Deck 12: Derivatives and Foreign Currency: Concepts and Common Transactions

Question 1

Which of the following statements is true regarding forward contracts,futures contracts,options and swaps?

A)A forward contract can be purchased on the open market and is recorded at its historical cost,then adjusted for changes in the market.
B)A futures contract is negotiated between two parties who are betting in the opposite direction on the movement of the underlying price.
C)An option is a contract requiring the holder to either "put" or "call" an underlying asset at a specified point in time.
D)A swap is a contract between two parties to exchange an ongoing stream of cash flows.

Answer 1

D

Question 2

Use the following information to answer the question(s) below.

On October 4, 2014, Sooty Corporation borrowed 250,000 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 were:


-What is the final amount of the loan payable that Sooty repaid?

A)$250,000
B)$287,500
C)$397,500
D)$402,500

Answer 2

$402,500

Question 3

A U.S.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.

Answer 3

C

Question 4

On December 5,2014,Unca Corporation,a U.S.firm,bought inventory items from Skagerrak Corporation of Norway for 1,000,000 Norwegian kroner when the spot rate for kroner was $0.166.The purchase was denominated in kroner.At Unca's fiscal year end,December 31,2014,the spot rate was $0.171.On January 4,2015,Unca purchased 1,000,000 kroner for $167,500 and paid the invoice.How much gain or (loss)did Unca report in its 2014 and 2015 income statements,respectively?

A)$(5,000)and $1,500
B)$0 and ($1,500)
C)($5,000)and $3,500
D)$0 and ($3,500)

Question 5

Cass Corporation's balance sheet at December 31,2014 included a $48,480 account receivable from Redmun Corporation of Mexico.The account receivable was denominated as 600,000 Mexican pesos.What entry did Cass make on January 16,2015 when the account receivable was collected and the exchange rate for the peso was $.09?

A)
B)
C)
D)

Question 6

Use the following information to answer the question(s) below.

On October 4, 2014, Sooty Corporation borrowed 250,000 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 were:


-What exchange gain or loss appeared on Sooty's 2015 income statement?

A)a loss of $15,000
B)a loss of $5,000
C)a gain of $15,000
D)a gain of $5,000

Question 7

Ulysses Company purchases goods from China amounting to 372,372 Yuan (the transaction is denominated in the Chinese Yuan).Assume the Yuan is trading at $0.154 at the date the goods are ordered,and the Yuan is trading at $0.155 at the date the goods are received.When the invoice is paid a month later,the Yuan is trading at $.156.Assume all three dates are in the same fiscal year.Which of the following is true?

A)The entry to record the payment will include a gain of $744.74.
B)The entry to record the payment will include a gain of $372.37.
C)The entry to record the purchase will include a credit to Accounts Payable of $57,345.29.
D)The entry to record the purchase will include a credit to Accounts Payable of $57,717.66.

Question 8

Use the following information to answer the question(s) below.

On November 1, 2014, Rolleks Corporation sold merchandise to Watchem Corporation, a Swiss firm. Rolleks measured and recorded the account receivable from the sale at $107,100. Watchem paid for this account on November 30, 2014. Spot rates for Swiss francs on November 1 and November 30, respectively, were $1.05 and $1.02.


-If the sale of merchandise is denominated in dollars,the November 30 entry to record receipt of the payment from Watchem included a

A)credit to Accounts Receivable for $104,040.
B)credit to Exchange Gain for $3,060.
C)debit to Cash for $107,100.
D)debit to Exchange Loss for $3,060.

Question 9

Use the following information to answer the question(s) below.

On November 1, 2014, Rolleks Corporation sold merchandise to Watchem Corporation, a Swiss firm. Rolleks measured and recorded the account receivable from the sale at $107,100. Watchem paid for this account on November 30, 2014. Spot rates for Swiss francs on November 1 and November 30, respectively, were $1.05 and $1.02.


