Dokumen Tips Advanced Accounting Test Bank Chapter 07 Susan Hamlen

TEST BANK
CHAPTER 7
Foreign Currency Transactions and Hedging
MULTIPLE CHICE
1. To!ic" #a$uation o% %or&ard contracts

L '
A U.S. company invests in a forward purchase contract for 100,000,000 yen with a
purchase price of $0.009/yen, for delivery in 4 days. !he spot rate at the time the
contract is initiated is $0.00"/yen. At the end of the accountin# year, the forward
contract is still outstandin#. !he yearend spot rate is $0.00""/yen. !he yearend forward
rate for delivery at the contract date is $0.009%/yen. &ow is the forward contract
reported on the U.S. company's (alance sheet)
a. $%0,000 asset
(. $%0,000 lia(ility
c. $*0,000 asset
d. $*0,000 lia(ility
A+S a
-$0.009%  $0.009  100,000,000  $%0,000
%. To!ic" Cas( %$o& (edge

L )
n Au#ust 1, a U.S. company enters into a forward contract, in which it a#rees to (uy
1,000,000 euros from a (an2 at a rate of $1.11 on 3ecem(er 1. han#es in the value of
the forward contract will (e reported in other comprehensive income on the (alance sheet
in which one of the followin# situations)
a. !he U.S. company has receiva(les denominated in euros, with payment to (e

received on 3ecem(er 1.
(. !he U.S. company sold merchandise to a customer in 5el#ium on Au#ust 1, and
epects payment of 1,000,000 euros on 3ecem(er 1.
c. !he U.S. company plans to sell merchandise to a customer in 5el#ium on Au#ust
1, with payment of 1,000,000 euros epected on 3ecem(er 1.
d. !he U.S. company plans to purchase merchandise from a supplier in 5el#ium, with
payment of 1,000,000 euros epected to (e paid on 3ecem(er 1.
A+S d
©Cambridge Business Publishers, 2010

Test Bank, Chapter 7 1

Use the followin# information on the U.S. dollar value of the euro to answer 6uestions * 7 8
(elow
For&ard rate %or

A!ri$ '*+ ,*--
S!ot rate de$i.ery
cto(er *0, %010 $ 1.% $ 1.*0
3ecem(er *1, %010 1.%" 1.*%
April *0, %011 1.% 1.%
n cto(er *0, %010, a company enters a forward contract to sell :100,000 on April *0, %011.
!he company's accountin# year ends 3ecem(er *1.
*. To!ic" Hedge o% e/!ort transaction

L 0
!he forward contract hed#es an outstandin# :100,000 account receiva(le due on April *0.
;hat is the net effect on income in %010 and %011)
,*-* ,*--
a. $1,000 #ain $4,000 #ain
(. $1,000 loss $4,000 #ain
c. $*,000 #ain $,000 #ain
d. $%,000 loss $,000 #ain
A+S a
%010 <ain on receiva(le, -$1.%"  $1.%  :100,000  $*,000

=oss on forward, -$1.*%  $1.*0  :100,000  $%,000
+et #ain $1,000
%011 =oss on receiva(le, -$1.%"  $1.%  :100,000  $%,000

<ain on forward, -$1.*%  $1.%  :100,000  $,000
+et #ain $4,000

2 Advanced Accounting, 1st
dition

4. To!ic" Hedge o% %ir1 co11it1ent

L 2
!he forward contract hed#es a sales order for :100,000, received cto(er *0. !he sale
was made and the :100,000 collected on April *0, %011. Sales revenue recorded on April
*0 is
a. $1%,000
(. $1%%,000
c. $1*0,000
d. $1%4,000
A+S c
-:100,000  $1.% > -$1.*0  $1.%  :100,000  $1*0,000
. To!ic" Hedge o% %ir1 co11it1ent

L 2
!he forward contract hed#es a sales order for :100,000, received cto(er *0. !he sale
was made and the :100,000 collected on April *0, %011. !he net effect on %010 income
is
a. +o effect
(. $%,000 loss
c. $*,000 #ain
d. $1,000 #ain
A+S a
!he #ain on the firm commitment and loss on the forward contract are -$1.*%  $1.*0 
:100,000  $%,000, and they offset for a ?ero effect on %010 income.

Test Bank, Chapter 7 !

. To!ic" Hedge o% %orecasted transaction

L )
!he forward contract hed#es a forecasted sale for :100,000, epected at the end of April
%011. !he net effect on %010 income is
a. +o effect
(. $%,000 loss
c. $*,000 #ain
d. $1,000 #ain
A+S a
!he loss on the forward contract is reported in other comprehensive income.
8. To!ic" Hedge o% %orecasted transaction

L )
!he forward contract hed#es a forecasted sale for :100,000, epected at the end of April
%011. !he sale ta2es place on April *0, %011, :100,000 is collected, and the forward
contract is closed. ;hich statement is true, concernin# the sale on April *0, %011)
a. !he $1,000 total loss on the forward contract is reclassified from other
comprehensive income as an ad@ustment to sales revenue.
(. !he $4,000 total #ain on the forward contract is reclassified from other
comprehensive income as an ad@ustment to sales revenue.
c. !he %011 $,000 #ain on the forward contract is reco#ni?ed as a hed#in# #ain on
the %011 income statement.
d. !he %010 $%,000 loss on the forward contract is reco#ni?ed as a hed#in# loss on
the %010 income statement.
A+S (
!he total #ain on the forward contract is -$1.*0  $1.%  :100,000  $4,000. han#es
in the value of the forward are reported in other comprehensive income until the hed#ed
forecasted transaction is reported in income. n this case, the forecasted transaction
results in sales revenue, reported in %011.

" Advanced Accounting, 1st
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". To!ic" E/!ort transaction

L ,
n Bay %0, %01%, when the spot rate is $1.*0/:, a company sells merchandise to a
customer in taly. !he spot rate is $1.*1/: on Cune *0, the company's yearend. Dayment
of :100,000 is received on Culy *0, %01%, when the spot rate is $1.%"/:. ;hat is the effect
on fiscal %01% and %01* income)
Fisca$ ,*-, Fisca$ ,*-'

a. $1,000 echan#e loss $*,000 echan#e #ain
(. $1,000 echan#e #ain $*,000 echan#e loss
c. +o effect $%,000 echan#e loss
d. +o effect $%,000 echan#e #ain
A+S (
Eiscal %01% echan#e #ain  -$1.*1  $1.*0  :100,000  $1,000

Eiscal %01* echan#e loss  -$1.*1  $1.%"  :100,000  $*,000
9. To!ic" I1!ort transaction

L ,
n Bay %0, %01%, when the spot rate is $1.*0/:, a company purchases merchandise from
a supplier in taly. !he spot rate is $1.*1/: on Cune *0, the company's yearend. Dayment
of :100,000 is made on Culy *0, %01%, when the spot rate is $1.%"/:. ;hat is the effect on
fiscal %01% and %01* income)
Fisca$ ,*-, Fisca$ ,*-'

a. $1,000 echan#e loss $*,000 echan#e #ain
(. $1,000 echan#e #ain $*,000 echan#e loss
c. +o effect $%,000 echan#e loss
d. +o effect $%,000 echan#e #ain
A+S a
Eiscal %01% echan#e loss  -$1.*1 – $1.*0  :100,000  $1,000

Eiscal %01* echan#e #ain  -$1.*1 – $1.%"  :100,000  $*,000

Test Bank, Chapter 7 #

3ata for 6uestions 10 and 11 are as follows
n Septem(er ", the Sealy ompany purchased cotton at an invoice price of :%0,000, when the
echan#e rate was $1.*%/:. Dayment was to (e made on +ovem(er ". n +ovem(er ", Sealy
purchased the :%0,000 for $1.*0/:, and paid the invoice.

L ,
!he cotton should (e valued in SealyFs inventory at
a. $%0,000
(. $%,00
c. $%,000
d. $%,400
A+S d
€%0,000  $1.*%  $%,400

L ,
!he echan#e #ain or loss reco#ni?ed (y Sealy as a result of this transaction is
a. +o #ain or loss
(. $400 #ain
c. $400 loss
d. $1,8 #ain
A+S (
€%0,000  -$1.*%  $1.*0  $400 #ain

$ Advanced Accounting, 1st
dition

3ata for 6uestions 1% and 1* are as follows
n Cune , !eneco orporation sold merchandise at an invoice price of :100,000, when the
echan#e rate was $1.*/:. Dayment was to (e received on Au#ust 1. n Au#ust 1, the
customer paid the :100,000. !he echan#e rate on that date was $1.*9/:.
1%. To!ic" E/!ort transaction

L ,
!he sale should (e reported on !enecoFs (oo2s at
a. $1*,000
(. $1*9,000
c. $ 8*,*0
d. $ 81,94%
A+S a
:100,000  $1.*  $1*,000
1*. To!ic" E/!ort transaction

L ,
!he echan#e #ain or loss reco#ni?ed (y !eneco as a result of this transaction is
a. 0
(. $*,000 #ain
c. $*,000 loss
d. $*,919 loss
A+S (
:100,000  -$1.*9  1.*  $*,000 #ain


14. To!ic" Ana$ysis o% %oreign currency ris3s

L '
A U.S. eporter has made a sale to a customer in another country. !he customer is
o(li#ated to remit payment in his local currency in 90 days. !he direct spot rate is now
$1.4. !he 90day forward rate is $1.0. At which spot rate at the time the customer
remits payment would the company have (een (etter off not hed#in# the eport
transaction with a forward contract)
a. $1.%
(. $1.4
c. $1.9
d. $1.%
A+S d
Any rate a(ove $1.0 leads to hi#her U.S. dollar value of payment received than under the
forward contract.
1. To!ic" Foreign currency o!tions

L '
A company invests $%00 in a forei#n echan#e option with the followin# terms !he
company may purchase 1,000,000 ?loty at a price of $.%/?loty on 3ecem(er %0, %014.
;hich statement is true)
a. f the spot price for ?loty is $.* on 3ecem(er %0, the company will #ain $*9,"00
on the option.
(. f the spot price for ?loty is $.%4 on 3ecem(er %0, the company will lose $%00 on
the option.
c. f the spot price for ?loty is $.%8 on 3ecem(er %0, the company will lose $%0,%00
on the option.
d. f the spot price for ?loty is $.*0 on 3ecem(er %0, the company will #ain $%4,"00
on the option.
A+S (
!he option #ives the holder the option to (uy 1,000,000 ?loty for $%0,000. At a spot
price of $.%4/?loty, the option has no value and the holder loses its $%00 investment.

