Chap 11

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Chapter 11 Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Multiple Choice Questions
1. If 1 British pound can be e changed for 1!" cents of #.$. currency% &hat fraction should be used to compute the indirect 'uotation of the e change rate e pressed in British pounds( A. 1)1!" B. 1).*+ C. 1.!)1 ,. 1)1.!
$uppose the direct foreign e change rates in #.$. dollars are: 1 $ingapore dollar - ../"0* 1 Cyprus pound - .0.*110
0. Based on the information gi2en abo2e% the indirect e change rates for the $ingapore dollar and the Cyprus 3ound are: A. 1./+** $ingapore dollars and 1.401* Cyprus pounds respecti2ely. B. ".05/* $ingapore dollars and 1.*110 Cyprus pounds respecti2ely. C. 0.1+00 $ingapore dollars and ".4+0* Cyprus pounds respecti2ely. ,. 1.401* $ingapore dollars and ".15/5 Cyprus pounds respecti2ely.
1. Based on the information gi2en abo2e% ho& many #.$. dollars must be paid for a purchase of citrus fruits costing 1"%""" Cyprus pounds( A. .0*%110 B. .1*%110 C. .1%5/5 ,. .1*%//*
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4. Based on the information gi2en abo2e% ho& many $ingapore dollars are re'uired to purchase goods costing 1"%""" #$ dollars( A. /%"0* B. 14%01* C. 1/%+** ,. 0%5/*
*. #pon arri2al in Chile% 6aren e changed .1%""" of #.$. currency into 4%!"%""" Chilean 3esos. 7hile returning after her t&o month 2isit% she e changed her remaining *"%""" 3esos into .1"" of #.$. currency. 7hat amount of gain or a loss did 6aren e perience on the *"%""" pesos she held during her 2isit and con2erted to #.$. dollars at the departure date( A. 8oss of .4. B. 9ain of .4. C. 8oss of .+. ,. :o gain or loss.
+. Chicago based Corporation ; has a number of importing transactions &ith companies based in #6. Importing acti2ities result in payables. If the settlement currency is the British 3ound% &hich of the follo&ing &ill happen by changes in the direct or indirect e change rates(
A. <ption A B. <ption B C. <ption C ,. <ption ,
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/. Chicago based Corporation ; has a number of e porting transactions &ith companies based in $&eden. = porting acti2ities result in recei2ables. If the settlement currency is the $&edish 6rona% &hich of the follo&ing &ill happen by changes in the direct or indirect e change rates(
!. Corporation ; has a number of e porting transactions &ith companies based in >ietnam. = porting acti2ities result in recei2ables. If the settlement currency is the #$ dollar% &hich of the follo&ing &ill happen by changes in the direct or indirect e change rates(
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5. Mint Corporation has se2eral transactions &ith foreign entities. =ach transaction is denominated in the local currency unit of the country in &hich the foreign entity is located. <n <ctober 1% 0""!% Mint purchased confectionary items from a foreign company at a price of 8C# *%""" &hen the direct e change rate &as 1 8C# - .1.0". The account has not been settled as of ,ecember 11% 0""!% &hen the e change rate has decreased to 1 8C# - .1.1". The foreign e change gain or loss on Mint?s records at year-end for this transaction &ill be: A. .*"" loss B. .*"" gain C. .1/! gain ,. .*%*"" loss
1". Mint Corporation has se2eral transactions &ith foreign entities. =ach transaction is denominated in the local currency unit of the country in &hich the foreign entity is located. <n :o2ember 0% 0""!% Mint sold confectionary items to a foreign company at a price of 8C# 01%""" &hen the direct e change rate &as 1 8C# - .1."!. The account has not been settled as of ,ecember 11% 0""!% &hen the e change rate has increased to 1 8C# - .1.1". The foreign e change gain or loss on Mint?s records at year-end for this transaction &ill be: A. .4+" loss B. .1!/ loss C. .1!/ gain ,. .4+" gain
11-4
11. <n $eptember 1% 0""!% @acAson Corporation purchases goods for a #.$. dollar e'ui2alent of .1/%""" from a $&iss company. The transaction is denominated in $&iss francs B$FrC. The payment is made on <ctober 1". The e change rates &ere: 7hat entry is re'uired to re2alue foreign currency payable to #.$. dollar e'ui2alent 2alue on <ctober 1"(
11-*
10. <n March 1% 0""!% 7ilson Corporation sold goods for a #.$. dollar e'ui2alent of .11%""" to a Thai company. The transaction is denominated in Thai bahts. The payment is recei2ed on May 1". The e change rates &ere:
7hat entry is re'uired to re2alue foreign currency payable to #.$. dollar e'ui2alent 2alue on May 1"(
<n ,ecember *% 0""!% Te as based Imperial Corporation purchased goods from a $audi Arabian firm for 1""%""" riyals B$ADC% to be paid on @anuary 1"% 0""5. The transaction is denominated in $audi riyals. Imperial?s fiscal year ends on ,ecember 11% and its reporting currency is the #.$. dollar. The e change rates are:
11-+
11. Based on the preceding information% &hat Eournal entry &ould Imperial maAe on ,ecember 11% 0""!% to re2alue foreign currency payable to e'ui2alent #.$. dollar 2alue(
14. Based on the preceding information% &hat Eournal entry &ould Imperial maAe on @anuary 1"% 0""5% to re2alue foreign currency payable to e'ui2alent #.$. dollar 2alue(
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1*. Based on the preceding information% &hat &as the o2erall foreign currency gain or loss on the accounts payable transaction( A. .1"" loss B. .0"" loss C. .1"" gain ,. .0"" gain