-If the sale of the merchandise was denominated in Swiss francs,the November 30 entry to record the receipt of payment from Watchem included a

A)credit to Accounts Receivable for $104,040.
B)credit to Exchange Gain for $3,060.
C)debit to Cash for $107,100.
D)debit to Exchange Loss for $3,060.

Question 10

The exchange rates between the Australian dollar and the U.S.dollar were as follows: 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.

Question 11

At the date the transaction is recognized,the transaction shall be measured and recorded in

A)the functional currency of the recording entity by using the exchange rate in effect at that date.
B)the functional currency of the foreign country in which it is denominated.
C)the functional currency of the foreign country in which it is measured.
D)the functional currency of the recording entity.

Question 12

When the billing for a U.S.company's sale to a company in a foreign country is denominated in U.S.dollars,________ is required when preparing journal entries for the sale.

A)translation to a foreign currency
B)conversion to a foreign currency
C)translation to U.S.dollars
D)no translation

Question 13

If a U.S.company is preparing a journal entry for a recent purchase,foreign-currency-denominated purchases must be measured in ________ at the purchase date using the foreign currency ________ rate on the purchase date.

A)foreign currency; spot
B)foreign currency; future
C)U.S.dollars; forward
D)U.S.dollars; spot

Question 14

With respect to exchange rates,which of the following statements is true?

A)An official exchange rate is the "market" rate resulting from the supply and demand for a currency.
B)A floating exchange rate is the "market" rate resulting from the supply and demand for a currency.
C)A government cannot set an exchange rate for their currency that is higher (weakens their currency)than the quoted interbank market rate.
D)A government cannot set an exchange rate for their currency that is lower (strengthens their currency)than the quoted interbank market rate.

Question 15

Gains or losses on foreign currency transactions are recorded before the related receivable or payable is settled when

A)the government cannot set an exchange rate for the foreign currency.
B)the foreign currency is unknown.
C)the fiscal year ends after the settlement of the receivable or payable.
D)the fiscal year ends before the settlement of the receivable or payable.

Question 16

On May 1,2014,Deerfield Corporation purchased merchandise from a German firm for 78,000 euros when the spot rate for the euro was 1.48 euro per dollar.The account payable was denominated in the euro.Deerfield settled the account on August 1 when the spot rate for the euro was 1.39 euro per dollar.How much cash will Deerfield have to disburse to settle the account?

A)$52,702.72
B)$56,115.11
C)$108,420.00
D)$115,440.00

Question 17

On November 14,2014,Scuby Company (a U.S.corporation)enters into a transaction which is denominated in the Canadian dollar.Assume the exchange rate at November 14 is $1.03,and at the December 31 year-end reporting date,the exchange rate is $1.07.On January 27,2015,when the transaction is settled,the exchange rate is $1.05.At the date of settlement,which of the following is correct?

A)The historical rate = $1.05,and the spot rate at which it is settled is the same as the current rate at $1.07.
B)The historical rate = $1.03,and the spot rate at which it is settled is the same as the current rate at $1.06.
C)The historical rate = $1.05,the current rate for reporting at December 31,2014 is $1.07,and the spot rate at which it is settled is $1.03.
D)The historical rate = $1.03,the current rate for reporting at December 31,2014 is $1.07,and the spot rate at which it is settled is $1.05.

Question 18

Use the following information to answer the question(s) below.

On October 4, 2014, Sooty Corporation borrowed 250,000 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 were:


-What exchange gain or loss appeared on Sooty's 2014 income statement?

A)a loss of $10,000
B)a loss of $15,000
C)a gain of $10,000
D)a gain of $15,000

Question 19

If a sale on account by a U.S.company is made with a foreign company,and the U.S.company has no foreign currency risk,then

A)the U.S.company has measured the transaction in U.S.dollars.
B)the U.S.company has denominated the transaction in U.S.dollars.
C)the foreign company has measured the transaction in their own currency.
D)the foreign company has denominated the transaction in their own currency.

