Fundamentals of Advanced Accounting 8th Edition Hoyle Test Bank

Fundamentals of Advanced Accounting 8th Edition

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Student name:__________
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or
answers the question.
1) Brandon Co., a U.S. corporation, sold inventory on credit to a British company on April
8, 2021. Brandon received payment of 40,000 British pounds on May 8, 2021. The exchange rate
was £1 = $1.56 on April 8 and £1 = 1.45 on May 8. What amount of foreign exchange gain or
loss should be recognized? (Round to the nearest dollar.)

A) $10,200 loss
B) $10,200 gain
C) $4,400 gain
D) $4,400 loss
E) No gain or loss should be recognized.

2) Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of
12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

Dec. 1 Spot rate: $ 1.831

Dec. 31 Spot rate: $ 1.976

Jan. 30 Spot rate: $ 1.768

For what amount should Sales be credited on December 1?

A) $18,310.
B) $19,760.
C) $23,712.
D) $21,972.
E) $21,216.

3) Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of
12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

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 Dec. 1 Spot rate: $ 1.831

Dec. 31 Spot rate: $ 1.976

Jan. 30 Spot rate: $ 1.768

What amount of foreign exchange gain or loss should be recorded on December 31?

A) $756 gain.
B) $756 loss.
C) $0.
D) $1,740 loss.
E) $1,740 gain.

4) Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of
12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

Dec. 1 Spot rate: $ 1.831

Dec. 31 Spot rate: $ 1.976

Jan. 30 Spot rate: $ 1.768

What amount of foreign exchange gain or loss should be recorded on January 30?

A) $2,496 gain.
B) $2,496 loss.
C) $0.
D) $1,740 loss.
E) $1,740 gain.

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5) Clark Stone purchases raw material from its foreign supplier, Rinne Clay, on May 8.
Payment of 1,500,000 foreign currency units (FC) is due in 30 days. May 31 is Clark’s fiscal
year-end. The pertinent exchange rates were as follows:

May 8 Spot rate: $ 1.16

May 31 Spot rate: $ 1.18

June 7 Spot rate: $ 1.12

For what amount should Clark’s Accounts Payable be credited on May 8?

A) $1,740,000.
B) $1,850,000.
C) $1,500,000.
D) $1,680,000.
E) $1,770,000.

6) Clark Stone purchases raw material from its foreign supplier, Rinne Clay, on May 8.
Payment of 1,500,000 foreign currency units (FC) is due in 30 days. May 31 is Clark’s fiscal
year-end. The pertinent exchange rates were as follows:

May 8 Spot rate: $ 1.16

May 31 Spot rate: $ 1.18

June 7 Spot rate: $ 1.12

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

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 A) $0.
B) $30,000 gain.
C) $30,000 loss.
D) $60,000 gain.
E) $60,000 loss.

7) Clark Stone purchases raw material from its foreign supplier, Rinne Clay, on May 8.
Payment of 1,500,000 foreign currency units (FC) is due in 30 days. May 31 is Clark’s fiscal
year-end. The pertinent exchange rates were as follows:

May 8 Spot rate: $ 1.16

May 31 Spot rate: $ 1.18

June 7 Spot rate: $ 1.12

How much US $ will it cost Clark to finally pay the payable on June 7?

A) $1,850,000.
B) $1,500,000.
C) $1,770,000.
D) $1,740,000.
E) $1,680,000.

8) On June 1, Cagle Co. received a signed agreement to sell inventory for ¥650,000. The
sale would take place in 90 days. Cagle immediately signed a 90-day forward contract to sell the
yen as soon as they are received. The spot rate on June 1 was ¥1 = $0.003986, and the 90-day
forward rate was ¥1 = $0.004021. At what amount would Cagle record the Forward Contract on
June 1?

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 A) $2,613.65.
B) $0.
C) $2,590.90.
D) $2,275.00.
E) $1,993.00.

9) Curtis purchased inventory on December 1, 2020. Payment of 250,000 stickles was to be

made in sixty days. Also on December 1, Curtis signed a contract to purchase §250,000 in sixty
days. The spot rate was §1 = 0.33682, and the 60-day forward rate was §1 = $0.36842. On
December 31, the spot rate was §1 = 0.32438 and the 30-day forward rate was §1 = 0.36386.
Assume an annual interest rate of 12% and a fair value hedge. The present value for one month
at 12% is 0.9901.In the journal entry to record the establishment of a forward exchange contract,
at what amount should the Forward Contract account be recorded on December 1?

A) $90,965.
B) $84,205.
C) $81,095.
D) $92,105.
E) $0.

10) Nelson Co. ordered parts costing §120,000 from a foreign supplier on May 12 when the
spot rate was $0.31 per stickle. A one-month forward contract was signed on that date to
purchase §120,000 at a forward rate of $0.32 per stickle. On June 12, when the parts were
received and payment was made, the spot rate was $0.36 per stickle. At what amount should
inventory be reported?

A) $0.
B) $43,200.
C) $38,400.
D) $37,200.
E) $6,000.

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11) Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2021, with payment of 20 million Korean won to be received on January 15, 2022. The
following exchange rates applied:

Date Spot Rate Forward Rate to Jan.15

December 16, 2021 $ 0.00082 $ 0.00089

December 31, 2021 0.00080 0.00083

January 15, 2022 0.00086 0.00086

Assuming a forward contract was not entered into, what would be the net impact on Jackson
Corp.'s 2021 income statement related to this transaction?

A) $600 (gain).
B) $600 (loss).
C) $400 (gain).
D) $400 (loss).
E) $0

12) Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2021, with payment of 20 million Korean won to be received on January 15, 2022. The
following exchange rates applied:

Date Spot Rate Forward Rate to Jan.15

December 16, 2021 $ 0.00082 $ 0.00089

December 31, 2021 0.00080 0.00083

January 15, 2022 0.00086 0.00086

Assuming a forward contract was entered into, the foreign currency was originally sold in the
foreign currency market on December 16, 2021 at a:

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 A) Forward contract discount $1,400.
B) Forward contract premium $1,400.
C) Forward contract discount $600.
D) Forward discount premium $600.
E) There is no premium or discount because the fair value of the contract is zero.

13) Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2021, with payment of 20 million Korean won to be received on January 15, 2022. The
following exchange rates applied:

Date Spot Rate Forward Rate to Jan.15

December 16, 2021 $ 0.00082 $ 0.00089

December 31, 2021 0.00080 0.00083

January 15, 2022 0.00086 0.00086

Assuming a forward contract was entered into on December 16, at what amount should the
forward contract be recorded at December 31, 2021? Assume an annual interest rate of 12% and
a fair value hedge. The present value for one month at 12% is 0.9901.

A) $396.
B) $594.
C) $1,188.
D) $1,200.
E) $792.

14) Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2021, with payment of 20 million Korean won to be received on January 15, 2022. The
following exchange rates applied:

Date Spot Rate Forward Rate to Jan.15

December 16, 2021 $ 0.00082 $ 0.00089

December 31, 2021 0.00080 0.00083

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January 15, 2022 0.00086 0.00086

Assuming a forward contract was entered into on December 16, how would the forward contract
be reflected on Jackson’s December 31, 2021 balance sheet?

A) Forward contract (asset).

B) Forward contract (liability).
C) Foreign currency (asset).
D) Foreign currency (liability).
E) Foreign exchange (liability).

15) Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2021, with payment of 20 million Korean won to be received on January 15, 2022. The
following exchange rates applied:

Date Spot Rate Forward Rate to Jan.15

December 16, 2021 $ 0.00082 $ 0.00089

December 31, 2021 0.00080 0.00083

January 15, 2022 0.00086 0.00086

Assuming a forward contract was entered into on December 16, what would be the net impact on
Jackson's 2021 income statement related to this transaction? Assume an annual interest rate of
12% and a fair value hedge. The present value for one half-month at 12% is 0.9950.

A) $800 (gain).
B) $1,594 (loss).
C) $1,594 (gain).
D) $794 (loss).
E) $794 (gain).

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16) Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2021, with payment of 20 million Korean won to be received on January 15, 2022. The
following exchange rates applied:

Date Spot Rate Forward Rate to Jan.15

December 16, 2021 $ 0.00082 $ 0.00089

December 31, 2021 0.00080 0.00083

January 15, 2022 0.00086 0.00086

Assuming a forward contract was entered into on December 16, what would be the net impact on
Jackson's 2022 income statement related to this transaction?

A) $400 (gain).
B) $400 (loss).
C) $600 (gain).
D) $600 (loss).
E) $0.

