Ch12 Beams10e TB

Chapter 12 Test Bank

FOREIGN CURRENCY CONCEPTS AND TRANSACTIONS

Multiple Choice Questions

LO11. On May 1, 20X3, Emu Corporation purchased merchandise from a

Danish firm for 198,000 Danish krone when the spot rate for krone was 5.200 krone per dollar. The account payable was denominated in krone. Emu settled the account on September 1 when the spot rate for krone was 5.345 krone per dollar. How much cash will Emu have to disburse to settle the account?

a. $ 37,043.97.b. $ 38,076.93.c. $1,029,600.00.d. $1,058,310.00.

LO12. Cassowary Corporation’s balance sheet at December 31, 20X3

included a $20,400 account receivable from Quail Corporation of Australia. The account receivable was denominated as 30,000 Australian dollars (A$). What entry did Cassowary make on January 16, 20X3 when the account receivable was collected and the exchange rate for A$ was $.67?

a. Cash 20,100 Accounts Receivable 20,100

b. Cash 20,100Exchange Loss 300 Accounts Receivable 20,400

c. Cash 20,400 Accounts Receivable 20,400

d. Cash 20,700 Accounts Receivable 20,400 Exchange Gain 300

©2009 Pearson Education, Inc. publishing as Prentice Hall12-1

LO23. The exchange rates between the Australian dollar and the US

dollar were as follows:

Jun 1 1$AUS = $.71US Jul 1 1$AUS = $.73US Aug 1 1$AUS = $.79US Sep 1 1$AUS = $.83US

This chart shows a

a. strengthening Australian Dollar which makes it less expensive for Americans to buy Australian goods.

b. weakening Australian dollar which makes it less expensive for Americans to buy Australian goods.

c. strengthening Australian dollar which makes it more expensive for Americans to buy Australian goods.

d. weakening Australian dollar which makes it more expensive for Americans to buy Australian goods.

LO24. Which of the following factors will affect the spread between

spot and forward rates?

a. The current cross rate between two currencies.b. The length of time for the forward contract.c. The currency denominated as the domestic currency.d. All of the above will affect the spread.

LO25. A US importer that purchased merchandise from a South Korean

firm would be exposed to a net exchange gain on the unpaid balance if the

a. dollar weakened relative to the Korean won and the won was the denominated currency.

b. dollar weakened relative to the Korean won and the dollar was the denominated currency.

c. dollar strengthened relative to the Korean won and the won was the denominated currency.

d. dollar strengthened relative to the Korean won and the dollar was the denominated currency.


Use the following information for Questions 6 and 7.

On November 1, 20X3, Magpie Corporation sold merchandise to William Tell Corporation, a Swiss firm. Magpie measured and recorded the account receivable from the sale at $78,000. William Tell paid for this account on November 30, 20X3. Spot rates for Swiss francs on November 1 and November 30, respectively, were $0.80 and $0.78.

LO36. If the sale of the merchandise was denominated in francs, the

November 30 entry to record the receipt of payment from William Tell included a

a. credit to Accounts Receivable for $76,050.b. credit to Exchange Gain for $1,950.c. debit to Cash for $78,000.d. debit to Exchange Loss for $1,950.

LO37. If the sale of merchandise is denominated in dollars, the

November 30 entry to record receipt of the payment from William Tell included a

a. debit to Cash for $78,000.b. debit to Cash for $76,050.c. credit to Exchange Gain for $1,950.d. credit to Accounts Receivable for $76,050.

LO38. On December 5, 20X3, Goose Corporation, a US firm, bought

inventory items from Grebes Corporation of Norway for 1,000,000 Norwegian krone when the spot rate for krone was $0.168. At Goose’s December 31, year-end, the spot rate was $0.167. On January 4, 20X4, Goose purchased 1,000,000 krone for $167,500 and paid the invoice. How much gain or (loss) did Goose report in its 20X3 and 20X4, respectively, income statements?

a. $(1,000) and $500.b. $0 and ($500).c. $0 and $500.d. $1,000 and ($500).


