Question 1

REFERENCE: Ref.09_03
Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied:
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-A U.S.company buys merchandise from a foreign company denominated in U.S.dollars.Which of the following statements is true?

Accepted Answer

Since the transaction is denominated in U.S. dollars, there will be no foreign exchange gain or loss regardless of any fluctuations in the value of the foreign currency. The U.S. company will simply pay the agreed-upon amount in U.S. dollars.

Question 2

REFERENCE: Ref.09_03
Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied:
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-A U.S.company sells merchandise to a foreign company denominated in U.S.dollars.Which of the following statements is true?

Accepted Answer

Since the transaction is denominated in U.S. dollars, there will be no foreign exchange gain or loss regardless of any fluctuation in the exchange rate. The amount owed will simply be converted from Korean won to U.S. dollars at the prevailing exchange rate on the payment date.

Question 3

REFERENCE: Ref.09_02
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: 
-For what amount should Brisco's Accounts Payable be credited on May 8?

Accepted Answer

A

Question 4

REFERENCE: Ref.09_03
Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied:
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-The forward rate may be defined as

Accepted Answer

The forward rate is the price today at which a foreign currency can be purchased or sold in the future. In this case, the payment of 10 million Korean won is set to be received on January 15, 2009, so the forward rate would be the exchange rate for that date. Therefore, the best choice is B.

Question 5

REFERENCE: Ref.09_03
Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied:
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-A U.S.company sells merchandise to a foreign company denominated in the foreign currency.Which of the following statements is true?

Accepted Answer

If the foreign currency appreciates, the US company will receive more US dollars when they convert the foreign currency to dollars. This will result in a foreign exchange gain. Conversely, if the foreign currency depreciates, the US company will receive less US dollars when converting the foreign currency, resulting in a foreign exchange loss. Therefore, Option A is the correct answer. Option B and D are incorrect as they have the wrong direction for the exchange rate movement. Option C is also incorrect as there will be a gain or loss. Finally, Option E is partially correct as any gain or loss will be included in comprehensive income, but it does not provide a complete answer to the question.

Question 6

REFERENCE: Ref.09_02
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: 
-How much US $ will it cost Brisco to finally pay the payable on June 7?

Accepted Answer

The answer of REFERENCE: Ref.09_02
Brisco Bricks purchases raw material from...

Question 7

REFERENCE: Ref.09_03
Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied:
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-Assuming a forward contract was entered into on December 16,what would be the net impact on Car Corp.'s 2009 income statement related to this transaction?

Accepted Answer

The forward contract was entered into on December 16, 2009, and the contract price was $1,000. The spot price on December 31, 2009, was $1,200. Therefore, Car Corp. would have a gain of $200 on the forward contract.

Question 8

REFERENCE: Ref.09_03
Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied:
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-Assuming a forward contract was not entered into,what would be the net impact on Car Corp.'s 2008 income statement related to this transaction?

Accepted Answer

The answer of REFERENCE: Ref.09_03
Car Corp.(a U.S.-based company)sold parts to...

Question 9

REFERENCE: Ref.09_03
Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied:
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-A spot rate may be defined as

Accepted Answer

A spot rate is the price at which a currency can be purchased or sold for immediate delivery or settlement, typically within two business days. In this scenario, the exchange rate used to convert Korean won to U.S. dollars on December 16, 2008, would be considered a spot rate.

Question 10

REFERENCE: Ref.09_02
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: 
-Belsen purchased inventory on December 1,2008.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 = §2.80,and the 60-day forward rate was $1 = §2.60.On December 31,the spot rate was $1 = §2.90 and the 30-day forward rate was $1 = §2.62.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?

Accepted Answer

The forward contract is a derivative instrument that initially has no cost or value at inception. The value is determined by changes in exchange rates over time.

Question 11

REFERENCE: Ref.09_03
Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied:
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-Mills Inc.had a receivable from a foreign customer that is due in the local currency of the customer (stickles).On December 31,2008,this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000.When the receivable was collected on February 15,2009,the U.S.dollar equivalent was $144,000.In Mills' 2009 consolidated income statement,how much should have been reported as a foreign exchange gain?

Accepted Answer

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

Question 12

REFERENCE: Ref.09_01
Norton Co. ,a U.S.corporation,sold inventory on December 1,2008,with payment of 10,000 British pounds to be received in sixty days.The pertinent exchange rates were as follows: 
-What amount of foreign exchange gain or loss should be recorded on December 31?

Accepted Answer

The answer of REFERENCE: Ref.09_01
Norton Co. ,a U.S.corporation,sold inventory on...

Question 13

REFERENCE: Ref.09_02
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: 
-On June 1,CamCo received a contract 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 = ¥240,and the 90-day forward rate was $1 = ¥234.At what amount would CamCo record the Forward Contract on June 1?

Accepted Answer

The answer of REFERENCE: Ref.09_02
Brisco Bricks purchases raw material from...

