Practice Qs: Ch. 9 Foreign Currency Transactions and Hedging Foreign Exchange Risk

On which of the following dates would a company enter into a hedge of a forecasted foreign currency import purchase?

Date on which the company forecasts the purchase of goods from a foreign supplier

Grace Company had a Chinese yuan payable resulting from imports from China and a Mexican peso receivable resulting from exports to Mexico. Grace recorded foreign exchange losses related to both its yuan payable and peso receivable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?

b. Increase/Decrease

Brief, Incorporated, had a receivable from a foreign customer that is payable in the customer's local currency. On December 31, 2023, Brief correctly included this receivable for 300,000 local currency units (LCU) in its balance sheet at $277,500. When Brief collected the receivable on February 15, 2024, the U.S. dollar equivalent was $289,000. In Brief's 2024 consolidated income statement, how much should it report as a foreign exchange gain?

$28,000

$289,000 - $277,500 = $28,000

Which of the following is not one of the three conditions that must be satisfied in order for a foreign currency forward contract to be accounted for as a hedge, that is, using hedge accounting?

The forward contract is purchased in an officially recognized foreign currency market.

Exchange Rate

The price at which the foreign currency can be acquired/sold.

Independent Float

The value of currency is allowed to fluctuate freely according to market forces with little/no intervention from the central bank.

Pegged to Another Currency

The value of currency is fixed. Central banks intervene as necessary to maintain fixed value.

European Monetary System (euro)

Common currency among 19 different countries and floats freely against other currencies.

the value of the euro can best be described as being:

allowed to float freely against other currencies

Spot Rate

The price at which a foreign currency can be purchased or sold today.

Forward Rate

The price available today at which foreign currency can be purchased/sold sometime in the future.

Put Option

For the sale of foreign currency by the holder

Call Option

For the purchase of foreign currency by the holder

Strike Price

The exchange rate at which the option will be executed if the holder decides to exercise the option.

Export Sale

A foreign transaction when exporter allows the buyer to pay in foreign currency and allows buyer to pay sometime after the sale has been made.

Import Purchase

A foreign currency transaction when the importer is required to pay in foreign currency and is allowed to pay sometime after the purchase has been made.

Risk in Export Sale

exporter is exposed to the risk that the foreign currency might depreciate between date of sale and date payment is received.

Risk in Import Purchase

Importer exposed to risk that the foreign currency might appreciate between date of purchase and date of payment.

What would you debit and what would you credit on the date of sale in a foreign exchange export sale?

Dr. Accounts Receivable

Cr. Sales

[QUIZ QUESTION] Jackson Corporation (a U.S.-based company) sold parts to a Korean customer on December 16, 2024, with payment of 20 million Korean won to be received on January 15, 2025. The following exchange rates applied:

[view image attached]

Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2024, at a __________

Forward contract premium $1,400.

Two ways to calculate:

1. (0.00089 - 0.00082) x 20,000,000 = $1,400 premium

2. 0.00082 × 20,000,000 = $16,400

   0.00089 × 20,000,000 = $17,800

   $17,800 - 16,400 = $1,400

[QUIZ QUESTION]

The forward rate may be defined as:

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

[QUIZ QUESTION]

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

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

[QUIZ QUESTION] Clark Company, a U.S. corporation, sold inventory on December 1, 2024, with payment of 12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

[see image attached]

What amount of foreign exchange gain or loss should be recorded on December 31?

$1,740 gain

Explanation:

$1.976 - $1.831 = $0.145

$0.145 × £12,000 = $1,740 gain

[QUIZ QUESTION]

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

No foreign exchange gain or loss will result.

[QUIZ QUESTION] Clark Stone purchases raw material from its foreign supplier, Rinne Clay, on May 8. Payment of 1,500,000 foreign currency units (FC) is due in 30 days. May 31 is Clark’s fiscal year-end. The pertinent exchange rates were as follows:

[see attached image]

How much US $ will it cost Clark to finally pay the payable on June 7?

$1,680,000

Explanation:

$1.12 × Foreign Currency 1,500,000 = $1,680,000 Accounts Payable

[QUIZ QUESTION] On April 1, 2023, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2024. The dollar value of the loan was as follows:

[see attached image]

How much foreign exchange gain or loss should be included in Shannon’s 2024 income statement?

$2,000 loss

Explanation:

$103,000 − $105,000 = ($2,000) Loss

[QUIZ QUESTION] Winston Corporation, a U.S. company, had the following foreign currency transactions during 2024:

1. Purchased merchandise from a foreign supplier on July 16, 2024, for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2024, at the U.S. dollar equivalent of $54,000.

2. On October 15, 2024, borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2025. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2024, and $299,000 on October 15, 2025.

What amount should be included as a foreign exchange gain or loss from the two transactions for 2025?

$4,000 loss

Explanation:

$295,000 − $299,000 = ($4,000) Loss

[QUIZ QUESTION]

U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except:

deferred foreign currency gains and losses.

[QUIZ QUESTION]

Which of the following statements is true concerning hedge accounting?

Hedges of foreign currency firm commitments are used for future sales or purchases.

[QUIZ QUESTION]

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

Changes in derivative fair value are included in comprehensive income.

[QUIZ QUESTION]

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

the forward rate for a contract that has the same duration as the forward contract entered into.

[QUIZ QUESTION]

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

The derivative is minimally effective in offsetting changes in the cash flows or fair value related to the hedged item.

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