Use the following information for Questions 9 and 10.

On October 2, 20X4, Duck Corporation borrowed 150,000 British pounds from a London bank, evidenced by an interest-bearing note payable due in one year. The note was payable in pounds. Exchange rates for pounds was:

October 2, 20X4 $1.60 December 31, 20X4 $1.62 October 2, 20X5 $1.56

LO39. What exchange gain or loss appeared on Duck’s 20X4 income

statement?

a. a loss of $6,000.b. a loss of $3,000.c. a gain of $3,000.d. a gain of $6,000.

LO310. What is the final amount of the loan payable that Duck showed

on its books, in dollars, just before it repaid the loan?

a. $234,000.b. $236,000.c. $240,000.d. $243,000.

Use the following information for questions 11 and 12.

On November 2, 20X5, Swan Corporation entered into a 90-day contract to sell 220,000 kiwis in a transaction accounted for as speculation. The spot rate for kiwis on November 2 was $0.74 and the current quotation for 90-day futures was $0.68. On December 31, 20X3, the spot rate was $0.78 and the quotation for 30-day futures was $0.35.


LO411. Swan’s entry on November 2, 20X5 included a

a. debit to Contract Receivable denominated in kiwis for $149,600.

b. credit to Contracts Payable denominated in kiwis for $149,600.

c. debit to Contract Receivable denominated in kiwis for $154,000.

d. credit to Contracts Payable denominated in kiwis for $154,000.

LO412. What amount of exchange gain or (loss) was included in Swan’s

20X5 income?

a. $(8,800).b. $(4,400).c. $ 4,400.d. $ 8,800.

LO413. Under which of the following situations must a discount on a

forward contract be amortized to income over the life of the contract?

a. If the contract is a hedge of a net asset position.b. If the contract is a speculation in currency.c. If the contract is a hedge of a foreign currency

commitment.d. Under none of the above would a discount on a forward

contract be amortized to income over the life of the contract.

LO414. A forward exchange contract is transacted at a discount if the

current forward rate is

a. less than the current spot rate.b. more than the current spot rate.c. less than the expected spot rate.d. more than the expected spot rate.


LO515. Which of the following is not a characteristic of a derivative?

a. It has one or more underlyings and one or more notational amounts.

b. It requires no initial net investment or an initial investment that is smaller than would be required for contracts expected to have a similar response to the market.

c. It requires no net settlement.d. It will be represented as an asset or liability on the

financial statements.

LO516. Derivatives are measured on the financial statements at?

a. Historical cost.b. Effective hedge price.c. Strike price.d. Fair value.

LO617. Which of the following hedging strategies would a business most

likely use?

a. An importer will want to hedge his foreign denominated accounts receivable and will purchase forward contracts to hedge an exposed net asset position.

b. An importer will want to hedge his foreign denominated accounts payable and will purchase forward contracts to hedge an exposed net liability position.

c. An exporter will want to hedge his foreign denominated accounts receivable and will purchase forward contracts to hedge an exposed net liability position.

d. An exporter will want to hedge his foreign denominated accounts payable and will purchase forward contracts to hedge an exposed net liability position.


LO618. Which of the following techniques can be used to measure hedge

effectiveness?

a. Critical term analysis.b. Contribution margin analysis.c. Present value analysis.d. Breakeven analysis.

LO619. Which of the following is not an approach appropriate for hedge

accounting?

a. Fair value hedge.b. Straddle hedge.c. Cash flow hedge.d. Hedge of net investment in a foreign subsidiary.

LO720. If a financial instrument is classified as a cash flow hedge,

then

a. its gains or losses are represented in the income statement if a year-end occurs before the settlement date.

b. it is classified as a held-to-maturity asset.c. it does not require a notational amount.d. its gains or losses are represented in the balance sheet if

a year-end occurs before the settlement date.