17) Schrute Inc. had a receivable from a foreign customer that is due in the local currency of
the customer (stickles). On December 31, 2021, this receivable for §200,000 was correctly
included in Schrute’s balance sheet at $167,000. When the receivable was collected on February
15, 2022, the U.S. dollar equivalent was $181,000. In Schrute's 2022 consolidated income
statement, how much should have been reported as a foreign exchange gain?

A) $0.
B) $7,000.
C) $19,000.
D) $33,000.
E) $14,000.

18) A spot rate may be defined as

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 A) The price a foreign currency can be purchased or sold today.
B) The price today at which a foreign currency can be purchased or sold in the future.
C) The forecasted future value of a foreign currency.
D) The U.S. dollar value of a foreign currency.
E) The Euro value of a foreign currency.

19) The forward rate may be defined as

A) The price a foreign currency can be purchased or sold today.

B) The price today at which a foreign currency can be purchased or sold in the future.
C) The forecasted future value of a foreign currency.
D) The U.S. dollar value of a foreign currency.
E) The Euro value of a foreign currency.

20) Which statement is true regarding a foreign currency option?

A) A foreign currency option gives the holder the obligation to buy or sell foreign
currency in the future.
B) A foreign currency option gives the holder the obligation to only sell foreign
currency in the future.
C) A foreign currency option gives the holder the obligation to only buy foreign
currency in the future.
D) A foreign currency option gives the holder the right but not the obligation to buy or
sell foreign currency in the future.
E) A foreign currency option gives the holder the obligation to buy or sell foreign
currency in the future at the spot rate on the future date.

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

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 A) If the foreign currency appreciates, a foreign exchange gain will result.
B) If the foreign currency depreciates, a foreign exchange gain will result.
C) No foreign exchange gain or loss will result.
D) If the foreign currency appreciates, a foreign exchange loss will result.
E) If the foreign currency depreciates, a foreign exchange loss will result.

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

A) If the foreign currency appreciates, a foreign exchange gain will result.

B) If the foreign currency depreciates, a foreign exchange gain will result.
C) No foreign exchange gain or loss will result.
D) If the foreign currency appreciates, a foreign exchange loss will result.
E) Any gain or loss will be included in comprehensive income.

23) A U.S. company buys merchandise from a foreign company denominated in U.S. dollars.
Which of the following statements is true?

A) If the foreign currency appreciates, a foreign exchange gain will result.

B) If the foreign currency depreciates, a foreign exchange gain will result.
C) No foreign exchange gain or loss will result.
D) If the foreign currency appreciates, a foreign exchange loss will result.
E) Any gain or loss will be included in comprehensive income.

24) A U.S. company buys merchandise from a foreign company denominated in the foreign
currency. Which of the following statements is true?

A) If the foreign currency appreciates, a foreign exchange gain will result.

B) If the foreign currency depreciates, a foreign exchange loss will result.
C) No foreign exchange gain or loss will result.
D) If the foreign currency appreciates, a foreign exchange loss will result.
E) Any gain or loss will be included in comprehensive income.

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

A) Recognized foreign currency denominated assets and liabilities.

B) Unrecognized foreign currency firm commitments.
C) Forecasted foreign currency denominated transactions.
D) Net investment in foreign operations.
E) Deferred foreign currency gains and losses.

26) All of the following data may be needed to determine the fair value of a forward contract
at any point in time except

A) The forward rate when the forward contract was entered into.
B) The current forward rate for a contract that matures on the same date as the forward
contract entered into.
C) The future spot rate.
D) A discount rate.
E) The company's incremental borrowing rate.

27) A forward contract may be used for which of the following?1) A fair value hedge of an
asset.2) A cash flow hedge of an asset.3) A fair value hedge of a liability.4) A cash flow hedge of
a liability.

A) 1 and 3
B) 2 and 4
C) 1 and 2
D) 1, 3, and 4
E) 1, 2, 3, and 4

28) A company has a discount on a forward contract for a foreign currency denominated
asset. How is the discount recognized over the life of the contract under fair value hedge
accounting?

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 A) As a debit to discount expense.
B) As a debit to amortization expense.
C) As a debit to accumulated other comprehensive income.
D) As a debit impact on net income, as a result of the hedge.
E) As a decreases to sales.

29) Which of the following statements is true concerning hedge accounting?

A) Hedges of foreign currency firm commitments are used for future sales only.
B) Hedges of foreign currency firm commitments are used for future purchases only.
C) Hedges of foreign currency firm commitments are used for current sales or
purchases.
D) Hedges of foreign currency firm commitments are used for future sales or
purchases.
E) Hedges of foreign currency firm commitments are entered into for speculative
purposes.

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

A) Forward contracts used as a fair value hedge of a firm commitment.

B) Options used as a fair value hedge of a firm commitment.
C) Option contract cash flow hedge of a forecasted transaction.
D) Forward contract cash flow hedges of a forecasted transaction.
E) Forward contracts used to hedge a foreign currency denominated liability.

31) On December 1, 2021, Keenan Company, a U.S. firm, sold merchandise to Velez
Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on
February 1, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97
(U.S.) on December 1, 2021. This foreign currency option is designated as a cash flow hedge.
Relevant exchange rates follow:

Date Spot Rate Option Premium

December 1, 2021 $ 0.97 $ 0.05

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December 31, 2021 $ 0.95 $ 0.04

February 1, 2022 $ 0.94 $ 0.03

Compute the fair value of the foreign currency option at December 1, 2021.

A) $6,000.
B) $4,500.
C) $3,000.
D) $7,500.
E) $1,500.

32) On December 1, 2021, Keenan Company, a U.S. firm, sold merchandise to Velez
Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on
February 1, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97
(U.S.) on December 1, 2021. This foreign currency option is designated as a cash flow hedge.
Relevant exchange rates follow:

Date Spot Rate Option Premium

December 1, 2021 $ 0.97 $ 0.05

December 31, 2021 $ 0.95 $ 0.04

February 1, 2022 $ 0.94 $ 0.03

Compute the fair value of the foreign currency option at December 31, 2021.

A) $6,000.
B) $4,500.
C) $3,000.
D) $7,500.
E) $1,500.

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33) On December 1, 2021, Keenan Company, a U.S. firm, sold merchandise to Velez
Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on
February 1, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97
(U.S.) on December 1, 2021. This foreign currency option is designated as a cash flow hedge.
Relevant exchange rates follow:

Date Spot Rate Option Premium

December 1, 2021 $ 0.97 $ 0.05

December 31, 2021 $ 0.95 $ 0.04

February 1, 2022 $ 0.94 $ 0.03

Compute the fair value of the foreign currency option at February 1, 2022.

A) $6,000.
B) $4,500.
C) $3,000.
D) $7,500.
E) $1,500.

34) On December 1, 2021, Keenan Company, a U.S. firm, sold merchandise to Velez
Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on
February 1, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97
(U.S.) on December 1, 2021. This foreign currency option is designated as a cash flow hedge.
Relevant exchange rates follow:

Date Spot Rate Option Premium

December 1, 2021 $ 0.97 $ 0.05

December 31, 2021 $ 0.95 $ 0.04

February 1, 2022 $ 0.94 $ 0.03

Compute the U.S. dollars received on February 1, 2022.

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 A) $138,000.
B) $136,500.
C) $145,500.
D) $141,000
E) $142,500.

35) Which of the following approaches is used in the United States in accounting for foreign
currency transactions?

A) One-transaction perspective; defer foreign exchange gains and losses.

B) Two-transaction perspective; accrue foreign exchange gains and losses.
C) Three-transaction perspective; defer foreign exchange gains and losses.
D) One-transaction perspective; accrue foreign exchange gains and losses.
E) Two-transaction perspective; defer foreign exchange gains and losses.

36) When a U.S. company purchases parts from a foreign company, which of the following
will result in zero foreign exchange gain or loss?

A) The transaction is denominated in U.S. dollars.

B) The option strike price to sell foreign currency is less than the spot rate of the
currency.
C) The option strike price to buy foreign currency is less than the spot rate of the
currency.
D) The foreign currency appreciated in value relative to the U.S. dollar.
E) The foreign currency depreciated in value relative to the U.S. dollar.

37) Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in
Mexican pesos. On December 31, 2020, this receivable for 75,000 pesos was correctly included
in Alpha’s balance sheet at $8,000. The receivable was collected on March 2, 2021, when the
U.S. equivalent was $6,900. How much foreign exchange gain or loss will Alpha record on the
income statement for the year ended December 31, 2021?

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 A) $1,100 loss.
B) $1,100 gain.
C) $6,900 loss.
D) $6,900 gain.
E) $8,000 gain.

38) On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a
foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan
was as follows:

Date Amount
April 1, 2020 $ 97,000

December 31, 2020 103,000

April 1, 2021 105,000

How much foreign exchange gain or loss should be included in Shannon’s 2020 income
statement?

