Ch05 - practice materials PDF

Preview

Summary

CHAPTER 5FOREIGN CURRENCY TRANSACTIONSSUMMARY OF ITEMS BY TOPICTrue- FalseConceptual Multiple ChoiceComputational Multiple Choice ProblemsShort Answer Exchange Rates 1-12 78-Purchase or sale - immediate payment13-14 82 116-117 230-233 270Purchase or sale - delayed payment, no balance sheet date, no ...

Description

CHAPTER 5 FOREIGN CURRENCY TRANSACTIONS SUMMARY OF ITEMS BY TOPIC

Exchange Rates Purchase or sale immediate payment Purchase or sale delayed payment, no balance sheet date, no hedge Purchase or sale delayed payment, balance sheet date, no hedge Hedging Purchase or sale forward contract hedge Purchase or sale - option contract hedge Foreign currency commitment Foreign currency commitment - forward contract hedge Foreign currency commitment - option contract hedge Forecasted transactions Forecasted transactions forward contract hedge Forecasted transactions option contract hedge Speculative contracts

TrueFalse 1-12

Conceptual Multiple Choice 78-81

Computational Multiple Choice

Problems

Short Answer

13-14

82

116-117

230-233

270

15-19

83-85

118-123

234-237

20-22

86-89

124-132

238-241

23-45, 50 46-49

90-101

133-137

102-103

138-157

242-245

51-57

104-105

158-177

246-249

58-64

106-108

65-66

109

178-193

250-253

281-282

67

110

194-209

254-257

283

68-70

111-112

71-73

113

210-219

258-261

74-76

114

220-229

262-265

77

115

271-272 273-275 276-277

278-280

284-285

266-269

286

True-False Statements 1.

Entities of any size may be involved in foreign currency transactions

2.

Transactions conducted with a company outside of the U.S. will always result in a foreign currency transaction for the U.S. company.

3.

The currency that is ultimately received or paid as a result of a transaction is said to be the currency in which the transaction is denominated.

4.

The relative value between two currencies is called the exchange rate.

5.

When a fixed exchange rate between two currencies exists, the exchange rate will be the same for all types of transactions.

6.

A fixed exchange rate is the exchange rate between two currencies determined by market conditions.

7.

Floating exchange rates allow the exchange rate among currencies to fluctuate based on supply and demand.

8.

Changes in the supply and demand for a currency and therefore the exchange rate are based solely on interest rates.

9.

When the market value of a currency increases, that currency is said to strengthen against the other currencies.

10.

When the value of a currency increases relative to other currencies, it is easier for businesses in the country where the currency has strengthened to export products.

11.

The spot exchange rate is the forecasted exchange rate that will exist in 30 days.

12.

The difference between the exchange rate to buy a currency and the exchange rate to sell a currency is called the spread.

13.

When a purchase or sale occurs and it is denominated in a foreign currency, the amount recorded is the estimated value of the foreign currency based on the exchange rate that exists at the transaction date.

14.

The values recorded, when a purchase with immediate payment occurs, are different when the payment is in dollars versus in some other currency.

15.

When payment for a foreign currency purchase occurs at a date subsequent to the purchase, the currency in which the transaction is denominated makes a different in the values recorded to recognize the payment.

16.

When inventory is sold with payment to occur at a later date, and the transaction is denominated in a foreign currency, the amount recorded at the date of the sale is the known value of the currency that will be received at a later date.

17.

The FASB views the purchase or sale denominated in a foreign currency as separate from any change in value of the receivable or payable that may occur between the transaction date and the settlement date.

18.

The settlement date in a foreign currency transaction is the date on which the domestic company enters into a transaction denominated in a foreign currency.

19.

The amount recorded at the date of a foreign currency purchase transaction is an estimated amount because the value of the currency to be exchanged is unknown at the date of the initial transaction.

20.

A foreign currency purchase transaction requires the recognition of gains and losses at the balance sheet date because one or more of the accounts on the financial records is a monetary account.

21.

For an account to qualify as a monetary account, it must be fixed in units of a foreign currency.

22.

An adjusting entry recorded at the balance sheet date between the date of a foreign currency transaction and the exchange of currency occurs because of a change in the estimated value of the foreign currency to be exchanged.

23.

Hedging is used to capitalize on foreign currency exchange rate fluctuations.

24.

The hedge of a foreign currency payable or receivable results in the manager not knowing the amount of cash that will be paid or received.

25.

The risk from foreign currency exchange rate fluctuations can occur both before and after the transaction.

26.

A foreign currency forward contract is an agreement to exchange currency units at a later date at an agreed exchange rate.

27.

The forward exchange rate is the currency exchange rate predicted to exist at a future date.

28.

