Question 1

A spot rate may be defined as
A) The price a foreign currency can be purchased or sold today.
B) The price today at which a foreign currency can be purchased or sold in the future.
C) The forecasted future value of a foreign currency.
D) The U.S. dollar value of a foreign currency.
E) The Euro value of a foreign currency.

Accepted Answer

A

Question 2

Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2018 at a
A) Forward contract discount $ 600.
B) Forward contract premium $ 600.
C) Forward contract discount $ 980.
D) Forward discount premium $ 980.
E) There is no premium or discount because the fair value of the contract is zero.

Accepted Answer

B

Question 3

Meisner Co.ordered parts costing §100,000 for a foreign supplier on May 12 when the spot rate was $.24 per stickle.A one-month forward contract was signed on that date to purchase §100,000 at a forward rate of $.25 per stickle.On June 12, when the parts were received and payment was made, the spot rate was $.28 per stickle.At what amount should inventory be reported?
A) $ 0.
B) $28,000.
C) $24,000.
D) $25,000.
E) $ 2,000.

Accepted Answer

B

Question 4

Mills Inc.had a receivable from a foreign customer that is due in the local currency of the customer (stickles).On December 31, 2018, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000.When the receivable was collected on February 15, 2019, the U.S.dollar equivalent was $144,000.In Mills' 2019 consolidated income statement, how much should have been reported as a foreign exchange gain?
A) $ 0.
B) $36,000.
C) $48,000.
D) $10,000.
E) $12,000.

Accepted Answer

The foreign exchange gain is calculated as the difference between the amount received in USD when the receivable was collected ($144,000) and the amount it was recorded at on the balance sheet ($132,000). Therefore, the gain is $144,000 - $132,000 = $12,000.

Question 5

How much Foreign Exchange Gain or Loss should Brisco record on May 31?
A) $2,520,000 gain.
B) $ 20,000 gain.
C) $ 20,000 loss.
D) $ 80,000 gain.
E) $ 80,000 loss.

Accepted Answer

The foreign currency payable was originally recorded at $640,000 (CAD 800,000 x $0.80), and as of May 31, the CAD had weakened to $0.79. Therefore, the liability is effectively cheaper in USD terms and Brisco would record a foreign exchange loss. The loss is calculated as follows: CAD 800,000 x ($0.80 - $0.79) = CAD 800, which is equivalent to $20,000 USD (CAD 800 x 1 USD/ CAD 0.04). Therefore, the correct answer is C, $20,000 loss.

Question 6

For what amount should Brisco's Accounts Payable be credited on May 8?
A) $2,500,000.
B) $2,440,000.
C) $1,600,000.
D) $1,639,344.
E) $1,666,667.

Accepted Answer

The question asks for the amount Brisco's Accounts Payable should be credited on May 8, which is $2,500,000.

Question 7

On June 1, CamCo received a signed agreement to sell inventory for ¥500,000.The sale would take place in 90 days.CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received.The spot rate on June 1 was ¥1 =$.004167, and the 90-day forward rate was ¥1 = $.00427.At what amount would CamCo record the Forward Contract on June 1?
A) $2,083.
B) $ 0.
C) $2,110.
D) $2,532.
E) $2,135.

Accepted Answer

The forward contract is recorded at fair value, which is initially zero, as it is an off-balance sheet item until settlement.

Question 8

Assuming a forward contract was entered into on December 16, how would the forward contract be reflected on Car's December 31, 2018 balance sheet?
A) Forward contract (asset).
B) Forward contract (liability).
C) Foreign currency (asset).
D) Foreign currency (liability).
E) Foreign exchange (liability)

Accepted Answer

A forward contract would be reflected as an asset on the balance sheet if it has a positive fair value as of the balance sheet date.

Question 9

What amount of foreign exchange gain or loss should be recorded on January 30?
A) $1,516 gain.
B) $1,516 loss.
C) $575 loss.
D) $500 loss.
E) $500 gain.

Accepted Answer

The answer of What amount of foreign exchange gain or...

Question 10

What amount of foreign exchange gain or loss should be recorded on December 31?
A) $300 gain.
B) $300 loss.
C) $ 0.
D) $941 loss.
E) $941 gain.

Accepted Answer

The answer of What amount of foreign exchange gain or...

Question 11

For what amount should Sales be credited on December 1?
A) $ 5,500.
B) $16,949.
C) $18,182.
D) $17,241.
E) $16,667.

Accepted Answer

The sales revenue recognized in November is $44,828 ($28,207 in cash received + $16,621 in accounts receivable). The total cost of goods sold for the November sales is $27,000. Therefore, the gross profit for the November sales is $17,828. The December 1 sale has a selling price of $20,000 and a cost of goods sold of $12,759 ($7,405 + $5,354). Therefore, the gross profit for the December 1 sale is $7,241. Adding this to the gross profit from November results in a total gross profit of $25,069. Since the December 1 sale is on credit, sales revenue should be credited for the entire selling price of $20,000, resulting in sales being credited for $17,241 ($20,000 - $2,759).

Question 12

Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2018 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge.The present value for one half-month at 12% is .9950.
A) $ 700 (gain).
B) $ 700 (loss).
C) $ 995 (gain).
D) $ 300 (loss).
E) $ 298 (gain).

Accepted Answer

The net impact on Car Corp.'s 2018 income statement related to this transaction would be a $298 gain. This is because the fair value of the forward contract increased by $298 during the period, and this gain is recognized on the income statement.