Question 20

A direct quote for the U.S.dollar is given at $1.45 per 1 foreign currency unit (fcu).The respective indirect quote for the U.S.dollar would be reported as

A)1.45 fcu = $1.00.
B)1.45 fcu = $.6897.
C).6897 fcu = $1.00.
D)1.00 fcu = $1.45.

Question 21

Plymouth Corporation (a U.S.company)began operations on September 1,2014,when the owner borrowed $250,000 to establish the business.Plymouth then had the following import and export transactions with unaffiliated Chinese companies:
The following exchange rates apply:
$\begin{array}{ll} \underline{\text { Date }} & \underline{\text { Rate }} \\\text { September } 6 & \$ 0.1544=1 \text { yuan } \\\text { September } 18 & \$ 0.1607=1 \text { yuan } \\\text { September } 30 & \$ 0.1591=1 \text { yuan } \\\text { October } 5 & \$ 0.1578=1 \text { yuan } \\\text { October } 18 & \$ 0.1593=1 \text { yuan }\end{array}$
Required:
1.What were Sales in the September month-end income statement?
2.What was the COGS associated with these sales?
3.What is the Accounts Receivable balance in the balance sheet at September 30,2014?
4.What is the Inventory balance in the balance sheet at September 30,2014?
5.What is the Exchange gain or loss that will be reported for the month of September?

Question 22

On November 4,2014,the Oak Corporation,a U.S.corporation,purchased components for an assembly machine from Maple Industries,a Canadian Company,which were put into Parts Inventory.The purchase price was 80,000 Canadian dollars and Oak agreed to pay in Canadian dollars in 90 days.Both corporations are on a calendar year accounting period.Assume that the spot rates for the Canadian dollar on November 4,2014,December 31,2014,and February 2,2015,are $0.9985,$1.0191,and $1.0064,respectively.
Required:
Record the November 4,December 31,and February 2 transactions in the General Journals of Oak Corporation and Maple Industries.If no entry is required on a particular date,indicate "No entry" in the General Journal.

Question 23

A review of Ace Industries,a U.S.corporation,shows the following balances in accounts receivable and accounts payable detail at September 30,2014,their fiscal year end.
ACCOUNTS RECEIVABLE
ACCOUNTS PAYABLE
As Ace prepared to close their books,they noted that the September 30 exchange rates for the Australian dollar,Canadian dollar and Hong Kong dollar were $1.0366,$1.0301 and $0.1284,respectively.
Required:
Determine the exchange gain or loss to be included in the 2014 financial statements,and the amount of Accounts Receivable and Accounts Payable that will be included on the September 30,2014 balance sheet.

Question 24

Slade Corporation,a U.S.company,purchased materials on account from a manufacturer in Mexico on June 15.The invoice was denominated in the shipper's currency for 480,000 pesos.The goods were paid for on July 18.Slade closes their fiscal year on June 30,and used the following indirect quotes to measure the amounts related to the transactions.
June 15 $1.00 = 12.50 pesos
June 30 $1.00 = 12.80 pesos
July 18 $1.00 = 12.00 pesos
Required:
Show all related journal entries for Slade Company.

Question 25

Charin Corporation,a U.S.corporation,imports and exports small electronics.On December 1,2014,Charin purchased components from an Egyptian manufacturer amounting to 500,000 Egyptian pounds.The purchase is payable in Egyptian pounds.At December 30,Charin wanted to take advantage of favorable exchange rates,but did not have the full amount required to pay off the entire amount.Charin wired the funds to pay off half of the balance owed,and expected to pay the remaining balance on January 3,2015.Charin paid the remaining balance on January 3,2015.
The respective exchange rates were as follows:
$\begin{array}{ll}\text { December } 1,2014 & 1 \text { pound }=\$ .170 \\\text { December } 30,2014 & 1 \text { pound }=\$ .165 \\\text { December } 31,2014 & 1 \text { pound }=\$ .175 \\\text { January } 3,2015 & 1 \text { pound }=\$ .180\end{array}$
Required:
Document the journal entries related to these transactions for the four dates shown.If no entry is required,record "no entry."