LO2Exercise 1

On September 1, 20X5, Cormorant Company purchased merchandise from Osaka Company of Japan for 20,000,000 yen payable on October 1, 20X5. The spot rate for yen was $0.0079 on September 1 and the spot rate was $0.0077 on October 1.

Required:

1. Did the exchange rate strength or weaken from September to October and what are the implications for Cormorant’s business?2. What journal entry did Cormorant record on September 1, 20X5?3. What journal entry did Cormorant record on October 1, 20X5?

LO3Exercise 2

On October 15, 20X5, Ibis Corporation, a French company, ordered merchandise listed on the Internet for 20,000 Euros from Spoonbill Corporation, a US corporation, which immediately accepted the order. The Euro rate was $1.20 US on October 15. On November 15, 20X5 Spoonbill shipped the goods and billed Ibis the purchase price of 20,000 Euros when the Euro rate was $1.30 US. Ibis paid the bill on December 10, 20X5. Three days later Spoonbill exchanged the 20,000 Euros for US dollars when the Euro rate was $1.28US.

Required:

Compute the foreign currency gains or losses on the December 31, 20X5 financial statements and show your calculations.

LO3Exercise 3

On November 1, 20X3, the Penguin Corporation, a US corporation, purchased an extruding machine from Shearwater Corporation, a UK company. The purchase price was $10,000 and Penguin agreed to pay in pounds on February 1, 20X4. Both corporations are on a calendar year accounting period. Assume that the spot rates for the British pound on November 1, 20X3, December 31, 20X3, and February 1, 20X4, are $1.60, $1.62, and $1.66, respectively.

Required:

Record the November 1, December 31, and February 1 transactions in the General Journals of Penguin Corporation and Shearwater Corporation. If no entry is required on a particular date, indicate “No entry” in the General Journal.


LO4Exercise 4

On November 1, 20X3, Petrel Corporation, a calendar-year US corporation, invested in a purely speculative contract to purchase 1 million yen on January 30, 20X4, from the Karoke Trading Company, a Japanese brokerage firm. Petrel agreed to purchase 1,000,000 yen from Karoke at a fixed price of $0.0100 per yen. Karoke agreed to transmit 1,000,000 yen to Petrel on February 1, 20X4. The spot rates for yen are:

Nov 01, 20X3 1 yen = $0.0097 Dec 31, 20X3 1 yen = $0.0103 Jan 30, 20X4 1 yen = $0.0106

The 30-day forward rate for yen on December 31, 20X3 was $0.0104.

Required:

Prepare the General Journal entries that Petrel would record on November 1, December 31, and January 30.

LO4Exercise 5

On November 1, 20X5, Albatross Corporation, a calendar-year US corporation, invested in a purely speculative contract to purchase 1 million euros on January 30, 20X6, from Munich Company, a German brokerage firm. Albatross agreed to purchase 1,000,000 euros from Munich at a fixed price of $1.020 per euro. Munich agreed to transmit 1,000,000 euros to Albatross on January 30, 20X6. The spot rates for euros are:

Nov 01, 20X5 1 euro = $1.015 Dec 31, 20X5 1 euro = $0.995 Jan 30, 20X6 1 euro = $1.010

The 30-day futures rate for euros on December 31, 20X5 was $1.005.

Required:

Prepare the General Journal entries that Albatross would record on November 1, December 31, and January 30.


LO7Exercise 6

0n June 1, 20X5, Stork Industries purchases an option contract for $5,000 on 10,000 gallons of aviation gas to minimize its purchasing cost price exposure. At the time, the market price is $2.50 per gallon and the option price of $2 per gallon will expire 6 months later. Stork can exercise the option at its discretion. When Stork prepares quarter reports on June 30, the option is worth $4.50 and Stork is still holding it.

