Exam 9: Foreign Currency Transactions and Hedging Foreign Exchange Risk

On March 1, 2021, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2022. On March 1, 2021, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2022 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2021. The following spot exchange rates apply: Mattie's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the net impact on Mattie's 2022 income including the fair value hedge of a firm commitment?

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

What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates?

On May 1, 2021, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2022 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2021. The following spot exchange rates apply: Mosby's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the impact on Mosby's 2022 net income as a result of this fair value hedge of a firm commitment?

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

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

On December 1, 2021, King Co. sold inventory to a customer in a foreign country. King agreed to accept 96,000 local currency units (LCU) in full payment for this inventory. Payment was to be made on February 1, 2022. On the date of sale, King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months. The two-month forward exchange rate on that date was 1 LCU = $0.30. Any contract discount or premium is amortized using the straight-line method. The spot rates and forward rates on various dates were as follows: The company's borrowing rate is 12%. The present value factor for one month is 0.9901.(A.) Assume this hedge is designated as a fair value hedge. Prepare the journal entries relating to the transaction and the forward contract.(B.) Compute the effect on 2021 net income.(C.) Compute the effect on 2022 net income.

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2021: The appropriate exchange rates during 2021 were as follows: The beginning balance of cash was 50,000 pesos on January 1, 2021, translated at 1 peso = $0.18. What amount will Coyote Corp. report in its 2021 balance sheet for Cash?

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: How much Foreign Exchange Gain or Loss should Clark record on May 31?

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

Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of 12,000 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?

On December 1, 2021, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2022, as a fair value hedge of a foreign currency denominated account payable. The following U.S. dollar per peso exchange rates apply: Joseph's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent is 0.9803. Which of the following is included in Joseph's December 31, 2021 balance sheet for the forward contract?

Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2021, for 100,000 stickles. Payment was received on October 15, 2021. The following exchange rates applied: Required:Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that the company closes its books on September 30 to prepare interim financial statements.

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.

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, 2021. On July 24, 2021, 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, 2021. The following exchange rates apply: What amount will Woolsey include as an option expense in net income for the period July 24 to October 24?

Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2021 at a:

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

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

All of the following hedges are used for future purchase/sale transactions except

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 $0.025 per baht. A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $0.027. 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 $0.028. What is the amount of accounts payable that will be paid at this date?