% Advanced Accounting, 1st
dition

1. To!ic" Hedge o% i1!ort transaction

L 0
A U.S. import company purchases (oomeran#s from an Australian supplier on cto(er 1,
%01* for 100,000 Australian dollars -A$, paya(le Ee(ruary 1, %014. n cto(er 1, %01*,
the company enters into a forward contract to hed#e the forei#n currency ris2 resultin#
from this purchase. Gchan#e rates are as follows
For&ard
rate %or ,4-
S!ot rate de$i.ery
cto(er 1, %01* $0."9 $0."
3ecem(er *1, %01* 0."" 0."4
Ee(ruary 1, %014 0."% 0."%
Eor the import company, what is the income statement effect of the a(ove information)
a. +o effect in %01*, $4,000 #ain in %014

(. $1,000 #ain in %01*, $,000 #ain in %014
c. $1,000 loss in %01*, $,000 loss in %014
d. +o effect in %01*, $4,000 loss in %014
A+S a
%01*
forward contract -$."  $."4  A$100,000  $1,000 loss
paya(le -$."9  $.""  A$100,000  1,000 #ain
0
%014
forward contract -$."4  $."%  A$100,000  $%,000 loss
paya(le -$.""  $."%  A$100,000  ,000 #ain
$4,000 #ain

Test Bank, Chapter 7 &


L 2
A5 orporation issues a purchase order for 1,000,000 semiconductors to a forei#n
supplier. !he a#reed upon total price is E1,%00,000, and the current spot rate is $1/E.
Suppose a forward contract is ta2en out when the purchase order is issued, at a rate of
$0.9/E, for delivery when the semiconductors are received. f the spot rate rises to
$1.0 when the semiconductors are received and paid for (y A5, at what value will the
semiconductors (e reported on A5's (oo2s)
a. $1,0%0,000
(. $1,140,000
c. $1,%00,000
d. $1,%0,000
A+S (
$1.0  E1,%00,000  $1,%0,000
-$1.0  $.9  E1,%00,000  -1%0,000
$1,140,000
Use the followin# information to answer 6uestions 1" and 19 (elow.
A U.S. company purchases a 0day certificate of deposit from an talian (an2 on cto(er 1.
!he certificate has a face value of :1,000,000, costs $1,%00,000 -the spot rate is $1.%0/:, and
pays interest at an annual rate of  percent. n 3ecem(er 14, the certificate of deposit matures
and the company receives principal and interest of :1,010,000. !he spot rate on 3ecem(er 14 is
$1.1"/:. !he avera#e spot rate for the period cto(er 1 7 3ecem(er 14 is $1.19/:.
1". To!ic" Foreign currency $ending

L ,
!he echan#e #ain or loss on this investment is
a. $%0,%00 #ain
(. $%0,%00 loss
c. $%0,000 #ain
d. $%0,000 loss
A+S d
:1,000,000  -$1.%0  $1.1"  $%0,000 loss

dition

19. To!ic" Foreign currency $ending

L ,
nterest income on the investment is reported at
a. $0
(. $11,"00
c. $11,900
d. $1%,000
A+S (
€10,000  $1.1"  $11,"00
Use the followin# information to answer 6uestions %0 7 %% (elow
A U.S. company anticipates that it will purchase merchandise for €10,000,000 at the end of Culy,
and pay for it at the end of Septem(er. n Barch 1, it enters a forward contract to (uy
€10,000,000 on Septem(er *0. !he forward contract 6ualifies as a cash flow hed#e. !he
company's accountin# year ends 3ecem(er *1. !he company actually purchases the merchandise
on Culy *0 and closes the forward contract and pays for the merchandise on Septem(er *0. t still
holds the merchandise at the end of the year. Gchan#e rates are as follows
For&ard rate
%or 54'* de$i.ery
S!ot rate
Barch 1 $1.40 $1.41
Culy *0 1.4% 1.41
Septem(er *0 1.4* 1.4*


%0. To!ic" Hedge o% %orecasted transaction

L )
!he merchandise is reported on the yearend (alance sheet at
a. $14,100,000
(. $14,10,000
c. $14,%00,000
d. $14,*00,000
A+S c
C(anges in t(e .a$ue o% t(e %or&ard contract re1ain in ot(er co1!re(ensi.e inco1e
unti$ t(e 1erc(andise is so$d . !he merchandise is reported at the spot rate at the date of
purchase, $1.4%.
%1. To!ic" Hedge o% %orecasted transaction

L )
;hat is the net effect on income for the year)
a. +o effect
(. $100 loss
c. $100 #ain
d. $0 #ain
A+S a
C(anges in t(e .a$ue o% t(e %or&ard are re!orted in ot(er co1!re(ensi.e inco1e6
!he $100 loss on the paya(le is eactly offset (y a reclassification of $100 out of other
comprehensive income, so there is no net effect on income.

dition

%%. To!ic" Hedge o% %orecasted transaction

L )
;hen the merchandise is sold, what amount is reported for cost of #oods sold)
a. $14,100,000
(. $14,10,000
c. $14,%00,000
d. $14,*00,000
A+S a
At the end of the year, other comprehensive income has a credit (alance of $100. ;hen
the merchandise is sold, it is reclassified as a reduction in cost of #oods soldH $14,100,000
 $14,%00,000  $100,000.
ourna$ entries re$ated to 8uestions ,* 9 ,, (in thousands)"
Culy *0
nventory 14,%00
Accounts paya(le 14,%00
nvestment in forward 0
ther comprehensive income 0
Septem(er *0
Gchan#e loss 100
Accounts paya(le 100
nvestment in forward 10

ther comprehensive income 10
ther comprehensive income 100

Gchan#e #ain 100
Accounts paya(le 14,*00

ash 14,100
nvestment in forward %00
:(en 1erc(andise is so$d"

ost of #oods sold 14,100
nventory 14,%00

Test Bank, Chapter 7 1!

Use the followin# information on the U.S. dollar value of the euro to answer 6uestions %* 7 %
For&ard rate %or

Marc( ,*+ ,*-,
S!ot rate de$i.ery
+ovem(er *0, %011 $ 1.*0 $ 1.%9
3ecem(er *1, %011 1.** 1.*1
Barch %0, %01% 1.* 1.*
%*. To!ic" S!ecu$ati.e %or&ard !urc(ase contract

L 7
n +ovem(er *0, %011, a U.S. company, with a 3ecem(er *1 yearend, enters a forward
!urc(ase contract for :100,000 to (e delivered on Barch %0, %01%. !he forward
contract does not 6ualify as a hed#e. !he company closes the contract at its epiration
date. ;hich statement is true)
a. +o #ain or loss is reported until the forward is closed on Barch %0

(. A #ain of $%,000 is reported in %01%
c. A #ain of $4,000 is reported in %01%
d. A #ain of $,000 is reported in %01%
A+S c
!he chan#e in value of the forward is reported in income as the forward rate chan#es. Eor
%01%, the #ain is -$1.*  $1.*1  :100,000  $4,000.
%4. To!ic" S!ecu$ati.e %or&ard sa$e contract

L 7
sa$e contract for :100,000 to (e delivered on Barch %0, %01%. !he forward contract
does not 6ualify as a hed#e. !he company closes the forward contract on 3ecem(er *1.
;hich statement is true)
a. +o #ain or loss is reported

(. A loss of $1,000 is reported in %011
c. A loss of $*,000 is reported in %011
d. A loss of $%,000 is reported in %011
A+S d
!he chan#e in value of the forward is reported in income as the forward rate chan#es. Eor
%011, the loss is -$1.*1  $1.%9  :100,000  $%,000

1" Advanced Accounting, 1st
dition

%. To!ic" IFRS %or (edge o% a %orecasted !urc(ase

L ;
!urc(ase contract for :100,000 to (e delivered on Barch %0, %01%. !he contract hed#es
a forecasted purchase of e6uipment. !he forward is closed and the e6uipment purchased
on Barch %0. f the company follows EIS and reports #ains and losses on hed#es of
forecasted transactions as (asis ad@ustments, total de!reciation e/!ense over the life of
the e6uipment is
a. $1%9,000
(. $1*0,000
c. $1*1,000
d. $1*,000
A+S a
!he e6uipment is recorded at the spot rate of $1.*  :100,000  $1*,000, ad@usted for
the $,000 J $1.*  $1.%9  :100,000K #ain on the forward contract.
%. To!ic" E/c(ange rates

L -
!he value of the euro chan#es from $1.*9 to $1.4*. ;hich statement is true concernin#
chan#es in the value of the euro in relation to the U.S. dollar)
a. Gach U.S. dollar can (e echan#ed for more euros.

