Chapter 9 Exam 3

30 Questions | Total Attempts: 60

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Chapter 9 Exam 3

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Questions and Answers
  • 1. 
    1.  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. 

      A) $10,500 loss

    • B. 

      B) $10,500 gain

    • C. 

      C) $  1,750 loss

    • D. 

      D) $  3,850 loss                

    • E. 

      E) No gain or loss should be recognized.

  • 2. 
    2- Norton Co., a U.S. corporation, sold inventory on December 1, 2018, 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?
    • A. 

      A) $ 5,500.

    • B. 

      B) $16,949.

    • C. 

      C) $18,182.

    • D. 

      D) $17,241.

    • E. 

      E) $16,667.

  • 3. 
    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. 

      A) $         0.

    • B. 

      B) $28,000.                               

    • C. 

      C) $24,000.

    • D. 

      D) $25,000.

    • E. 

      E) $   2,000.

  • 4. 
    4-   Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2018, with payment of 10 million Korean won to be received on January 15, 2019.  The following exchange rates applied:         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. 

      A) $ 500 (gain).

    • B. 

      B) $ 500 (loss).

    • C. 

      C) $ 200 (gain).

    • D. 

      D) $ 200 (loss).             

    • E. 

      E) $ - 0 -

  • 5. 
    5-  Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2018, with payment of 10 million Korean won to be received on January 15, 2019.  The following exchange rates applied:
    • A. 

      A) $    200.

    • B. 

      B) $    295.

    • C. 

      C) $    495.                     

    • D. 

      D) $    500.

    • E. 

      E) $ 9,300.

  • 6. 
    6.  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. 

      A) $         0.

    • B. 

      B) $36,000.

    • C. 

      C) $48,000.

    • D. 

      D) $10,000.

    • E. 

      E) $12,000.                           

  • 7. 
    7.  A spot rate may be defined as
    • A. 

      A) The price a foreign currency can be purchased or sold today.

    • B. 

      B) The price today at which a foreign currency can be purchased or sold in the future.

    • C. 

      C) The forecasted future value of a foreign currency.

    • D. 

      D) The U.S. dollar value of a foreign currency.

    • E. 

      E) The Euro value of a foreign currency.

  • 8. 
    8.  The forward rate may be defined as
    • A. 

      A) The price a foreign currency can be purchased or sold today.

    • B. 

      B) The price today at which a foreign currency can be purchased or sold in the future.

    • C. 

      C) The forecasted future value of a foreign currency.

    • D. 

      D) The U.S. dollar value of a foreign currency.

    • E. 

      E) The Euro value of a foreign currency.

  • 9. 
    9- A U.S. company sells merchandise to a foreign company denominated in U.S. dollars.  Which of the following statements is true?
    • A. 

      A) If the foreign currency appreciates, a foreign exchange gain will result.

    • B. 

      B) If the foreign currency depreciates, a foreign exchange gain will result.

    • C. 

      C) No foreign exchange gain or loss will result.

    • D. 

      D) If the foreign currency appreciates, a foreign exchange loss will result. 

    • E. 

      E) If the foreign currency depreciates, a foreign exchange loss will result.

  • 10. 
    10.  A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true? 
    • A. 

      A) If the foreign currency appreciates, a foreign exchange gain will result.

    • B. 

      B) If the foreign currency depreciates, a foreign exchange gain will result.

    • C. 

      C) No foreign exchange gain or loss will result.

    • D. 

      D) If the foreign currency appreciates, a foreign exchange loss will result.

    • E. 

      E) Any gain or loss will be included in comprehensive income.

  • 11. 
    11- U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except
    • A. 

      A) Recognized foreign currency denominated assets and liabilities.

    • B. 

      B) Unrecognized foreign currency firm commitments.

    • C. 

      C) Forecasted foreign currency denominated transactions.

    • D. 

      D) Net investment in foreign operations.

    • E. 

      E) Deferred foreign currency gains and losses.

  • 12. 
    12.  A forward contract may be used for which of the following? 1) A fair value hedge of an asset. 2) A cash flow hedge of an asset. 3) A fair value hedge of a liability. 4) A cash flow hedge of a liability.
    • A. 

      A) 1 and 3

    • B. 

      B) 2 and 4

    • C. 

      C) 1 and 2

    • D. 

      D) 1, 3, and 4

    • E. 

      E) 1, 2, 3, and 4

  • 13. 
    13.  A company has a discount on a forward contract for a foreign currency denominated asset.  How is the discount recognized over the life of the contract under fair value hedge accounting?
    • A. 

      A) As a debit to discount expense.

    • B. 

      B) As a debit to amortization expense.

    • C. 

      C) As a debit to accumulated other comprehensive income.

    • D. 

      D) As a debit impact on net income, as a result of the hedge.

    • E. 

      E) As a decreases to sales.

  • 14. 
    14.  All of the following hedges are used for future purchase/sale transactions except
    • A. 

      A) Forward contracts used as a fair value hedge of a firm commitment.

    • B. 

      B) Options used as a fair value hedge of a firm commitment.

    • C. 

      C) Option contract cash flow hedge of a forecasted transaction.

    • D. 

      D) Forward contract cash flow hedges of a forecasted transaction.

    • E. 

      E) Forward contracts used to hedge a foreign currency denominated liability.