$partan Company purchased interior decoration material from =gypt for 1""%""" =gyptian pounds on $eptember *% 0""!% &ith payment due on ,ecember 0% 0""!. Additionally% on $eptember *% $partan ac'uired a 5"-day for&ard contract to purchase 1""%""" =gyptian pounds of =F - ..1!*". The for&ard contract &as ac'uired to manage the e posed net liability position in =gyptian pounds% but it &as not designated as a hedge. The spot rates &ere:
1+. Based on the preceding information% in the entry made on ,ecember 0nd to re2alue foreign currency recei2able to current e'ui2alent #.$. dollar 2alue% A. Accounts 3ayable &ill be debited for .1!%1*". B. Foreign Currency #nits &ill be debited for .1!%*"". C. Foreign Currency Transaction 9ain &ill be credited for .1*". ,. <ther Comprehensi2e Income &ill be credited for .1"".
11-!
1/. Based on the preceding information% &hat is the entry re'uired to settle foreign currency payable on ,ecember 0(
1!. ,etroit based Auto Corporation% purchased ancillaries from a @apanese firm on ,ecember 1% 0""!% for 1%"""%""" Gen% &hen the spot rate for Gen &as ..""5*. <n ,ecember 11% 0""!% the spot rate stood at ..""5+. <n @anuary 1"% 0""5 Auto paid 1%"""%""" Gen ac'uired at a rate of ..""54. Auto?s income statements should report a foreign e change gain or loss for the years ended ,ecember 11% 0""! and 0""5 of:
11-5
15. <n :o2ember 1% 0""!% ,en2er Company borro&ed *""%""" local currency units B8C#C from a foreign lender e2idenced by an interest-bearing note due on :o2ember 1% 0""5% &hich is denominated in the currency of the lender. The #.$. dollar e'ui2alent of the note principal &as as follo&s:
In its income statement for 0""5% &hat amount should ,en2er include as a foreign e change gain or loss on the note principal( A. 1*%""" gain B. 0*%""" gain C. 1*%""" loss ,. 4"%""" loss
0". Company ; denominated a ,ecember 1% 0""5% purchase of goods in a currency other than its functional currency. The transaction resulted in a payable fi ed in terms of the amount of foreign currency% and &as paid on the settlement date% @anuary 1"% 0"1". = change rates mo2ed unfa2ourably at ,ecember 11% 0""5% resulting in a loss that should: A. be included as a separate component of stocAholders? e'uity at ,ec. 11% 0""5. B. be included as a component of income from continuing operations for 0""5. C. be included as a deferred charge at ,ecember 11% 0""5. ,. not be reported until @anuary 1"% 0"1"% the settlement date.
Hea2y Company sold metal scrap to a BraIilian company for 0""%""" BraIilian reals on ,ecember 1% 0""!% &ith payment due on @anuary 0"% 0""5. The e change rates &ere:
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01. Based on the preceding information% &hich of the follo&ing is true of dollar?s mo2ement 2is-J-2is BraIilian real during the period(
00. Based on the preceding information% &hat is the Hea2y?s o2erall net gain or net loss from its foreign currency e posure related to this transaction( A. .4%!+" loss B. .0%+"" loss C. ./%10" gain ,. .0%0+" gain
My&ay Company sold e'uipment to a Canadian company for 1""%""" Canadian dollars BC.C on @anuary 1% 0""5 &ith settlement to be in +" days. <n the same date% Alman entered into a +"day for&ard contract to sell 1""%""" Canadian dollars at a for&ard rate of 1 C. - ..54 in order to manage its e posed foreign currency recei2able. The for&ard contract is not designated as a hedge. The spot rates &ere:
11-11
01. Based on the preceding information% the entry to re2alue foreign currency payable to current #.$. dollar 2alue on March 1 &ill ha2e: A. a credit to Foreign Currency Transaction 9ain for .1%*"". B. a debit to Foreign Currency Transaction 8oss for .0%*"". C. a debit to Foreign Currency Transaction 8oss for .1%*"". ,. a credit to Foreign Currency Transaction 9ain for .1%""".
04. Based on the preceding information% &hat is the o2erall effect on net income of My&ay?s use of the for&ard e change contract( A. :et loss of .1%""" B. :et gain of .1%*"" C. :et loss of .*"" ,. :o effect
0*. Based on the preceding information% had My&ay not used the for&ard e change contract% net income for the year &ould ha2e: A. increased by .1%""". B. increased by .*"". C. decreased by .1%""". ,. decreased by .1%*"".
0+. 8e2in company entered into a for&ard contract to speculate in the foreign currency. It sold 1""%""" foreign currency units under a contract dated :o2ember 1% 0""!% for deli2ery on @anuary 11% 0""5:
In its income statement for the year ended ,ecember 11% 0""!% &hat amount of loss should 8e2in report from this for&ard contract( A. ." B. .1"" C. .0"" ,. .1""
11-10
Taste Bits Inc. purchased chocolates from $&itIerland for 0""%""" $&iss francs B$FrC on ,ecember 1% 0""!. 3ayment is due on @anuary 1"% 0""5. <n ,ecember 1% 0""!% the company also entered into a +"-day for&ard contract to purchase 1""%""" $&iss francs. The for&ard contract is not designated as a hedge. The rates &ere as follo&s:
0/. Based on the preceding information% the entries on ,ecember 11% 0""!% include a: A. Credit to Foreign Currency 3ayable to = change BroAer% .4%""". B. ,ebit to Foreign Currency Decei2able from = change BroAer% .+%""". C. ,ebit to Foreign Currency Decei2able from = change BroAer% .1!+%""". ,. ,ebit to Foreign Currency Transaction 9ain% .4%""".
