Question 1

All of the following data points are needed to determine the fair value of a forward contract (at any point), EXCEPT

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Question 2

For speculative derivatives, the change in the fair value of the derivative must be:

Accepted Answer

For speculative derivatives, the change in the fair value of the derivative must be recognized immediately as a gain or loss in net income. This is because speculative derivatives are held for trading purposes and any gains or losses on them are recognized in the income statement in the period in which they occur.

Question 3

How is the fair value of a Forward Contract determined by U.S.GAAP?

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Question 4

What is the purpose of a hedge of foreign exchange risk?

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Question 5

What is the amount of option expense for 2019 from these transactions?

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Question 6

How does a foreign currency forward contract differ from a foreign currency option?

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Question 7

Authoritative literature provides guidance for hedges of the following sources of foreign exchange risk. I.Recognized foreign currency denominated assets and liabilities.
II.Unrecognized foreign currency firm commitments.
III.Forecasted foreign currency denominated transactions.

Accepted Answer

Authoritative literature provides guidance for hedges for all three sources of foreign exchange risk listed in the question: recognized foreign currency denominated assets and liabilities, unrecognized foreign currency firm commitments, and forecasted foreign currency denominated transactions. Therefore, the correct choice is E – all three options listed are valid sources of foreign exchange risk that can be hedged according to authoritative literature.

Question 8

What is the amount of Cost of Goods Sold for 2019 as a result of these transactions?

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Question 9

What journal entry should Eagle prepare on October 1, 2018?

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Question 10

What journal entry should Eagle prepare on December 31, 2018?

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Question 11

Which is a true statement regarding the fundamental requirement of accounting for derivatives?

Accepted Answer

Changes in derivative fair value are recorded in comprehensive income. This is in accordance with the accounting standards set by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Derivatives can be reported on the balance sheet as either an asset or liability, depending on whether the derivative instrument is in a net asset or net liability position, respectively. However, the changes in fair value of the derivative are reported in the comprehensive income section of the statement of comprehensive income.

Question 12

Yelton Co.just sold inventory for 80,000 euros, which Yelton will collect in sixty days.Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.

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Question 13

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date requires which of the following?

Accepted Answer

Choice C is correct because it recognizes the transaction (sale or purchase) and the foreign currency denominated asset or liability, but does not make an entry related to the forward contract since its fair value is zero at initiation. This is consistent with the cash flow hedge accounting rules under ASC 815. Choices A, B, and D are incorrect because they involve recognizing an option as an asset or liability, which is not necessary for a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date. Choice E is incorrect because a journal entry is necessary for proper accounting of the transaction.

Question 14

What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2019 from these transactions?

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Question 15

What are the two separate transactions that require recording under the two-transaction perspective?

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Question 16

What is the 2019 effect on net income as a result of these transactions?

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Question 17

Which of the following is not a condition of accounting for hedge derivatives?

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Question 18

What is meant by the spot rate?

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Question 19

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at the balance sheet date

Accepted Answer

Choice A outlines the correct steps for accounting for a forward contract cash flow hedge of a foreign currency denominated asset or liability, including adjusting the hedged asset or liability and the forward contract to fair value, transferring amounts between AOCI and net income to offset gains or losses, and accounting for discount or premium amortization. Choices B through E do not correctly address the accounting for this type of hedge.

Question 20

Where can you find exchange rates between the U.S.dollar and most foreign currencies?

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Quiz 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

All of the following data points are needed to determine the fair value of a forward contract (at any point) , EXCEPT