Question 26

Jefferson Company entered into a forward contract with Washington Company on October 1,2014,under which Jefferson agreed to buy (and Washington agreed to sell)10,000 tons of coal at $80.00 per ton in 90 days.On October 1,2014,the price of coal is $82.00 per ton.On December 29,2014,the price of coal is $85.00 per ton.The contract allows for net settlement.
Required:
Determine the net settlement on the forward contract.

Question 27

Crabby Industries,a U.S.corporation,purchased inventory from a company in Sweden on November 18,2014 when the Swedish krona was trading at 1 krona = $0.161.The transaction was for 600,000 krona,and was to be paid in krona in 90 days.Crabby closed their books at December 31 for financial reporting purposes when the krona was trading at $0.167.On February 16,2015,Crabby paid the invoice when the krona was trading at $0.156.
Required:
Show the journal entries recorded by Crabby on November 18,2014,December 31,2014,and February 16,2015.

Question 28

The table below provides either a direct or indirect quote for a given foreign currency unit,and the related units of that foreign currency.
Required:
Complete the table,indicating the amount of U.S.Dollars that is the equivalent of the foreign currency shown,based on the direct or indirect quote provided.

Question 29

Blue Corporation,a U.S.manufacturer,sold goods to their customer in Hungary on December 12,2014 for 6,000,000 Hungarian forints.The customer agreed to pay in Hungarian forints in 30 days.When the customer wired the foreign currency to Blue on January 11,2015,Blue held them in their bank account until January 15 before selling them and converting them to U.S.dollars.The following exchange rates apply:
Required:
Record the journal entries that Blue would need related to the dates listed above.If no entry is required,state "no entry."

Question 30

In September of 2014,Gunny Corporation anticipates that the price of heating oil will increase soon,and wishes to lock in a firm price for the winter months.They enter into a forward contract with Selton Industries to buy 100,000 barrels of oil at $160 per barrel in December 2014.Selton's cost of production of the heating oil is $120 per barrel.
Required:
Determine the economic impact of the transaction to Selton (the seller of the heating oil)at the market price levels indicated in the table below,with and without the hedge.
$$\begin{array} { | r | c | c | c | c | } \hline \begin{array} { c } \text { Market Price } \\\text { per Barrel }\end{array} & \begin{array} { c } \text { Forward Price } \\\text { per Bushel }\end{array} & \begin{array} { c } \text { Unhedged } \\\text { Market Gain/ } \\\text { (Loss) }\end{array} & \begin{array} { c } \text { Economic Gain } \\/ \text { (Loss)on } \\\text { Forward }\end{array} & \begin{array} { c } \text { Economic } \\\text { Income with } \\\text { Hedge }\end{array} \\\hline \$ 180 & & & & \\\hline 170 & & & & \\\hline 160 & & & & \\\hline 150 & & & & \\\hline 140 & & & & \\\hline\end{array}$$

Question 31

Johnson Corporation (a U.S.company)began operations on December 1,2015,when the owner contributed $100,000 of his own money to establish the business.Johnson then had the following import and export transactions with unaffiliated Mexican companies:
$$\text { December 15, } 2015 \quad \text { Sold 60\% of inventory acquired on 12/12/15 for 120,000 pesos on account. Invoice \quad d }$$ $$\text { Janury 1, } 2016 \quad \text { Acquired and paid the 150,00t pesos owed to the Mexican supplier. }$$ Janury 15,2016 $\quad$ Collected the 120,001 pesos from the Mexican customer and immediately converted them into U. S dollars. The following exchange rates apply:
$$\begin{array} { l l } \underline {\text { Date} } & \underline { \text {Rate } } \\\text { December 12 } & \$ .11 = 1 \text { peso } \\\text { December 15 } & \$ 12 = 1 \text { peso } \\\text { December 31 } & \$ .13 = 1 \text { peso } \\\text { January 1 } & \$ .14 = 1 \text { peso } \\\text { January 15 } & \$ .15 = 1 \text { peso }\end{array}$$ Required:
1.What were Sales in the income statement for the year ended December 31,2015?
2.What was the COGS associated with these sales?
3.What is the Accounts Payable balance in the balance sheet at December 31,2015?
4.What is the Inventory balance in the balance sheet at December 31,2015?