0!. Based on the preceding information% the entries on @anuary 1"% 0""5% include a: A. ,ebit to ,ollars 3ayable to = change BroAer% .1!"%""". B. Credit to Cash% .1!4%""". C. Credit to 3remium on For&ard Contract% .4%""". ,. Credit to Foreign Currency Decei2able from = change BroAer% .1!"%""".
05. Based on the preceding information% the entries on @anuary 1"% 0""5% include a: A. Credit to Foreign Currency #nits B$FrC% .1!4%""". B. Credit to Cash% .1!"%""". C. ,ebit to Foreign Currency Transaction 8oss% .4%""". ,. ,ebit to ,ollars 3ayable to = change BroAer% .1!4%""".
1". Based on the preceding information% the entries on @anuary 1"% 0""5% include a: A. ,ebit to ,ollars 3ayable to = change BroAer% .1!4%""". B. Credit to Foreign Currency Transaction 9ain% .4%""". C. Credit to Foreign Currency Decei2able from = change BroAer% .1!"%""". ,. ,ebit to Foreign Currency #nits B$FrC% .1!4%""".
11-11
<n ,ecember 1% 0""!% Hedge Company entered into a +"-day speculati2e for&ard contract to sell 0""%""" British pounds BFC at a for&ard rate of F1 - .1./!. <n the same day it purchased a +"-day speculati2e for&ard contract to buy 1""%""" euros BKC at a for&ard rate of K1 - .1.40. The rates are as follo&s:
Hedge had no other speculation transactions in 0""! and 0""5. Ignore ta es.
11. Based on the preceding information% &hat is the effect of the British pound speculati2e contract on 0""! net income( A. .1"%""" gain B. .+%""" gain C. .!%""" gain ,. .0%""" loss
10. Based on the preceding information% &hat is the o2erall effect of speculation on 0""! net income( A. .4%""" gain B. .+%""" gain C. .!%""" loss ,. .!%""" gain
11. Based on the preceding information% &hat is the effect of the euro speculati2e contract on 0""5 net income( A. .4%""" loss B. .1%""" gain C. .!%""" gain ,. .0%""" loss
11-14
14. Based on the preceding information% &hat is the o2erall effect of speculation on 0""5 net income( A. .1%""" loss B. .+%""" gain C. .1%""" loss ,. .!%""" gain
1*. Based on the preceding information% &hat is the net gain or loss on the British pound speculati2e contract( A. .!%""" gain B. .+%""" gain C. .1%""" loss ,. .1"%""" gain
1+. Based on the preceding information% &hat is the net gain or loss on the euro speculati2e contract( A. .!%""" gain B. .+%""" gain C. .1%""" loss ,. .1%""" loss
The fair marAet 2alue of a near-month call option &ith a striAe price of .4* is .*% &hen the stocA is trading at .4!.
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1/. Based on the preceding information% &hich of the follo&ing is true of the intrinsic and time 2alues associated &ith this option.
1!. Based on the preceding information% the call option: A. has no intrinsic 2alue currently. B. is at the money. C. is out of the money. ,. is in the money.
15. An in2estor purchases a put option &ith a striAe price of .1"" for .1. This option is considered Lin the moneyL if the underlying is trading: A. belo& .1"". B. at .1"". C. abo2e .1"". ,. abo2e .1"1.
4". 7hich of the follo&ing obser2ations is true of futures contracts( A. Contracted through a dealer% usually a banA. B. CustomiIed to meet contracting company?s terms and needs. C. Typically no margin deposit re'uired. ,. Traded on an e change and ac'uired through an e change broAer
11-1+
41. 7hich of the follo&ing obser2ations is true of for&ards contracts( A. $ubstantial margin is re'uired to initiate a contract. B. Must be completed either &ith the underlying?s future deli2ery or net C. cash settlement. ,. Cannot be customiIedM for a specific amount at a specific date. =. #sually settled &ith a net cash amount prior to maturity date.
40. Company ; issues 2ariable-rate debt but &ishes to fi its interest rates because it belie2es the 2ariable rate may increase. Company G has a fi ed-rate bond but is looAing for a 2ariablerate interest because it assumes the interest rates may decrease. The t&o companies agree to e change cash flo&s. $uch an arrangement is called: A. a futures contract. B. a for&ard contract. C. a s&ap. ,. an option.
11-1/
$piralling crude oil prices prompted AMAD Company to purchase call options on oil as a price-risA-hedging de2ice to hedge the e pected increase in prices on an anticipated purchase of oil. <n :o2ember 1"% 0""!% AMAD purchases call options for 0"%""" barrels of oil at .1"" per barrel at a premium of .4 per barrel% &ith a February 1% 0""5% call date. The follo&ing is the pricing information for the term of the call:
The information for the change in the fair 2alue of the options follo&s:
<n February 1% 0""5% AMAD sells the options at their 2alue on that date and ac'uires 0"%""" barrels of oil at the spot price. <n April 1% 0""5% AMAD sells the oil for .110 per barrel.
11-1!
41. Based on the preceding information% &hich of the follo&ing adEusting entries &ould be re'uired on ,ecember 11% 0""!(
44. Based on the preceding information% in the entry to record the increase in the intrinsic 2alue of the options on ,ecember 11% 0""!% A. 3urchased Call <ptions &ill be credited for .1""%""". B. 3urchased Call <ptions &ill be debited for .11"%""". C. Detained =arnings &ill be credited for .1""%""". ,. <ther Comprehensi2e Income &ill be credited for .1""%""".
11-15
4*. Based on the preceding information% &hich of the follo&ing entries &ill be re'uired on February 1% 0""5(
