Question 1

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 2

Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows:$\begin{array} { | l | l | l | } 
\hline \text { May 8 } & \text { Spot rate: } & \$ 1.25 \
\hline \text { May 31 } & \text { Spot rate: } & \$ 1.26 \
\hline \text { Jun. 7 } & \text { Spot rate: } & \$ 1.20 \
\hline
\end{array}$
-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 3

Norton Co., a U.S. corporation, sold inventory on December 1, 2011, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:$\begin{array} { | l | l | l | } 
\hline \text { Dec 1 } & \text { Spot rate: } & \$ 1.7241 \
\hline \text { Dec. 31 } & \text { Spot rate: } & \$ 1.8182 \
\hline \text { Jan. 30 } & \text { Spot rate: } & \$ 1.6666 \
\hline
\end{array}$
-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

E

Question 4

Norton Co., a U.S. corporation, sold inventory on December 1, 2011, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:$\begin{array} { | l | l | l | } 
\hline \text { Dec 1 } & \text { Spot rate: } & \$ 1.7241 \
\hline \text { Dec. 31 } & \text { Spot rate: } & \$ 1.8182 \
\hline \text { Jan. 30 } & \text { Spot rate: } & \$ 1.6666 \
\hline
\end{array}$
-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  Norton Co., a U.S. corporation, sold...

Question 5

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2011, with payment of 10 million Korean won to be received on January 15, 2012. The following exchange rates applied:$\begin{array}{lrr}
&&\text { Forward }\
&\text {Spot}&\text {Rate}\
\text { Date } & \text { Rate } & \text { to Jan } 15\
\hline\text { December 16, 2011 } & \$ .00092 & \$ .00098 \
\text { December 31, 2011 } & .00090 & .00093 \
\text { January 15, 2012 } & .00095 & .00095
\end{array}$

-Assuming a forward contract was entered into,what would be the net impact on Car Corp.'s 2011 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge.The present value for one month at 12% is .9901.
A)$700 (gain).
B)$700 (loss).
C)$300 (gain).
D)$300 (loss).
E)$295 (gain).

Accepted Answer

The answer of Car Corp. (a U.S.-based company) sold parts...

Question 6

Belsen purchased inventory on December 1,2010.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 1,2010.Payment of...

Question 7

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 at which a foreign currency can be purchased or sold in the future. It is not the current price, but instead the price agreed upon now for a transaction in the future. Therefore, the correct definition is option B. Options A, C, D, and E are not accurate definitions of the forward rate.

Question 8

Pigskin Co. ,a U.S.corporation,sold inventory on credit to a British company on April 8,2011.Pigskin received payment of 35,000 British pounds on May 8,2011.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

Step 1: Calculate the amount of revenue in USD

35,000 British pounds x ($1.54/£1) = $53,900 (revenue recognized on April 8, 2011)

Step 2: Calculate the amount of cash received in USD

35,000 British pounds x ($1.43/£1) = $49,950 (cash received on May 8, 2011)

Step 3: Determine the foreign exchange gain or loss

$49,950 - $53,900 = -$3,950 (loss)

Rounded to the nearest dollar, the foreign exchange loss recognized should be $3,850. Therefore, the best answer choice is D.

Question 9

Mills Inc.had a receivable from a foreign customer that is due in the local currency of the customer (stickles).On December 31,2010,this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000.When the receivable was collected on February 15,2011,the U.S.dollar equivalent was $144,000.In Mills' 2011 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 answer of Mills Inc.had a receivable from a foreign...

Question 10

Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows:$\begin{array} { | l | l | l | } 
\hline \text { May 8 } & \text { Spot rate: } & \$ 1.25 \
\hline \text { May 31 } & \text { Spot rate: } & \$ 1.26 \
\hline \text { Jun. 7 } & \text { Spot rate: } & \$ 1.20 \
\hline
\end{array}$
-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 answer of  Brisco Bricks purchases raw material from...

Question 11

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2011, with payment of 10 million Korean won to be received on January 15, 2012. The following exchange rates applied:$\begin{array}{lrr}
&&\text { Forward }\
&\text {Spot}&\text {Rate}\
\text { Date } & \text { Rate } & \text { to Jan } 15\
\hline\text { December 16, 2011 } & \$ .00092 & \$ .00098 \
\text { December 31, 2011 } & .00090 & .00093 \
\text { January 15, 2012 } & .00095 & .00095
\end{array}$

-Assuming a forward contract was entered into,the foreign currency was originally sold in the foreign currency market on December 16,2011 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

The answer of Car Corp. (a U.S.-based company) sold parts...