On August 1, Stork exercises the option when the gas market price is $5.00 per gallon and purchases 40,000 gallons of gas. On August 15, Stork uses all of the gas on a charter flight. Required:

What are Stork’s journal entries with regard to the aviation gas option?

LO7Exercise 7

On November 1, 20X5, US Pelican Company entered into a 90 day forward contract of 200,000£ pounds to hedge a commitment to purchase special equipment on February 1, 20X6 from a British firm Raven Inc. Assume Pelican uses a 12% interest rate.

The relevant exchange rates are of dollars per pound:Spot Rate Forward Rate

(for Feb 1, 20X6)November 1, 20X5 1.32 1.35December 31, 20X5 1.47 1.50February 1, 20X6 1.55 -

Required:

1.What journal entry did Pelican record on November 1, 20X5?2.What journal entry did Pelican record on December 1, 20X5?3.What journal entry did Pelican record on February 1, 20X6 if the purchase was made?


LO8Exercise 8

On November 1, 20X3, Darter Corporation, a US corporation, purchased from Jacana Corporation, a Mexican company, some machinery that cost 1,000,000 pesos. The invoice was payable in pesos on January 30, 20X4. To hedge against rapid changes in the peso, Darter entered into a forward exchange contract on November 1, 20X3 with AB Trader & Company, a US brokerage and investment firm. The contract specified that AB Trader would sell 1,000,000 pesos to Darter at $0.102 per peso for settlement on January 30, 20X4.

Assume that all three companies are subject to the same accounting standards and have December 31st year-ends. The spot rates for pesos on November 1, December 31, and January 30, are $0.100, $0.098, and $0.107, respectively. The 30-day forward rate for pesos on December 31, 20X3 is $0.101.

Required:

Record General Journal entries for Darter Corporation on November 1, December 31, and January 30. If no entry is required on a particular date, indicate “No entry” in the General Journal.

LO8Exercise 9

On November 1, 20X3, Gannet Corporation purchased 5,000 television sets for its merchandise inventory from Seoul, a South Korean firm, at a total quoted cost of 600,000,000 won (W). On this date, the spot rate for won was $1 = 750W. On the same day, Gannet invested $900,000 cash in a non-interest bearing account with Tokyo, a Japanese bank, to hedge its exposed liability position. The account payable to Seoul is due on January 30, 20X4. The exchange rates on December 31, 20X3 and January 30, 20X4 were $1 = 730W, and $1 = 700W, respectively. Gannet agreed to pay Seoul in won. Tokyo held the deposit in won but will remit dollars back to Gannet on January 30th.

Assume that Gannet, Seoul and Tokyo are subject to the same accounting standards and have December 31 year-ends.

Required:

Prepare all the journal entries for Gannet Corporation's General Journal on November 1, 20X3, December 31, 20X3, and January 30, 20X4. If no entry is required on a particular date, indicate “No entry” in the General Journal.


LO8Exercise 10

On November 1, 20X5, US Frigatebird Company sold an airplane worth $1 million Australian dollars to Australian company Heron Inc. to be delivered on February 1, 20X6 in Sydney. In order hedge foreign exchange, Frigatebird entered into a 90 day forward contract on the same day for the amount of the sale at .73 US per Australian dollar.

The relevant exchange rates are of US dollars per Australian dollar:Spot Rate

November 1, 20X5 .73December 31, 20X5 .75February 1, 20X6 .79

Required:

1.What journal entry did Frigatebird record on November 1, 20X5?2.What journal entry did Frigatebird record on December 1, 20X5?3.What journal entry did Frigatebird record on February 1, 20X6 if the purchase was made?