(. Gach euro can (e echan#ed for fewer U.S. dollars.
c. !he U.S. dollar has stren#thened with respect to the euro.
d. A $10 product can (e purchased with fewer euros.
A+S d
%8. To!ic" E/c(ange rates

L -
nformal mar2ets contractin# for future delivery of forei#n currencies are called
a. Spot mar2ets
(. Eorward mar2ets
c. Eutures mar2ets
d. 3irect mar2ets
A+S (

Test Bank, Chapter 7 1#

%". To!ic" For&ard sa$e (edging %oreign currency recei.a<$e

L 0
A U.S. company has eurodenominated receiva(les that it hed#es with a forward sale of
euros. !he euro wea2ens a#ainst the U.S. dollar. ;hich statement is true)
a. !he #ain on the receiva(les and the loss on the forward are reported on the income
statement.
(. !he #ain on the receiva(les and the loss on the forward are reported in other
comprehensive income.
c. !he loss on the receiva(les and the #ain on the forward are reported on the income
statement.
d. !he loss on the receiva(les and the #ain on the forward are reported in other
A+S c
%9. To!ic" For&ard !urc(ase (edging %oreign currency !aya<$e

L 0
A U.S. company has paya(les to suppliers denominated in euros, and hed#es these
paya(les with forei#n currency forward purchase contracts. !he euro stren#thens a#ainst
the U.S. dollar. ;hich statement is true)
a. !he #ain on the paya(les and the loss on the forward are reported on the income
statement.
(. !he #ain on the paya(les and the loss on the forward are reported in other
c. !he loss on the paya(les and the #ain on the forward are reported on the income
statement.
d. !he loss on the paya(les and the #ain on the forward are reported in other
A+S c

1$ Advanced Accounting, 1st
dition

*0. To!ic" For&ard sa$e (edging %orecasted transaction

L )
A U.S. company sells its products to customers in Capan, priced in yen. t hed#es a
forecasted sale to a Capanese customer with a forward sale of yen. han#es in the value of
the hed#e investment are
a. Ieported in other comprehensive income until the products are produced

(. Ieported as ad@ustments to sellin# and administrative epenses when the products
are sold
c. Ieported in income as the chan#es occur
d. Ieported in other comprehensive income until the products are sold
A+S d
*1. To!ic" S!ecia$ (edge accounting+ cas( %$o& (edges

L '+ )
han#es in the mar2et value of forward forei#n currency contracts used to hed#e
forecasted sales of merchandise to customers are
a. Ieported on the income statement if the forwards 6ualify for special hed#e
accountin# and in other comprehensive income if they don't 6ualify.
(. Ieported as a direct ad@ustment to retained earnin#s if they 6ualify for special
hed#e accountin# and on the income statement if they don't 6ualify.
c. Ieported in other comprehensive income if they 6ualify for special hed#e
accountin# and on the income statement if they don't 6ualify.
d. +ot reported if they 6ualify for special hed#e accountin# and reported on the
income statement if they don't 6ualify.
A+S c


*%. To!ic" Cas( %$o& (edges

L '+ )
;hich one of the followin# is a cash flow hed#e for a U.S. company)
a. A hed#e of eurodenominated receiva(les

(. A hed#e of a planned purchase of inventory, denominated in pesos
c. A hed#e of a sales order from a customer in the U.L., denominated in pounds
d. A hed#e of paya(les denominated in U.S. dollars
A+S (
**. To!ic" Identi%ication o% (edge in.est1ents

L '
;hich of the followin# is not a hed#e investment)
a. A U.S. company issues a purchase order to a supplier in Beico who re6uires

payment in pesos, and invests in a put option in pesos.
(. A U.S. company has de(t denominated in euros, and invests in a forward purchase
of euros.
c. A U.S. company's customers owe it several million pesos from credit sales, and the
company invests in a forward sale of pesos.
d. A U.S. company invests in corporate (onds denominated in euros and enters a put
option in euros.
A+S a
*4. To!ic" Identi%ication o% (edge in.est1ents

L '
Mou are a U.S. investor and you epect that the value of the euro, in U.S. dollar terms,
will increase. ;hich of the followin# investments would you ma2e)
a. Short position in euro futures.

(. Dut option in euros.
c. 5orrow from a (an2 in taly, payment denominated in euros.
d. Eorward purchase of euros.
A+S d

1% Advanced Accounting, 1st
dition

*. To!ic" =eri.ati.es disc$osures

L 7
SFAS 161, effective at the end of %00", provides that
a. &ed#es reported as assets (e com(ined with hed#es reported as lia(ilities.

(. All hed#ed items (e carried at mar2et value.
c. Additiona$ %ootnote disc$osures detai$ (edging gains and $osses <y (edge ty!e .
d. &ed#in# #ains and losses (e separately displayed on the income statement and not
com(ined with other accounts.
A+S c
*. To!ic" Identi%ication o% (edge in.est1ents

L '
;hich of the followin# is the real hed#e)
a. A call option in euros, used to hed#e a forecasted sale to a customer, denominated

in euros
(. A call option in euros, used to hed#e an investment in securities, denominated in
euros
c. A put option in euros, used to hed#e a receiva(le denominated in euros
d. A forward sale in euros, used to hed#e de(t denominated in euros
A+S c
*8. To!ic" Hedge accounting

L '
n Au#ust 1, a U.S. company enters into a forward contract, in which it a#rees to (uy
1,000,000 euros from a (an2 at a rate of $1.4 on 3ecem(er 1. han#es in the value of
the forward contract will (e reported on the income statement in which one of the
followin# situations)
a. !he U.S. company uses the forward contract to hed#e a loan denominated in
euros.
(. !he U.S. company uses the forward contract to hed#e a forecasted purchase of
merchandise from a Erench supplier.
c. !he U.S. company uses the forward contract to hed#e a planned purchase of
commodities from an talian supplier.
d. !he U.S. company uses the forward contract to hed#e an epected ac6uisition of
commodities from a 5el#ian company.
A+S a

Test Bank, Chapter 7 1&

*". To!ic" Hedging %inancia$ ris3

L -+ '
;hich statement (elow (est descri(es the process of hed#in# usin# financial derivatives)
a. Mou have inside information that the $/yen rate is #oin# to rise, so you invest in a
financial derivative that allows you to #ain if the $/yen rate rises.
(. Mou have inside information that the $/euro rate is #oin# to fall, so you invest in a
financial derivative that allows you to #ain if the $/euro rate falls.
c. As part of your normal (usiness transactions, you are eposed to financial ris2.
Mou invest in financial derivatives to increase potential #ains from financial ris2.
d. As part of your normal (usiness transactions, you are eposed to financial ris2.
Mou invest in financial derivatives to reduce that ris2.
A+S d
*9. To!ic" Hedging %inancia$ ris3

L -+ '
A U.S. manufacturin# company imports parts from a supplier in <ermany. !he company is
re6uired to pay the supplier in euros. ;hich investment will hed#e the manufacturin#
companyFs forei#n echan#e ris2)
a. all option in euros

(. Short position in euros
c. Eorward sale of euros
d. 5orrowin# from a <erman (an2
A+S a

L '
&ow are investments in financial derivatives valued on the (alance sheet)
a. Mar3et .a$ue
(. ost
c. =ower of cost or mar2et value
d. +ot reported
A+S a

dition


L '
n 3ecem(er 1, a U.S. company a#rees to (uy euros on Ee(ruary 1 at a contract price of
$1.40. !he company did not pay anythin# for this contract. !he echan#e rate for euros
declines to $1.*" -U.S. dollar stren#thens (etween 3ecem(er 1 and 3ecem(er *1, when
the company's reportin# year ends. &ow is this contract reported on the company's year
end (alance sheet)
a. n the asset section

(. In t(e $ia<i$ity section
c. As a contra asset
d. !he contract is not reported on the (alance sheet
A+S (
4%. To!ic" Hedges o% %ir1 co11it1ents

L 2
n Culy 10, %01%, a U.S. company with a 3ecem(er *1 yearend enters a forward contract
that loc2s in the sellin# price of won, for delivery on Au#ust 1. !he forward contract
hed#es a firm commitment to sell merchandise to a customer in Lorea, with payment
denominated in won. !he sale is made on Au#ust 1, %01% and payment is received from
the customer on Au#ust 1. ;here is the value of the firm commitment to sell reported in
the yearend financial statements for %01%)
a. Asset or lia(ility on the (alance sheet

(. ncrease or decrease in other comprehensive income
c. Ad@ustment to sales revenue
d. Ad@ustment to cost of #oods sold
A+S c


4*. To!ic" Foreign currency <orro&ing

L ,
!he NMO ompany (orrows 100,000,000 euros (y issuin# (onds to <erman investors
when the spot rate is $1.%/:. !he interest rate is 10 percent per annum. ;hen NMO
accounts for this loan, which of the followin# will not (e true)
a. A decrease in the echan#e rate will #enerate an echan#e #ain on the (onds
paya(le
(. f the spot rate rises to $1.*/: one year hence, when the interest payment is
accrued, the interest epense will (e recorded at $1*,00,000
c. f NMO desires to hed#e these (onds, it will have to purchase euros forward
d. !he (onds paya(le will (e carried at $1%,000,000 until they mature
A+S d
44. To!ic" Foreign currency <orro&ing

L ,
nterest epense on a loan denominated in another currency is translated at
a. !he avera#e spot rate for the period the interest covers
(. !he spot rate when the loan was made
c. !he spot rate when the interest is recorded
d. !he forward rate for delivery when the interest must (e paid
A+S c
4. To!ic" Hedging strategy

L '
U.S. manufacturers that sell to customers in other countries, priced in the currency of the
customer's country, often ad@ust their hed#in# strate#y dependin# on which way they
(elieve forei#n currency rates are headed. ;hich statement (est represents the ad@ustment
they ma2e, if the U.S. dollar is epected to wea2en)
a. Ieduce the percenta#e of receiva(les hed#ed

(. Ieduce the percenta#e of paya(les hed#ed
c. ncrease the percenta#e of receiva(les hed#ed
d. ncrease the percenta#e of paya(les hed#ed
A+S a

dition

4. To!ic" Hedge accounting

L '
!wo ma@or #oals of SFAS 133 are
a. 3isclose the fair values of derivatives investments in the footnotes of the financial
statements, and report hed#ed assets and lia(ilities at fair value on the (alance
sheet.
(. Ieport the fair values of derivatives investments on the (alance sheet, and report
hed#ed assets and lia(ilities at fair value on the (alance sheet.
c. Ieport the fair values of derivatives investments on the (alance sheet, and match
#ains and losses on hed#e investments and hed#ed assets and lia(ilities on the same
income statement.
d. Ieport hed#ed assets and lia(ilities at fair value on the (alance sheet, and match
#ains and losses on hed#e investments and hed#ed assets and lia(ilities on the same
income statement.
A+S c

L )
A U.S. company hed#es an anticipated sale of merchandise to a forei#n customer. ;hen
are #ains and losses on the hed#e investment reported on the income statement)
a. ;hen the customer pays for the merchandise

(. ;hen the anticipated sale (ecomes a firm commitment
c. ;hen the hed#e investment is determined to (e an effective hed#e
d. ;hen the merchandise is sold
A+S d
4". To!ic" S!ecu$ati.e in.est1ents

L 7
A U.S. company enters a forward purchase contract that does not 6ualify as a hed#e
investment. ;hen are #ains and losses on the hed#e investment reported on the income
statement)
a. ;hen the forward contract chan#es in mar2et value

(. ;hen the forward contract is closed
c. ;hen the forward contract is determined to (e an effective hed#e
d. ;hen the merchandise is sold
A+S a

Test Bank, Chapter 7 2!

