Exam 12: Derivatives and Foreign Currency: Concepts and Common Transactions

Crabby Industries,a U.S.corporation,purchased inventory from a company in Sweden on November 18,2011 when the Swedish krona was trading at 1 krona = $0.161.The transaction was for 600,000 krona,and was to be paid in krona in 90 days.Crabby closed their books at December 31 for financial reporting purposes when the krona was trading at $0.167.On February 16,2012,Crabby paid the invoice when the krona was trading at $0.156. Required: Show the journal entries recorded by Crabby on November 18,2011,December 31,2011,and February 16,2012.

Use the following information to answer the question(s)below. On October 4,2010,Sooty Corporation borrowed 250,000 British pounds from a London bank,evidenced by an interest-bearing note payable due in one year.The note was payable in pounds.Exchange rates for pounds were: -What exchange gain or loss appeared on Sooty's 2010 income statement?

Blue Corporation,a U.S.manufacturer,sold goods to their customer in Hungary on December 12,2011 for 6,000,000 Hungarian forints.The customer agreed to pay in Hungarian forints in 30 days.When the customer wired the foreign currency to Blue on January 11,2012,Blue held them in their bank account until January 15 before selling them and converting them to U.S.dollars.The following exchange rates apply: Required: Record the journal entries that Blue would need related to the dates listed above.If no entry is required,state "no entry."

Ulysses Company purchases goods from China amounting to 372,372 Yuan (the transaction is denominated in the Chinese Yuan).Assume the Yuan is trading at $0.154 at the date the goods are ordered,and the Yuan is trading at $0.155 at the date the goods are received,and when the invoice is paid a month later,the Yuan is trading at $.156.Assume all three dates are in the same fiscal year.Which of the following is true?

A U.S.importer that purchased merchandise from a South Korean firm would be exposed to a net exchange gain on the unpaid balance if the

Use the following information to answer the question(s)below. On November 1,2010,Rolleks Corporation sold merchandise to Watchem Corporation,a Swiss firm.Rolleks measured and recorded the account receivable from the sale at $107,100.Watchem paid for this account on November 30,2010.Spot rates for Swiss francs on November 1 and November 30,respectively,were $1.05 and $1.02. -If the sale of the merchandise was denominated in Swiss francs,the November 30 entry to record the receipt of payment from Watchem included a

Which of the following is a true statement regarding the recording of a transaction which involves foreign currency?

Charin Corporation,a U.S.corporation,imports and exports small electronics.On December 1,2011,Charin purchased components from an Egyptian manufacturer amounting to 500,000 Egyptian pounds.The purchase is payable in Egyptian pounds.At December 30,Charin wanted to take advantage of favorable exchange rates,but did not have the full amount required to pay off the entire amount.Charin wired the funds to pay off half of the balance owed,and expected to pay the remaining balance on January 3,2012.Charin paid the remaining balance on January 3,2012. The respective exchange rates were as follows: Required: Document the journal entries related to these transactions for the four dates shown.If no entry is required,record "no entry."

On September 1,2011,Bylin Company purchased merchandise from Himeji Company of Japan for 20,000,000 yen payable on October 1,2011.The spot rate for yen was $0.0079 on September 1 and the spot rate was $0.0077 on October 1.The purchase was paid on October 1,2011. Required: 1.Did the U.S.dollar strengthen or weaken from September to October and what are the implications for Bylin's business? 2.What journal entry did Bylin record on September 1,2011? 3.What journal entry did Bylin record on October 1,2011?

On October 15,2011,Napole Corporation,a French company,ordered merchandise listed on the internet for 20,000 Euros from Adams Corporation,a U.S.corporation.The euro rate was $1.20 (U.S.dollars)on October 15.On November 15,2011 Adams shipped the goods and billed Napole the purchase price of 20,000 Euros when the euro rate was $1.30.Napole paid the bill on December 10,2011,and Adams immediately exchanged the 20,000 Euros for US dollars when the Euro rate was $1.28 on December 10,2011. Required: Compute the foreign currency gain or loss on the December 31,2011 financial statements of Adams and show the related journal entries.