A) $3,000 gain.
B) $3,000 loss.
C) $6,000 gain.
D) $6,000 loss.
E) $7,000 gain.

39) On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a
foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan
was as follows:

Date Amount
April 1, 2020 $ 97,000

December 31, 2020 103,000

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April 1, 2021 105,000

How much foreign exchange gain or loss should be included in Shannon’s 2021 income
statement?

A) $1,000 gain.
B) $1,000 loss.
C) $2,000 gain.
D) $2,000 loss.
E) $8,000 loss.

40) On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a
foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan
was as follows:

Date Amount
April 1, 2020 $ 97,000

December 31, 2020 103,000

April 1, 2021 105,000

Angela, Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound
payable resulting from imports from England. Angela recorded foreign exchange gain related to
both its euro receivable and pound payable. Did the foreign currencies increase or decrease in
dollar value from the date of the transaction to the settlement date?

Euro Pound

A) Increase Increase
B) Increase Decrease
C) Decrease Decrease
D) Decrease Increase
E) No change Decrease

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 A) Option A.
B) Option B.
C) Option C.
D) Option D.
E) Option E.

41) Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia and
a euro payable resulting from imports from Italy. Frankfurter recorded foreign exchange loss
related to both its ruble receivable and euro payable. Did the foreign currencies increase or
decrease in dollar value from the date of the transaction to the settlement date?

Ruble Euro

A) Increase Decrease
B) Decrease Decrease
C) Decrease Increase
D) No change Decrease
E) Increase Increase

A) Option A.
B) Option B.
C) Option C.
D) Option D.
E) Option E.

42) Parker Corp., a U.S. company, had the following foreign currency transactions during
2021:(1.) Purchased merchandise from a foreign supplier on July 5, 2021 for the U.S. dollar
equivalent of $80,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of
$82,000.(2.) On October 1, 2021 borrowed the U.S. dollar equivalent of $872,000 evidenced by
a non-interest-bearing note payable in euros on October 1, 2022. The U.S. dollar equivalent of
the note amount was $860,000 on December 31, 2021, and $881,000 on October 1, 2022.What
amount should be included as a foreign exchange gain or loss from the two transactions for
2021?

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 A) $2,000 loss.
B) $2,000 gain.
C) $10,000 gain.
D) $14,000 loss.
E) $14,000 gain.

43) Parker Corp., a U.S. company, had the following foreign currency transactions during
2021:(1.) Purchased merchandise from a foreign supplier on July 5, 2021 for the U.S. dollar
equivalent of $80,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of
$82,000.(2.) On October 1, 2021 borrowed the U.S. dollar equivalent of $872,000 evidenced by
a non-interest-bearing note payable in euros on October 1, 2022. The U.S. dollar equivalent of
the note amount was $860,000 on December 31, 2021, and $881,000 on October 1, 2022.What
amount should be included as a foreign exchange gain or loss from the two transactions for
2022?

A) $9,000 loss.
B) $9,000 gain.
C) $11,000 loss.
D) $21,000 loss.
E) $21,000 gain.

44) Winston Corp., a U.S. company, had the following foreign currency transactions during
2021:(1.) Purchased merchandise from a foreign supplier on July 16, 2021 for the U.S. dollar
equivalent of $47,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of
$54,000.(2.) On October 15, 2021 borrowed the U.S. dollar equivalent of $315,000 evidenced by
a non-interest-bearing note payable in euros on October 15, 2022. The U.S. dollar equivalent of
the note amount was $295,000 on December 31, 2021, and $299,000 on October 15, 2022.What
amount should be included as a foreign exchange gain or loss from the two transactions for
2021?

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 A) $9,000 loss.
B) $9,000 gain.
C) $11,000 loss.
D) $13,000 gain.
E) $14,000 gain.

45) Winston Corp., a U.S. company, had the following foreign currency transactions during
2021:(1.) Purchased merchandise from a foreign supplier on July 16, 2021 for the U.S. dollar
equivalent of $47,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of
$54,000.(2.) On October 15, 2021 borrowed the U.S. dollar equivalent of $315,000 evidenced by
a non-interest-bearing note payable in euros on October 15, 2022. The U.S. dollar equivalent of
the note amount was $295,000 on December 31, 2021, and $299,000 on October 15, 2022.What
amount should be included as a foreign exchange gain or loss from the two transactions for
2022?

A) $1,000 loss.
B) $1,000 gain.
C) $2,000 loss.
D) $4,000 gain.
E) $4,000 loss.

46) Williams, Inc., a U.S. company, has a Japanese yen account receivable resulting from an
export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March
1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was
$0.0094, and the forward rate was $0.0095. Which of the following did the U.S. exporter report
in net income?

A) Discount revenue.
B) Premium revenue.
C) Discount expense.
D) Premium expense.
E) Both discount revenue and premium expense.

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47) Larson Company, a U.S. company, has an India rupee account receivable resulting from
an export sale on September 7 to a customer in India. Larson signed a forward contract on
September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable. The
spot rate was $0.023, and the forward rate was $0.021. Which of the following did the U.S.
exporter report in net income?

A) Discount revenue.
B) Premium revenue.
C) Discount expense.
D) Premium expense.
E) Both discount revenue and premium expense.

48) Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier
on July 7 when the spot rate was $0.025 per rupee. A one-month forward contract was signed on
that date to purchase 100,000 rupee at a rate of $0.027. The forward contract is properly
designated as a fair value hedge of the 100,000 rupee firm commitment. On August 7, when the
parts are received, the spot rate is $0.028. At what amount should the payable be carried on
Primo’s books?

A) $2,000.
B) $2,100.
C) $2,500.
D) $2,700.
E) $2,800.

49) Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts
from a foreign supplier on July 7 when the spot rate was $0.025 per baht. A one-month forward
contract was signed on that date to purchase 1,000,000 bahts at a rate of $0.027. The forward
contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment. On
August 7, when the parts are received, the spot rate is $0.028. What is the amount of accounts
payable that will be paid at this date?

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 A) $20,000.
B) $20,100.
C) $25,000.
D) $27,000.
E) $28,000.

50) On December 1, 2021, Joseph Company, a U.S. company, entered into a three-month
forward contract to purchase 50,000 pesos on March 1, 2022, as a fair value hedge of a foreign
currency denominated account payable. The following U.S. dollar per peso exchange rates apply:

Date Spot Rate Forward Rate

(Mar. 1, 2022)
December 1, 2021 $ 0.092 $ 0.105

December 31, 2021 0.090 0.095

March 1, 2022 0.089 N/A

Joseph’s incremental borrowing rate is 12 percent. The present value factor for two months at an
annual interest rate of 12 percent is 0.9803. Which of the following is included in Joseph’s
December 31, 2021 balance sheet for the forward contract?

A) $5,146.58 asset.
B) $5,146.58 liability.
C) $500.00 liability.
D) $490.15 asset.
E) $490.15 liability.

51) On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a

French customer in three months, denominating the transaction in euros. On April 1, the spot rate
is $1.41 per euro, and Quality enters into a three-month forward contract cash flow hedge to sell
400,000 euros at a rate of $1.36. At the end of three months, the spot rate is $1.37 per euro, and
Quality delivers the merchandise, collecting 400,000 euros. What are the effects on net income
from these transactions?

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 A) $20,000 Discount Expense plus a $12,000 positive Adjustment to Net Income when
the merchandise is delivered.
B) $20,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when
the merchandise is delivered.
C) $20,000 Discount Expense plus a $20,000 negative Adjustment to Net Income when
the merchandise is delivered.
D) $20,000 Discount Expense plus a $16,000 positive Adjustment to Net Income when
the merchandise is delivered.
E) $20,000 Discount Expense plus a $20,000 positive Adjustment to Net Income when
the merchandise is delivered.

52) Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a
price of 250,000 pounds, with delivery and payment to be made on October 24, 2021. On July
24, 2021, Woolsey purchased a three-month put option for 250,000 British pounds and
designated this option as a cash flow hedge of a forecasted foreign currency transaction expected
to be completed in late October, 2021. The following exchange rates apply:

Option strike price $ 2.17

Option cost $ 4,000

July 24 spot rate $ 2.17

October 24 spot rate $ 2.13

October 24 option premium $ 0.04

What amount will Woolsey include as an option expense in net income for the period July 24 to
October 24?

A) $4,000.
B) $5,000.
C) $10,000.
D) $12,000.
E) $14,000.

