountable to our ethics guidelines and procedures. We do not tolerate violations of our ethics policy and will consistently enforce these policies and procedures.”

1. How would you evaluate the internal controls of the company?

2. Do you think there are companies that develop comprehensive ethics and compliance pro-grams for mid- and lower-level employees and ignore upper-level executives and managers?

3. Is it an ethical issue if companies are not forth-coming concerning fraudulent activities of top executives in an effort to minimize negative publicity?

Chapter 12

Accounting for Foreign Currency Transactions And Hedging Foreign Exchange Risk

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.

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.

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.

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.

5. During 2011, 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 2012. For the years 2011 and 2012, transaction gains or losses should be recognized as:

2011 2012a. gain gainb. gain lossc. loss lossd. loss gain

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.

7. On November 1, 2011, 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:

Per Unit ofDate Foreign Currency

November 1 $0.73December 31 0.71March 1 0.74

The entry to record the forward contract isa. FCU Receivable 350,000

Premium on Forward Contract 15,000Dollars Payable 365,000

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

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

d. Dollars Receivable 350,000Discount on Forward Contract 15,000

FCU Payable 365,000

8. On November 1, 2011, 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:

Per Unit ofDate Foreign Currency

November 1 $0.73December 31 0.71March 1 0.74

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?

Receivable Balance Gain/Loss Recordeda. $319,500 $9,000 gainb. $319,500 $9,000 lossc. $333,000 $4,500 gaind. $333,000 $18,000 gain

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.

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.

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.

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.

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.

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.

15. Craiger, Inc. a U.S. corporation, bought machine parts from Reinsch Company of Germany on March 1, 2011, for 70,000 marks, when the spot rate for marks was $0.5395. Craiger’s year-end was March 31, 2011, when the spot rate for marks was $0.5445. Craiger bought 70,000 marks and paid the invoice on April 20, 2011, when the spot rate was $0.5495. How much should be shown in Craiger’s income statements as foreign exchange (transaction) gain or loss for the years ended March 31, 2011 and 2012?

2011 2012a. $0 $0b. $0 $350 lossc. $350 loss $0d. $350 loss $350 loss

16. A forward exchange contract is transacted at a discount if the current forward rate is:a. less than the expected spot rate.b. more than the expected spot rate.c. less than the current spot rate.d. more than the current spot rate.

17. Stuart 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 Stuart’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.

18. Jackson Paving Company purchased equipment for 350,000 British pounds from a supplier in London on July 7, 2011. Payment in British pounds is due on Sept. 7, 2011. The exchange rates to purchase one pound is as follows:

July 7 August 31, (year end)September 7

Spot-rate 2.08 2.05 2.0430-day rate 2.07 2.03 --60-day rate 2.06 1.99 --

On its August 31, 2011 income statement, what amount should Jackson Paving report as a foreign exchange transaction gain:a. $14,000.b. $7,000.c. $10,500.d. $0.

19. On September 1, 2011, Swash Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:

Forward RateSpot rate For Dec. 1, 2011

September 1, 2011 1.46 1.47September 30, 2011 (year-end) 1.50 1.48

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 Swash Plating report in income?a. $0.b. $2,500.c. $5,000.d. $10,000.

20. On September 1, 2011, Swash Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:

Forward RateSpot rate For Dec. 1, 2011

September 1, 2011 1.46 1.47September 30, 2011 (year-end) 1.50 1.48

The second forward contract was strictly for speculation. On September 30, 2011, what amount of foreign currency transaction gain should Swash Plating report in income?a. $0.b. $2,500.

c. $5,000.d. $10,000.

21. On November 1, 2011, Prism 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, Prism also entered into a forward contract to hedge the exposed asset. The forward rate is $0.90 per unit of foreign currency. Prism has a December 31 fiscal year-end. Spot rates on relevant dates were:

Per Unit ofDate Foreign CurrencyNovember 1 $0.93December 31 0.91March 1 0.94

The entry to record the forward contract isa. FCU Receivable 225,000

Premium on Forward Contract 7,500Dollars Payable 232,500

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

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

d. Dollars Receivable 225,000Discount on Forward Contract 7,500

FCU Payable 232,500

22. On November 1, 2011, 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:

Per Unit ofDate Foreign Currency

November 1 $0.83December 31 0.81March 1 0.84

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?