The forward exchange rate is the known future value of the foreign currency.

29.

Regardless of the ultimate exchange rate that exists between two currencies, a forward contract requires the two parties to exchange currencies.

30.

Entering into a foreign currency forward contract results in the manager knowing the amount of cash that will be given or received with certainty.

31.

A foreign currency forward contract can only be acquired in predetermined number of foreign currency units.

32.

The foreign currency forward exchange rate will always be greater than the spot rate.

33.

A foreign currency option contract is an agreement in which the contract’s writer guarantees the holder that the holder may purchase or sell the foreign currency at a known price (strike price) but the holder is not obligated to purchase or sell the currency if the exchange rate is not favorable.

34.

When a manager enters into a foreign currency option contract, the company is obligated to exchange currencies at an agreed price on a future date.

35.

Foreign currency option contracts are only created in fixed sizes.

36.

Foreign currency option contracts are individually negotiated between the two parties.

37.

The strike price of a foreign currency option contract is the amount the holder must pay to enter into the contract.

38.

Foreign currency option contracts where the holder has the right to purchase the currency is termed a call option

39.

Foreign currency put options are more risky than foreign currency call options.

40.

Foreign currency option contracts where the holder has the right to sell the currency are termed a put option.

41.

The premium for a foreign currency option contract always increases as the strike price decreases.

42.

A foreign currency option contract is said to be in the money when the currency’s spot rate is less than the put strike price or more than the call strike price.

43.

A foreign currency option contract is said to be out of the money when the currency’s spot rate is more than the put strike price or less than the call strike price.

44.

Foreign currency forward contracts are recognized on the balance sheet at their fair value while foreign currency option contracts are recognized at the amount paid for the contract.

45.

Foreign currency forward contracts and option contracts can each result in gains and losses to the holder as a result of foreign currency exchange rate fluctuations.

46.

Generally a journal entry is not required at the date a foreign currency forward contract is created.

47.

The fair value of a foreign currency forward contract at a balance sheet date is based on the difference between the forward exchange rate and the spot rate at that date.

48.

The foreign currency forward exchange rate and the spot rate become the same at the date the forward contract matures.

49.

Gains and losses resulting from a receivable or payable hedge with a foreign currency forward contract are placed in Other Comprehensive Income until the transaction occurs.

50.

The recording of an inventory purchase transaction will be different when hedged with an option contract as compared to when it is hedged with a forward contract.

51.

A journal entry is required at the date an option contract is purchased

52.

The holder of an option contract has an unlimited potential loss on the option contract.

53.

The writer of an option contract has an unlimited potential loss on the option contract.

54.

The writer of an option contract has an unlimited potential gain on the option contract.

55.

The holder of an option contract has an unlimited potential gain on the option contract.

56.

An option contract creates a requirement that the holder and the writer of the option contract exchange currencies at a future date.

57.

The strike price for a foreign currency and the currency’s spot rate will be the same at the date the option contract matures.

58.

A foreign currency commitment exists when an entity enters into an agreement to buy or sell goods denominated in a fixed number of foreign currency units at a future date.

59.

If management does not hedge a purchase commitment in a foreign currency, the company is exposed to exchange rate fluctuation risk from the date the purchase commitment occurs until the transaction date.

60.

The change in the fair value of the derivative (forward contract or option contract) used to hedge a foreign currency commitment does not have to be recognizes because a transaction has not yet occurred.

61.

The existence of a foreign currency purchase or sales commitment requires the creation of a foreign currency commitment.

62.

The gain or loss or a foreign currency commitment is offset by a loss or gain on a purchase or sales commitment.

63.

When a company hedges a foreign currency commitment, it has two executory commitments: one for the hedge and one for the underlying purchase or sale transaction.

64.

Gains and losses on a foreign currency commitment are recognized as gains or losses on the income statement in the period when the underlying transaction occurs.

65.

When recording the creation of a foreign currency commitment established with a forward contract, the hedge is recorded using the forward exchange rate that exists on that date.

66.

At an intervening balance sheet date of a foreign currency commitment created with a forward contract, the gain or loss on the hedge is determined by comparing the forward rate at the balance sheet date with the spot rate at the balance sheet date.

67.

The hedge of a foreign currency commitment with an option contract requires a journal entry for the option contract at the date the hedge is established but it does not require a journal entry for the purchase or sales commitment.

68.

It is possible to hedge a foreign currency transaction that is forecast to occur even though there is no transaction or even an agreement to a transaction.

69.

Gains or losses that incur in conjunction with the hedge of a forecasted foreign currency transaction impact the income statement in the period of exchange rate fluctuation.

70.

The gain or loss resulting from the hedge of a forecasted foreign currency transaction is placed in other comprehensive income and it never becomes part of net income.