SOLUTIONS

Multiple Choice Questions

1. a (198,000 krone/5.345 krone per dollar) = $37,043.97

2. b 30,000 x .67 = 20,100; $20,100 - $20,400 = $300 loss

3. c

4. b

5. c

6. d $78,000/.80 dollars per franc = 97,500$78,000/.78 dollars per franc = 100,000Difference in francs = (2,500)

Difference in dollars (2,500) x .78 = $ (1,950)

7. b $97,500 francs (from 6 above) x .78 = $76,050

8. d Account payable, Dec 05, 20X3 1,000,000 x $0.168 = $ 168,000Account payable, Dec 31, 20X31,000,000 x $0.167 = 167,000Gain $ 1,000

Account payable, Dec 31, 20X3 $ 167,000Account payable, at settlement 167,500Realized loss $ 500

9. b 150,000 pounds x (1.60 – 1.62) = $(3,000) loss

10. d 150,000 pounds x 1.62 = $243,000

11. b (220,000 kiwis)x($0.68) = $149,600

12. b (220,000 kiwis)x($.68 - $.70) = $4,400 loss

(To adjust the contract to the 30 day futures amount)

13. d

14. c

15. c©2009 Pearson Education, Inc. publishing as Prentice Hall

12-13

16. d

17. b

18. a

19. b

20. d


Exercise 1

Requirement 1

The foreign exchange rate weakened making the purchase of goods on time cheaper from Japan.

Requirement 2 and 3

Date Account Name Debit Credit9/01/X5 Merchandise 158,000

Accounts Payable: Osaka 158,000

10/01/X5 Accounts Payable: Osaka 158,000 FX gain 4,000 Cash 154,000

Exercise 2

A $1,042 foreign exchange loss

Spoonbill’s General Journal

Date Account Name Debit Credit10/15/X5 Accounts receivable 16,667

Sale 20,000/1.2 16,667

12/10/X5 No entry

12/13/X5 Cash 20,000/1.28 15,625Foreign exchange loss 1,042 Accounts receivable 16,667


Exercise 3

Date Direct Method Indirect MethodNov 01 1£ = $1.60 $1 = £.6250Dec 31 1£ = $1.62 $1 = £.6173Feb 01 1£ = $1.66 $1 = £.6024

Penguin’s General Journal

Date Account Name Debit Credit11/01/X1 Machinery 10,000

Accounts Payable: Shearwater 10,000

12/31/X1 Exchange Loss 125 Accounts Payable: Shearwater 125

(£6,250 x $1.62 = $10,125)($10,000 - $10,125 = $125 loss)

02/01/X2 Exchange Loss 250 Accounts Payable: Shearwater 250

Accounts Payable: Shearwater 10,375 Cash 10,375

(£6,250 x $1.66 = $10,375)

Shearwater’s General Journal

11/01/X1 Accounts Receivable: Penguin 6,250 Sales Revenue 6,250

12/31/X1 No entry

02/01/X2 Cash 6,250 Accounts Receivable: Penguin 6,250


Exercise 4

Petrel’s General Journal

11/01/X1 Contract Receivable 10,000 Contract Payable 10,000(1,000,000 x $0.0100)

12/31/X1 Contract Receivable 400 Exchange Gain 400{1,000,000 x ($.0104 – 0.0100)}

01/30/X2 Contract Receivable 200 Exchange Gain 200{1,000,000 x ($.0106 - .0104)} Cash 10,600Contracts Payable 10,000 Cash 10,000 Contract Payable 10,600

Exercise 5

Albatross’s General Journal

11/01/X3 Contract Receivable 1,020,000 Contract Payable 1,020,000(1,000,000 x $1.020/euro)

12/31/X3 Exchange Loss 10,000 Contract Receivable 10,000{1,000,000 x ($1.010 – $1.020)}

01/30/X4 Contract Receivable 5,000 Exchange Gain 5,000{1,000,000 x ($1.015 - $1.010)}

Cash 1,015,000Contract Payable 1,020,000 Cash 1,020,000 Contract Receivable 1,015,000


Exercise 6

Stork’s General Journal

6/01/X5 Aviation gas contract option 5,000 Cash 5,000

6/30/X5 Aviation gas contract option 20,000 Other comprehensive income 20,000

8/01/X5 Cash 30,000 Aviation gas contract option 25,000 Other comprehensive income 5,000