49. To!ic" Hedge o% %oreign>currency>deno1inated !aya<$e

L 0
A U.S. company has entered into a forward purchase contract to hed#e a reported forei#n
currency o(li#ation. f the U.S. dollar wea2ens a#ainst the forei#n currency
a. !he forward contract appears as a current asset on the company's (alance sheet.
(. !he forward contract's reported value eactly offsets the reported forei#n currency
o(li#ation, with no net (alance sheet disclosure.
c. !he #ain on the forward contract adds to other comprehensive income.
d. !he #ain on the forei#n currency o(li#ation adds to other comprehensive income.
A+S a
0. To!ic" IFRS %or %oreign currency (edging

L ;
EIS allows which reportin# practice, not allowed under U.S. <AAD)
a. Ieportin# forei#n currency derivative positions at cost rather than at mar2et value
(. Ieportin# #ains and losses on cash flow hed#es as ad@ustments to the carryin#
value of related asset ac6uisitions
c. Ieportin# #ains and losses on firm commitment hed#es as ad@ustments to the
carryin# value of related asset ac6uisitions
d. Ieportin# forei#n currency derivative positions at mar2et rather than at cost
A+S (

2" Advanced Accounting, 1st
dition

PRBLEMS
1. To!ic" Fair .a$ue (edge o% recei.a<$es and !aya<$es+ cas( %$o& (edge o%
%orecasted transaction
L 0+ )
Use the followin# echan#e rates for the anadian dollar to answer the three 6uestions
(elow concernin# a U.S. company's forei#n echan#e activities. !he company's
accountin# year ends 3ecem(er *1.
For&ard rate %or

S!ot rate Marc( '-+ ,*-- de$i.ery
cto(er *1, %010 $ 0."% $ 0."1
3ecem(er *1, %010 0." 0."
Barch *1, %011 0."* 0."*
Required
Answer the followin# 6uestions.
a. !he company sells merchandise to a anadian customer for $100,000 on cto(er

*1, %010, and receives payment from the customer, in anadian dollars, on Barch
*1, %011. ;hat are the followin# (alances)
i. Sales revenue for %010
ii. Accounts receiva(le, 3ecem(er *1, %010
iii. Gchan#e #ain or loss for %011
(. !he company sells merchandise to a anadian customer for $100,000 on cto(er
*1, %010, and receives payment from the customer, in anadian dollars, on Barch
*1, %011. n cto(er *1, %010 it enters a forward contract to loc2 in the sellin#
price of anadian dollars, for Barch *1, %011 delivery. n Barch *1, %011, it
delivers the anadian dollars and closes the forward contract. ;hat are the
(alances)
i. nvestment in forward , 3ecem(er *1, %010
ii. Amount of U.S. dollars received Barch *1, %011
c. !he company enters a forward contract on cto(er *1, %010 to hed#e a forecasted
purchase of merchandise for $100,000 on Barch *1, %011. n Barch *1 it ta2es
delivery of the merchandise, closes the forward and pays for the merchandise. t
sells the merchandise in Bay. ;hat are the (alances)
i. nvestment in forward, 3ecem(er *1, %010
ii. ost of #oods sold on Bay sale

Test Bank, Chapter 7 2#

A+S
a. i. $100,000  $."%  $"%,000

ii. $100,000  $."  $",000
iii. $100,000  -$."  $."*  $%,000 loss
(. i. $100,000  -$."1  $."  $,000 lia(ility

ii. $100,000  $."1  $"1,000
c. i. $100,000  -$."1  $."  $,000 asset

ii. $"*,000 7 -$."*  $."1-$100,000  $"1,000
%. To!ic" Un(edged %oreign currency transactions+ (edges o% %ir1 co11it1ents

L ,+ 0+ 2
A U.S. company (uys merchandise from suppliers in the U.L., and pays for the
merchandise in pounds sterlin#. ts accountin# year ends 3ecem(er *1. Use the followin#
information on $/P to answer the 6uestions (elow.
For&ard rate %or de$i.ery

S!ot rate Marc( -+ ,*-'
cto(er 1, %01% $1.%9 $1.%"
+ovem(er 1, %01% 1.*0 1.*%
3ecem(er *1, %01% 1.* 1.*4
Barch 1, %01* 1.*8 1.*8
Required
Answer the followin# 6uestions
a. !he U.S. company ta2es delivery of merchandise costin# P1,000,000 on +ovem(er

1, %01%. !he company pays for the merchandise, in pounds, on Barch 1, %01*.
+o hed#in# is involved. !he company sells the merchandise on Cune 1, %01*.
;hat amounts will appear on the financial statements of the U.S. company for
i. Accounts paya(le, 3ecem(er *1, %01% (alance sheet
ii. Gchan#e #ain or loss, %01% income statement
iii. ost of #oods sold, %01* income statement
(. Assume the same facts as in a. a(ove, (ut the U.S. company issues a purchase
order on cto(er 1, %01% (efore ta2in# delivery on +ovem(er 1. n cto(er 1
the company also enters a forward contract to hed#e its EN ris2, for delivery of
pounds on Barch 1, %01*. ;hat amounts will appear on the financial statements
of the U.S. company for
i. nvestment in forward contract, 3ecem(er *1, %01% (alance sheet
ii. ost of #oods sold, %01* income statement

2$ Advanced Accounting, 1st
dition

A+S
a. i. P1,000,000  $1.*  $1,*0,000

ii. P1,000,000  -$1.*0  $1.*  $0,000 loss
iii. P1,000,000  $1.*0  $1,*00,000
(. i. P1,000,000  -$1.%"  $1.*4  $0,000 asset

ii. P1,000,000  $1.*0 7 JP1,000,000  -$1.%"  $1.*%K  $1,%0,000
*. To!ic" Un(edged %oreign currency transactions+ (edges o% i1!ort and

%orecasted transactions
L ,+ 0+ )
Eollowin# are echan#e rates for the euro -U.S. $/: . mport Gpress is a U.S. company
whose accountin# year ends on 3ecem(er *1.
For&ard rate %or

May '-+ ,*--
S!ot rate de$i.ery
+ovem(er *0, %010 $ 1.% $ 1.*0
3ecem(er *1, %010 1.%" 1.*%
Bay *1, %011 1.% 1.%
Required
Answer the followin# 6uestions.
a. n +ovem(er *0, %010, mport Gpress ta2es delivery of merchandise on credit

from an talian supplier for :1,000. t pays for the merchandise on Bay *1, %011.
t sells the inventory to a U.S. customer durin# %011. ;hat are the correct
amounts that will appear on mport Gpress' financial statements for each of the
followin# items)
i. Accounts paya(le, 3ecem(er *1, %010 (alance sheet
ii. ost of #oods sold, %011 income statement
iii. Eorei#n echan#e loss, %010 income statement
(. n +ovem(er *0, %010, mport Gpress ta2es delivery of merchandise on credit
from an talian supplier for :1,000. n the same day, it a#rees to (uy :1,000
-forward purchase for delivery on Bay *1, %011. mport Gpress closes the
forward on Bay *1 and pays for the merchandise. t sells the inventory to a U.S.
customer durin# %011. ;hat are the correct amounts that will appear on mport
Gpress' financial statements for each of the followin# items)
i. nvestment in forward contract, 3ecem(er *1, %010 -asset
ii. =oss on forward contract, %011
<ain on accounts paya(le, %011


c. n +ovem(er *0, %010, mport Gpress forecasts that it will need to (uy
merchandise for :1,000 from an talian supplier at the end of Bay, %011. t plans
to pay for the merchandise as soon as it is delivered. n +ovem(er *0, %010,
mport Gpress a#rees to (uy :1,000 -forward purchase for delivery on Bay *1,
%011. !he forward contract 6ualifies as a cash flow hed#e of the forecasted
purchase of merchandise. !he merchandise is actually delivered on Bay *1, %011.
mport Gpress closes the forward and immediately pays the supplier. !he
merchandise is su(se6uently sold to a U.S. customer later in %011. Ba2e the
@ournal entries necessary to record these events
i. 3ecem(er *1, %010 Ad@ust the investment in forward contract.
ii. Bay *1, %011
-1 Ad@ust the investment in forward contract.
-% lose out the forward contract.
-* !a2e delivery of the merchandise and pay for it.
iii. Iecord cost of sales for %011.
A+S
a. Gntries -not re6uired
11/*0
nventory 1,%0
Accounts paya(le 1,%0
1%/*1
Gchan#e loss *0
Accounts paya(le *0
/*1
Accounts paya(le %0
Gchan#e #ain %0
Accounts paya(le 1,%0

ash 1,%0
i. Accounts paya(le, 3ecem(er *1, %010 (alance sheet $1,%"0

ii. ost of #oods sold, %011 income statement $1,%0
ii. Gchan#e loss, %010 income statement $ *0

2% Advanced Accounting, 1st
dition

(. Gntries -not re6uired
11/*0
nventory 1,%0
Accounts paya(le 1,%0
1%/*1
Gchan#e loss *0
Accounts paya(le *0
Gchan#e #ain %0
/*1
Accounts paya(le %0
Gchan#e #ain %0
Gchan#e loss 0
nvestment in forward 0
Eorei#n currency 1,%0
nvestment in forward 40
ash 1,*00
Accounts paya(le 1,%0
i. nvestment in forward contract, 3ecem(er *1, %010 -asset $%0

ii. =oss on forward contract, %011 $0
<ain on accounts paya(le, %011 $%0

Test Bank, Chapter 7 2&

c. i.
ther comprehensive income %0
ii. -1
ther comprehensive income 0
nvestment in forward 0
-%
ash 1,*00
-*
nventory 1,%0
iii.
ost of #oods sold 1,*00
nventory 1,%0

!0 Advanced Accounting, 1st
dition

4. To!ic" For&ard !urc(ase+ cas( %$o& (edge t(at <eco1es a %air .a$ue (edge
L 0+ 2+ )
Use the followin# information on echan#e rates for the euro to answer the 6uestion
(elow.
For&ard
rate %or
S!ot 04'*4-,
rate de$i.ery
cto(er 1, %011 $1.4 $1.4"
3ecem(er *1, %011 1.0 1.*
Canuary *1, %01% 1.% 1.
Barch *1, %01% 1. 1."
April *0, %01% 1.0 1.0
n cto(er 1, %011, a U.S. company forecasts that it will ta2e delivery of merchandise
from a supplier in Dortu#al for :10,000,000 around the end of Barch, %01%, with payment
epected to (e made, in euros, a(out one month later. !he company closes its (oo2s on
3ecem(er *1. !he followin# events occur
1. cto(er 1, %011 !he company enters a forward purchase a#reement for delivery
of :10,000,000 on April *0, %01%. !his position 6ualifies as a hed#e of the
forecasted transaction descri(ed a(ove. +o initial investment is re6uired.
%. 3ecem(er *1, %011 !he company closes its (oo2s.
*. Canuary *1, %01% !he company issues a purchase order to the supplier for
:10,000,000 in merchandise, to (e delivered Barch *1, %01%.
4. Barch *1, %01% !he company ta2es delivery of the merchandise.
. April *0, %01% !he company closes the forward contract and pays the supplier
:10,000,000.
. Bay 1, %01% !he company sells the merchandise to a U.S. customer for
$%%,00,000.
Required
Drepare the @ournal entries to record the a(ove events on the indicated dates.

