312308798 Advanced Accounting Test bank chapter 07 Susan Hamlen PDF

Preview

Summary

TEST BANKCHAPTER 7Foreign Currency Transactions and HedgingMULTIPLE CHOICE Topic: Valuation of forward contracts LO 3 A U. company invests in a forward purchase contract for 100,000,000 yen with a purchase price of $0/yen, for delivery in 45 days. The spot rate at the time the contract is initiated ...

Description

TEST BANK CHAPTER 7 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. b. c. d.

$20,000 asset $20,000 liability $30,000 asset $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. b. c. d.

The U.S. company has receivables denominated in euros, with payment to be received on December 1. 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. 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. 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

Test Bank, Chapter 7

©Cambridge Business Publishers, 2010 1

Use the following information on the U.S. dollar value of the euro to answer questions 3 – 7 below:

October 30, 2010 December 31, 2010 April 30, 2011

Spot rate $ 1.25 1.28 1.26

Forward rate for April 30, 2011 delivery $ 1.30 1.32 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. b. c. d.

2010 $1,000 gain $1,000 loss $3,000 gain $2,000 loss

2011 $4,000 gain $4,000 gain $6,000 gain $6,000 gain

ANS: a 2010: Gain on receivable, ($1.28 - $1.25) x €100,000 Loss on forward, ($1.32 - $1.30) x €100,000 Net gain

= $3,000 = $2,000 $1,000

2011: Loss on receivable, ($1.28 - $1.26) x €100,000 Gain on forward, ($1.32 - $1.26) x €100,000 Net gain

= $2,000 = $6,000 $4,000

©Cambridge Business Publishers, 2010 2 Edition

Advanced Accounting, 1st

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. b. c. d.

$126,000 $122,000 $130,000 $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. b. c. d.

No effect $2,000 loss $3,000 gain $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.

Test Bank, Chapter 7

©Cambridge Business Publishers, 2010 3

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. b. c. d.

No effect $2,000 loss $3,000 gain $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. b. c. d.

The $1,000 total loss on the forward contract is reclassified from other comprehensive income as an adjustment to sales revenue. The $4,000 total gain on the forward contract is reclassified from other comprehensive income as an adjustment to sales revenue. The 2011 $6,000 gain on the forward contract is recognized as a hedging gain on the 2011 income statement. 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 4 Edition

Advanced Accounting, 1st

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? a. b. c. d.

Fiscal 2012 $1,000 exchange loss $1,000 exchange gain No effect No effect

Fiscal 2013 $3,000 exchange gain $3,000 exchange loss $2,000 exchange loss $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? a. b. c. d.

Fiscal 2012 $1,000 exchange loss $1,000 exchange gain No effect No effect

Fiscal 2013 $3,000 exchange gain $3,000 exchange loss $2,000 exchange loss $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

Test Bank, Chapter 7

©Cambridge Business Publishers, 2010 5

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. b. c. d.

$20,000 $25,600 $26,000 $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. b. c. d.

No gain or loss $400 gain $400 loss $1,667 gain

ANS: b €20,000 x ($1.32 - $1.30) = $400 gain

©Cambridge Business Publishers, 2010 6 Edition

Advanced Accounting, 1st

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. b. c. d.

$136,000 $139,000 $ 73,530 $ 71,942

ANS: a €100,000 x $1.36 = $136,000 13.

Topic: Export transaction LO 2 The exchange gain or loss recognized by Teneco as a result of this transaction is: a. b. c. d.

-0$3,000 gain $3,000 loss $3,919 loss

ANS: b €100,000 x ($1.39 - 1.36) = $3,000 gain

Test Bank, Chapter 7

©Cambridge Business Publishers, 2010 7

14.

Topic: Analysis of foreign currency risks LO 3 A U.S. exporter has made a sale to a customer in another country. The customer is obligated to remit payment in his local currency in 90 days. The direct spot rate is now $1.54. The 90-day forward rate is $1.60. At which spot rate at the time the customer remits payment would the company have been better off not hedging the export transaction with a forward contract? a. b. c. d.

$1.52 $1.54 $1.59 $1.62

ANS: d Any rate above $1.60 leads to higher U.S. dollar value of payment received than under the forward contract. 15.

Topic: Foreign currency options LO 3 A company invests $200 in a foreign exchange option with the following terms: The company may purchase 1,000,000 zloty at a price of $.25/zloty on December 20, 2014. Which statement is true? a. b. c. d.

If the spot price for zloty is $.36 on December 20, the company will gain $359,800 on the option. If the spot price for zloty is $.24 on December 20, the company will lose $200 on the option. If the spot price for zloty is $.27 on December 20, the company will lose $20,200 on the option. If the spot price for zloty is $.30 on December 20, the company will gain $24,800 on the option.