4+. Based on the preceding information% the entries made on April 1% 0""5 &ill include: A. a debit to <ther Comprehensi2e Income for .0""%""". B. a debit to Cost of 9oods $old for .0%04"%""". C. a credit to <il In2entory for .0%04"%""". ,. a credit to Cost of 9oods $old for .1""%""".
11-0"
<n ,ecember 1% 0""!% 7inston Corporation ac'uired 1"" shares of 8inAed Corporation at a cost of .4" per share. 7inston classifies them as a2ailable-for-sale securities. <n this same date% it decides to hedge against a possible decline in the 2alue of the securities by purchasing% at a cost of .0*"% an at-the-money put option to sell the 1"" shares at .4" per share. The option e pires on February 0"% 0""5. $elected information concerning the fair 2alues of the in2estment and the options follo&:
Assume that 7inston e ercises the put option and sells 8inAed shares on February 0"% 0""5.
4/. Based on the preceding information% &hat is the marAet price of 8inAed Corporation stocA on ,ecember 11% 0""!( A. .4" B. .1/ C. .1+ ,. .1!
4!. Based on the preceding information% &hat is the marAet price of 8inAed Corporation stocA on February 0"% 0""5( A. .1* B. .1/ C. .1+ ,. .4"
11-01
45. Based on the preceding information% the Eournal entry made on ,ecember 11% 0""! to record decrease in the time 2alue of the options &ill include: A. a debit to 8oss on Hedge Acti2ity for .1*". B. a credit to 3ut <ption for .1"". C. a debit to 8oss on Hedge Acti2ity for .1"". ,. a credit to 3ut <ption for .1"".
*". Based on the preceding information% &hich of the follo&ing Eournal entries &ill be made on February 0"% 0""5(
Essay Questions
11-00
*1. Nuantum Company imports goods from different countries. $ome transactions are denominated in #.$. dollars and others in foreign currencies. A summary of accounts recei2able and accounts payable on ,ecember 11% 0""!% before adEustments for the effects of changes in e change rates during 0""!% follo&s:
The spot rates on ,ecember 11% 0""!% &ere:
The a2erage e change rates during the collection and payment period in 0""5 are:
De'uired: 1C 3repare the adEusting entries on ,ecember 11% 0""!. 0C Decord the collection of the accounts recei2able and the payment of the accounts payable in 0""5. 1C 7hat &as the foreign currency gain or loss on the accounts recei2able transaction denominated in $Fr for the year ended ,ecember 11% 0""!( For the year ended ,ecember 11% 0""5( <2erall for this transaction( 4C 7hat &as the foreign currency gain or loss on the accounts recei2able transaction denominated in O( For the year ended ,ecember 11% 0""!( For the year ended ,ecember 11% 0""5( <2erall for this transaction(
11-01
*0. <n ,ecember 1% 0""!% $ecure Company bought a 5"-day for&ard contract to purchase 0""%""" euros BKC at a for&ard rate of K1 - .1.1* &hen the spot rate &as .1.11. <ther e change rates &ere as follo&s:
De'uired 1C 3repare all Eournal entries related to $ecure Company?s foreign currency speculation from ,ecember 1% 0""!% through March 1% 0""5% assuming the fiscal year ends on ,ecember 11% 0""!. 0C ,id the company gain or lose on its purchase of the for&ard contract(
11-04
*1. <n ,ecember 1% 0""!% ,eniIen Corporation entered into a 10"-day for&ard contract to purchase 0""%""" Canadian dollars BC.C. ,eniIen?s fiscal year ends on ,ecember 11. The for&ard contract &as to hedge a firm commitment agreement made on ,ecember 1% 0""!% to purchase electronic goods on @anuary 1"% &ith payment due on March 11% 0""!. The deri2ati2e is designated as a fair 2alue hedge. The direct e change rates follo&:
De'uired: 3repare all Eournal entries for ,eniIen Corporation.
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*4. <n ,ecember 1% 0""!% ,eniIen Corporation entered into a 10"-day for&ard contract to purchase 0""%""" Canadian dollars BC.C. ,eniIen?s fiscal year ends on ,ecember 11. The for&ard contract &as to hedge an anticipated purchase of electronic goods on @anuary 1"% 0""5. The purchase tooA place on @anuary 1"% &ith payment due on March 11% 0""5. The deri2ati2e is designated as a cash flo& hedge. The company uses the for&ard e change rate to measure hedge effecti2eness. The direct e change rates follo&:
11-0+
**. <n ,ecember 1% 0""!% Merry Corporation ac'uired 1"" shares of >enus Corporation at a cost of .+" per share. Merry classifies them as a2ailable-for-sale securities. <n this same date% it decides to hedge against a possible decline in the 2alue of the securities by purchasing% at a cost of .4""% an at-the-money put option to sell the 1"" shares at .+" per share. The option e pires on February 0"% 0""5. $elected information concerning the fair 2alues of the in2estment and the options follo&:
Assume that Merry e ercises the put option and sells >enus shares on February 0"% 0""5. De'uired: 1C 3repare the entries re'uired on ,ecember 1% 0""!% to record the purchase of the >enus stocA and the put options. 0C 3repare the entries re'uired on ,ecember 11% 0""!% to record the change in intrinsic 2alue and time 2alue of the options% as &ell as the re2aluation of the a2ailable-for-sale securities. 1C 3repare the entries re'uired on February 0"% 0""!% to record the e ercise of the put option and the sale of the securities at that date.
Chapter 11 Multinational Accounting: Foreign Currency Transactions and Financial Instruments Ans&er 6ey
11-0/

