Question 1

Under U.S. GAAP, where are changes in the fair value of derivatives reported?

Accepted Answer

A)  As part of "Accumulated Other Comprehensive Income" on the Balance Sheet 
B)  They are not recognized until the options are exercised 
C)  Retained Earnings 
D)  None of the above 
A)  As part of "Accumulated Other Comprehensive Income" on the Balance Sheet 
B)  They are not recognized until the options are exercised 
C)  Retained Earnings 
D)  None of the above A

Question 2

On December 1, 2001 Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees. The customer has until March 1, 2002 to pay. On December 1, 2001, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 2002, which was the spot rate on December 1, 2001. On December 31, 2001, the spot rate was $2.80 per 100 rupees and the option premium was $0.004 per 100 rupees. If the spot rate on March 1, 2002 was $2.45 per 100 rupees, what is the foreign currency exchange gain or loss that should be recorded that day?

Accepted Answer

A)  $15,000 gain 
B)  $15,000 loss 
C)  $35,000 gain 
D)  $35,000 loss 
A)  $15,000 gain 
B)  $15,000 loss 
C)  $35,000 gain 
D)  $35,000 loss D

Question 3

On December 1, 2001 Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees. The customer has until March 1, 2002 to pay. On December 1, 2001, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 2002, which was the spot rate on December 1, 2001. On December 31, 2001, the spot rate was $2.80 per 100 rupees and the option premium was $0.004 per 100 rupees. What is the foreign currency exchange gain or loss on December 31, 2001?

Accepted Answer

A)  $50,000 loss 
B)  $50,000 gain 
C)  $10,000 gain 
D)  $10,000 loss 
A)  $50,000 loss 
B)  $50,000 gain 
C)  $10,000 gain 
D)  $10,000 loss B

Question 4

Which of the following statements is true about the Euro?

Accepted Answer

A)  It is the currency used by all countries in the European Union. 
B)  It is pegged to the U.S. dollar. 
C)  It is the currency required to be used in financial reporting under international accounting standards. 
D)  None of the statements above is true. 
A)  It is the currency used by all countries in the European Union. 
B)  It is pegged to the U.S. dollar. 
C)  It is the currency required to be used in financial reporting under international accounting standards. 
D)  None of the statements above is true.

Question 5

Amazing Corporation, a U.S. enterprise, sold product to a customer in Wales on October 1, 20x1 for £100,000 with payment required on April 1, 20x2. Relevant exchange rates are:   The discount factor corresponding to the company's incremental borrowing rate for 6 months is 0.95.
What term is used to describe the circumstances under which Amazing Corporation is entering the forward contract?

Accepted Answer

A)  Hedge of an unrecognized foreign currency firm commitment 
B)  Hedge of a recognized foreign-currency-denominated asset 
C)  Hedge of a forecast foreign-currency-denominated transaction 
D)  Hedge of net investment in foreign operations 
A)  Hedge of an unrecognized foreign currency firm commitment 
B)  Hedge of a recognized foreign-currency-denominated asset 
C)  Hedge of a forecast foreign-currency-denominated transaction 
D)  Hedge of net investment in foreign operations

Question 6

King's Bank, a British company, purchases market research services from Harris Interactive, a U.S. company. As per the terms of the contract, payment is to be made three months later in U.S. dollars when the report is delivered. How would King's Bank like to see the exchange rate move, assuming it isn't hedging the transaction?

Accepted Answer

A)  It hopes that the U.S. dollar appreciates in value against the British pound. 
B)  It hopes that the British pound appreciates in value against the U.S. dollar. 
C)  It makes no difference, since they are the customer and the sale takes place in the U.K. 
D)  It hopes that there is no change between the spot rate and the forward rate. 
A)  It hopes that the U.S. dollar appreciates in value against the British pound. 
B)  It hopes that the British pound appreciates in value against the U.S. dollar. 
C)  It makes no difference, since they are the customer and the sale takes place in the U.K. 
D)  It hopes that there is no change between the spot rate and the forward rate.

Question 7

What information is needed to determine the fair value of a foreign currency forward contract?