  • 15. 
    15-   On December 1, 2018, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD).  Collection of the receivable is due on February 1, 2019.  Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2018.  This foreign currency option is designated as a cash flow hedge.  Relevant exchange rates follow: Date Spot Rate Option Premium December 1, 2018 $ .97 $ .05 December 31, 2018 $ .95 $ .04 February 1, 2019 $ .94 $ .03              Compute the fair value of the foreign currency option at December 1, 2018.
    • A. 

      A) $6,000.

    • B. 

      B) $4,500.

    • C. 

      C) $3,000.

    • D. 

      D) $7,500.       

    • E. 

      E) $1,500.

  • 16. 
    16- On December 1, 2018, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD).  Collection of the receivable is due on February 1, 2019.  Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2018.  This foreign currency option is designated as a cash flow hedge.  Relevant exchange rates follow: Date Spot Rate Option Premium December 1, 2018 $ .97 $ .05 December 31, 2018 $ .95 $ .04 February 1, 2019 $ .94 $ .03       Compute the U.S. dollars received on February 1, 2019.
    • A. 

      A) $138,000.

    • B. 

      B) $136,500.

    • C. 

      C) $145,500.             

    • D. 

      D) $141,000

    • E. 

      E) $142,500.

  • 17. 
    17- Which of the following approaches is used in the United States in accounting for foreign currency transactions?
    • A. 

      A) One-transaction perspective; defer foreign exchange gains and losses.

    • B. 

      B) Two-transaction perspective; accrue foreign exchange gains and losses.

    • C. 

      C) Three-transaction perspective; defer foreign exchange gains and losses.

    • D. 

      D) One-transaction perspective; accrue foreign exchange gains and losses.

    • E. 

      E) Two-transaction perspective; defer foreign exchange gains and losses.

  • 18. 
    18. When a U.S. company purchases parts from a foreign company, which of the following will result in zero foreign exchange gain or loss?
    • A. 

      A) The transaction is denominated in U.S. dollars.

    • B. 

      B) The option strike price to sell foreign currency is less than the spot rate of the currency.

    • C. 

      C) The option strike price to buy foreign currency is less than the spot rate of the currency.

    • D. 

      D) The foreign currency appreciated in value relative to the U.S. dollar.

    • E. 

      E) The foreign currency depreciated in value relative to the U.S. dollar.

  • 19. 
    19. Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in Mexican pesos.  On December 31, 2017, this receivable for 75,000 pesos was correctly included in Alpha’s balance sheet at $8,000.  The receivable was collected on March 2, 2018, when the U.S. equivalent was $6,900.  How much foreign exchange gain or loss will Alpha record on the income statement for the year ended December 31, 2018?
    • A. 

      A) $1,100 loss.                                

    • B. 

      B) $1,100 gain.

    • C. 

      C) $6,900 loss.

    • D. 

      D) $6,900 gain.

    • E. 

      E) $8,000 gain.

  • 20. 
    20. Angela, Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound payable resulting from imports from England.  Angela recorded foreign exchange gain related to both its euro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?
    • A. 

      Option 1

    • B. 

      Option 2

    • C. 

      Option 3

    • D. 

      Option 4

  • 21. 
    21-  Parker Corp., a U.S. company, had the following foreign currency transactions during 2018:       What amount should be included as a foreign exchange gain or loss from the two transactions for 2018?
    • A. 

      A) $  2,000 loss.

    • B. 

      B) $  2,000 gain.

    • C. 

      C) $10,000 gain.

    • D. 

      D) $14,000 loss.

    • E. 

      E) $ 14,000 gain.

  • 22. 
    22-  Williams, Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan.  The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable.  The spot rate was $.0094, and the forward rate was $.0095.  Which of the following did the U.S. exporter report in net income?
    • A. 

      A) Discount revenue.

    • B. 

      B) Premium revenue.

    • C. 

      C) Discount expense.

    • D. 

      D) Premium expense.

    • E. 

      E) Both discount revenue and premium expense.

  • 23. 
    23. Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on July 7 when the spot rate was $.025 per rupee.  A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $.027.  The forward contract is properly designated as a fair value hedge of the 100,000 rupee firm commitment.  On August 7, when the parts are received, the spot rate is $.028.  At what amount should the payable be carried on Primo’s books?
    • A. 

      A) $2,000.       

    • B. 

      B) $2,100.

    • C. 

      C) $2,500.

    • D. 

      D) $2,700.

    • E. 

      E) $2,800.                         

  • 24. 
    24 . Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts from a foreign supplier on July 7 when the spot rate was $.025 per baht.  A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $.027.  The forward contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment.  On August 7, when the parts are received, the spot rate is $.028.  What is the amount of accounts payable that will be paid at this date?
    • A. 

      A) $20,000.

    • B. 

      B) $20,100.

    • C. 

      C) $25,000.

    • D. 

      D) $27,000.

    • E. 

                   E) $28,000.                             

  • 25. 
    25-  Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24, 2018.  On July 24, 2018, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October, 2018.  The following exchange rates apply: Option strike price $2.17 Option cost $4,000 July 24 spot rate $2.17 October 24 spot rate $2.13 October 24 option premium $  .04    What amount will Woolsey include as an option expense in net income for the period July 24 to October 24?
    • A. 

      A) $  4,000.                         

    • B. 

      B) $  5,000.

    • C. 

      C) $10,000.

    • D. 

      D) $12,000.

    • E. 

      E) $14,000.

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