Multiple Choice Questions
1. If 1 British pound can be e changed for 1!" cents of #.$. currency% &hat fraction should be used to compute the indirect 'uotation of the e change rate e pressed in British pounds( A. 1)1!" B. 1).*+ C. 1.!)1 D. 1)1.!
AACSB: Analytic AICPA: Measurement
$uppose the direct foreign e change rates in #.$. dollars are: 1 $ingapore dollar - ../"0* 1 Cyprus pound - .0.*110
0. Based on the information gi2en abo2e% the indirect e change rates for the $ingapore dollar and the Cyprus 3ound are: A. 1./+** $ingapore dollars and 1.401* Cyprus pounds respecti2ely. B. ".05/* $ingapore dollars and 1.*110 Cyprus pounds respecti2ely. C. 0.1+00 $ingapore dollars and ".4+0* Cyprus pounds respecti2ely. D. 1.401* $ingapore dollars and ".15/5 Cyprus pounds respecti2ely.
1. Based on the information gi2en abo2e% ho& many #.$. dollars must be paid for a purchase of citrus fruits costing 1"%""" Cyprus pounds( A. .0*%110 B. .1*%110 C. .1%5/5 ,. .1*%//*
11-0!
4. Based on the information gi2en abo2e% ho& many $ingapore dollars are re'uired to purchase goods costing 1"%""" #$ dollars( A. /%"0* B. 14%01* C. 1/%+** ,. 0%5/*
*. #pon arri2al in Chile% 6aren e changed .1%""" of #.$. currency into 4%!"%""" Chilean 3esos. 7hile returning after her t&o month 2isit% she e changed her remaining *"%""" 3esos into .1"" of #.$. currency. 7hat amount of gain or a loss did 6aren e perience on the *"%""" pesos she held during her 2isit and con2erted to #.$. dollars at the departure date( A. 8oss of .4. B. 9ain of .4. C. 8oss of .+. ,. :o gain or loss.
11-05
+. Chicago based Corporation ; has a number of importing transactions &ith companies based in #6. Importing acti2ities result in payables. If the settlement currency is the British 3ound% &hich of the follo&ing &ill happen by changes in the direct or indirect e change rates(
AACSB: Reflective Thinking AICPA: Decision Making
/. Chicago based Corporation ; has a number of e porting transactions &ith companies based in $&eden. = porting acti2ities result in recei2ables. If the settlement currency is the $&edish 6rona% &hich of the follo&ing &ill happen by changes in the direct or indirect e change rates(
A. <ption A B. <ption B C. <ption C D. <ption ,
11-1"
!. Corporation ; has a number of e porting transactions &ith companies based in >ietnam. = porting acti2ities result in recei2ables. If the settlement currency is the #$ dollar% &hich of the follo&ing &ill happen by changes in the direct or indirect e change rates(
5. Mint Corporation has se2eral transactions &ith foreign entities. =ach transaction is denominated in the local currency unit of the country in &hich the foreign entity is located. <n <ctober 1% 0""!% Mint purchased confectionary items from a foreign company at a price of 8C# *%""" &hen the direct e change rate &as 1 8C# - .1.0". The account has not been settled as of ,ecember 11% 0""!% &hen the e change rate has decreased to 1 8C# - .1.1". The foreign e change gain or loss on Mint?s records at year-end for this transaction &ill be: A. .*"" loss B. .*"" gain C. .1/! gain ,. .*%*"" loss
11-11
1". Mint Corporation has se2eral transactions &ith foreign entities. =ach transaction is denominated in the local currency unit of the country in &hich the foreign entity is located. <n :o2ember 0% 0""!% Mint sold confectionary items to a foreign company at a price of 8C# 01%""" &hen the direct e change rate &as 1 8C# - .1."!. The account has not been settled as of ,ecember 11% 0""!% &hen the e change rate has increased to 1 8C# - .1.1". The foreign e change gain or loss on Mint?s records at year-end for this transaction &ill be: A. .4+" loss B. .1!/ loss C. .1!/ gain D. .4+" gain
11. <n $eptember 1% 0""!% @acAson Corporation purchases goods for a #.$. dollar e'ui2alent of .1/%""" from a $&iss company. The transaction is denominated in $&iss francs B$FrC. The payment is made on <ctober 1". The e change rates &ere: 7hat entry is re'uired to re2alue foreign currency payable to #.$. dollar e'ui2alent 2alue on <ctober 1"(
11-10
10. <n March 1% 0""!% 7ilson Corporation sold goods for a #.$. dollar e'ui2alent of .11%""" to a Thai company. The transaction is denominated in Thai bahts. The payment is recei2ed on May 1". The e change rates &ere:
7hat entry is re'uired to re2alue foreign currency payable to #.$. dollar e'ui2alent 2alue on May 1"(
<n ,ecember *% 0""!% Te as based Imperial Corporation purchased goods from a $audi Arabian firm for 1""%""" riyals B$ADC% to be paid on @anuary 1"% 0""5. The transaction is denominated in $audi riyals. Imperial?s fiscal year ends on ,ecember 11% and its reporting currency is the #.$. dollar. The e change rates are:
11-11
11. Based on the preceding information% &hat Eournal entry &ould Imperial maAe on ,ecember 11% 0""!% to re2alue foreign currency payable to e'ui2alent #.$. dollar 2alue(
14. Based on the preceding information% &hat Eournal entry &ould Imperial maAe on @anuary 1"% 0""5% to re2alue foreign currency payable to e'ui2alent #.$. dollar 2alue(
11-14
1*. Based on the preceding information% &hat &as the o2erall foreign currency gain or loss on the accounts payable transaction( A. .1"" loss B. .0"" loss C. .1"" gain ,. .0"" gain
$partan Company purchased interior decoration material from =gypt for 1""%""" =gyptian pounds on $eptember *% 0""!% &ith payment due on ,ecember 0% 0""!. Additionally% on $eptember *% $partan ac'uired a 5"-day for&ard contract to purchase 1""%""" =gyptian pounds of =F - ..1!*". The for&ard contract &as ac'uired to manage the e posed net liability position in =gyptian pounds% but it &as not designated as a hedge. The spot rates &ere:
1+. Based on the preceding information% in the entry made on ,ecember 0nd to re2alue foreign currency recei2able to current e'ui2alent #.$. dollar 2alue% A. Accounts 3ayable &ill be debited for .1!%1*". B. Foreign Currency #nits &ill be debited for .1!%*"". C. Foreign Currency Transaction 9ain &ill be credited for .1*". ,. <ther Comprehensi2e Income &ill be credited for .1"".
11-1*
1/. Based on the preceding information% &hat is the entry re'uired to settle foreign currency payable on ,ecember 0(
1!. ,etroit based Auto Corporation% purchased ancillaries from a @apanese firm on ,ecember 1% 0""!% for 1%"""%""" Gen% &hen the spot rate for Gen &as ..""5*. <n ,ecember 11% 0""!% the spot rate stood at ..""5+. <n @anuary 1"% 0""5 Auto paid 1%"""%""" Gen ac'uired at a rate of ..""54. Auto?s income statements should report a foreign e change gain or loss for the years ended ,ecember 11% 0""! and 0""5 of:
11-1+