Question 32

On September 1,2014,Bylin Company purchased merchandise from Himeji Company of Japan for 20,000,000 yen payable on October 1,2014.The spot rate for yen was $0.0079 on September 1 and the spot rate was $0.0077 on October 1.The purchase was paid on October 1,2014.
Required:
1.Did the U.S.dollar strengthen or weaken from September to October and what are the implications for Bylin's business?
2.What journal entry did Bylin record on September 1,2014?
3.What journal entry did Bylin record on October 1,2014?

Question 33

Piel Corporation (a U.S.company)began operations on January 1,2015,when common stock was issued for $250,000.In the first two months of operations,Piel had the following transactions:
The following exchange rates apply:
Required:
Complete the summary income statement and balance sheet for the month ended January 31,2015 and February 28,2015,assuming there were no other transactions.

Question 34

On November 1,2014,the Yankee Corporation,a U.S.corporation,purchased and received an extruding machine from Wales Corporation,a UK company.The purchase price was $10,000 (U.S.dollars)and Yankee agreed to pay in pounds on February 1,2015.Both corporations are on a calendar year accounting period.Assume that the spot rates for the British pound on November 1,2014,December 31,2014,and February 1,2015,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 Yankee Corporation and Wales Corporation.If no entry is required on a particular date,indicate "No entry" in the General Journal.

Question 35

On October 15,2014,Napole Corporation,a French company,ordered merchandise listed on the internet for 20,000 Euros from Adams Corporation,a U.S.corporation.The euro rate was $1.20 (U.S.dollars)on October 15.On November 15,2014 Adams shipped the goods and billed Napole the purchase price of 20,000 Euros when the euro rate was $1.30.Napole paid the bill on December 10,2014,and Adams immediately exchanged the 20,000 Euros for U.S.dollars when the Euro rate was $1.28 on December 10,2014.
Required:
Compute the foreign currency gain or loss on the December 31,2014 financial statements of Adams and show the related journal entries.

Question 36

Tank Corporation,a U.S.manufacturer,has a June 30 fiscal year end.Tank sold goods to their customer in Columbia on May 27,2014 for 18,000,000 Columbian pesos.The customer agreed to pay pesos in 60 days.When the customer wired the funds to Tank on July 26,Tank held them in their bank account until July 31 before selling them and converting them to U.S.dollars.The following exchange rates apply:
Required:
Record the journal entries related to the dates listed above.If no entry is required,state "no entry."

Question 37

Lincoln Corporation,a U.S.manufacturer,both imports needed materials and exports finished products.Their receivables and payables are listed below,prior to year-end adjustments or preparation of the closing entries.
$$\begin{array} { | l | r | r | r | r | } \hline & \begin{array} { c } \text { Foreign } \\\text { Currency } \\\text { Units }\end{array} & \begin{array} { c } \text { Rate at } \\\text { Date of } \\\text { Transaction }\end{array} & \begin{array} { c } \text { Per Books } \\\text { in U.S. } \\\text { Dollars }\end{array} & { \begin{array} { c } \text { Current } \\\text { Rate at } \\12 / 31 / 14\end{array} } \\\hline \text { ACCOUNTS RECEIVABLE } & & & & \\\hline \text { Japanese yen } & 14,678,000 & \$ 0.0109007 & 160,000 & \$ 0.0120 \\\hline \text { Euros } & 50,000 & 1.2372 & 61,860 & 1.4235 \\\hline \text { Hungarian forint } & 50,000,000 & 0.0044 & \underline { 220,000 } & 0.0053 \\\hline \text { TOTAL } & & & 441,860 & \\\hline & & & & \\\hline \text { ACCOUNTS PAYABLE } & & & & \\\hline \text { Euros } & 50,000 & 1.2378 & 61,890 & \$ 1.4235 \\\hline \text { Mexican pesos } & 1,250,000 & 0.0790 & 99,875 & 0.0845 \\\hline \text { Indian rupee } & 4,000,000 & 0.0216 & \underline { 86,400 } & 0.0223 \\\hline \text { TOTAL } & & & 248,165 & \\\hline\end{array}$$ Required:
Determine the amount at which receivables and payables should be reported on December 31,2014,and the net exchange gain or loss that would be reported as a result of year-end adjustments.