Accepted Answer

A)  The forward rate at the date the contract was entered 
B)  The current forward rate for a contract that matures on the same dates as the forward contract that was entered into 
C)  A discount rate to determine the present value of the contract 
D)  All of the above information is needed 
A)  The forward rate at the date the contract was entered 
B)  The current forward rate for a contract that matures on the same dates as the forward contract that was entered into 
C)  A discount rate to determine the present value of the contract 
D)  All of the above information is needed

Question 8

The number of Japanese yen (¥) required today to buy one U.S. dollar ($) today is called:

Accepted Answer

A)  the spot rate. 
B)  the exact rate. 
C)  the forward rate. 
D)  the retail rate. 
A)  the spot rate. 
B)  the exact rate. 
C)  the forward rate. 
D)  the retail rate.

Question 9

What is the intrinsic value of a foreign currency option?

Accepted Answer

A)  The difference between the spot rate and the strike price 
B)  The gain that could be realized if the option was exercised immediately 
C)  The chance that a currency will rise over time to make the option in the money 
D)  The difference between a call option and a put option 
A)  The difference between the spot rate and the strike price 
B)  The gain that could be realized if the option was exercised immediately 
C)  The chance that a currency will rise over time to make the option in the money 
D)  The difference between a call option and a put option

Question 10

On 1 January, 2015, Hikers Inc., a U.S.-based company, borrowed £200,000 on a two-year note at a per annum interest of 4.5%. The spot rate on this day was $1.65 per pound. The spot rate on 31 December, 2015, was $1.64 per pound. The journal entries to account for this foreign currency borrowing will include:

Accepted Answer

A)  a debit to Cash for $200,000 on January 1, 2015. 
B)  a credit to Notes Payable for $330,000 on December 31, 2015. 
C)  a debit to Foreign Exchange Loss for $90 on December 31, 2015. 
D)  a debit to Interest Expense for $14,760 on December 31, 2015. 
A)  a debit to Cash for $200,000 on January 1, 2015. 
B)  a credit to Notes Payable for $330,000 on December 31, 2015. 
C)  a debit to Foreign Exchange Loss for $90 on December 31, 2015. 
D)  a debit to Interest Expense for $14,760 on December 31, 2015.

Question 11

What is the requirement for reporting derivatives under international accounting standards and U.S. GAAP?

Accepted Answer

A)  They may be shown on the balance sheet or they may be treated as off-balance sheet investments. 
B)  They must be shown on the balance sheet at fair value. 
C)  They must be shown on the balance sheet at historical cost. 
D)  They may be shown on the balance sheet at historical cost or at net realizable value. 
A)  They may be shown on the balance sheet or they may be treated as off-balance sheet investments. 
B)  They must be shown on the balance sheet at fair value. 
C)  They must be shown on the balance sheet at historical cost. 
D)  They may be shown on the balance sheet at historical cost or at net realizable value.

Question 12

The central bank of Country X buys and sells its own currency to ensure that the currency is always exchanged in a ratio of 2:1 with the currency of Country Y. What can we conclude about these two currencies?

Accepted Answer

A)  Country X is using the Euro. 
B)  Country X has pegged its currency to the currency of Country Y. 
C)  Country X has an undesirable currency. 
D)  Country X allows its currency to float relative to the currency of Country Y. 
A)  Country X is using the Euro. 
B)  Country X has pegged its currency to the currency of Country Y. 
C)  Country X has an undesirable currency. 
D)  Country X allows its currency to float relative to the currency of Country Y.

Question 13

Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange losses?

Accepted Answer

A)  They should be deferred on the Balance Sheet until the cash is paid. 
B)  They should not be recognized until cash is received to complete the transaction. 
C)  They should be recorded on the Income Statement in the period the exchange rate changes. 
D)  They should be deferred on the Balance Sheet until an offsetting foreign exchange gain is realized. 
A)  They should be deferred on the Balance Sheet until the cash is paid. 
B)  They should not be recognized until cash is received to complete the transaction. 
C)  They should be recorded on the Income Statement in the period the exchange rate changes. 
D)  They should be deferred on the Balance Sheet until an offsetting foreign exchange gain is realized.