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53) Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a
price of 250,000 pounds, with delivery and payment to be made on October 24, 2021. On July
24, 2021, Woolsey purchased a three-month put option for 250,000 British pounds and
designated this option as a cash flow hedge of a forecasted foreign currency transaction expected
to be completed in late October, 2021. The following exchange rates apply:

Option strike price $ 2.17

Option cost $ 4,000

July 24 spot rate $ 2.17

October 24 spot rate $ 2.13

October 24 option premium $ 0.04

What amount will Woolsey include as Adjustment to Net Income for the period ended October
31?

A) $6,000 positive.
B) $6,000 negative.
C) $10,000 positive.
D) $10,000 negative.
E) $14,000 positive.

54) Atherton, Inc., a U.S. company, expects to order goods from a foreign supplier at a price
of 100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton
purchased a three-month call option on 100,000 lira and designated this option as a cash flow
hedge of a forecasted foreign currency transaction. The following exchange rates apply:

Option Strike Price $ 4.34

Option Cost $ 5,000

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January 17 Spot Rate $ 4.34

April 17 Spot Rate $ 4.26

What amount will Atherton include as an option expense in net income for the period January 17
to April 17?

A) $4,000
B) $4,260
C) $4,340
D) $5,000
E) $5,260

55) On May 1, 2021, Mosby Company received an order to sell a machine to a customer in
Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was
received on March 1, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to
sell 2,000,000 pesos on March 1, 2022 at a price of $190,000. Mosby properly designates the
option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair
value of $3,200 on December 31, 2021. The following spot exchange rates apply:

Date Spot Rate

May 1, 2021 $ 0.095

December 31, 2021 $ 0.094

March 1, 2022 $ 0.089

Mosby’s incremental borrowing rate is 12%, and the present value factor for two months at a
12% annual rate is 0.9803.What was the impact on Mosby's 2021 net income as a result of this
fair value hedge of a firm commitment?

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 A) $1,760.60 decrease.
B) $1,960.60 decrease.
C) $1,000.00 decrease.
D) $1,760.60 increase.
E) $1,960.60 increase.

56) On May 1, 2021, Mosby Company received an order to sell a machine to a customer in
Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was
received on March 1, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to
sell 2,000,000 pesos on March 1, 2022 at a price of $190,000. Mosby properly designates the
option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair
value of $3,200 on December 31, 2021. The following spot exchange rates apply:

Date Spot Rate

May 1, 2021 $ 0.095

December 31, 2021 $ 0.094

March 1, 2022 $ 0.089

Mosby’s incremental borrowing rate is 12%, and the present value factor for two months at a
12% annual rate is 0.9803.What was the impact on Mosby's 2022 net income as a result of this
fair value hedge of a firm commitment?

A) $1,800.00 decrease.
B) $2,500.00 increase.
C) $2,500.00 decrease.
D) $188,760.60 increase.
E) $188,760.60 decrease.

Version 1 27
57) On May 1, 2021, Mosby Company received an order to sell a machine to a customer in
Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was
received on March 1, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to
sell 2,000,000 pesos on March 1, 2022 at a price of $190,000. Mosby properly designates the
option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair
value of $3,200 on December 31, 2021. The following spot exchange rates apply:

Date Spot Rate

May 1, 2021 $ 0.095

December 31, 2021 $ 0.094

March 1, 2022 $ 0.089

Mosby’s incremental borrowing rate is 12%, and the present value factor for two months at a
12% annual rate is 0.9803.What was the overall result of having entered into this hedge of
exposure to foreign exchange risk?

A) $0.
B) $9,000 net loss on the option.
C) $9,000 net gain on the option.
D) $2,000 net gain on the option.
E) $2,000 net loss.

58) On March 1, 2021, Mattie Company received an order to sell a machine to a customer in
England at a price of 200,000 British pounds. The machine was shipped and payment was
received on March 1, 2022. On March 1, 2021, Mattie purchased a put option giving it the right
to sell 200,000 British pounds on March 1, 2022 at a price of $380,000. Mattie properly
designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and
had a fair value of $2,200 on December 31, 2021. The following spot exchange rates apply:

Date Spot Rate

March 1, 2021 $ 1.90

December 31, 2021 $ 1.89

March 1, 2022 $ 1.84

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Mattie’s incremental borrowing rate is 12%, and the present value factor for two months at a
12% annual rate is 0.9803.What was the net impact on Mattie’s 2021 income as a result of this
fair value hedge of a firm commitment?

A) $1,800.00 decrease.
B) $1,760.60 decrease.
C) $2,240.40 decrease.
D) $1,660.40 increase.
E) $2,240.60 increase.

59) On March 1, 2021, Mattie Company received an order to sell a machine to a customer in
England at a price of 200,000 British pounds. The machine was shipped and payment was
received on March 1, 2022. On March 1, 2021, Mattie purchased a put option giving it the right
to sell 200,000 British pounds on March 1, 2022 at a price of $380,000. Mattie properly
designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and
had a fair value of $2,200 on December 31, 2021. The following spot exchange rates apply:

Date Spot Rate

March 1, 2021 $ 1.90

December 31, 2021 $ 1.89

March 1, 2022 $ 1.84

Mattie’s incremental borrowing rate is 12%, and the present value factor for two months at a
12% annual rate is 0.9803.What was the net impact on Mattie’s 2022 income including the fair
value hedge of a firm commitment?

A) $379,760.60 decrease.
B) $8,360.60 increase.
C) $8,360.60 decrease.
D) $4,390.40 decrease.
E) $379,760.60 increase.

Version 1 29
60) On March 1, 2021, Mattie Company received an order to sell a machine to a customer in
England at a price of 200,000 British pounds. The machine was shipped and payment was
received on March 1, 2022. On March 1, 2021, Mattie purchased a put option giving it the right
to sell 200,000 British pounds on March 1, 2022 at a price of $380,000. Mattie properly
designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and
had a fair value of $2,200 on December 31, 2021. The following spot exchange rates apply:

Date Spot Rate

March 1, 2021 $ 1.90

December 31, 2021 $ 1.89

March 1, 2022 $ 1.84

Mattie’s incremental borrowing rate is 12%, and the present value factor for two months at a
12% annual rate is 0.9803.What was the net increase or decrease in cash flow from having
purchased the foreign currency option to hedge this exposure to foreign exchange risk?

A) $0
B) $10,000 increase.
C) $10,000 decrease.
D) $20,000 increase.
E) $20,000 decrease.

61) On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British
supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle
pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per
pound. The option is considered to be a cash flow hedge of a forecasted foreign currency
transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot
exchange rates apply:

Date Spot Rate

October 1, 2021 $ 2.00

December 31, 2021 $ 1.97

February 1, 2022 $ 2.01

Version 1 30
What journal entry should Eagle prepare on October 1, 2021?

Event General Journal Debit Credit

A) Cash 1,800

Foreign Currency Option 1,800

B) Forward Contract 1,800

Cash 1,800

C) Foreign Currency Option 1,800

Gain on Foreign Currency 1,800

D) Loss on Foreign Currency 1,800

Cash 1,800

E) Foreign Currency Option 1,800

Cash 1,800

A) Option A.
B) Option B.
C) Option C.
D) Option D.
E) Option E.

62) On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British
supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle
pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per
pound. The option is considered to be a cash flow hedge of a forecasted foreign currency
transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot
exchange rates apply:

Date Spot Rate

Version 1 31
October 1, 2021 $ 2.00

December 31, 2021 $ 1.97

February 1, 2022 $ 2.01

What journal entry should Eagle prepare on December 31, 2021?

Event General Journal Debit Credit

A) Foreign Currency Option 200

Cash 200

B) Foreign Currency Option 200

Option Revenue 200

C) Foreign Currency Option 400

Option Revenue 400

D) Option Expense 200

Foreign Currency Option 200

E) Option Expense 400

Foreign Currency Option 400

Version 1 32
 A) Option A.
B) Option B.
C) Option C.
D) Option D.
E) Option E.

63) On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British
supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle
pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per
pound. The option is considered to be a cash flow hedge of a forecasted foreign currency
transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot
exchange rates apply:

Date Spot Rate

October 1, 2021 $ 2.00

December 31, 2021 $ 1.97

February 1, 2022 $ 2.01

What is the amount of option expense for 2022 from these transactions?

A) $1,000.
B) $1,600.
C) $2,500.
D) $2,600.
E) $0.

64) On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British
supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle
pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per
pound. The option is considered to be a cash flow hedge of a forecasted foreign currency
transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot
exchange rates apply:

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Date Spot Rate
October 1, 2021 $ 2.00

December 31, 2021 $ 1.97

February 1, 2022 $ 2.01

What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2022 from
these transactions?