Test Bank, Chapter 7 !1

A+S
3ecem(er *1, %011 Gnd of year ad@ustin# entry

nvestment in forward 00,000
ther comprehensive
income 00,000
Canuary *1, %01% Ad@ust the investment

nvestment in forward %00,000
income %00,000
Barch *1, %01% Ad@ust for the period Canuary *1  Barch *1, and ta2e delivery of
the merchandise.
nvestment in forward *00,000
income *00,000
Gchan#e loss *00,000

Eirm commitment *00,000
ther comprehensive income *00,000

Gchan#e #ain *00,000
nventory 1,*00,000
Accounts paya(le 1,00,000

!2 Advanced Accounting, 1st
dition

April *0, %01% Ad@ust for the period Barch *1 to April *0, close the forward
contract and pay the supplier.
income %00,000
Gchan#e loss 400,000

Accounts paya(le 400,000
ther comprehensive income 400,000

Gchan#e #ain 400,000
Eorei#n currency 1,000,000

nvestment in forward 1,%00,000
ash 14,"00,000
Accounts paya(le 1,000,000

Eorei#n currency 1,000,000
ost of #oods sold 14,"00,000

ther comprehensive income 00,000

Test Bank, Chapter 7 !!

. To!ic" Hedge o% %ir1 co11it1ent

L 2
Eollowin# is information on $/: echan#e rates

S!ot rate August -2+ ,*-,
Barch 1, %01% $1.0 $1.
Cune *0, %01% 1.0 1.%
Au#ust 1, %01% 1. 1.
A U.S. company (uys from suppliers in <ermany, and pays the suppliers in euros. !he
U.S. company's accountin# year ends Cune *0. n Barch 1, %01%, the company sends a
purchase order to a <erman supplier for :1,000,000 in merchandise, paya(le in euros,
delivery to ta2e place Au#ust 1, %01%. n the same day the company enters into a
forward contract for delivery of :1,000,000 on Au#ust 1. !he forward 6ualifies as a
hed#e of a firm commitment. n Au#ust 1, the company closes the forward contract,
ta2es delivery of the merchandise, and pays the supplier. !he company sells the
merchandise to its customers on Au#ust *1, %01%.
Required
;hat amounts will appear on the financial statements of the U.S. company for
a. nvestment in forward contract, Cune *0, %01% (alance sheet

(. ost of #oods sold, fiscal %01* income statement
A+S
a. :1,000,000  -$1.%  $1.  $80,000

b. Qalue of firm commitment  :1,000,000  -$1.  $1.  $100,000 credit
urrency paid  $1,0,000  firm commitment offset $100,000  $1,0,000

!" Advanced Accounting, 1st
dition

. To!ic" Hedge o% %ir1 co11it1ent

L 2
n +ovem(er 1, %01%, a U.S. company issues a purchase order to (uy merchandise for
:1,000,000. !he company epects to ta2e delivery of the merchandise on Canuary 10,
%00", and will pay the supplier on Barch 1, %01*. !o hed#e its EN ris2, on +ovem(er 1,
%01% the company invests in a forward contract for delivery of :1,000,000 on Barch 1,
%01*. !he company sells the merchandise to a U.S. customer for $%,000,000 in cash on
April 1, %01*. Assume the forward contract 6ualifies as a fair value hed#e of the firm
commitment to (uy merchandise.
Gchan#e rates for the euro -$/: are (elow.
For&ard rate %or

S!ot rate Marc( -+ ,*-' de$i.ery
+ovem(er 1, %01% $ 1.40 $1.4%
3ecem(er *1, %01% 1.41 1.4*
Canuary 10, %01* 1.44 1.4*
Barch 1, %01* 1.4 1.4
Required
Eor each date (elow, prepare the necessary @ournal entries to record the events and/or
ad@ustments needed.
a. 3ecem(er *1, %01% -end of year closin#

(. Canuary 10, %01* -ta2es delivery of merchandise
c. Barch 1, %01* -closes the forward and pays the (ill
d. April 1, %01* -sells the merchandise to a U.S. customer. Assume the company
uses the perpetual inventory method.

Test Bank, Chapter 7 !#

A+S
a. 3ecem(er *1, %01%

nvestment in forward 10,000

Eirm commitment 10,000
Iate chan#es from $1.4% to $1.4*.
(. Canuary 10, %01*

nvestment in forward ,000
Gchan#e #ain ,000
Gchan#e loss ,000

Eirm commitment ,000
Iate chan#es from $1.4* to $1.4*.
nventory 1,4%,000
Eirm commitment 1,000
Accounts paya(le 1,440,000
c. Barch 1, %01*
Iate chan#es from $1.44 to $1.4.
nvestment in forward 1,000

Gchan#e #ain 1,000
Iate chan#es from $1.4* to $1.4.
Eorei#n currency 1,40,000

ash 1,4%0,000
Accounts paya(le 1,40,000

Eorei#n currency 1,40,000
d. April 1, %01*
ash %,000,000
Sales revenue %,000,000
ost of #oods sold 1,4%,000

nventory 1,4%,000

!$ Advanced Accounting, 1st
dition

8. To!ic" I1!ort and e/!ort transactions

L ,
Eollowin# is information on $/: echan#e rates
S!ot rate
+ovem(er 1, %01* $1.4%
3ecem(er *1, %01* 1.*"
Ee(ruary 1, %014 1.*
Barch 1, %014 1.*
Required
Answer the followin# 6uestions
a. A U.S. company sells merchandise to customers in euro countries, with payment to

(e received in euros. Sales totalin# :1,000,000 occur on +ovem(er 1, %01*.
Dayment is made on Barch 1, %014. !he U.S. company's accountin# year ends
3ecem(er *1. ;hat amounts will appear on the financial statements of the U.S.
company for
i. Sales revenue, %01* income statement
ii. Accounts receiva(le, 1%/*1/1* (alance sheet
iii. Gchan#e #ain or loss, %01* income statement
(. A U.S. company (uys merchandise from suppliers in euro countries, paya(le in
euros. Durchases of :1,000,000 are made on +ovem(er 1, %01*. !he U.S.
company pays the suppliers on Ee(ruary 1, %014. !he U.S. company sells the
merchandise to its customers on Barch 1, %014. !he U.S. company's accountin#
year ends 3ecem(er *1. ;hat amounts will appear on the financial statements of
the U.S. company for
i. Accounts paya(le, 1%/*1/1* (alance sheet
ii. Gchan#e #ain or loss, %014 income statement
iii. ost of #oods sold, %014 income statement
A+S
a. i. :1,000,000  $1.4%  $1,4%0,000

ii. :1,000,000  $1.*"  $1,*"0,000
iii. :1,000,000  -$1.*"  $1.4%  $40,000 loss
(. i. :1,000,000  $1.*"  $1,*"0,000

ii. :1,000,000  -$1.*"  $1.*  $%0,000 #ain
iii. :1,000,000  $1.4%  $1,4%0,000

Test Bank, Chapter 7 !7

". To!ic" Hedges o% e/!ort transactions

L 0
A U.S. company sells merchandise to a <ree2 customer on Ee(ruary 1, %010 for
:1,000,000. !he customer pays the (ill on Bay 1, %010. !o hed#e forei#n echan#e ris2,
on Ee(ruary 1, %010 the U.S. company enters a forward sale contract for :1,000,000 with
a Bay 1 delivery date. n Bay 1 the company collects the :1,000,000 from the customer
and closes the forward contract. Ielevant rates are as follows
S!ot 24- For&ard

Ee(ruary 1, %010 $1.*4 $1.*4"
Bay 1, %010 1.**0 1.**0
Required
Ba2e the @ournal entries to record the followin# transactions, includin# appropriate
ad@ustin# entries
a. Ee(ruary 1 sale to the <ree2 customer.