15. <n :o2ember 1% 0""!% ,en2er Company borro&ed *""%""" local currency units B8C#C from a foreign lender e2idenced by an interest-bearing note due on :o2ember 1% 0""5% &hich is denominated in the currency of the lender. The #.$. dollar e'ui2alent of the note principal &as as follo&s:
In its income statement for 0""5% &hat amount should ,en2er include as a foreign e change gain or loss on the note principal( A. 1*%""" gain B. 0*%""" gain C. 1*%""" loss ,. 4"%""" loss
0". Company ; denominated a ,ecember 1% 0""5% purchase of goods in a currency other than its functional currency. The transaction resulted in a payable fi ed in terms of the amount of foreign currency% and &as paid on the settlement date% @anuary 1"% 0"1". = change rates mo2ed unfa2ourably at ,ecember 11% 0""5% resulting in a loss that should: A. be included as a separate component of stocAholders? e'uity at ,ec. 11% 0""5. B. be included as a component of income from continuing operations for 0""5. C. be included as a deferred charge at ,ecember 11% 0""5. ,. not be reported until @anuary 1"% 0"1"% the settlement date.
AACSB: Reflective Thinking AICPA: Reporting
Hea2y Company sold metal scrap to a BraIilian company for 0""%""" BraIilian reals on ,ecember 1% 0""!% &ith payment due on @anuary 0"% 0""5. The e change rates &ere:
11-1/
01. Based on the preceding information% &hich of the follo&ing is true of dollar?s mo2ement 2is-J-2is BraIilian real during the period(
00. Based on the preceding information% &hat is the Hea2y?s o2erall net gain or net loss from its foreign currency e posure related to this transaction( A. .4%!+" loss B. .0%+"" loss C. ./%10" gain ,. .0%0+" gain
My&ay Company sold e'uipment to a Canadian company for 1""%""" Canadian dollars BC.C on @anuary 1% 0""5 &ith settlement to be in +" days. <n the same date% Alman entered into a +"day for&ard contract to sell 1""%""" Canadian dollars at a for&ard rate of 1 C. - ..54 in order to manage its e posed foreign currency recei2able. The for&ard contract is not designated as a hedge. The spot rates &ere:
11-1!
01. Based on the preceding information% the entry to re2alue foreign currency payable to current #.$. dollar 2alue on March 1 &ill ha2e: A. a credit to Foreign Currency Transaction 9ain for .1%*"". B. a debit to Foreign Currency Transaction 8oss for .0%*"". C. a debit to Foreign Currency Transaction 8oss for .1%*"". D. a credit to Foreign Currency Transaction 9ain for .1%""".
04. Based on the preceding information% &hat is the o2erall effect on net income of My&ay?s use of the for&ard e change contract( A. :et loss of .1%""" B. :et gain of .1%*"" C. :et loss of .*"" ,. :o effect
0*. Based on the preceding information% had My&ay not used the for&ard e change contract% net income for the year &ould ha2e: A. increased by .1%""". B. increased by .*"". C. decreased by .1%""". D. decreased by .1%*"".
11-15
0+. 8e2in company entered into a for&ard contract to speculate in the foreign currency. It sold 1""%""" foreign currency units under a contract dated :o2ember 1% 0""!% for deli2ery on @anuary 11% 0""5:
In its income statement for the year ended ,ecember 11% 0""!% &hat amount of loss should 8e2in report from this for&ard contract( A. ." B. .1"" C. .0"" ,. .1""
Taste Bits Inc. purchased chocolates from $&itIerland for 0""%""" $&iss francs B$FrC on ,ecember 1% 0""!. 3ayment is due on @anuary 1"% 0""5. <n ,ecember 1% 0""!% the company also entered into a +"-day for&ard contract to purchase 1""%""" $&iss francs. The for&ard contract is not designated as a hedge. The rates &ere as follo&s:
0/. Based on the preceding information% the entries on ,ecember 11% 0""!% include a: A. Credit to Foreign Currency 3ayable to = change BroAer% .4%""". B. ,ebit to Foreign Currency Decei2able from = change BroAer% .+%""". C. ,ebit to Foreign Currency Decei2able from = change BroAer% .1!+%""". ,. ,ebit to Foreign Currency Transaction 9ain% .4%""".
11-4"
0!. Based on the preceding information% the entries on @anuary 1"% 0""5% include a: A. ,ebit to ,ollars 3ayable to = change BroAer% .1!"%""". B. Credit to Cash% .1!4%""". C. Credit to 3remium on For&ard Contract% .4%""". ,. Credit to Foreign Currency Decei2able from = change BroAer% .1!"%""".
05. Based on the preceding information% the entries on @anuary 1"% 0""5% include a: A. Credit to Foreign Currency #nits B$FrC% .1!4%""". B. Credit to Cash% .1!"%""". C. ,ebit to Foreign Currency Transaction 8oss% .4%""". ,. ,ebit to ,ollars 3ayable to = change BroAer% .1!4%""".
1". Based on the preceding information% the entries on @anuary 1"% 0""5% include a: A. ,ebit to ,ollars 3ayable to = change BroAer% .1!4%""". B. Credit to Foreign Currency Transaction 9ain% .4%""". C. Credit to Foreign Currency Decei2able from = change BroAer% .1!"%""". D. ,ebit to Foreign Currency #nits B$FrC% .1!4%""".
11-41
<n ,ecember 1% 0""!% Hedge Company entered into a +"-day speculati2e for&ard contract to sell 0""%""" British pounds BFC at a for&ard rate of F1 - .1./!. <n the same day it purchased a +"-day speculati2e for&ard contract to buy 1""%""" euros BKC at a for&ard rate of K1 - .1.40. The rates are as follo&s:
Hedge had no other speculation transactions in 0""! and 0""5. Ignore ta es.
11. Based on the preceding information% &hat is the effect of the British pound speculati2e contract on 0""! net income( A. .1"%""" gain B. .+%""" gain C. .!%""" gain ,. .0%""" loss
10. Based on the preceding information% &hat is the o2erall effect of speculation on 0""! net income( A. .4%""" gain B. .+%""" gain C. .!%""" loss ,. .!%""" gain
11-40
11. Based on the preceding information% &hat is the effect of the euro speculati2e contract on 0""5 net income( A. .4%""" loss B. .1%""" gain C. .!%""" gain ,. .0%""" loss
14. Based on the preceding information% &hat is the o2erall effect of speculation on 0""5 net income( A. .1%""" loss B. .+%""" gain C. .1%""" loss ,. .!%""" gain
1*. Based on the preceding information% &hat is the net gain or loss on the British pound speculati2e contract( A. .!%""" gain B. .+%""" gain C. .1%""" loss ,. .1"%""" gain
11-41
1+. Based on the preceding information% &hat is the net gain or loss on the euro speculati2e contract( A. .!%""" gain B. .+%""" gain C. .1%""" loss D. .1%""" loss
The fair marAet 2alue of a near-month call option &ith a striAe price of .4* is .*% &hen the stocA is trading at .4!.
1/. Based on the preceding information% &hich of the follo&ing is true of the intrinsic and time 2alues associated &ith this option.
1!. Based on the preceding information% the call option: A. has no intrinsic 2alue currently. B. is at the money. C. is out of the money. D. is in the money.
11-44
15. An in2estor purchases a put option &ith a striAe price of .1"" for .1. This option is considered Lin the moneyL if the underlying is trading: A. belo& .1"". B. at .1"". C. abo2e .1"". ,. abo2e .1"1.