Question 14

Why is the accrual method of accounting for unrealized foreign exchange gains sometimes criticized?

Accepted Answer

A)  Foreign exchange gains almost never occur, so there is no reason to have an accounting standard for it. 
B)  It violates the principle of conservatism. 
C)  It is not objective. 
D)  There is no reliable method for measuring unrealized foreign exchange gains. 
A)  Foreign exchange gains almost never occur, so there is no reason to have an accounting standard for it. 
B)  It violates the principle of conservatism. 
C)  It is not objective. 
D)  There is no reliable method for measuring unrealized foreign exchange gains.

Question 15

Which of the following statements is true of intrinsic value of options?

Accepted Answer

A)  When the option strike price is more than the spot rate, the intrinsic value is zero. 
B)  When the option strike price is equal to the spot rate, the intrinsic value is positive. 
C)  When the option strike price is less than the spot rate, the intrinsic value is zero. 
D)  When the option strike price is more than the spot rate, the intrinsic value is negative. 
A)  When the option strike price is more than the spot rate, the intrinsic value is zero. 
B)  When the option strike price is equal to the spot rate, the intrinsic value is positive. 
C)  When the option strike price is less than the spot rate, the intrinsic value is zero. 
D)  When the option strike price is more than the spot rate, the intrinsic value is negative.

Question 16

Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange gains?

Accepted Answer

A)  They should be deferred on the Balance Sheet until cash is received. 
B)  The principle of conservatism requires that they should never be recognized. 
C)  They should not be recorded until cash is received and the exchange transaction is completed. 
D)  They should be recognized in income on the date the exchange rate changes. 
A)  They should be deferred on the Balance Sheet until cash is received. 
B)  The principle of conservatism requires that they should never be recognized. 
C)  They should not be recorded until cash is received and the exchange transaction is completed. 
D)  They should be recognized in income on the date the exchange rate changes.

Question 17

When a currency is allowed to increase or decrease freely according to market forces, the currency is said to:

Accepted Answer

A)  be pegged to another currency. 
B)  be less valuable. 
C)  have independent float. 
D)  devalue. 
A)  be pegged to another currency. 
B)  be less valuable. 
C)  have independent float. 
D)  devalue.

Question 18

What is the primary difference between a cash flow hedge and a fair value hedge?

Accepted Answer

A)  The fair value hedge must completely offset the variability in the cash flow from the foreign currency receivable or payable. 
B)  The cash flow hedge can only be used to offset potential foreign currency losses on accounts receivable. 
C)  The cash flow hedge must completely offset the variability in cash flow from the foreign currency receivable or payable. 
D)  The fair value hedge can only be used to offset the variability in cash flow from long-term fixed assets related to foreign currency fluctuations. 
A)  The fair value hedge must completely offset the variability in the cash flow from the foreign currency receivable or payable. 
B)  The cash flow hedge can only be used to offset potential foreign currency losses on accounts receivable. 
C)  The cash flow hedge must completely offset the variability in cash flow from the foreign currency receivable or payable. 
D)  The fair value hedge can only be used to offset the variability in cash flow from long-term fixed assets related to foreign currency fluctuations.

Question 19

Which of the following statements is true about hedge accounting under U.S. GAAP?

Accepted Answer

A)  Companies may choose whether to account for derivatives as cash flow hedges or fair value hedges. 
B)  If a derivative qualifies as a cash flow hedge, the hedging instrument is adjusted to fair value on each balance sheet date. 
C)  If a derivative is elected by the company not to be designated as a cash flow hedge, it must be accounted for as such. 
D)  Hedge accounting is only advantageous when a foreign currency depreciates between the transaction date and the payment date. 
A)  Companies may choose whether to account for derivatives as cash flow hedges or fair value hedges. 
B)  If a derivative qualifies as a cash flow hedge, the hedging instrument is adjusted to fair value on each balance sheet date. 
C)  If a derivative is elected by the company not to be designated as a cash flow hedge, it must be accounted for as such. 
D)  Hedge accounting is only advantageous when a foreign currency depreciates between the transaction date and the payment date.