(. Bay 1 collection of the receiva(le and closin# of the contract.
A+S
a.
Accounts receiva(le 1,*4,000
Sales revenue 1,*4,000
(.
Gchan#e loss 1,000
Accounts receiva(le 1,000
nvestment in forward 1",000

Gchan#e #ain 1",000
Eorei#n currency 1,**0,000

Accounts receiva(le 1,**0,000
ash 1,*4",000
nvestment in forward 1",000

!% Advanced Accounting, 1st
dition


L 2
n Ee(ruary 1, %010, a U.S. company issues a purchase order to (uy merchandise from a
<ree2 supplier for :1,000,000. n Ee(ruary 1, %010 the U.S. company enters a forward
purchase contract for :1,000,000 with a Culy 1 delivery date. !he forward 6ualifies as a
hed#e of the firm commitment to (uy the merchandise. n Bay 1, %010, the company
ta2es delivery of the merchandise. n Culy 1, %010, the company closes the forward and
pays the (ill. Ielevant echan#e rates are as follows
74- %or&ard
S!ot rate rate
Ee(ruary 1, %010 $1.*4 $1.*0
Bay 1, %010 1.*40 1.*44
Culy 1, %010 1.**0 1.**0
Required
a. Ba2e the @ournal entries to record the followin# transactions, includin#
appropriate ad@ustin# entries
i. Bay 1 delivery of merchandise.
ii. Culy 1 closin# of forward contract and payment of (ill.
(. Assume the U.S. company sells the merchandise to a U.S. customer for
$1,00,000. ;hat is the reported #ross mar#in -sales revenue minus cost of #oods
sold on the sale)
A+S
a. i.
Gchan#e loss ,000
nvestment in forward ,000
Eirm commitment ,000

Gchan#e #ain ,000
nventory 1,*4,000
Eirm commitment ,000
Accounts paya(le 1,*40,000

Test Bank, Chapter 7 !&

ii.


ash 1,*0,000
Accounts paya(le 1,**0,000

(. $1,00,000  $1,*4,000  $%4,000

L )
A U.S. corporation purchases merchandise from a <erman supplier on a re#ular (asis. n
+ovem(er ", %01%, the corporation purchased :100,000 for delivery on Barch ", %01*,
in anticipation of an epected purchase of merchandise for :100,000 at the (e#innin# of
Barch. !he forward contract 6ualifies as a hed#e of a forecasted transaction. !he
corporation too2 delivery of the merchandise, settled the forward contract, and paid the
<erman supplier :100,000 on Barch ", %01*. !he merchandise was su(se6uently sold on
April 10, %01* to a U.S. customer for $%00,000. !he corporation's accountin# year ends
on 3ecem(er *1. Ielevant echan#e rates are as follows

S!ot rate Marc( ;+ ,*-'
+ovem(er ", %01% 1.% 1.%
3ecem(er *1, %01% 1.%8 1.%"
Barch ", %01* 1.%4 1.%4
April 10, %01* 1.%* +/A
Required
a. Drepare the ad@ustin# entry necessary to update the investment in forward at
3ecem(er *1, %01%.
(. Drepare the entries necessary to ta2e delivery of the merchandise and close the
forward on Barch ", %01*.
c. Drepare the entry necessary to record cost of #oods sold on April 10, %01*.

"0 Advanced Accounting, 1st
dition

A+S
a.
nvestment in forward %,000
ther comprehensive income %,000
(.
Eorei#n currency 1%4,000

ash 1%,000
nventory 1%4,000
c.
ost of #oods sold 1%,000
nventory 1%4,000

Test Bank, Chapter 7 "1

11. To!ic" #a$uation o% %or&ard contracts+ (edging entries

L '+ 0+ )
A U.S. company enters into the followin# forward contracts on cto(er 1, %011
1. A#reement to sell 100,000,000 yen on Canuary 1, %01% at $0.00""

%. A#reement to (uy 1,000,000 new she2els on Ee(ruary 1, %01% at $0.%%1
Eorward and spot rates for yen and she2els are as follows
For&ard rate
For&ard rate S!ot rate %or ,4-24-,
S!ot rate %or -4-24-, %or ne& de$i.ery o% ne&
%or yen de$i.ery o% yen s(e3e$s s(e3e$s
cto(er 1, %011 $ .00" $ .00"" $.%%0 $ .%%1
3ecem(er *1,%011 .00"4 .00" .%%% .%19
Required
a. &ow are the forward contracts valued on the company's 3ecem(er *1, %011
(alance sheet) Eor each contract, specify the amount and whether it is a current
asset or a current lia(ility.
(. Assume that the forward contract to sell yen is an effective hed#e of a 100,000,000
yen forecasted sale to customers in Capan. Ba2e the ad@ustin# entry for this
contract at 3ecem(er *1, %011.
c. Assume the forward contract to (uy new she2els is an effective hed#e of a
1,000,000 new she2el o(li#ation currently on the company's (oo2s. Ba2e the
ad@ustin# entry for this contract at 3ecem(er *1, %011.
A+S
a. Eorward sale in yen -$.00""  $.00"  100,000,000  $*0,000 current asset

Eorward purchase in new she2els -$.%%1  $.%19  1,000,000  $%,000 current
lia(ility
(.
ther comprehensive income *0,000
c.
Gchan#e loss %,000

"2 Advanced Accounting, 1st
dition

1%. To!ic" Hedge o% %ir1 co11it1ent

L 2
n Barch 1, %011, a U.S. company issued a purchase order to a supplier in the ayman
slands for #oods with a price of LM3 ,000,000. !he #oods will (e delivered Culy 1,
%011, and payment will (e made on Septem(er 1, %011. n Barch 1, %011, the company
purchased LM3 ,000,000 for delivery Septem(er 1, %011. !he forward contract is an
effective hed#e of the firm commitment to purchase #oods from the ayman slands. !he
#oods are delivered as epected on Culy 1, and the company follows throu#h on the
forward contract and ma2es the payment to the supplier on Septem(er 1. !he company's
accountin# year ends on 3ecem(er *1.
Spot and forward rates are as follows -$/LM3

S!ot Rate on Se!te1<er -+ ,*--
Barch 1, %011 $1.%% $1.%1
Culy 1, %011 1.%1 1.%0
Septem(er 1, %011 1.19 1.19
Required
Answer the followin# 6uestions re#ardin# how the a(ove information is reported on the
company's financial statements
a. ;hat is the net hed#in# #ain or loss for %011)

(. Suppose the #oods purchased from the ayman slands are sold to a U.S.
customer for $",000,000. ;hat is the #ross mar#in -sales revenue less cost of
#oods sold on the sale) Show calculations clearly.
A+S
a. =oss on forward -$1.%1  $1.19  ,000,000  $100,000 loss

<ain on firm commitment -$1.%1  $1.%0  ,000,000  0,000 #ain
<ain on accounts paya(le -$1.%1  $1.19  ,000,000  100,000 #ain
+et $ 0,000 #ain
(. nventory is recorded as follows when the #oods are delivered on Culy 1
nventory ,100,000
Eirm commitment 0,000
Accounts paya(le ,00,000
!he #ross mar#in on the sale is
Sales $",000,000
ost of #oods sold ,100,000
<ross mar#in $1,900,000

Test Bank, Chapter 7 "!

1*. To!ic" For&ard !urc(ase+ cas( %$o& (edge t(at <eco1es a %air .a$ue (edge
L 0+ 2+ )
A U.S. company purchases merchandise from a &on# Lon# supplier on a re#ular (asis.
!he followin# events occur
< cto(er 1, %01% !he company purchased $&1,000,000 for delivery on Bay 1,
%01*, in anticipation of an epected payment of $& for a forecasted merchandise
purchase.
< 3ecem(er 1, %01% !he company issued a purchase order for $&1,000,000 in
merchandise from the supplier.
< Barch 1, %01* !he company too2 delivery of the merchandise.
< Bay 1, %01* !he company closed the forward contract and paid the supplier.
< Bay *1, %01* !he company sold the merchandise to a U.S. customer for
$%00,000.
Gchan#e rates -$/& are as follows
For&ard rate %or

S!ot rate de$i.ery 24-4-'
cto(er 1, %01% $0.1% $0.1%8
3ecem(er 1, %01% 0.1%8 0.1%9
3ecem(er *1, %01% 0.1%" 0.1*1
Barch 1, %01* 0.1*1 0.1*1
Bay 1, %01* 0.1*% 0.1*%
Required
Drepare the @ournal entries to record the a(ove transactions, includin# necessary ad@ustin#
entries. Assume the hed#e 6ualifies for special hed#e accountin#.

"" Advanced Accounting, 1st
dition

A+S
Ad@ustin# entries at 3ecem(er *1, %01%

!o record increase in value of forward contract -$.1%8 to $.1*1
Gchan#e loss %,000

Eirm commitment %,000
!o record loss on firm commitment -$.1%9 to $.1*1

Gchan#e #ain %,000
!o reclassify other comprehensive income to income to match a#ainst loss on firm
commitment.
Barch 1, %01*
!o mar2 the forward to mar2et -$.1*1 to $.1*1
Gchan#e loss 00

Eirm commitment 00
!o mar2 the firm commitment to mar2et -$.1*1 to $.1*1

Gchan#e #ain 00
!o reclassify other comprehensive income to income to match a#ainst firm commitment
loss.
nventory 1%",00
Eirm commitment %,00
Accounts paya(le 1*1,000
!o record delivery of merchandise, ad@usted for firm commitment (alance.

Test Bank, Chapter 7 "#

Bay 1, %01*
!o mar2 the forward to mar2et -$.1*1 to $.1*%

!o mar2 accounts paya(le to mar2et -$.1*1 to $.1*%

!o reclassify other comprehensive income to income to match a#ainst accounts paya(le
loss.
Eorei#n currency 1*%,000

nvestment in forward ,000
ash 1%8,000
!o close forward contract.
Accounts paya(le 1*%,000

Eorei#n currency 1*%,000
!o pay the supplier.
Bay *1, %01*

ost of #oods sold 1%8,000
ther comprehensive income 1,00
nventory 1%",00
+ote Iemainin# other comprehensive income (alance is $4,000  $%,000 > $00  $00 >
$00  $1,000  $1,00 #ain.

"$ Advanced Accounting, 1st
dition

14. To!ic" Cas( %$o& (edge accounting .ersus regu$ar accounting

L '+ )
Eollowin# is information on echan#e rates for the euro
S!ot rate For&ard rate %or 04'*4-, de$i.ery

cto(er 1, %011 $1.4 $1.4"
3ecem(er *1, %011 1.0 1.*
Canuary *1, %01% 1.% 1.
Barch *1, %01% 1. 1."
April *0, %01% 1.0 1.0
n cto(er 1, %011, a U.S. company forecasts that it will (uy merchandise from a
supplier in Dortu#al for :10,000,000 around the end of Barch, %01%, with payment
epected to (e made, in euros, a(out one month later. !he company closes its (oo2s on
3ecem(er *1. !he followin# events occur
1. cto(er 1, %011 !he company enters a forward purchase a#reement for delivery
of €10,000,000 on April *0, %01%. +o initial investment is re6uired.
%. 3ecem(er *1, %011 !he company closes its (oo2s.
*. Canuary *1, %01% !he company issues a purchase order to the supplier for
€10,000,000 in merchandise, to (e delivered Barch *1, %01%.
4. Barch *1, %01% !he company ta2es delivery of the merchandise.
. April *0, %01% !he company closes the forward contract and pays the supplier
€10,000,000.
. Bay 1, %01% !he company sells the merchandise to a U.S. customer for
$%%,00,000.
Required
Eill in the schedule (elow, showin# the amounts related to the a(ove events that will (e
reported in the company's annual reports for %011 and %01%. Show related @ournal entries
in the net schedule. Show lia(ilities and #ains in parenthesis.