4". 7hich of the follo&ing obser2ations is true of futures contracts( A. Contracted through a dealer% usually a banA. B. CustomiIed to meet contracting company?s terms and needs. C. Typically no margin deposit re'uired. D. Traded on an e change and ac'uired through an e change broAer
41. 7hich of the follo&ing obser2ations is true of for&ards contracts( A. $ubstantial margin is re'uired to initiate a contract. B. Must be completed either &ith the underlying?s future deli2ery or net C. cash settlement. ,. Cannot be customiIedM for a specific amount at a specific date. =. #sually settled &ith a net cash amount prior to maturity date.
11-4*
40. Company ; issues 2ariable-rate debt but &ishes to fi its interest rates because it belie2es the 2ariable rate may increase. Company G has a fi ed-rate bond but is looAing for a 2ariablerate interest because it assumes the interest rates may decrease. The t&o companies agree to e change cash flo&s. $uch an arrangement is called: A. a futures contract. B. a for&ard contract. C. a s&ap. ,. an option.
$piralling crude oil prices prompted AMAD Company to purchase call options on oil as a price-risA-hedging de2ice to hedge the e pected increase in prices on an anticipated purchase of oil. <n :o2ember 1"% 0""!% AMAD purchases call options for 0"%""" barrels of oil at .1"" per barrel at a premium of .4 per barrel% &ith a February 1% 0""5% call date. The follo&ing is the pricing information for the term of the call:
The information for the change in the fair 2alue of the options follo&s:
<n February 1% 0""5% AMAD sells the options at their 2alue on that date and ac'uires 0"%""" barrels of oil at the spot price. <n April 1% 0""5% AMAD sells the oil for .110 per barrel.
11-4+
41. Based on the preceding information% &hich of the follo&ing adEusting entries &ould be re'uired on ,ecember 11% 0""!(
44. Based on the preceding information% in the entry to record the increase in the intrinsic 2alue of the options on ,ecember 11% 0""!% A. 3urchased Call <ptions &ill be credited for .1""%""". B. 3urchased Call <ptions &ill be debited for .11"%""". C. Detained =arnings &ill be credited for .1""%""". D. <ther Comprehensi2e Income &ill be credited for .1""%""".
11-4/
4*. Based on the preceding information% &hich of the follo&ing entries &ill be re'uired on February 1% 0""5(
4+. Based on the preceding information% the entries made on April 1% 0""5 &ill include: A. a debit to <ther Comprehensi2e Income for .0""%""". B. a debit to Cost of 9oods $old for .0%04"%""". C. a credit to <il In2entory for .0%04"%""". ,. a credit to Cost of 9oods $old for .1""%""".
11-4!
<n ,ecember 1% 0""!% 7inston Corporation ac'uired 1"" shares of 8inAed Corporation at a cost of .4" per share. 7inston classifies them as a2ailable-for-sale securities. <n this same date% it decides to hedge against a possible decline in the 2alue of the securities by purchasing% at a cost of .0*"% an at-the-money put option to sell the 1"" shares at .4" per share. The option e pires on February 0"% 0""5. $elected information concerning the fair 2alues of the in2estment and the options follo&:
Assume that 7inston e ercises the put option and sells 8inAed shares on February 0"% 0""5.
4/. Based on the preceding information% &hat is the marAet price of 8inAed Corporation stocA on ,ecember 11% 0""!( A. .4" B. .1/ C. .1+ ,. .1!
11-45
4!. Based on the preceding information% &hat is the marAet price of 8inAed Corporation stocA on February 0"% 0""5( A. .1* B. .1/ C. .1+ ,. .4"
45. Based on the preceding information% the Eournal entry made on ,ecember 11% 0""! to record decrease in the time 2alue of the options &ill include: A. a debit to 8oss on Hedge Acti2ity for .1*". B. a credit to 3ut <ption for .1"". C. a debit to 8oss on Hedge Acti2ity for .1"". ,. a credit to 3ut <ption for .1"".
11-*"
*". Based on the preceding information% &hich of the follo&ing Eournal entries &ill be made on February 0"% 0""5(
Essay Questions
11-*1
*1. Nuantum Company imports goods from different countries. $ome transactions are denominated in #.$. dollars and others in foreign currencies. A summary of accounts recei2able and accounts payable on ,ecember 11% 0""!% before adEustments for the effects of changes in e change rates during 0""!% follo&s:
The spot rates on ,ecember 11% 0""!% &ere:
The a2erage e change rates during the collection and payment period in 0""5 are:
De'uired: 1C 3repare the adEusting entries on ,ecember 11% 0""!. 0C Decord the collection of the accounts recei2able and the payment of the accounts payable in 0""5. 1C 7hat &as the foreign currency gain or loss on the accounts recei2able transaction denominated in $Fr for the year ended ,ecember 11% 0""!( For the year ended ,ecember 11% 0""5( <2erall for this transaction( 4C 7hat &as the foreign currency gain or loss on the accounts recei2able transaction denominated in O( For the year ended ,ecember 11% 0""!( For the year ended ,ecember 11% 0""5( <2erall for this transaction(
11-*0
11-*1
11-*4
*0. <n ,ecember 1% 0""!% $ecure Company bought a 5"-day for&ard contract to purchase 0""%""" euros BKC at a for&ard rate of K1 - .1.1* &hen the spot rate &as .1.11. <ther e change rates &ere as follo&s:
De'uired 1C 3repare all Eournal entries related to $ecure Company?s foreign currency speculation from ,ecember 1% 0""!% through March 1% 0""5% assuming the fiscal year ends on ,ecember 11% 0""!. 0C ,id the company gain or lose on its purchase of the for&ard contract(
11-**
0C $ecure Company e perienced a net loss of .4%""" B.0%""" gain in 0""! less a .+%""" loss in 0""5C.
11-*+
*1. <n ,ecember 1% 0""!% ,eniIen Corporation entered into a 10"-day for&ard contract to purchase 0""%""" Canadian dollars BC.C. ,eniIen?s fiscal year ends on ,ecember 11. The for&ard contract &as to hedge a firm commitment agreement made on ,ecember 1% 0""!% to purchase electronic goods on @anuary 1"% &ith payment due on March 11% 0""!. The deri2ati2e is designated as a fair 2alue hedge. The direct e change rates follo&:
11-*/
11-*!
11-*5
11-+"
*4. <n ,ecember 1% 0""!% ,eniIen Corporation entered into a 10"-day for&ard contract to purchase 0""%""" Canadian dollars BC.C. ,eniIen?s fiscal year ends on ,ecember 11. The for&ard contract &as to hedge an anticipated purchase of electronic goods on @anuary 1"% 0""5. The purchase tooA place on @anuary 1"% &ith payment due on March 11% 0""5. The deri2ati2e is designated as a cash flo& hedge. The company uses the for&ard e change rate to measure hedge effecti2eness. The direct e change rates follo&:
11-+1
11-+0
11-+1