A) $1,000.
B) $1,600.
C) $1,800.
D) $2,000.
E) $2,600.

65) On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British
supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle
pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per
pound. The option is considered to be a cash flow hedge of a forecasted foreign currency
transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot
exchange rates apply:

Date Spot Rate

October 1, 2021 $ 2.00

December 31, 2021 $ 1.97

February 1, 2022 $ 2.01

What is the amount of Cost of Goods Sold for 2022 as a result of these transactions?

Version 1 34
 A) $200,000.
B) $195,000.
C) $201,000.
D) $202,600.
E) $203,000.

66) On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British
supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle
pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per
pound. The option is considered to be a cash flow hedge of a forecasted foreign currency
transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot
exchange rates apply:

Date Spot Rate

October 1, 2021 $ 2.00

December 31, 2021 $ 1.97

February 1, 2022 $ 2.01

What is the 2022 effect on net income as a result of these transactions?

A) $195,000
B) $201,600
C) $201,000
D) $202,600
E) $203,000

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

Version 1 35
 A) Derivatives are reported on the balance sheet only as an asset.
B) Derivatives are reported on the balance sheet only as a liability.
C) Changes in derivative cost basis are recorded in the asset value.
D) Changes in derivative fair value are included in comprehensive income.
E) Changes in derivative cost basis are recorded in the liability value.

68) Authoritative literature provides guidance for hedges of the following sources of foreign
exchange risk.I. Recognized foreign currency denominated assets and liabilities.II. Unrecognized
foreign currency firm commitments.III. Forecasted foreign currency denominated transactions.

A) I only
B) I and II
C) II only
D) II and III
E) I, II, and III

69) All of the following data points are needed to determine the fair value of a forward
contract (at any point), except

A) The forward rate when the forward contract was entered into.
B) The current forward rate for a contract that matures on the same date as the forward
contract entered into.
C) The forward rate for a contract that has the same duration as the forward contract
entered into.
D) A discount rate which is typically the company’s incremental borrowing rate.
E) A future rate which is typically the company’s incremental borrowing rate.

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

Version 1 36
 A) Utilized to adjust the derivative asset.
B) Recognized immediately as a gain or loss in net income.
C) Recognized as a loss in other comprehensive income.
D) Recognized as a gain in other comprehensive income.
E) Recognized as a gain or loss in net income at a later date.

71) Which of the following is not a condition of accounting for hedge derivatives?

A) The derivative is minimally effective in offsetting changes in the cash flows or fair
value related to the hedged item.
B) The derivative is properly documented as a hedge.
C) The derivative is used to hedge a cash flow exposure to foreign exchange risk.
D) The derivative is highly effective in offsetting changes in the cash flows or fair
value related to the hedged item.
E) The derivative is used to hedge a fair value exposure to foreign exchange risk.

72) To account for a forward contract cash flow hedge of a foreign currency denominated
asset or liability at initiation date requires which of the following?

A) 1. Recognize the transaction (sale or purchase) and foreign currency denominated

asset or liability2. Recognize option as an asset (purchase price is fair value)
B) 1. No entry related to the firm commitment (zero value)2. No entry related to
forward contract (zero fair value)
C) 1. Recognize the transaction (sale or purchase) and foreign currency denominated
asset or liability2. No entry related to forward contract (zero fair value)
D) 1. Recognize the transaction (sale or purchase).2. Recognize the option as a liability.
E) 1. None. No journal entry is required.

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

Version 1 37
 A) 1. Adjust hedged asset or liability to fair value, with counterpart (change in fair
value) reported as foreign exchange gain or loss in net income,2. Adjust forward contract to fair
value (either an asset or a liability), with counterpart (change in fair value) reported in AOCI,3.
Transfer an amount from AOCI to net income to offset the foreign exchange gain or loss on the
hedged asset or liability recognized in 1, and4. Transfer from AOCI to net income (as discount
expense or premium revenue) the current period's amortization of discount or premium.
B) 1. Adjust hedged asset or liability to fair value, with counterpart (change in fair
value) reported as foreign exchange gain or loss in net income and2. Adjust option to fair value
(either an asset or zero value), with counterpart (change in fair value) reported as gain or loss in
net income.
C) 1. Adjust forward contract to fair value (either an asset or a liability), with
counterpart (change in fair value) reported as gain or loss in net income and2. Adjust firm
commitment to fair value (based on change in forward rate), with counterpart (change in fair
value) reported as gain or loss in net income.
D) 1. Adjust hedged asset, with counterpart (change in fair value) reported as a foreign
exchange gain in net income and2. Adjust forward contract to fair value (either an asset or a
liability), with counterpart (change in fair value) reported as a gain or loss in net income.
E) 1. None. No journal entry is required.

SHORT ANSWER. Write the word or phrase that best completes each statement or
answers the question.
74) What is the purpose of a hedge of foreign exchange risk?

75) How does a foreign currency forward contract differ from a foreign currency option?

76) What factors create a foreign exchange gain?

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

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

79) What happens when a U.S. company sells goods denominated in a foreign currency and
the foreign currency depreciates?

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

81) What is meant by the terms direct quote and indirect quote?

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82) How can an import purchase result in an exposure to foreign exchange risk for the buyer?

83) How can an export sale result in an exposure to foreign exchange risk for the seller?

84) Gaw Produce Company purchased inventory from a Japanese company on December 18,
2021. Payment of 4,000,000 yen (¥) was due on January 18, 2022. Exchange rates between the
dollar and the yen were as follows:

Date Exchange Rate

December 18, 2021 ¥1 = $0.0080

December 31, 2021 ¥1 = $0.0082

January 18, 2022 ¥1 = $0.0083

Required:Prepare all journal entries for Gaw Produce Co. in connection with the purchase and
payment.

85) Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15,
2021, for 100,000 stickles. Payment was received on October 15, 2021. The following exchange
rates applied:

Date Exchange Rate

September 15, 2021 §1 = $0.48

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September 30, 2021 §1 = $0.50

October 15, 2021 §1 = $0.44

Required:Prepare all journal entries for Old Colonial Corp. in connection with this sale
assuming that the company closes its books on September 30 to prepare interim financial
statements.

86) Prepare all journal entries in U.S. dollars along with any December 31, 2021 adjusting
entries. Coyote uses a perpetual inventory system.

87) Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2021:

Mar. 1 Bought inventory costing 60,000 pesos on credit.

May 1 Sold 60% of the inventory for 54,000 pesos on credit.

Aug. 1 Collected 48,000 pesos from customers

Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

March 1, 2021 $0.20 = 1 peso

May 1, 2021 $0.22 = 1 peso

August 1, 2021 $0.23 = 1 peso

September 1, 2021 $0.24 = 1 peso

Version 1 41
December 31, 2021 $0.25 = 1 peso

What amount will Coyote Corp. report in its 2021 balance sheet for Inventory?

88) Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2021:

Mar. 1 Bought inventory costing 60,000 pesos on credit.

May 1 Sold 60% of the inventory for 54,000 pesos on credit.

Aug. 1 Collected 48,000 pesos from customers

Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

March 1, 2021 $0.20 = 1 peso

May 1, 2021 $0.22 = 1 peso

August 1, 2021 $0.23 = 1 peso

September 1, 2021 $0.24 = 1 peso

December 31, 2021 $0.25 = 1 peso

What amount will Coyote Corp. report in its 2021 income statement for Cost of goods sold?

89) Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2021:

Version 1 42
 Mar. 1 Bought inventory costing 60,000 pesos on credit.

May 1 Sold 60% of the inventory for 54,000 pesos on credit.

Aug. 1 Collected 48,000 pesos from customers

Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

March 1, 2021 $0.20 = 1 peso

May 1, 2021 $0.22 = 1 peso

August 1, 2021 $0.23 = 1 peso

September 1, 2021 $0.24 = 1 peso

December 31, 2021 $0.25 = 1 peso

What amount will Coyote Corp. report in its 2021 income statement for Sales?

90) Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2021:

Mar. 1 Bought inventory costing 60,000 pesos on credit.

May 1 Sold 60% of the inventory for 54,000 pesos on credit.

Aug. 1 Collected 48,000 pesos from customers

Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

March 1, 2021 $0.20 = 1 peso

Version 1 43
May 1, 2021 $0.22 = 1 peso

August 1, 2021 $0.23 = 1 peso

September 1, 2021 $0.24 = 1 peso

December 31, 2021 $0.25 = 1 peso

What amount will Coyote Corp. report in its 2021 balance sheet for Accounts receivable?

91) Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2021:

Mar. 1 Bought inventory costing 60,000 pesos on credit.

May 1 Sold 60% of the inventory for 54,000 pesos on credit.