Aviation gas 200,000 Cash 200,000

8/15/X5 Cost of goods sold 200,000 Aviation gas 200,000

Other comprehensive income 25,000 Cost of goods sold 25,000


Exercise 7

Pelican’s General Journal

12/31/X5 Forward contract 29,703 OCI 29,703

(1.35-1.50)x200,000/(1.01)1

Implicitrate

1.32x200,000(1+r)3=1.35x200,000r=0.007519Discount Amortization Balance

26400011/30 1985.04 26598512/31 1999.97 2679851/31 2015.00 270000

12/31/X5 Exchange Loss 1985.042+1999.968 3985 OCI 3985

02/01/X6 Forward contract 10,297 AOCI 10,297

Cash (1.55-1.35)x200,000 40,000 Forward contract 40,000

Equipment 310,000 Cash 310,000

Equipment 2015 OCI 2015


Exercise 8

Darter’s General Journal

Date Account Name Debit Credit11/01/X1 Machinery 100,000

Accounts Payable: Jacana(pesos)

100,000

11/01/X1 Contract Receivable-pesos 102,000 Contract Payable:AB Trader 102,000

12/31/X1 Accounts Payable: Jacana(pesos) 2,000 Exchange Gain 2,000

12/31/X1 Unrealized Loss on Contract 1,000 Contract Receivable-pesos 1,000{($.101 - $.102)(1,000,000)}

01/30/X2 Exchange Loss Accounts Payable: Jacana(pesos)

9,0009,000

Contract Receivable-pesos 6,000 Unrealized Gain on Contract 6,000

Cash-pesosContract payable:AB Trader Contract Receivable-pesos Cash

Accounts Payable:Jacana(pesos) Cash-pesos

107,000102,000

107,000

107,000102,000

107,000


Exercise 9

Date Direct Method Indirect MethodNov 01 1W = $.001333 $1 = W750Dec 31 1W = $.001369 $1 = W730Jan 30 1W = $.001428 $1 = W700

GANNET’s General Journal

11/01/X1 Inventory 800,000 Accounts Payable: Seoul 800,000

(600,000,000/W750 per $1)

11/01/X1 Deposit Receivable: Tokyo 900,000 Cash 900,000

Value of deposit in won:$900,000 x 750 won/ $1 =675,000,000 won

12/31/X1 Deposit Receivable: TokyoExchange Loss

24,65821,918

Accounts Payable: Seoul 21,918 Exchange Gain 24,658

Account Payable:600,000,000/W730 = $821,918$821,918 - $800,000 = $21,918

Deposit Receivable:675,000,000/W730 = $924,658$924,658 - $900,000 = $24,658

01/30/X2 Deposit Receivable: Tokyo 39,628Exchange Loss 35,225 Exchange Gain 39,628 Accounts Payable: Seoul 35,225

Account Payable:600,000,000/W700 = $857,143$857,143 - $821,918 = $35,225

Deposit Receivable:675,000,000/W700 = $964,286$964,286 - $924,658 = $39,628


01/30/X2 Accounts Payable: Seoul 857,143 Cash 857,143

01/30/X2 Cash 964,286 Deposits Receivable: Tokyo 964,286

Exercise 10

Frigatebird’s General Journal

11/1/X5 Accounts receivable 1,369,863 Sales 1,369,863

12/31/X5 Exchange rate loss 36,530 Accounts receivable 36,530

1,369,863-1,333,333=36,530

Forward contract 36,530 Exchange rate gain 36,530

02/01/X6 Exchange rate loss 67,510 Accounts receivable 67,510

Forward contract 67,510 Exchange rate gain 67,510

1,333,333-1,265,823=67,510

Cash 1,369,863 Accounts receivable 1,265,823 Forward contract 104,040


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