11-+4
**. <n ,ecember 1% 0""!% Merry Corporation ac'uired 1"" shares of >enus Corporation at a cost of .+" per share. Merry classifies them as a2ailable-for-sale securities. <n this same date% it decides to hedge against a possible decline in the 2alue of the securities by purchasing% at a cost of .4""% an at-the-money put option to sell the 1"" shares at .+" per share. The option e pires on February 0"% 0""5. $elected information concerning the fair 2alues of the in2estment and the options follo&:
Assume that Merry e ercises the put option and sells >enus shares on February 0"% 0""5. De'uired: 1C 3repare the entries re'uired on ,ecember 1% 0""!% to record the purchase of the >enus stocA and the put options. 0C 3repare the entries re'uired on ,ecember 11% 0""!% to record the change in intrinsic 2alue and time 2alue of the options% as &ell as the re2aluation of the a2ailable-for-sale securities. 1C 3repare the entries re'uired on February 0"% 0""!% to record the e ercise of the put option and the sale of the securities at that date.
11-+*
11-++
11-+/

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

A. <ption A B. <ption B C. <ption C ,. <ption ,

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

A. <ption A B. <ption B C. <ption C ,. <ption ,

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

A. <ption A B. <ption B C. <ption C ,. <ption ,

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

A. <ption A B. <ption B C. <ption C ,. <ption ,

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

A. <ption A B. <ption B C. <ption C ,. <ption ,

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

The spot rates on ,ecember 11% 0""!% &ere:

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

De'uired: 3repare all Eournal entries for ,eniIen Corporation.

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

De'uired: 3repare all Eournal entries for ,eniIen Corporation.

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

AACSB: Analytic AICPA: Measurement

AACSB: Analytic AICPA: Measurement

AACSB: Analytic AICPA: Measurement

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

AACSB: Analytic AICPA: Measurement

AACSB: Analytic AICPA: Measurement

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

A. <ption A B. <ption B C. <ption C ,. <ption ,

AACSB: Reflective Thinking AICPA: Decision Making

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AACSB: Reflective Thinking AICPA: Decision Making

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

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AACSB: Reflective Thinking AICPA: Decision Making

AACSB: Analytic AICPA: Measurement

Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

AACSB: Analytic AICPA: Measurement