ANS: b The option gives the holder the option to buy 1,000,000 zloty for $250,000. At a spot price of $.24/zloty, the option has no value and the holder loses its $200 investment.

©Cambridge Business Publishers, 2010 8 Edition

Advanced Accounting, 1st

16.

Topic: Hedge of import transaction LO 4 A U.S. import company purchases boomerangs from an Australian supplier on October 1, 2013 for 100,000 Australian dollars (A$), payable February 1, 2014. On October 1, 2013, the company enters into a forward contract to hedge the foreign currency risk resulting from this purchase. Exchange rates are as follows:

October 1, 2013 December 31, 2013 February 1, 2014

Spot rate $0.89 0.88 0.82

Forward rate for 2/1 delivery $0.85 0.84 0.82

For the import company, what is the income statement effect of the above information? a. b. c. d.

No effect in 2013, $4,000 gain in 2014 $1,000 gain in 2013, $6,000 gain in 2014 $1,000 loss in 2013, $6,000 loss in 2014 No effect in 2013, $4,000 loss in 2014

ANS: a 2013: forward contract: ($.85 - $.84) x A$100,000 = payable: ($.89 - $.88) x A$100,000 = 2014: forward contract: ($.84 - $.82) x A$100,000 = payable: ($.88 - $.82) x A$100,000 =

Test Bank, Chapter 7

$1,000 loss 1,000 gain -0$2,000 loss 6,000 gain $4,000 gain

©Cambridge Business Publishers, 2010 9

17.

Topic: Hedge of firm commitment LO 5 ABC Corporation issues a purchase order for 1,000,000 semiconductors to a foreign supplier. The agreed upon total price is FC1,200,000, and the current spot rate is $1/FC. Suppose a forward contract is taken out when the purchase order is issued, at a rate of $0.95/FC, for delivery when the semiconductors are received. If the spot rate rises to $1.05 when the semiconductors are received and paid for by ABC, at what value will the semiconductors be reported on ABC’s books? a. b. c. d.

$1,020,000 $1,140,000 $1,200,000 $1,260,000

ANS: b $1.05 x FC1,200,000 = ($1.05 - $.95) x FC1,200,000 =

$1,260,000 (120,000) $1,140,000

Use the following information to answer questions 18 and 19 below. A U.S. company purchases a 60-day certificate of deposit from an Italian bank on October 15. The certificate has a face value of €1,000,000, costs $1,200,000 (the spot rate is $1.20/€), and pays interest at an annual rate of 6 percent. On December 14, the certificate of deposit matures and the company receives principal and interest of €1,010,000. The spot rate on December 14 is $1.18/€. The average spot rate for the period October 15 – December 14 is $1.19/€. 18.

Topic: Foreign currency lending LO 2 The exchange gain or loss on this investment is: a. b. c. d.

$20,200 gain $20,200 loss $20,000 gain $20,000 loss

ANS: d €1,000,000 x ($1.20 - $1.18) = $20,000 loss

©Cambridge Business Publishers, 2010 10 Edition

Advanced Accounting, 1st

19.

Topic: Foreign currency lending LO 2 Interest income on the investment is reported at: a. b. c. d.

$0 $11,800 $11,900 $12,000

ANS: b €10,000 x $1.18 = $11,800

Use the following information to answer questions 20 – 22 below: A U.S. company anticipates that it will purchase merchandise for €10,000,000 at the end of July, and pay for it at the end of September. On March 1, it enters a forward contract to buy €10,000,000 on September 30. The forward contract qualifies as a cash flow hedge. The company’s accounting year ends December 31. The company actually purchases the merchandise on July 30 and closes the forward contract and pays for the merchandise on September 30. It still holds the merchandise at the end of the year. Exchange rates are as follows: Forward rate for 9/30 delivery March 1 July 30 September 30

Test Bank, Chapter 7

Spot rate $1.40 1.42 1.43

$1.41 1.415 1.43

©Cambridge Business Publishers, 2010 11

20.

Topic: Hedge of forecasted transaction LO 6 The merchandise is reported on the year-end balance sheet at: a. b. c. d.

$14,100,000 $14,150,000 $14,200,000 $14,300,000

ANS: c Changes in the value of the forward contract remain in other comprehensive income until the merchandise is sold. The merchandise is reported at the spot rate at the date of purchase, $1.42. 21.

Topic: Hedge of forecasted transaction LO 6 What is the net effect on income for the year? a. b. c. d.

No effect $100 loss $100 gain $50 gain

ANS: a Changes in the value of the forward are reported in other comprehensive income. The $100 loss on the payable is exactly offset by a reclassification of $100 out of other comprehensive income, so there is no net effect on income.