Test Bank, Chapter 7 "7

A+S
For&ard contract 8ua$i%ies as a

(edge o% t(e %orecasted T(e %or&ard contract does not
Account tit$e transaction 8ua$i%y as a (edge
,*-- ,*-, ,*-- ,*-,
nvestment in forward $ 00,000  $ 00,000 

-(alance sheet
ther comprehensive -00,000   
income -5alance sheet
-<ains and losses -income   -00,000 $ -%00,000
statement -*00,000
-%00,000
400,000
$ -*00,000
ost of #oods sold -income  $14,"00,000  $1,00,000
statement

"% Advanced Accounting, 1st
dition

For&ard contract is a 8ua$i%ied (edge For&ard contract is not a 8ua$i%ied (edge

3ecem(er *1
nvestment in forward 00,000 nvestment in forward 00,000
 00,000 Gchan#e #ain 00,000
Canuary *1
nvestment in forward %00,000 nvestment in forward %00,000
 %00,000 Gchan#e #ain %00,000
Barch *1
nvestment in forward *00,000 nvestment in forward *00,000
 *00,000 Gchan#e #ain *00,000
Gchan#e loss *00,000 
 *00,000 
<ain *00,000
nventory 1,*00,000 nventory 1,00,000
Eirm commitment *00,000 A/D
A/D 1,00,000 1,00,000
April *0
 %00,000 nvestment in forward %00,000
Gchan#e loss 400,000 Gchan#e #ain
A/D 400,000 %00,000
 400,000 Gchan#e loss 400,000
Gchan#e #ain 400,000 A/D
Eorei#n currency 1,000,000 400,000
ash 14,"00,000 
nvestment in for. 1,%00,000
A/D 1,000,000 Eorei#n currency 1,000,000
Eorei#n currency 1,000,000 ash
14,"00,000
Bay 1 nvestment in for. 1,%00,000
<S 14,"00,000 A/D 1,000,000
 00,000 Eorei#n currency 1,000,000
<S 1,00,000
nventory
1,00,000

Test Bank, Chapter 7 "&

1. To!ic" Cas( %$o& (edge accounting .ersus regu$ar accounting

L '+ )
Eollowin# are echan#e rates for the anadian dollar.
For&ard rate %or Marc( '-+

S!ot rate ,*-, de$i.ery
cto(er *1, %011 $ 0."0 $ 0."1
3ecem(er *1, %011 0."4 0."
Barch *1, %01% 0."% 0."%
A U.S. company enters a forward contract on cto(er *1, %011 to hed#e a forecasted
purchase of merchandise for $1,000,000 on Barch *1, %01%. n Barch *1 it ta2es
delivery of the merchandise, closes the forward and pays for the merchandise. t sells the
merchandise in Bay. !he company's accountin# year ends 3ecem(er *1.
Required
;hat are the (alances for the followin# accounts, assumin# the forward contract 6ualifies
as a hed#e of the forecasted transaction for the period cto(er *1, %011 to Barch *1,
%01%, and also if the forward contract does not 6ualify as a hed#e)
a. ther comprehensive income (alance, 3ecem(er *1, %011

(. <ain/loss on forward contract, %011 income statement
c. <ain/loss on forward contract, %01% income statement
d. %01% cost of #oods sold
A+S
?ua$i%ies as (edge =oes not 8ua$i%y

ther comprehensive income, 3ecem(er
*1, %011 -#ain $ 0,000 $ 0
%011 income statement
#ain on forward contract 0 0,000
%01% income statement
loss on forward contract 0 40,000
%01% cost of #oods sold "10,000 "%0,000

#0 Advanced Accounting, 1st
dition

1. To!ic" Hedge o% %ir1 co11it1ent+ i1!ort transaction+ s!ecu$ation

L ,+ 2+ 7
Glectronic mporters, a U.S. company, has the followin# outstandin# (alances as of
3ecem(er *1, %011, its accountin# yearend.
For&ard !urc(ase contract dated 3ecem(er 1, %011 for %0,000,000 yen to hed#e a firm
commitment to purchase computer hardware for %0,000,000 yen in 90 days endin# on
Barch 1, %01%.
Account !aya<$e for 80,000,000 yen for unpaid merchandise ac6uired on 3ecem(er 1,
%011 and due on Canuary 1, %01%.
For&ard sa$e contract dated 3ecem(er 1, %011 for *0,000,000 yen to speculate in
echan#e rate chan#es and due on Canuary 1, %01%.
Gchan#e rates 6uoted in the U.S. for Capanese yen are
-,4-4-- -,4-)4-- -,4'-4-- -4-24-, '4-4-,

Spot rate $.00%0 $.0010 $.0000 $.009* $.00"0
90day forward .00*0 .00%0 .0010 .0000 .0090
0day forward .00%0 .0010 .000* .0090 .00"0
*0day forward .0010 .0000 .0090 .00"0 .0080
1day forward .001 .000 .009 .00" .008
Required
a. alculate the #ain or loss on Glectronic mportersF %011 income statement due to
the a(ove items. Specify the amount and whether it is a #ain or loss.
(. alculate the (alances at which the forward purchase contract and the forward sale
contract would (e reported in the 3ecem(er *1, %011 (alance sheet.
c. At what amount -U.S. dollars should the computer hardware (e valued on Barch
1, %01%)

Test Bank, Chapter 7 #1

A+S
a. Eorward purchase contract no income effect due to offsettin# #ain and loss on
contract and firm commitment.
Accounts paya(le 80,000,000  -$.0010  $.0000  $8,000 #ain

Eorward sale *0,000,000  -$.0000  $.009  1,00 #ain
$",00 #ain
(. Eorward purchase contract

-$.00*  $.000*  %0,000,000  $,400 current lia(ility
Eorward sale contract

-$.00  $.009  *0,000,000  $1,00 current asset
c.
-$.00"  %0,000,000  $11,000
Dlus firm commitment (alance
-$.00*  $.00"  %0,000,000 10,000
&ardware (alance, */1/1% $1%,000

#2 Advanced Accounting, 1st
dition

18. To!ic" I1!ort transactions+ (edge o% %ir1 co11it1ent+ (edge o% %orecasted

transaction+ s!ecu$ation
L ,+ 2+ )+ 7
Gach of the followin# situations is independent of the others. Acme mporters is a U.S.
company with a 3ecem(er *1 yearend. Use the followin# information on echan#e rates
-US$/$anadian to answer each 6uestion.
For&ard rate
%or de$i.ery on
S!ot rate ,4-4-'
Septem(er 1, %01% $."0 $."%
cto(er 1, %01% .8" .89
3ecem(er *1, %01% .8 .84
Ee(ruary 1, %01* .9 .9
Required
Eor each situation, -1 ma2e the @ournal entries necessary to record the events, includin#
yearend ad@ustments, and -% calculate the effect on AcmeFs income in the year %01%, and
in the year %01*. Show the amounts and whether they are #ains or losses.
a. n Septem(er 1, %01% Acme mporters a#rees to (uy merchandise from Bontreal

Suppliers. 3elivery will ta2e place on cto(er 1, %01%, and Acme will pay
Bontreal Suppliers $,000 on Ee(ruary 1, %01*.
(. n Septem(er 1, %01%, Acme mporters ma2es a firm commitment to (uy
merchandise from Bontreal Suppliers. 3elivery will ta2e place on cto(er 1,
%01%, and Acme will pay Bontreal Suppliers $,000 on Ee(ruary 1, %01*. n
cto(er 1, %01%, Acme enters into a forward purchase contract with A5
Gchan#e 3ealers for the purchase of $,000, to (e delivered Ee(ruary 1, %01*.
c. n Septem(er 1, %01%, Acme mporters ma2es a firm commitment to (uy
merchandise from Bontreal Suppliers. 3elivery will ta2e place on cto(er 1,
%01%, and Acme will pay Bontreal Suppliers $,000 on Ee(ruary 1, %01*. n
Septem(er 1, %01%, Acme enters into a forward purchase contract with A5
Gchan#e 3ealers for the purchase of $,000, to (e delivered Ee(ruary 1, %01*.
!he merchandise remains in AcmeFs inventory as of 3ecem(er *1, %01*.
d. !he E at Acme mporters (elieves that the U.S. dollar will continue to
stren#then with respect to the anadian dollar. n cto(er 1, %01%, he enters into
a speculative forward sale contract with A5 Gchan#e 3ealers for delivery of
$,000 on Ee(ruary 1, %01*.
e. n Septem(er 1, %01%, Acme mporters forecasts that it will (uy merchandise
from a anadian supplier. 3elivery and payment of $,000 is epected to ta2e
place on cto(er 1, %01%. n Septem(er 1, %01%, Acme enters into a forward
purchase contract with A5 Gchan#e 3ealers for the purchase of $,000 for
$0.8, to (e delivered cto(er 1, %01%. !he merchandise purchase occurs as
forecasted, and the merchandise remains in Acme's inventory as of 3ecem(er *1,
%01*.

Test Bank, Chapter 7 #!

A+S
1a.
10/1 Berchandise *,900
Accounts paya(le *,900
-,000  $.8"
1%/*1 Accounts paya(le 10

10/1
Gchan#e #ain 10
J-$.8"  $.8  ,000K
%/1 Accounts paya(le *00

Gchan#e #ain *00
J-$.8  $.9  ,000K
%/1 Accounts paya(le *,40

ash *,40
-,000  $.9
(.