Receivable Balance Gain/Loss Recordeda. $170,000 $4,000 gainb. $162,000 $4,000 lossc. $168,000 $2,000 gaind. $164,000 $2,000 loss

23. Caldron Company purchased equipment for 375,000 British pounds from a supplier in London on July 3, 2011. Payment in British pounds is due on Sept. 3, 2011. The exchange rates to purchase one pound is as follows:

July 3 August 31, (year end) September 3Spot-rate 1.58 1.55 1.5430-day rate 1.57 1.53 --60-day rate 1.56 1.49 --

On its August 31, 2011, income statement, what amount should Caldron report as a foreign exchange transaction gain:a. $18,750.b. $3,750.c. $11,250.d. $0.

24. On April 1, 2011, Trent Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days. The relevant exchange rates are as follows:

Forward RateSpot rate For Aug. 1, 2011

April 1, 2011 1.16 1.17April 30, 2011 (year-end) 1.20 1.18

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 Trent report in income?a. $0.b. $3,000.c. $9,000.d. $12,000.

25. On April 1, 2011, Trent Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days. The relevant exchange rates are as follows:

Forward RateSpot rate For Aug. 1, 2011

April 1, 2011 1.16 1.17April 30, 2011 (year-end) 1.20 1.18

The second forward contract was strictly for speculation. On April 30, 2011, what amount of foreign currency transaction gain should Trent report in income.

a. $0.b. $3,000.c. $9,000.d. $12,000.

Problems

12-1 On November 1, 2010, Dorsey Company sold inventory to a company in England. The sale was for 600,000 British pounds and payment will be received on February 1, 2011. On November 1, Dorsey 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 $1.61December 31 1.67February 1 1.62

Dorsey has a December 31 fiscal year-end.

Required:Compute each of the following:

1. The dollars to be received on February 1, 2011, from selling the 600,000 pounds to the exchange dealer.

2. The dollars that would have been received from the account receivable if Dorsey 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 2010 and 2011.

5. The transaction gain or loss on the forward contract in 2010 and 2011.

6. The amount of the discount or premium on the forward contract amortized in 2010 and 2011.

12-2 On December 1, 2010, Derrick 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, Derrick 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 RateDate Spot Rate (Delivery on 4/1)December 1 0.390 0.375December 31 0.370 0.373April 1 0.385 --

Required:

Prepare journal entries necessary for Derrick during 2010 and 2011 to account for the transactions described above.

12-3 Colony Corp., a U.S. corporation, entered into a contract on November 1, 2010, 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, 2011.

In order to hedge its commitment, Colony entered into a forward contract for 95,000 FCU delivery on March 1, 2011. 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, 2010 – Spot rate $1.3076 Forward rate for delivery on March 1, 2011 1.2980December 31, 2010 – Spot rate 1.3060 Forward rate for delivery on March 1, 2011 1.3150March 1, 2011 – Spot rate 1.2972

Required:Prepare all journal entries relative to the above on the books of Colony Corp. on the following dates:1. November 1, 2010.2. Year-end adjustments on December 31, 2010.3. March 1, 2011. (Include all adjustments related to the forward contract.)

12-4 On October 1, 2010, Nance Company purchased inventory from a foreign customer for 750,000 units of foreign currency (FCU) due on January 31, 2011. Simultaneously, Nance entered into a forward contract for 750,000 units of FC for delivery on January 31, 2011, at the forward rate of $0.75. Payment was made to the foreign customer on January 31, 2011. Spot rates on October 1, December 31, and January 31, were $0.72, $0.73, and $0.76, respectively. Nance 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 Nance on October 1, 2010.

B. Prepare all journal entries relative to the above to be made by Nance on December 31, 2010.

C. Compute the transaction gain or loss on the forward contract that would be recorded in 2011. Indicate clearly whether the amount is a gain or loss.