Question 20

How should U.S. companies record receivables and payables from international trade that are denominated in foreign currencies?

Accepted Answer

A)  All assets and liabilities of U.S. companies must be recorded in foreign currency. 
B)  Conservatism would dictate that liabilities should be recorded in the currency in which they are payable, but assets should be recorded in U.S. dollars, regardless of what currency will be received. 
C)  There should be separate receivable and payable accounts for each currency that is used by the company. 
D)  The company should choose any one currency to use for recording receivable and payables so that there is consistency in the accounts. 
A)  All assets and liabilities of U.S. companies must be recorded in foreign currency. 
B)  Conservatism would dictate that liabilities should be recorded in the currency in which they are payable, but assets should be recorded in U.S. dollars, regardless of what currency will be received. 
C)  There should be separate receivable and payable accounts for each currency that is used by the company. 
D)  The company should choose any one currency to use for recording receivable and payables so that there is consistency in the accounts.

Under U.S. GAAP, where are changes in the fair value of derivatives reported?

Which of the following statements is true about the Euro?

What information is needed to determine the fair value of a foreign currency forward contract?

The number of Japanese yen (¥) required today to buy one U.S. dollar ($) today is called:

What is the intrinsic value of a foreign currency option?

What is the requirement for reporting derivatives under international accounting standards and U.S. GAAP?

The central bank of Country X buys and sells its own currency to ensure that the currency is always exchanged in a ratio of 2:1 with the currency of Country Y. What can we conclude about these two currencies?

Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange losses?

Why is the accrual method of accounting for unrealized foreign exchange gains sometimes criticized?

Which of the following statements is true of intrinsic value of options?

Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange gains?

When a currency is allowed to increase or decrease freely according to market forces, the currency is said to:

What is the primary difference between a cash flow hedge and a fair value hedge?

Which of the following statements is true about hedge accounting under U.S. GAAP?

How should U.S. companies record receivables and payables from international trade that are denominated in foreign currencies?

Introduction to International Accounting

Worldwide Accounting Diversity

International Convergence of Financial Reporting

International Financial Reporting Standards: Part I

International Financial Reporting Standards: Part II

Translation of Foreign Currency Financial Statements

International Taxation

International Transfer Pricing

Management Accounting Issues in Multinational Corporations

Auditing and Corporate Governance: An International Perspective

International Sustainability Reporting

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Exam 6: Foreign Currency Transactions and Hedging Foreign Exchange Risk

Under U.S. GAAP, where are changes in the fair value of derivatives reported?

Which of the following statements is true about the Euro?

What information is needed to determine the fair value of a foreign currency forward contract?

The number of Japanese yen (¥) required today to buy one U.S. dollar ($) today is called:

What is the intrinsic value of a foreign currency option?

What is the requirement for reporting derivatives under international accounting standards and U.S. GAAP?

The central bank of Country X buys and sells its own currency to ensure that the currency is always exchanged in a ratio of 2:1 with the currency of Country Y. What can we conclude about these two currencies?

Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange losses?

Why is the accrual method of accounting for unrealized foreign exchange gains sometimes criticized?

Which of the following statements is true of intrinsic value of options?

Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange gains?

When a currency is allowed to increase or decrease freely according to market forces, the currency is said to:

What is the primary difference between a cash flow hedge and a fair value hedge?

Which of the following statements is true about hedge accounting under U.S. GAAP?

How should U.S. companies record receivables and payables from international trade that are denominated in foreign currencies?

Introduction to International Accounting

Worldwide Accounting Diversity

International Convergence of Financial Reporting

International Financial Reporting Standards: Part I

International Financial Reporting Standards: Part II

Translation of Foreign Currency Financial Statements

International Taxation

International Transfer Pricing

Management Accounting Issues in Multinational Corporations

Auditing and Corporate Governance: An International Perspective

International Sustainability Reporting

Filters