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

If a sale on account by a U.S.company is made with a foreign company,and the U.S.company has no foreign currency risk,then

Johnson Corporation (a U.S.company)began operations on December 1,2015,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: $\text { December 15, } 2015 \quad \text { Sold 60\% of inventory acquired on 12/12/15 for 120,000 pesos on account. Invoice \quad d }$ $\text { Janury 1, } 2016 \quad \text { Acquired and paid the 150,00t pesos owed to the Mexican supplier. }$ Janury 15,2016 $\quad$ Collected the 120,001 pesos from the Mexican customer and immediately converted them into U. S dollars. The following exchange rates apply: December 12 \ .11=1 peso December 15 \ 12=1 peso December 31 \ .13=1 peso January 1 \ .14=1 peso January 15 \ .15=1 peso Required: 1.What were Sales in the income statement for the year ended December 31,2015? 2.What was the COGS associated with these sales? 3.What is the Accounts Payable balance in the balance sheet at December 31,2015? 4.What is the Inventory balance in the balance sheet at December 31,2015?

One reason corporations enter into a derivative contract is to reduce the vulnerability of their cash flows.

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

If a U.S.company is preparing a journal entry for a recent purchase,foreign-currency-denominated purchases must be measured in ________ at the purchase date using the foreign currency ________ rate on the purchase date.

On May 1,2014,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?

Tank Corporation,a U.S.manufacturer,has a June 30 fiscal year end.Tank sold goods to their customer in Columbia on May 27,2014 for 18,000,000 Columbian pesos.The customer agreed to pay pesos in 60 days.When the customer wired the funds to Tank on July 26,Tank held them in their bank account until July 31 before selling them and converting them to U.S.dollars.The following exchange rates apply: Required: Record the journal entries related to the dates listed above.If no entry is required,state "no entry."

Use the following information to answer the question(s) below. On November 1, 2014, 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, 2014. 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

Swaps are contracts to exchange an ongoing stream of cash flows.

The exchange rates between the Australian dollar and the U.S.dollar were as follows: This chart shows a

At the date the transaction is recognized,the transaction shall be measured and recorded in

Piel Corporation (a U.S.company)began operations on January 1,2015,when common stock was issued for $250,000.In the first two months of operations,Piel had the following transactions: The following exchange rates apply: Required: Complete the summary income statement and balance sheet for the month ended January 31,2015 and February 28,2015,assuming there were no other transactions.

Futures contracts are very standardized and more easy to trade in the markets than forward contracts.

With respect to exchange rates,which of the following statements is true?

On April 1,2014,Button Industries enters into an agreement with Bows Incorporated to lock in the price of cotton.Button agrees to purchase (and Bows agrees to sell)100,000 pounds of cotton at $1.19 per pound,six months from the date of agreement.On October 1,2014,the price of cotton is $1.17 per pound.The contract allows for net settlement. Required: Determine the net settlement on the forward contract.

Forward contracts are very standardized and easily traded in the markets.

Transactions between businesses of different countries,the amounts for receivables and payables are typically denominated in the local currency of either the buying entity or the selling entity.

The table below provides either a direct or indirect quote for a given foreign currency unit,and the related units of that foreign currency. Required: Complete the table,indicating the amount of U.S.Dollars that is the equivalent of the foreign currency shown,based on the direct or indirect quote provided.

Use the following information to answer the question(s) below. On October 4, 2014, 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 is the final amount of the loan payable that Sooty repaid?

Plymouth Corporation (a U.S.company)began operations on September 1,2014,when the owner borrowed $250,000 to establish the business.Plymouth then had the following import and export transactions with unaffiliated Chinese companies: The following exchange rates apply: September 6 \ 0.1544=1 yuan September 18 \ 0.1607=1 yuan September 30 \ 0.1591=1 yuan October 5 \ 0.1578=1 yuan October 18 \ 0.1593=1 yuan Required: 1.What were Sales in the September month-end income statement? 2.What was the COGS associated with these sales? 3.What is the Accounts Receivable balance in the balance sheet at September 30,2014? 4.What is the Inventory balance in the balance sheet at September 30,2014? 5.What is the Exchange gain or loss that will be reported for the month of September?