Question 13

Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2018 income statement related to this transaction?
A) $ 500 (gain).
B) $ 500 (loss).
C) $ 200 (gain).
D) $ 200 (loss).
E) $ - 0 -

Accepted Answer

The answer of Assuming a forward contract was not entered...

Question 14

Assuming a forward contract was entered into on December 16, at what amount should the forward contract be recorded at December 31, 2018? Assume an annual interest rate of 12% and a fair value hedge.The present value for one month at 12% is .9901.
A) $ 200.
B) $ 295.
C) $ 495.
D) $ 500.
E) $ 9,300.

Accepted Answer

To calculate the amount at which the forward contract should be recorded, we need to determine the fair value of the contract at December 31, 2018.

Assuming that the forward contract is a fair value hedge, any changes in the fair value of the contract are offset by changes in the fair value of the underlying asset being hedged. Therefore, the fair value of the contract at December 31, 2018 would be determined by discounting the difference between the spot price of the underlying asset and the forward price of the contract to the present value using an appropriate discount rate.

Since the contract was entered into on December 16, 2018, there are only 15 days remaining until the contract's maturity date. Therefore, the difference between the spot price and the forward price of the contract would be discounted by the present value factor for one month at an annual interest rate of 12%, which is .9901.

Assuming that the difference between the spot price and the forward price is $500, the fair value of the contract at December 31, 2018 would be:

Fair value of contract = ($500 x .9901) = $495

Therefore, the forward contract should be recorded at $495 at December 31, 2018. The correct answer is C.

Question 15

Which statement is true regarding a foreign currency option?
A) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future.
B) A foreign currency option gives the holder the obligation to only sell foreign currency in the future.
C) A foreign currency option gives the holder the obligation to only buy foreign currency in the future.
D) A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future.
E) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate on the future date.

Accepted Answer

A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future. Thus, answer choice D is correct. Answer choices A, B, and C are incorrect because they imply an obligation for the holder to buy or sell foreign currency in the future. Answer choice E is incorrect because it specifies that the option must be exercised at the spot rate on the future date, which is not necessarily the case for all options.

Question 16

Belsen purchased inventory on December 1, 2017.Payment of 200,000 stickles was to be made in sixty days.Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days.The spot rate was §1 = .35714, and the 60-day forward rate was §1 = $.38462.On December 31, the spot rate was §1 = .34483 and the 30-day forward rate was §1 = .38168.Assume an annual interest rate of 12% and a fair value hedge.The present value for one month at 12% is .9901. In the journal entry to record the establishment of a forward exchange contract, at what amount should the Forward Contract account be recorded on December 1?
A) $71,428.
B) $76,924.
C) $ 588.
D) $ 582.
E) $ 0, since there is no cost, there is no value for the contract at this date.

Accepted Answer

The answer of Belsen purchased inventory on December 1, 2017.Payment...

Question 17

The forward rate may be defined as
A) The price a foreign currency can be purchased or sold today.
B) The price today at which a foreign currency can be purchased or sold in the future.
C) The forecasted future value of a foreign currency.
D) The U.S. dollar value of a foreign currency.
E) The Euro value of a foreign currency.

Accepted Answer

The forward rate is the price today at which a foreign currency can be purchased or sold in the future. It is a contractual agreement between two parties to exchange a specific amount of one currency for another currency at a predetermined rate on a future date. The forward rate is used to hedge against exchange rate risk and to lock in future exchange rates.

Question 18

Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2019 income statement related to this transaction?
A) $ 500 (gain).
B) $ 500 (loss).
C) $ 300 (gain).
D) $ 300 (loss).
E) $0.

Accepted Answer

The answer of Assuming a forward contract was entered into...

Question 19

Pigskin Co., a U.S.corporation, sold inventory on credit to a British company on April 8, 2018.Pigskin received payment of 35,000 British pounds on May 8, 2018.The exchange rate was £1 = $1.54 on April 8 and £1 = 1.43 on May 8.What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar)
A) $10,500 loss
B) $10,500 gain
C) $ 1,750 loss
D) $ 3,850 loss
E) No gain or loss should be recognized.

Accepted Answer

The answer of Pigskin Co., a U.S.corporation, sold inventory on...

Question 20

How much US $ will it cost Brisco to finally pay the payable on June 7?
A) $1,666,667.
B) $2,440,000.
C) $2,520,000.
D) $2,500,000.
E) $2,400,000.

Accepted Answer

The answer of How much US $ will it cost...

Quiz 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

A spot rate may be defined as

Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2018 at a

How much Foreign Exchange Gain or Loss should Brisco record on May 31?

For what amount should Brisco's Accounts Payable be credited on May 8?

Assuming a forward contract was entered into on December 16, how would the forward contract be reflected on Car's December 31, 2018 balance sheet?

What amount of foreign exchange gain or loss should be recorded on January 30?

What amount of foreign exchange gain or loss should be recorded on December 31?

For what amount should Sales be credited on December 1?

Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2018 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge.The present value for one half-month at 12% is .9950.

Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2018 income statement related to this transaction?

Assuming a forward contract was entered into on December 16, at what amount should the forward contract be recorded at December 31, 2018? Assume an annual interest rate of 12% and a fair value hedge.The present value for one month at 12% is .9901.

Which statement is true regarding a foreign currency option?

The forward rate may be defined as

Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2019 income statement related to this transaction?

How much US $ will it cost Brisco to finally pay the payable on June 7?