Question 14

Pigskin Co. ,a U.S.corporation,sold inventory on credit to a British company on April 8,2008.Pigskin received payment of 35,000 British pounds on May 8,2008.The exchange rate was $1 = £0.65 on April 8 and $1 = £0.70 on May 8.What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar)

Accepted Answer

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

Question 15

REFERENCE: Ref.09_03
Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied:
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-Which statement is true regarding a foreign currency option?

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, depending on whether it is advantageous to do so based on the current exchange rate. The holder is not obligated to do anything.

Question 16

REFERENCE: Ref.09_02
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: 
-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?

Accepted Answer

The answer of REFERENCE: Ref.09_02
Brisco Bricks purchases raw material from...

Question 17

REFERENCE: Ref.09_01
Norton Co. ,a U.S.corporation,sold inventory on December 1,2008,with payment of 10,000 British pounds to be received in sixty days.The pertinent exchange rates were as follows: 
-What amount of foreign exchange gain or loss should be recorded on January 30?

Accepted Answer

To calculate the foreign exchange gain or loss, we need to determine the functional currency of Norton Co. Assuming it is the U.S. dollar, we need to convert the amount received in British pounds to dollars using the exchange rate at the date of payment.

On December 1, 2008: 
10,000 British pounds x 1.4965 = $14,965

On January 30, 2009: 
60 days have passed, so we need to use the exchange rate at that date, which is 1.3540.

10,000 British pounds x 1.3540 = $13,540

Therefore, the loss in U.S. dollars is:
$14,965 - $13,540 = $1,425

However, since the pound has weakened against the dollar, Norton Co. actually received more dollars than it would have received at the December 1 exchange rate. Therefore, the loss is actually a gain of $1,425, which is answer choice B.

Question 18

REFERENCE: Ref.09_02
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: 
-How much Foreign Exchange Gain or Loss should Brisco record on May 31?

Accepted Answer

Brisco Bricks has a liability of 2,000,000 FC to be paid on June 7. The FC has increased in value from 1 FC = $0.12 to 1 FC = $0.125, resulting in a loss for Brisco Bricks. To calculate the loss, we need to find the difference between the amount of liability in USD at the time of purchase (2,000,000 FC x $0.12 = $240,000) and the amount of liability in USD at the end of the fiscal year (2,000,000 FC x $0.125 = $250,000). The difference is $10,000, which represents the foreign exchange loss that should be recorded by Brisco Bricks on May 31.

Question 19

REFERENCE: Ref.09_03
Car Corp.(a U.S.-based company)sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied:
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-Assuming a forward contract was entered into,what would be the net impact on Car Corp.'s 2008 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.

Accepted Answer

The fair value of the forward contract at the end of the year is $990.10 ($1,000 x .9901). The carrying value of the forward contract is $1,000. The unrealized loss on the forward contract is $9.90 ($990.10 - $1,000). The net impact on Car Corp.'s 2008 income statement related to this transaction is a $295.05 loss ($9.90 x 30 days).

Question 20

REFERENCE: Ref.09_01
Norton Co. ,a U.S.corporation,sold inventory on December 1,2008,with payment of 10,000 British pounds to be received in sixty days.The pertinent exchange rates were as follows: 
-For what amount should Sales be credited on December 1?

Accepted Answer

On December 1, 2008, Norton Co. sold inventory for payment of 10,000 British pounds.
The pertinent exchange rate on December 1, 2008, was 1 pound = $1.75.
Therefore, the amount of sales revenue in dollars would be $17,500 ($1.75 x 10,000).
So, Sales should be credited for $17,500 on December 1. The correct answer is D.

Quiz 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company) sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -The forward rate may be defined as

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company) sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -A spot rate may be defined as

REFERENCE: Ref.09_01 Norton Co. ,a U.S.corporation,sold inventory on December 1,2008,with payment of 10,000 British pounds to be received in sixty days.The pertinent exchange rates were as follows: -What amount of foreign exchange gain or loss should be recorded on December 31?

REFERENCE: Ref.09_03 Car Corp.(a U.S.-based company) sold parts to a Korean customer on December 16,2008,with payment of 10 million Korean won to be received on January 15,2009.The following exchange rates applied: SHAPE \* MERGEFORMAT -Which statement is true regarding a foreign currency option?

REFERENCE: Ref.09_01 Norton Co. ,a U.S.corporation,sold inventory on December 1,2008,with payment of 10,000 British pounds to be received in sixty days.The pertinent exchange rates were as follows: -What amount of foreign exchange gain or loss should be recorded on January 30?

REFERENCE: Ref.09_01 Norton Co. ,a U.S.corporation,sold inventory on December 1,2008,with payment of 10,000 British pounds to be received in sixty days.The pertinent exchange rates were as follows: -For what amount should Sales be credited on December 1?