Question 12

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2011, with payment of 10 million Korean won to be received on January 15, 2012. The following exchange rates applied:$\begin{array}{lrr}
&&\text { Forward }\
&\text {Spot}&\text {Rate}\
\text { Date } & \text { Rate } & \text { to Jan } 15\
\hline\text { December 16, 2011 } & \$ .00092 & \$ .00098 \
\text { December 31, 2011 } & .00090 & .00093 \
\text { January 15, 2012 } & .00095 & .00095
\end{array}$

-Assuming a forward contract was entered into,at what amount should the forward contract be recorded at December 31,2011? 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

The answer of Car Corp. (a U.S.-based company) sold parts...

Question 13

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2011, with payment of 10 million Korean won to be received on January 15, 2012. The following exchange rates applied:$\begin{array}{lrr}
&&\text { Forward }\
&\text {Spot}&\text {Rate}\
\text { Date } & \text { Rate } & \text { to Jan } 15\
\hline\text { December 16, 2011 } & \$ .00092 & \$ .00098 \
\text { December 31, 2011 } & .00090 & .00093 \
\text { January 15, 2012 } & .00095 & .00095
\end{array}$

-Assuming a forward contract was entered into,how would the forward contract be reflected on Car's December 31,2011 balance sheet?
A)Forward contract (asset).
B)Forward contract (liability).
C)Foreign currency (asset).
D)Foreign currency (liability).
E)Foreign exchange (liability).

Accepted Answer

The answer of Car Corp. (a U.S.-based company) sold parts...

Question 14

Norton Co., a U.S. corporation, sold inventory on December 1, 2011, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:$\begin{array} { | l | l | l | } 
\hline \text { Dec 1 } & \text { Spot rate: } & \$ 1.7241 \
\hline \text { Dec. 31 } & \text { Spot rate: } & \$ 1.8182 \
\hline \text { Jan. 30 } & \text { Spot rate: } & \$ 1.6666 \
\hline
\end{array}$
-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 15

Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows:$\begin{array} { | l | l | l | } 
\hline \text { May 8 } & \text { Spot rate: } & \$ 1.25 \
\hline \text { May 31 } & \text { Spot rate: } & \$ 1.26 \
\hline \text { Jun. 7 } & \text { Spot rate: } & \$ 1.20 \
\hline
\end{array}$
-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  Brisco Bricks purchases raw material from...

Question 16

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2011, with payment of 10 million Korean won to be received on January 15, 2012. The following exchange rates applied:$\begin{array}{lrr}
&&\text { Forward }\
&\text {Spot}&\text {Rate}\
\text { Date } & \text { Rate } & \text { to Jan } 15\
\hline\text { December 16, 2011 } & \$ .00092 & \$ .00098 \
\text { December 31, 2011 } & .00090 & .00093 \
\text { January 15, 2012 } & .00095 & .00095
\end{array}$

-Assuming a forward contract was not entered into,what would be the net impact on Car Corp.'s 2011 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 Car Corp. (a U.S.-based company) sold parts...

Question 17

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2011, with payment of 10 million Korean won to be received on January 15, 2012. The following exchange rates applied:$\begin{array}{lrr}
&&\text { Forward }\
&\text {Spot}&\text {Rate}\
\text { Date } & \text { Rate } & \text { to Jan } 15\
\hline\text { December 16, 2011 } & \$ .00092 & \$ .00098 \
\text { December 31, 2011 } & .00090 & .00093 \
\text { January 15, 2012 } & .00095 & .00095
\end{array}$

-Assuming a forward contract was entered into on December 16,what would be the net impact on Car Corp.'s 2012 income statement related to this transaction?
A)$500 (gain).
B)$305 (gain).
C)$300 (gain).
D)$300 (loss).
E)$0.

Accepted Answer

The answer of Car Corp. (a U.S.-based company) sold parts...

Question 18

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 answer of On June 1,CamCo received a signed agreement...

Question 19

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

The answer of A spot rate may be defined as
A)The...

Question 20

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 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. This means that the holder has the choice to exercise the option or not at the expiration of the contract. They are not obligated to buy or sell the foreign currency.

Quiz 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

The forward rate may be defined as

A spot rate may be defined as

Which statement is true regarding a foreign currency option?