Aug. 1 Collected 48,000 pesos from customers

Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

March 1, 2021 $0.20 = 1 peso

May 1, 2021 $0.22 = 1 peso

August 1, 2021 $0.23 = 1 peso

September 1, 2021 $0.24 = 1 peso

December 31, 2021 $0.25 = 1 peso

What amount will Coyote Corp. report in its 2021 balance sheet for Accounts payable?

Version 1 44
92) Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a
foreign country during 2021:

Mar. 1 Bought inventory costing 60,000 pesos on credit.

May 1 Sold 60% of the inventory for 54,000 pesos on credit.

Aug. 1 Collected 48,000 pesos from customers

Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

March 1, 2021 $0.20 = 1 peso

May 1, 2021 $0.22 = 1 peso

August 1, 2021 $0.23 = 1 peso

September 1, 2021 $0.24 = 1 peso

December 31, 2021 $0.25 = 1 peso

The beginning balance of cash was 50,000 pesos on January 1, 2021, translated at 1 peso =
$0.18. What amount will Coyote Corp. report in its 2021 balance sheet for Cash?

Version 1 45
93) On December 1, 2021, King Co. sold inventory to a customer in a foreign country. King
agreed to accept 96,000 local currency units (LCU) in full payment for this inventory. Payment
was to be made on February 1, 2022. On the date of sale, King entered into a forward exchange
contract wherein 96,000 LCU would be delivered to a currency broker in two months. The two-
month forward exchange rate on that date was 1 LCU = $0.30. Any contract discount or
premium is amortized using the straight-line method. The spot rates and forward rates on various
dates were as follows:

Date Rate Description Exchange Rate

December 1, 2021 Spot Rate $0.32 = 1
LCU
2-Month Forward Rate $0.30 = 1
LCU
December 31, 2021 Spot Rate $0.29 = 1
LCU
1-Month Forward Rate $0.28 = 1
LCU
February 1, 2022 Spot Rate $0.27 = 1
LCU

(A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal entries relating to
the transaction and the forward contract.(B.) Compute the effect on 2021 net income.(C.)
Compute the effect on 2022 net income.

94) On December 1, 2021, King Co. sold inventory to a customer in a foreign country. King
agreed to accept 96,000 local currency units (LCU) in full payment for this inventory. Payment
was to be made on February 1, 2022. On the date of sale, King entered into a forward exchange
contract wherein 96,000 LCU would be delivered to a currency broker in two months. The two-
month forward exchange rate on that date was 1 LCU = $0.30. Any contract discount or
premium is amortized using the straight-line method. The spot rates and forward rates on various
dates were as follows:

Date Rate Description Exchange Rate

December 1, 2021 Spot Rate $0.32 = 1
LCU
2-Month Forward Rate $0.30 = 1

Version 1 46
 LCU
December 31, 2021 Spot Rate $0.29 = 1
LCU
1-Month Forward Rate $0.28 = 1
LCU
February 1, 2022 Spot Rate $0.27 = 1
LCU

The company's borrowing rate is 12%. The present value factor for one month is 0.9901.(A.)
Assume this hedge is designated as a fair value hedge. Prepare the journal entries relating to the
transaction and the forward contract.(B.) Compute the effect on 2021 net income.(C.) Compute
the effect on 2022 net income.

95) On October 1, 2021, Jarvis Co. sold inventory to a customer in a foreign country,
denominated in 100,000 local currency units (LCU). Collection is expected in four months. On
October 1, 2021, a forward exchange contract was acquired whereby Jarvis Co. was to pay
100,000 LCU in four months (on February 1, 2022) and receive $78,000 in U.S. dollars. The spot
and forward rates for the LCU were as follows:

Date Rate Description Exchange Rate

October 1, 2021 Spot Rate $0.83 = 1
LCU
December 31, 2021 Spot Rate $0.85 = 1
LCU
1-Month Forward Rate $0.80 = 1
LCU
February 1, 2022 Spot Rate $0.86 = 1
LCU

The company's borrowing rate is 12%. The present value factor for one month is 0.9901.Any
discount or premium on the contract is amortized using the straight-line method.Assuming this is
a cash flow hedge; prepare journal entries for this sales transaction and forward contract.

Version 1 47
96) On October 1, 2021, Jarvis Co. sold inventory to a customer in a foreign country,
denominated in 100,000 local currency units (LCU). Collection is expected in four months. On
October 1, 2021, a forward exchange contract was acquired whereby Jarvis Co. was to pay
100,000 LCU in four months (on February 1, 2022) and receive $78,000 in U.S. dollars. The spot
and forward rates for the LCU were as follows:

Date Rate Description Exchange Rate

October 1, 2021 Spot Rate $0.83 = 1
LCU
December 31, 2021 Spot Rate $0.85 = 1
LCU
1-Month Forward Rate $0.80 = 1
LCU
February 1, 2022 Spot Rate $0.86 = 1
LCU

The company's borrowing rate is 12%. The present value factor for one month is 0.9901.Any
discount or premium on the contract is amortized using the straight-line method.Assuming this is
a fair value hedge; prepare journal entries for this sales transaction and forward contract.

97) On October 31, 2020, Darling Company negotiated a two-year 100,000-franc loan from a
foreign bank at an interest rate of 3% per year. Interest payments are made annually on October
31, and the principal will be repaid on October 31, 2022. Darling prepares U.S.-dollar financial
statements and has a December 31 year-end. Prepare all journal entries related to this foreign
currency borrowing assuming the following:

Franc Rate

October 31, 2020 $ 0.50

December 31, 2020 $ 0.52

October 31, 2021 $ 0.60

December 31, 2021 $ 0.62

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 October 31, 2022 $ 0.75

98) For each of the following situations, select the best answer concerning accounting for
foreign currency transactions:(G) Results in a foreign exchange gain.(L) Results in a foreign
exchange loss.(N) No foreign exchange gain or loss._____1. Export sale by a U.S. company
denominated in dollars, foreign currency of buyer appreciates._____2. Export sale by a U.S.
company denominated in foreign currency, foreign currency of buyer appreciates._____3. Import
purchase by a U.S. company denominated in foreign currency, foreign currency of seller
appreciates._____4. Import purchase by a U.S. company denominated in dollars, foreign
currency of seller appreciates._____5. Import purchase by a U.S. company denominated in
foreign currency, foreign currency of seller depreciates._____6. Import purchase by a U.S.
company denominated in dollars, foreign currency of seller depreciates._____7. Export sale by a
U.S. company denominated in dollars, foreign currency of buyer depreciates._____8. Export sale
by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates.

99) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a
foreign country during 2021:

Apr. 1 Bought inventory costing 150,000 Thai baht on credit.

May 1 Sold 70% of the inventory for 110,000 Thai baht on credit.

Aug. 1 Collected 40,000 Thai baht from customers.

Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

April 1, 2021 $0.036 = 1 baht

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May 1, 2021 $0.026 = 1 baht

August 1, 2021 $0.031 = 1 baht

October 1, 2021 $0.034 = 1 baht

December 31, 2021 $0.032 = 1 baht

Prepare all journal entries in U.S. dollars along with any December 31, 2021 adjusting entries.
Potter uses a perpetual inventory system.

100) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a
foreign country during 2021:

Apr. 1 Bought inventory costing 150,000 Thai baht on credit.

May 1 Sold 70% of the inventory for 110,000 Thai baht on credit.

Aug. 1 Collected 40,000 Thai baht from customers.

Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

April 1, 2021 $0.036 = 1 baht

May 1, 2021 $0.026 = 1 baht

August 1, 2021 $0.031 = 1 baht

October 1, 2021 $0.034 = 1 baht

December 31, 2021 $0.032 = 1 baht

What amount will Potter Corp. report in its 2021 balance sheet for Inventory?

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101) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a
foreign country during 2021:

Apr. 1 Bought inventory costing 150,000 Thai baht on credit.

May 1 Sold 70% of the inventory for 110,000 Thai baht on credit.

Aug. 1 Collected 40,000 Thai baht from customers.

Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

April 1, 2021 $0.036 = 1 baht

May 1, 2021 $0.026 = 1 baht

August 1, 2021 $0.031 = 1 baht

October 1, 2021 $0.034 = 1 baht

December 31, 2021 $0.032 = 1 baht

What amount will Potter Corp. report in its 2021 income statement for Cost of goods sold?

102) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a
foreign country during 2021:

Apr. 1 Bought inventory costing 150,000 Thai baht on credit.

May 1 Sold 70% of the inventory for 110,000 Thai baht on credit.

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 Aug. 1 Collected 40,000 Thai baht from customers.

Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

April 1, 2021 $0.036 = 1 baht

May 1, 2021 $0.026 = 1 baht

August 1, 2021 $0.031 = 1 baht

October 1, 2021 $0.034 = 1 baht

December 31, 2021 $0.032 = 1 baht

What amount will Potter Corp. report in its 2021 income statement for Sales?

103) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a
foreign country during 2021:

Apr. 1 Bought inventory costing 150,000 Thai baht on credit.

May 1 Sold 70% of the inventory for 110,000 Thai baht on credit.

Aug. 1 Collected 40,000 Thai baht from customers.

Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

April 1, 2021 $0.036 = 1 baht

May 1, 2021 $0.026 = 1 baht

August 1, 2021 $0.031 = 1 baht

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October 1, 2021 $0.034 = 1 baht

December 31, 2021 $0.032 = 1 baht

What amount will Potter Corp. report in its 2021 balance sheet for Accounts receivable?

104) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a
foreign country during 2021:

Apr. 1 Bought inventory costing 150,000 Thai baht on credit.

May 1 Sold 70% of the inventory for 110,000 Thai baht on credit.

Aug. 1 Collected 40,000 Thai baht from customers.

Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

April 1, 2021 $0.036 = 1 baht

May 1, 2021 $0.026 = 1 baht

August 1, 2021 $0.031 = 1 baht

October 1, 2021 $0.034 = 1 baht

December 31, 2021 $0.032 = 1 baht

What amount will Potter Corp. report in its 2021 balance sheet for Accounts payable?

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105) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a
foreign country during 2021:

Apr. 1 Bought inventory costing 150,000 Thai baht on credit.

May 1 Sold 70% of the inventory for 110,000 Thai baht on credit.

Aug. 1 Collected 40,000 Thai baht from customers.

Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate

April 1, 2021 $0.036 = 1 baht

May 1, 2021 $0.026 = 1 baht

August 1, 2021 $0.031 = 1 baht

October 1, 2021 $0.034 = 1 baht

December 31, 2021 $0.032 = 1 baht

The beginning balance of cash was 250,000 Thai baht on January 1, 2021, converted at the spot
rate of ฿1 = $0.041. What amount will Potter Corp. report in its 2021 balance sheet for Cash?

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
106) Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty days.
Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable
exchange rates.

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107) Where can you find exchange rates between the U.S. dollar and most foreign currencies?

108) What is meant by the spot rate?

109) How is the fair value of a Forward Contract determined by U.S. GAAP?

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

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Answer Key

Test name: Chap7

1) D
2) D
3) E
4) B
5) A
6) C
7) E
8) B
9) E
10) B
11) D
12) B
13) C
14) A
15) E
16) C
17) E
18) A
19) B
20) D
21) C
22) A
23) C
24) D
25) E
26) C

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27) E
28) D
29) D
30) E
31) D
32) A
33) B
34) C
35) B
36) A
37) A
38) D
39) D
40) B
41) C
42) C
43) D
44) D
45) E
46) B
47) C
48) E
49) E
50) E
51) D
52) A
53) C
54) D
55) A
56) D

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57) C
58) B
59) E
60) B
61) E
62) D
63) B
64) A
65) C
66) B
67) D
68) E
69) C
70) B
71) A
72) C
73) A
74) Hedge of foreign exchange risk is a strategy to limit exposure to the
effect of unfavorable changes in the value of foreign currencies that are
caused by fluctuations in exchange rates. In addition to avoiding
possible losses, companies hedge foreign currency transactions and
commitments to introduce an element of certainty into the future cash
flows resulting from foreign currency activities by establishing a price
today at which foreign currency can be sold or purchased at a future
date.
75) A foreign currency forward contract obligates the parties to deliver
one currency in exchange for another at a specified future date. On the
other hand, the owner of a foreign currency option can choose whether
to exercise the option and exchange one currency for another or not.

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76) Foreign exchange gains and losses are created by two factors: having
foreign currency exposures (foreign currency receivables and payables)
and changes in exchange rates.
77) The event results in a foreign exchange gain.
78) The event results in a foreign exchange loss.
79) The event results in a foreign exchange loss.
80) The event results in a foreign exchange gain.
81) A direct quote is an exchange rate that indicates the number of U.S.
dollars needed to purchase one unit of foreign currency. An indirect
quote is an exchange rate that indicates the number of foreign currency
units needed to purchase one U.S. dollar.
82) Exposure to foreign exchange risk occurs in the form of a
transaction exposure when the importer is required to pay in foreign
currency and is allowed to pay sometime after the purchase has been
made. The importer is exposed to the risk that the foreign currency
might appreciate between the date of purchase and the date of payment,
thereby increasing the U.S. dollars that have to be paid for the imported
goods.
83) Exposure to foreign exchange risk occurs in the form of a
transaction exposure when the exporter allows the buyer to pay in a
foreign currency and allows the buyer to pay sometime after the sale has
been made. The exporter is exposed to the risk that the foreign currency
might depreciate between the date of sale and the date payment is
received, thereby decreasing the U.S. dollars ultimately collected.
84)
Date General Journal Debit Credit
2021

Dec. Purchases (¥4,000,000 × $0.0080) 32,000

18
Accounts payable 32,000

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 31 Foreign exchange loss 800

Accounts payable 800

(¥4,000,000 × $0.0080) − (¥4,000,000 ×

$0.0082)
2022

Jan. Foreign exchange loss 400

18
Accounts payable 400

(¥4,000,000 × $0.0082) − (¥4,000,000 ×

$0.0083)

18 Accounts payable 33,200

Cash (¥4,000,000 × $0.0083) 33,200

85)
Date General Journal Debit Credit
2021

Sept. 15 Accounts receivable (§100,000 × $0.48) 48,000

Sales 48,000

30 Accounts receivable 2,000

Foreign exchange gain 2,000

[§100,000 × ($0.50 − $0.48)]

Oct. 15 Foreign exchange loss 6,000

Accounts Receivable 6,000

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 [§100,000 × ($0.50 − $0.44)]

Oct. 15 Cash [§100,000 × ($0.50 − $0.44)] 44,000

Accounts receivable 44,000

86) Coyote Corp. (a U.S. company in Texas) had the following series of
transactions in a foreign country during 2021:
Mar. 1 Bought inventory costing 60,000 pesos on credit.

May 1 Sold 60% of the inventory for 54,000 pesos on credit.

Aug. 1 Collected 48,000 pesos from customers

Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows:

Date Exchange Rate
March 1, 2021 $0.20 = 1 peso

May 1, 2021 $0.22 = 1 peso

August 1, 2021 $0.23 = 1 peso

September 1, 2021 $0.24 = 1 peso

December 31, 2021 $0.25 = 1 peso

Date General Journal Debit Credit

2021

March 1 Inventory (60,000p × $0.20) 12,000

Accounts payable 12,000

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May 1 Accounts receivable (54,000p × $0.22) 11,880

Sales 11,880

Cost of goods sold (36,000p × $0.20) 7,200

Inventory 7,200

August 1 Cash (48,000p × $0.23) 11,040

Accounts receivable (48,000p × $0.22) 10,560

Foreign Exchange Gain 480

Sept. 1 Accounts payable (36,000p × $0.20) 7,200

Foreign exchange loss 1,440

Cash (36,000p × $0.24) 8,640

Dec. 31 Foreign exchange loss [24,000p × ($0.20 - 1,200

$0.25)]
Accounts payable 1,200

Dec. 31 Accounts receivable 180

Foreign exchange gain [6,000p × ($0.22 180

- $0.25)]

87) Inventory (60,000 pesos × $0.20 × 40%): $ 4,800

88) Cost of goods sold (60,000 pesos × $0.20 × 60%) = $7,200
89) Sales (54,000 pesos × $0.22) = $11,880
90) Accounts receivable [(54,000 − 48,000 pesos) × $0.25] = $1,500

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91) Accounts payable [(60,000 − 36,000 pesos) × $0.25] = $6,000
92) Cash [(50,000 pesos × $0.18) + (48,000 pesos × $0.23) − (36,000
pesos × $0.24)] = $11,400
93)
Date Spot Value Change Forward
12/01/21 $ 0.32 $ 30,720 $ 0.30

12/31/21 $ 0.29 $ 27,840 −$ 2,880 $ 0.28

02/01/22 $ 0.27 $ 25,920 −$ 1,920 $ 0.27

A.
Date General Journal Debit Credit
11/10/21 Accounts receivable 30,720

Sales 30,720

12/01/21 No entry

12/31/21 Foreign exchange gain or loss 2,880

Accounts receivable 2,880

Forward contract 1,920

OCI 1,920

OCI 2,880

Foreign exchange gain or loss 2,880

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 Foreign exchange gain or loss 9603

OCI 960

3
[96,000 × ($0.32 - $0.30) ÷ 2] for 1st
of 2 mos.