1%/*1 Gchan#e loss %0

nvestment in forward %0
J-$.89  $.84  ,000K
%/1 Accounts paya(le *00

Gchan#e #ain *00
%/1 Gchan#e loss %0

J-$.84  $.9  ,000K
%/1 Eorei#n currency *,40

ash *,90
%/1 Accounts paya(le *,40

Eorei#n currency *,40

#" Advanced Accounting, 1st
dition

c.
10/1 Gchan#e loss 10
nvestment in forward 10
J-$."%  $.89  ,000K
10/1 Eirm commitment 10


10/1 Berchandise 10

Eirm commitment 10
1%/*1 Gchan#e loss %0


%/1 Gchan#e loss %0

Accounts paya(le *00
%/1
Gchan#e #ain *00

%/1
ash *,90
Accounts paya(le *,40
%/1

Test Bank, Chapter 7 ##

d.
1%/*1 nvestment in forward %0
Gchan#e #ain %0
J-$.89  $.84  ,000K
%/1 nvestment in forward %0

Gchan#e #ain %0
J-$.84  $.9  ,000K

ash *,40
ash *,90
%/1
e.
10/1 nvestment in forward 100
income 100
J-$.8".8  ,000K
10/1 Eorei#n currency *,900

ash *,"00
Berchandise *,900
10/1
Eorei#n currency *,900
%. Income efects:
%01% %01*
-a $10 #ain $*00 #ain
-( 100 loss 0 #ain
-c 100 loss 0 #ain
-d %0 #ain %0 #ain
-e 0 0

#$ Advanced Accounting, 1st
dition

1". To!ic" Borro&ing in %oreign currency

L ,
A U.S. company purchases a 0day certificate of deposit from a <erman (an2 on cto(er
1. !he certificate has a face value of :10,000,000, costs $1*,"00,000 -the spot rate is
$1.*"/: on cto(er 1, and pays interest at an annual rate of " percent. n 3ecem(er
14, the certificate of deposit matures and the company receives principal and interest due
to it. !he spot rate on 3ecem(er 14 is $1.40/:. !he avera#e spot rate for the period
cto(er 1  3ecem(er 14 is $1.*9/:.
Required
Drepare all necessary @ournal entries to record the a(ove events on the U.S. companyFs
(oo2s.
A+S
10/1
!emporary investments 1*,"00,000
ash 1*,"00,000
1%/14
!emporary investments %00,000
Gchan#e #ain %00,000
$%00,000  -$1.40  $1.*"  €10,000,000.
Eorei#n currency 14,1",8

!emporary
investments 14,000,000
nterest income 1",8
$1",8  -10,000,000  "R  %/1%  $1.40

Test Bank, Chapter 7 #7

19. To!ic" S!ecu$ation in %or&ard contracts

L 7
n +ovem(er 1, %01*, a U.S. company thin2s the echan#e rate for the euro will fall, so it
enters into a forward contract in the amount of :1,000,000, for delivery on Barch 1,
%014. !his is a speculative contract. !he company's accountin# year ends 3ecem(er *1.
!he company closes the contract on Ee(ruary 1, %014. Gchan#e rates are as follows -$/
:

For&ard rate %or
S!ot rate Marc( -2+ ,*-0 de$i.ery
+ovem(er 1, %01* $ 1.4% $ 1.4*
3ecem(er *1, %01* 1.4 1.4
Ee(ruary 1, %014 1.48 1.4"
Barch 1, %014 1.0 1.0
Required
a. 3oes the company enter a forward purchase or a forward sale contract) Gplain.
(. Drepare the @ournal entries necessary on 3ecem(er *1, %01* and Ee(ruary 1, %014
to record the a(ove events.
A+S
a. A forward sale loc2s in the sellin# price. f the rate falls, as the company epects,
it will #ain (y (uyin# euros at the lower price and sellin# at the hi#her contract
price.
(. 3ecem(er *1, %01*

=oss %0,000
!o ad@ust the forward contract to fair valueH $%0,000  -$1.4  $1.4* 
:1,000,000.
Ee(ruary 1, %014
=oss *0,000
!o ad@ust the forward contract to fair valueH $*0,000  -$1.4"  $1.4 
:1,000,000.
!he company closes the forward (y enterin# a forward purchase for delivery on Barch 1,
%014, at $1.4"/:. So the company sells at $1.4* and (uys at $1.4", for a net cash outflow
of -$1.4"  $1.4*  :1,000,000  $0,000.

ash 0,000
!o close the forward contract on Ee(ruary 1, %014.

#% Advanced Accounting, 1st
dition

%0. To!ic" IFRS %or (edging %orecasted transactions

L ;
n Ee(ruary 1, %011, an talian company, with a Cune *0 yearend, enters a forward
purchase contract for $1,000,000 to (e delivered on Au#ust 1, %011. !he contract hed#es
a forecasted purchase of e6uipment. !he forward is closed and the e6uipment purchased
on Au#ust 1. !he e6uipment has a %year life, and is strai#htline depreciated. Eollowin#
is information on echan#e rates -:/$
For&ard rate %or August -+

S!ot rate ,*-- de$i.ery
Ee(ruary 1, %011 €0."0 €0."1
Cune *0, %011 0.84 0.8
Au#ust 1, %011 0.8% 0.8%
!he company follows EIS and uses the (asis ad@ustment approach to reportin# cash flow
hed#es.
Required
Drepare the @ournal entries to record the followin# events
a. Cune *0, %011 ad@ustin# entry

(. Au#ust 1, %011 ad@ustin# entries and transactions
c. Cune *0, %01% ad@ustin# entry for the e6uipment
d. f the company followed U.S. <AAD, how would the Cune *0, %01% entry differ)

Test Bank, Chapter 7 #&

A+S
a. Cune *0, %011

ther comprehensive income 0,000
!o ad@ust the forward contract to fair valueH :0,000  -:."1  :.8  $1,000,000.
(. Au#ust 1, %011

!o ad@ust the forward contract to fair valueH :40,000  -:.8  :.8%  $1,000,000.

ash "10,000
!o close the forward contract.
G6uipment 8%0,000
!o purchase the e6uipment.
G6uipment 90,000
!o ad@ust the e6uipment for the accumulated loss on the forward.
c. Cune *0, %01%

3epreciation epense *81,%0
G6uipment, net *81,%0
!o record depreciation epense for fiscal %01%H :*81,%0  -:"10,000/%  11/1%.
d. Cune *0, %01%

3epreciation epense **0,000
G6uipment, net **0,000
!o record depreciation epense for fiscal %01%H :**0,000  -:8%0,000/%  11/1%.
3epreciation epense 41,%0

ther comprehensive income 41,%0
!o reclassify other comprehensive income as an ad@ustment of depreciation
epense for fiscal %01%H :41,%0  -:90,000/%  11/1%.

$0 Advanced Accounting, 1st
dition

Dokumen Tips Advanced Accounting Test Bank Chapter 07 Susan Hamlen

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1. To!ic" #a$uation o% %or&ard contracts

-$0.009%  $0.009  100,000,000  $%0,000

%. To!ic" Cas( %$o& (edge

a. !he U.S. company has receiva(les denominated in euros, with payment to (e

©Cambridge Business Publishers, 2010

For&ard rate %or

*. To!ic" Hedge o% e/!ort transaction

%010 <ain on receiva(le, -$1.%"  $1.%  :100,000  $*,000

%011 =oss on receiva(le, -$1.%"  $1.%  :100,000  $%,000

©Cambridge Business Publishers, 2010

4. To!ic" Hedge o% %ir1 co11it1ent

-:100,000  $1.% > -$1.*0  $1.%  :100,000  $1*0,000

. To!ic" Hedge o% %ir1 co11it1ent

©Cambridge Business Publishers, 2010

. To!ic" Hedge o% %orecasted transaction

!he loss on the forward contract is reported in other comprehensive income.

8. To!ic" Hedge o% %orecasted transaction

©Cambridge Business Publishers, 2010

". To!ic" E/!ort transaction

Fisca$ ,*-, Fisca$ ,*-'

Eiscal %01% echan#e #ain  -$1.*1  $1.*0  :100,000  $1,000

9. To!ic" I1!ort transaction

Fisca$ ,*-, Fisca$ ,*-'

Eiscal %01% echan#e loss  -$1.*1 – $1.*0  :100,000  $1,000

©Cambridge Business Publishers, 2010

3ata for 6uestions 10 and 11 are as follows

10. To!ic" I1!ort transaction

€%0,000  $1.*%  $%,400

11. To!ic" I1!ort transaction

©Cambridge Business Publishers, 2010

3ata for 6uestions 1% and 1* are as follows

1%. To!ic" E/!ort transaction

:100,000  $1.*  $1*,000

1*. To!ic" E/!ort transaction

:100,000  -$1.*9  1.*  $*,000 #ain

©Cambridge Business Publishers, 2010

14. To!ic" Ana$ysis o% %oreign currency ris3s

1. To!ic" Foreign currency o!tions

©Cambridge Business Publishers, 2010

1. To!ic" Hedge o% i1!ort transaction

a. +o effect in %01*, $4,000 #ain in %014

©Cambridge Business Publishers, 2010

18. To!ic" Hedge o% %ir1 co11it1ent

Use the followin# information to answer 6uestions 1" and 19 (elow.

1". To!ic" Foreign currency $ending

:1,000,000  -$1.%0  $1.1"  $%0,000 loss

©Cambridge Business Publishers, 2010

19. To!ic" Foreign currency $ending

€10,000  $1.1"  $11,"00

Use the followin# information to answer 6uestions %0 7 %% (elow

©Cambridge Business Publishers, 2010

%0. To!ic" Hedge o% %orecasted transaction

%1. To!ic" Hedge o% %orecasted transaction

©Cambridge Business Publishers, 2010

%%. To!ic" Hedge o% %orecasted transaction

ourna$ entries re$ated to 8uestions ,* 9 ,, (in thousands)"

nvestment in forward 10

ther comprehensive income 100

Accounts paya(le 14,*00

:(en 1erc(andise is so$d"

©Cambridge Business Publishers, 2010

For&ard rate %or

%*. To!ic" S!ecu$ati.e %or&ard !urc(ase contract

a. +o #ain or loss is reported until the forward is closed on Barch %0

-:100,000  $1.% > -$1.0  $1.%  :100,000  $10,000

Fisca$ ,-, Fisca$ ,-'

Eiscal %01% echan#e #ain  -$1.1  $1.0  :100,000  $1,000

Fisca$ ,-, Fisca$ ,-'

Eiscal %01% echan#e loss  -$1.1 – $1.0  :100,000  $1,000

:100,000  $1.  $1,000

:100,000  -$1.9  1.  $*,000 #ain

a. i. P1,000,000  $1.  $1,0,000