12-5 On October 1, 2010, Kline Company shipped equipment to a foreign customer for a foreign currency (FC) price of FC 3,000,000 due on January 31, 2011. All revenue realization criteria were satisfied and accordingly the sale was recorded

by Kline Company on October 1. Simultaneously, Kline entered into a forward contract to sell 3,000,000 FCU on January 31, 2011 for $1,200,000. Payment was received from the foreign customer on January 31, 2011. Spot rates on October 1, December 31, and January 31 were $0.42, $0.425, and $0.435, respectively. Kline 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 Kline during 2010 and 2011.

12-6 On July 15, Worth, Inc. purchased 88,500,000 yen worth 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.

12-7 On November 1, 2010, Bisk Corporation, a calendar-year U.S. Corporation, invested in a speculative contract to purchase 700,000 euros on January 31, 2011, from a German brokerage firm. Bisk 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 Bisk on January 31, 2011. The spot rates for euros are:

November 1, 2010 1 euro = 1.45December 31, 2010 1 euro = 1.43January 31, 2011 1 euro = 1.44

Required:Prepare the journal entries that Bisk would record on November 1, December 31, and

January 31.

12-8 Consider the following information:

1. On November 1, 2011, 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, 2012.

2. On November 1, 2011, the company enters into a forward contract to sell 500,000 pesos for $0.0948 on February 1, 2012.

3. Spot rates and the forward rates for February 1, 2012, settlement were as follows (dollars per peso):

Forward RateSpot Rate for 2/1/12

November 1, 2011 $0.0954 $0.0948Balance sheet date (12/31/11) 0.0949 0.0944February 1, 2012 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.

Short Answer

1. 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.

2. 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.

Short Answer Questions from the Textbook

1. Define currency exchange rates and distinguish between “direct” and “indirect” quotations.

2. Explain why a firm is exposed to an added risk when it enters into a transaction that is to be settled in a foreign currency.

3. Name the three stages of concern to the accountant in accounting for import–export transactions. Briefly explain the accounting for each stage.

4. How should a transaction gain or loss be reported that is related to an unsettled receivable recorded when the firm’s inventory was exported?

5. A U.S. firm carried a receivable for 100,000 yen. Assuming that the direct exchange rate declined from $.009 at the date of the transaction to $.006at the balance sheet date, compute the transaction gain or loss. What balance would be reported for the receivable in the firm’s balance sheet?

6. Explain what is meant by the “two-transaction method” in recording exporting or importing trans-actions. What support is given for this method?

7. Describe a forward exchange contract.

8. Explain the effects on income from hedging a foreign currency exposed net asset position or net liability position.

9. What criteria must be satisfied for a foreign currency transaction to be considered a hedge of an identifiable foreign currency commitment?

10. The FASB classifies forward contracts as those acquired for the purpose of hedging and those acquired for the purpose of speculation. What main differences are there in accounting for these two classifications?

11. How are foreign currency exchange gains and losses from hedging a forecasted transaction handled?

12. What is a put option, and how might it be used to hedge a forecasted transaction?

13. Define a derivative instrument, and describe the keystones identified by the FASB for the ac-counting for such instruments.

14. Differentiate between forward-based derivatives and option-based derivatives.

15. List some of the criteria laid out by the FASB that are required for a gain or loss on forecasted trans-actions (a cash flow hedge) to be excluded from the income statement. If these criteria are satisfied, where are the gains or losses reported, and when (if ever) are they shown in the income statement? What is the rationale for this treatment?

Business Ethics Question from Textbook

Executive stock options (ESOs) are used to provide incentives for executives to improve company performance. ESOs are usually granted “at-the-money,” meaning that the exercise price of the options is set to equal the market price of the underlying stock on the grant date. Clearly, executives would prefer to be granted options when the stock price (and thus the exercise price) is at its lowest. Backdating options is the practice of choosing a past date when the market price was particularly low. Backdating has not, in the past, been illegal if no documents are forged, if communicated to the shareholders, and if properly reflected in earnings and in taxes.

1. Since backdating gives the executive an “instant” profit, why wouldn’t the firm simply grant an option with the exercise price lower than the cur-rent market price?

2. Suppose the executive was not involved in back-dating the ESOs. Does the executive face any ethical issues?