71.

There is no journal entry required for the initiation of a foreign currency forward contract created as a hedge of a forecasted transaction.

72.

A forward contract used to hedge a foreign currency forecasted transaction does not have to be revalued at the balance sheet dates because there is no underlying transaction.

73.

It is possible to have a negative fair value for a foreign currency forward contract used to hedge a forecasted transaction.

74.

There is no journal entry required for the initiation of a foreign currency option contract created as a hedge of a forecasted transaction.

75.

An option contract used to hedge a foreign currency forecasted transaction has to be revalued at the balance sheet dates even though here is no underlying transaction.

76.

It is possible to have a negative fair value for a foreign currency option contract used to hedge a forecasted transaction.

77.

A speculative foreign currency contact exists when an entity enters into an agreement to buy or sell foreign currency in the future at a known price when there is no underlying transaction or commitment to a future transaction, or forecasted future transaction.

True-False Statement Solutions 1. T

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36.

F, The currency exchanged may be either dollars or some other currency. As a result, it is possible that a foreign currency transaction exists but it is not a certainty. T T F, Fixed exchange rates may differ depending on the type of transaction. F, Fixed exchange rates are established by public officials. T F, Exchange rates change as a result of a number of factors such as interest rates, balance of trade, political stability, and anticipated inflation. T F, A stronger currency requires more foreign currency units per unit of the domestic currency, making exporting more difficult because prices increase. F, The spot rate is the exchange rate that exists for immediate delivery T T F, The amount recorded for a purchase is the same when payment occurs immediately regardless of the currency exchanged. T F, The amount recorded as the sale and accounts receivable at the date of sale is the current estimate of the value of the foreign currency to be received. T F, The settlement date is the date on which the exchange of currency occurs T T F, A monetary account is any account that is fixed in units of currency. It is not necessary that it be a foreign currency. T F, Hedging is the use of a financial instrument contract to eliminate exchange rate fluctuation risk F, A hedge establishes a fixed exchange rate between currencies so the amount of cash to be paid or received is known T T T F, The forward exchange rate is the estimated future value of a currency based on the market’s expectations T T F, A foreign currency forward contract results from negotiations between an individual buyer and seller of foreign currency and can be for any number of currency units and the exchange can occur at any agreed date. F, The relationship between for forward exchange rate and the spot rate depends on the market’s expectations T F, An option contract gives the holder the right to exchange currency but not the obligation T F, Foreign currency option contracts are fixed contracts traded on organized exchanges.

37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64.

F, The strike price is the price at which the option writer agrees to exchange currency with the holder. The amount the holder pays to enter into the contract is the premium. T F, Call and put options define whether the holder is purchasing or selling the foreign currency. The terms are not related to the risk of the option contract T F, The premium will increase as the strike price decreases for a call option but will decrease as the strike price decreases for a put option T T F, Both foreign currency forward contracts and option contracts are recognized on the balance sheet at their fair value. F, Foreign currency forward contracts can result in a gain or a loss to the holder. However, the foreign currency option contract can only result in a gain to the holder. T F, The fair value of a forward contract is based on the difference between the forward exchange rate at the date the contract is created and the forward exchange rate at the balance sheet date. T F, Gains and losses on the hedge of a payable or receivable are immediately recognized to offset the loss or gain on the receivable or payable. F, The purchase transaction is the same regardless of whether the transaction is hedged or not whether it is hedged with a forward contract or an option contract. T F, The holder of the option contract has a loss limited to the amount of the premium paid to the option writer. T F, The writer of an option contract has a gain limited to the amount of the premium received from the holder. T F, An option contract permits the holder to exchange currencies with the writer but does not require the exchange. The holder will exchange currencies if the exchange rate in the option contract is favorable when compared to the market exchange rates. F, The strike price and the spot rate do not have to be equal at any time. T T F, The change in value of the derivative must always be recognized but, in the case of a foreign currency commitment, it is offset with a recognized change in value of the purchase or sales commitment. F, If a foreign currency commitment is not hedged, the company accepts the risk of currency rate fluctuation from the date of the purchase or sales commitment until the transaction date. T T F, Gains and losses on a foreign currency commitment are recognized as an adjustment to sales, in the case of a sales transaction, or the asset value, in the case of a purchase transaction, at the date of the underlying transaction.

65. 66. 67. 68. 69.

70. 71. 72. 73. 74. 75. 76. 77.

F, A foreign currency commitment is an executory contract. Given that cash is not exchanged at the date the hedge is created with a forward contract, there is no entry with regard to the foreign currency commitment. F, The gain or loss on the forward contract is based on the difference between the forward contract that existed at the date the contract was established and the forward rate at the balance sheet date. T...