02/01/22 Foreign exchange gain or loss 1,920

Accounts receivable 1,920

Forward contract 960

OCI 960

OCI 1,920

Foreign exchange gain or loss 1,920

Foreign exchange gain or loss 9604

OCI 960

4[96,000
× ($0.32 − $0.30) ÷ 2] for 2nd
of 2 mos.

Foreign currency 25,920

Accounts receivable 25,920

Cash 28,800

Forward contract 2,880

Foreign currency 25,920

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B.

Sales $ 30,720

Foreign exchange gain or loss (960 )

Increase $ 29,760

C.

Foreign exchange gain or loss (960 )

Decrease $ (960 )

94) A.
Date General Journal Debit Credit
11/10/21 Accounts receivable 33,600

Sales 33,600

12/01/21 No entry

12/31/21 Foreign exchange loss 5,760

Accounts receivable 5,760

Forward contract 1,901

Gain on forward contract 1,901

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02/01/22 Foreign exchange loss 1,920

Accounts receivable 1,920

Forward contract 979

Gain on forward contract 979

Foreign currency 25,920

Accounts receivable 25,920

Cash 28,800

Forward contract 2,880

Foreign currency 25,920

B.

Sales $ 33,600

Foreign Exchange loss (5,760 )

Gain on forward contract 1,901

Increase $ 29,741

C.

Foreign Exchange loss $ (1,920 )

Gain on forward contract 979

Version 1 66
 Decrease $ (941 )

95)
Date Spot Fair Value FV Change Forward to Forward
02/01/22 Change
10/01/21 $ 0.83 $ 83,000 $ 0.78

12/31/21 $ 0.85 $ 85,000 $ 2,000 $ 0.80 $ (1,908 )1

02/01/22 $ 0.86 $ 86,000 $ 1,000 $ 0.86 $ (6,020 )2

1
[($0.80 − $0.78) 100,000] × 0.9901 = $1,9802 [($0.78 − $0.86)
100,000] − $1,980 = $6,020
Date General Journal Debit Credit
10/01/21 Accounts receivable 83,000

Sales 83,000

12/31/21 Accounts receivable 2,000

Foreign exchange gain 2,000

AOCI 1,980

Forward contract 1,980

Loss on forward contract 2,000

AOCI 2,000

Discount expense 3,7503

AOCI 3,750

Version 1 67
 3
[100,000 × ($0.83 − $0.78) × 3/4] for 3
of 4 months

02/01/22 Accounts receivable 1,000

Foreign exchange gain 1,000

AOCI 6,020

Forward contract 6,020

Loss on forward contract 1,000

AOCI 1,000

Discount expense 1,2504

AOCI 1,250

4[100,000
× ($0.83 - $0.78) × 1/4] for 1
of 4 months

Foreign currency 86,000

Accounts receivable 86,000

Cash 78,000

Forward contract 8,000

Foreign currency 86,000

96)
Date Spot Value Change Forward Adjustment

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10/1/21 $ 0.83 $ 83,000 $ 0.78

12/31/21 $ 0.85 $ 85,000 + $ 2,000 $ 0.80 − $ 1,980 1

2/1/22 $ 0.86 $ 86,000 + $ 1,000 $ 0.86 − $ 6,020 2

1
[($0.80 − $0.78) 100,000 LCU] × 0.9901 = $1,9802 [($0.78 − $0.86)
100,000] LCU − $1,980 = $6,020
Date General Journal Debit Credit
10/01/21 Accounts receivable 83,000

Sales 83,000

12/31/21 Accounts receivable 2,000

Foreign exchange gain 2,000

Loss on forward contract 1,980

Forward contract 1,980

2/1/22 Accounts receivable 1,000

Foreign exchange gain 1,000

Loss on forward contract 6,020

Forward contract 6,020

Foreign currency 86,000

Accounts receivable 86,000

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 Cash 78,000

Forward contract 8,000

Foreign currency 86,000

97) In US dollars:
Date General Journal Debit Credit
10/31/20 Cash 50,000

Note payable (franc) [100,000 × $0.50] 50,000

To record the note and conversion of

100,000 francs
into $ at the spot rate

12/31/20 Interest expense 260

Interest payable (franc) 260

[100,000 × 3% × 2/12 = 500 francs ×

$0.52 spot rate]
To accrue interest for the period
10/31/20 − 12/31/20.

Foreign exchange loss 2,000

Note payable (franc) [100,000 × ($0.52 2,000

– $0.50)]
To revalue the note payable at the spot
rate of
$0.52 and record a foreign exchange loss.

10/31/21 Interest expense [2,500 francs × $0.60] 1,500

Interest payable (franc) 260

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 Foreign exchange loss [500 francs × 40
($0.60 – $0.52)]
Cash [3,000 francs × $0.60] 1,800

To record the first annual interest

payment,
record interest expense for the period
1/1 – 10/31/21,
and record a foreign exchange loss on the

interest payable accrued at 12/31/20.

12/31/21 Interest expense 310

Interest payable (franc) [500 francs × 310

$0.62]
To accrue interest for the period 10/31 −
12/31/21.

Foreign exchange loss 10,000

Note payable (franc) [100,000 × ($0.62 10,000

– $0.52)]
To revalue the note payable at the spot
rate of
$0.62 and record a foreign exchange loss.

Date General Journal Debit Credit

10/31/22 Interest expense [2,500 francs × $0.75] 1,875

Interest payable (franc) 310

Foreign exchange loss [500 francs × 65

($0.75 – $0.62)]
Cash [3,000 francs × $0.75] 2,250

To record the second annual interest

payment,

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 record interest expense for the period
1/1 – 10/31/22,
and record a foreign exchange loss on the
interest payable
accrued at 12/31/21.

Note payable (franc) 62,000

Foreign exchange loss 13,000

Cash [100,000 francs × $0.75] 75,000

To record payment of the 100,000 franc

note.

98) (1) N; (2) G; (3) L ; (4) N; (5) G; (6) N; (7) N; (8) L

99)
Date General Journal Debit Credit
2021

April 1 Inventory (฿150,000 × $0.036) 5,400

Accounts payable 5,400

May 1 Accounts receivable (฿110,000 × $0.026) 2,860

Sales 2,860

Cost of goods sold [(฿150,000 × 70%) × 3,780

$0.036]
Inventory 3,780

August 1 Cash (฿40,000 × $0.031) 1,240

Accounts receivable (฿40,000 × $0.026) 1,040

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 Foreign Exchange Gain 200

October 1 Accounts payable (฿100,000 × $0.036) 3,600

Cash (฿100,000 × $0.034) 3,400

Foreign Exchange Gain 200

Dec. 31 Accounts payable 200

Foreign exchange gain [฿50,000 × ($0.032 200

− $0.036)]

Dec. 31 Accounts receivable 420

Foreign exchange gain [฿70,000 × ($0.032 420

− $0.026)]

100) Inventory (฿150,000 × $0.036 × 30%) = $1,620

101) Cost of goods sold (฿150,000 × $0.036 × 70%) = $3,780
102) Sales (฿110,000 × $0.026) = $2,860
103) Accounts receivable [(฿110,000 − ฿40,000) × $0.032] = $2,240
104) Accounts payable [(฿150,000 − ฿100,000) × $0.032] = $1,600
105) Cash [(฿250,000 × $0.041) + (฿40,000 × $0.031) − (฿100,000 ×
$0.034)] = $8,090
106) Yelton could sign a forward exchange contract to sell the euros in
60 days, after they are received. Alternatively, Yelton could purchase an
option to sell the euros in 60 days, after they are received.
107) Foreign exchange rates are published in the Wall Street Journal,
major U.S. newspapers, and several Internet sites.
108) The spot rate is the price at which a foreign currency can be
purchased or sold today.

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Fundamentals of Advanced Accounting 8th Edition Hoyle Test Bank

109) The fair value of a Forward Contract is determined by comparing

the difference between the contracted forward rate and the currently
available forward rate for contracts expiring on the same date. On the
initial date of the contract, this would result in a fair value of $0. As time
passes, the currently available forward rate will likely fluctuate relative
to the “fixed” contracted forward rate, creating a difference that must be
accounted for as a gain or loss on the forward contract. A contract with a
net gain over its life is recorded on the balance sheet as a Forward
Contract Asset. A contract with a net loss over its life is recorded on the
balance sheet as a Forward Contract Liability.
110) The two separate transactions that require recording under the two-
transaction perspective are the income effects from the 1) export sale
and 2) credit extension in foreign currency to a customer.

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