©Cambridge Business Publishers, 2010 12 Edition

Advanced Accounting, 1st

22.

Topic: Hedge of forecasted transaction LO 6 When the merchandise is sold, what amount is reported for cost of goods sold? a. b. c. d.

$14,100,000 $14,150,000 $14,200,000 $14,300,000

ANS: a At the end of the year, other comprehensive income has a credit balance of $100. When the merchandise is sold, it is reclassified as a reduction in cost of goods sold; $14,100,000 = $14,200,000 - $100,000. Journal entries related to questions 20 – 22 (in thousands): July 30 Inventory

14,200 Accounts payable

14,200

Investment in forward

50 Other comprehensive income

September 30 Exchange loss

50 100

Accounts payable

100

Investment in forward

150 Other comprehensive income

Other comprehensive income

150 100

Exchange gain

100

Accounts payable

14,300 Cash Investment in forward

When merchandise is sold: Cost of goods sold Other comprehensive income

14,100 100 Inventory

Test Bank, Chapter 7

14,100 200

14,200

©Cambridge Business Publishers, 2010 13

Use the following information on the U.S. dollar value of the euro to answer questions 23 – 25:

November 30, 2011 December 31, 2011 March 20, 2012 23.

Spot rate $ 1.30 1.33 1.35

Forward rate for March 20, 2012 delivery $ 1.29 1.31 1.35

Topic: Speculative forward purchase contract LO 7 On November 30, 2011, a U.S. company, with a December 31 year-end, enters a forward purchase contract for €100,000 to be delivered on March 20, 2012. The forward contract does not qualify as a hedge. The company closes the contract at its expiration date. Which statement is true? a. b. c. d.

No gain or loss is reported until the forward is closed on March 20 A gain of $2,000 is reported in 2012 A gain of $4,000 is reported in 2012 A gain of $6,000 is reported in 2012

ANS: c The change in value of the forward is reported in income as the forward rate changes. For 2012, the gain is ($1.35 - $1.31) x €100,000 = $4,000. 24.

Topic: Speculative forward sale contract LO 7 On November 30, 2011, a U.S. company, with a December 31 year-end, enters a forward sale contract for €100,000 to be delivered on March 20, 2012. The forward contract does not qualify as a hedge. The company closes the forward contract on December 31. Which statement is true? a. b. c. d.

No gain or loss is reported A loss of $1,000 is reported in 2011 A loss of $3,000 is reported in 2011 A loss of $2,000 is reported in 2011

ANS: d The change in value of the forward is reported in income as the forward rate changes. For 2011, the loss is ($1.31 - $1.29) x €100,000 = $2,000

©Cambridge Business Publishers, 2010 14 Edition

Advanced Accounting, 1st

25.

Topic: IFRS for hedge of a forecasted purchase LO 8 On November 30, 2011, a U.S. company, with a December 31 year-end, enters a forward purchase contract for €100,000 to be delivered on March 20, 2012. The contract hedges a forecasted purchase of equipment. The forward is closed and the equipment purchased on March 20. If the company follows IFRS and reports gains and losses on hedges of forecasted transactions as basis adjustments, total depreciation expense over the life of the equipment is: a. b. c. d.

$129,000 $130,000 $131,000 $135,000

ANS: a The equipment is recorded at the spot rate of $1.35 x €100,000 = $135,000, adjusted for the $6,000 [= $1.35 - $1.29) x €100,000] gain on the forward contract. 26.

Topic: Exchange rates LO 1 The value of the euro changes from $1.39 to $1.43. Which statement is true concerning changes in the value of the euro in relation to the U.S. dollar? a. b. c. d.

Each U.S. dollar can be exchanged for more euros. Each euro can be exchanged for fewer U.S. dollars. The U.S. dollar has strengthened with respect to the euro. A $10 product can be purchased with fewer euros.

ANS: d 27.

Topic: Exchange rates LO 1 Informal markets contracting for future delivery of foreign currencies are called: a. b. c. d.

Spot markets Forward markets Futures markets Direct markets

ANS: b

Test Bank, Chapter 7

©Cambridge Business Publishers, 2010 15

28.

Topic: Forward sale hedging foreign currency receivable LO 4 A U.S. company has euro-denominated receivables that it hedges with a forward sale of euros. The euro weakens against the U.S. dollar. Which statement is true? a. b. c. d.

The gain on the receivables and the loss on the forward are reported on the income statement. The gain on the receivables and the loss on the forward are reported in other comprehensive income. The loss on the receivables and the gain on the forward are reported on the income statement. The loss on the receivables and the gain on the forward are reported in other comprehensive income.

ANS: c 29.

Topic: Forward purchase hedging foreign currency payable LO 4 A U.S. company has payables to suppliers den...