Use the following information to answer the question(s)below. On November 1,2010,Rolleks Corporation sold merchandise to Watchem Corporation,a Swiss firm.Rolleks measured and recorded the account receivable from the sale at $107,100.Watchem paid for this account on November 30,2010.Spot rates for Swiss francs on November 1 and November 30,respectively,were $1.05 and $1.02. -If the sale of merchandise is denominated in dollars,the November 30 entry to record receipt of the payment from Watchem included a

Lincoln Corporation,a U.S.manufacturer,both imports needed materials and exports finished products.Their receivables and payables are listed below,prior to year-end adjustments or preparation of the closing entries. Required: Determine the amount at which receivables and payables should be reported on December 31,2011,and the net exchange gain or loss that would be reported as a result of year-end adjustments.

Jefferson Company entered into a forward contract with Washington Company on October 1,2011,under which Jefferson agreed to buy (and Washington agreed to sell)10,000 tons of coal at $80.00 per ton in 90 days.On October 1,2011,the price of coal is $82.00 per ton.On December 29,2011,the price of coal is $85.00 per ton.The contract allows for net settlement. Required: Determine the net settlement on the forward contract.

Cass Corporation's balance sheet at December 31,2011 included a $48,480 account receivable from Redmun Corporation of Mexico.The account receivable was denominated as 600,000 Mexican pesos.What entry did Cass make on January 16,2012 when the account receivable was collected and the exchange rate for the peso was $.09?

A review of Ace Industries,a U.S.corporation,shows the following balances in accounts receivable and accounts payable detail at September 30,2011,their fiscal year end. As Ace prepared to close their books,they noted that the September 30 exchange rates for the Australian dollar,Canadian dollar and Hong Kong dollar were $1.0366,$1.0301 and $0.1284,respectively. Required: Determine the exchange gain or loss to be included in the 2011 financial statements,and the amount of Accounts Receivable and Accounts Payable that will be included on the September 30,2011 balance sheet.

On May 1,2011,Deerfield Corporation purchased merchandise from a German firm for 78,000 euros when the spot rate for the euro was 1.48 euro per dollar.The account payable was denominated in the euro.Deerfield settled the account on August 1 when the spot rate for the euro was 1.39 euro per dollar.How much cash will Deerfield have to disburse to settle the account?

Johnson Corporation (a U.S.company)began operations on December 1,2010,when the owner contributed $100,000 of his own money to establish the business.Johnson then had the following import and export transactions with unaffiliated Mexican companies: December 12,2011 Bought inventory for 150,000 pesos on account. Invoice denominated in pesos. December 15,2011 Sold 60% of inventory acquired on 12/12/11 for 120,000 pesos on account.Invoice denominated in pesos. January 1,2012 Acquired and paid the 150,000 pesos owed to the Mexican supplier January 15,2012 Collected the 120,000 pesos from the Mexican customer and immediately converted them into U.S.dollars The following exchange rates apply: Required: 1.What were Sales in the income statement for the year ended December 31,2011? 2.What was the COGS associated with these sales? 3.What is the Accounts Payable balance in the balance sheet at December 31,2011? 4.What is the Inventory balance in the balance sheet at December 31,2011?

Meric Corporation (a U.S.company)began operations on January 1,2011,when the owner borrowed $150,000 to start the company.In the first month of operations,Meric had the following transactions: January 3,2011 Bought inventory for 100,000 Brazilian real on account.Must be paid with Brazilian real. January 8,2011 Sold 60% of inventory acquired on 1/3/11 for 32,000 British pounds on account.Invoice denominated in British pounds. January 10,2011 Paid $3,000 in other operating expenses January 23,2011 Acquired and paid half of the Brazilian real owed to the Brazilian supplier January 28,2011 Collected half of the 32,000 pounds from the customer in Great Britain and immediately converted them into U.S.dollars The following exchange rates apply: Required: Complete the summary income statement and balance sheet for the month ended January 31,2011 assuming there were no other transactions.

When the billing for a U.S.company's sale to a company in a foreign country is denominated in U.S.dollars,________ is required when preparing journal entries for the sale.

In September of 2011,Gunny Corporation anticipates that the price of heating oil will increase soon,and wishes to lock in a firm price for the winter months.They enter into a forward contract with Selton Industries to buy 100,000 barrels of oil at $160 per barrel in December 2011.Selton's cost of production of the heating oil is $120 per barrel. Required: Determine the economic impact of the transaction to Selton (the seller of the heating oil)at the market price levels indicated in the table below,with and without the hedge.