Test Bank Advanced Accounting 3E by Jeter 12 chapter PDF

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Chapter 12Accounting for Foreign Currency TransactionsAnd Hedging Foreign Exchange RiskMultiple Choice 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 ...

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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 2012 a. gain gain b. gain loss c. loss loss d. loss gain

12-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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: Date November 1 December 31 March 1

Per Unit of Foreign Currency $0.73 0.71 0.74

The entry to record the forward contract is a. FCU Receivable 350,000 Premium on Forward Contract 15,000 Dollars Payable

365,000

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

15,000 350,000

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

15,000 350,000

d. Dollars Receivable Discount on Forward Contract FCU Payable

365,000

350,000 15,000

Chapter 12 Accounting for Foreign Currency Transactions And Hedging Foreign Exchange Risk 8.

12-3

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: Date November 1 December 31 March 1

Per Unit of Foreign Currency $0.73 0.71 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 a. $319,500 b. $319,500 c. $333,000 d. $333,000 9.

Gain/Loss Recorded $9,000 gain $9,000 loss $4,500 gain $18,000 gain

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.

12-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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? a. b. c. d.

2011 $0 $0 $350 loss $350 loss

2012 $0 $350 loss $0 $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.

Chapter 12 Accounting for Foreign Currency Transactions And Hedging Foreign Exchange Risk 18.

12-5

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 2.04 30-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:

September 1, 2011 September 30, 2011 (year-end)

Spot rate 1.46 1.50

Forward Rate For Dec. 1, 2011 1.47 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:

September 1, 2011 September 30, 2011 (year-end)

Spot rate 1.46 1.50

Forward Rate For Dec. 1, 2011 1.47 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.

12-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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: Date November 1 December 31 March 1

Per Unit of Foreign Currency $0.93 0.91 0.94

The entry to record the forward contract is a. FCU Receivable Premium on Forward Contract Dollars Payable

232,500

b. Dollars Receivable Discount on Forward Contract FCU Payable

232,500

c.

232,500

FCU Receivable Discount on Forward Contract Dollars Payable

d. Dollars Receivable Discount on Forward Contract FCU Payable 22.

225,000 7,500

7,500 225,000 7,500 225,000 225,000 7,500 232,500

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: Date November 1 December 31 March 1

Per Unit of Foreign Currency $0.83 0.81 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? a. b. c. d.

Receivable Balance $170,000 $162,000 $168,000 $164,000

Gain/Loss Recorded $4,000 gain $4,000 loss $2,000 gain $2,000 loss

Chapter 12 Accounting for Foreign Currency Transactions And Hedging Foreign Exchange Risk 23.

12-7

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 3 Spot-rate 1.58 1.55 1.54 30-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:

April 1, 2011 April 30, 2011 (year-end)

Spot rate 1.16 1.20

Forward Rate For Aug. 1, 2011 1.17 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:

April 1, 2011 April 30, 2011 (year-end)

Spot rate 1.16 1.20

Forward Rate For Aug. 1, 2011 1.17 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.

12-8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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 $1.61 December 31 1.67 February 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 Rate Date Spot Rate (Delivery on 4/1) December 1 0.390 0.375 December 31 0.370 0.373 April 1 0.385 --

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

Chapter 12 Accounting for Foreign Currency Transactions And Hedging Foreign Exchange Risk 12-3

12-9

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 Forward rate for delivery on March 1, 2011 December 31, 2010 – Spot ra te Forward rate for delivery on March 1, 2011 March 1, 2011 – Spot rate

$1.3076 1.2980 1.3060 1.3150 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. B. C.

12-5

Prepare all journal entries relative to the above to be made by Nance on October 1, 2010. Prepare all journal entries relative to the above to be made by Nance on December 31, 2010. 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. 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.

12-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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 December 31, 2010 January 31, 2011

1 euro = 1.45 1 euro = 1.43 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):

November 1, 2011 Balance sheet date (12/31/11) February 1, 2012 4.

Spot Rate $0.0954 0.0949 0.0947

Forward Rate for 2/1/12 $0.0948 0.0944

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 Novem...