Question 38

On April 1,2014,Button Industries enters into an agreement with Bows Incorporated to lock in the price of cotton.Button agrees to purchase (and Bows agrees to sell)100,000 pounds of cotton at $1.19 per pound,six months from the date of agreement.On October 1,2014,the price of cotton is $1.17 per pound.The contract allows for net settlement.
Required:
Determine the net settlement on the forward contract.

Question 39

Meric Corporation (a U.S.company)began operations on January 1,2014,when the owner borrowed $150,000 to start the company.In the first month of operations,Meric had the following transactions:
$\text { January } 10,2014\quad \text { Paid } \$ 3,000 \text { in other operating expenses }$
$$\text { Janury 23,2014 \quad Acquired and paid half of the Brazlian real owed to the Brazilian supplier }$$ January 28,2014 $\quad$ Collected half of the 32,000 pounds from the customer in Great Britain and immediately converted them into U.S, dollars The following exchange rates apply:
$\begin{array}{lll}\underline{\text { Date}}&\underline{\text { Rate}}&\underline{\text { Rate }} \\\text { January 3 } & \$ .6260=1 \text { real } & \$ 1.5950=1 \text { pound } \\\text { January 8 } & \$ .6230=1 \text { real } & \$ 1.5760=1 \text { pound } \\\text { January 10 } & \$ .6210=1 \text { real } & \$ 1.5880=1 \text { pound } \\\text { January 23 } & \$ .6250=1 \mathrm{real} & \$ 1.5610=1 \text { pound } \\\text { January 28 } & \$ .6330=1 \mathrm{real} & \$ 1.5570=1 \text { pound } \\\text { January 31 } & \$ .6180=1 \mathrm{real} & \$ 1.5720=1 \text { pound }\end{array}$
Required:
Complete the summary income statement and balance sheet for the month ended January 31,2014 assuming there were no other transactions.

Question 40

Behd Company,a U.S.firm,sold some of its inventory to Edinburgo Company,a company based in Scotland,on November 27,2014,when the local currency unit (the pound Sterling,"GBP")was trading at $1.64 : 1 GBP.The sales agreement called for Edinburgo to pay 140,000 GBP on January 26,2015.Additional exchange rates are shown below:
Required: Show all related journal entries for Behd Company.

Question 41

A put option requires the seller to buy an asset at market price and the buyer of the put option has the option to sell the asset at market.

Question 42

Forward contracts are very standardized and easily traded in the markets.

Question 43

Floating exchange rates reflect fluctuating market prices for a currency based on supply and demand in the world currency markets.

Question 44

One reason corporations enter into a derivative contract is to reduce the vulnerability of their cash flows.

Question 45

Forward contracts are negotiated contracts between three or more parties for the delivery or purchase of a commodity or foreign currency at a preagreed delivery date.

Question 46

Gains and losses on foreign currency transactions can be deferred until the foreign currency is converted into U.S.dollars.

Question 47

Futures contracts are very standardized and more easy to trade in the markets than forward contracts.

Question 48

Swaps are contracts to exchange an ongoing stream of cash flows.

Question 49

The common characteristic of derivatives is the contract's value to the investor has a direct relationship to fluctuations in price,rate and other variables.

Question 50

Transactions between businesses of different countries,the amounts for receivables and payables are typically denominated in the local currency of either the buying entity or the selling entity.