Chapter 10

c10
1. Which of the following is NOT currently a cause of fluctuation in foreign exchange rates?
A. Inflation rates.
B. The pegging of a currency to the American (U.S.) dollar.
C. Interest rates.
D. Trade surpluses and deficits.
2. Which of the following statements is correct?

A. In Canada, the cost of a unit of foreign currency in Canadian dollars is a direct quotation, while the
cost in that foreign currency of purchasing one Canadian dollar is referred to as an indirect quotation.
B. In Canada, the cost of a unit of foreign currency in Canadian dollars is an indirect quotation, while
the cost in that foreign currency of purchasing one Canadian dollar is referred to as a direct
quotation.
C. In Canada, the cost of a unit of foreign currency in Canadian dollars is a direct quotation, and the
cost in that foreign currency of purchasing one Canadian dollar is also referred to as a direct
quotation.
D. In Canada, the cost of a unit of foreign currency in Canadian dollars is an indirect quotation, while
the cost in that foreign currency of purchasing one Canadian dollar is also referred to as an indirect
quotation.
3. The rate charged by commercial banks for the purchase of any foreign currency (in Canadian dollars) on
any given day would be based on which of the following?
A. The average rate.
B. The closing rate.
C. The spot rate.
D. The forward rate.
4. At the balance sheet date, monetary items denominated in a foreign currency should be adjusted to
reflect the exchange rate in effect at the:
A. time of settlement of the contract.
B. time the sale was recorded.
C. balance sheet date.
D. time of payment.
On July 1, 2018, CDN purchased inventory from its main U.S. supplier, RNB Enterprises, at a cost of
US$1,000. CDN's year end is on July 31.
Some important dates regarding this transaction, as well as the exchange rates in effect at each of these dates are
shown below:
Transaction date: July 1, 2018: 1 U.S. Dollar = CDN$0.82
Year end: July 31, 2018: 1 U.S. Dollar = CDN$0.81
Settlement date: August 31, 2018: 1 U.S. Dollar = CDN$0.805
5. What was the cost to CDN of the amount paid to RNB on the settlement date?
A. CDN$805.
B. CDN$810.
C. CDN$820.
D. US$820.
At settlement date: US$1,000 x 0.805 = CDN$805.
6. At what amount would CDN record its inventory purchase from RNB at the time of purchase?
A. CDN$805.
B. CDN$810.
C. CDN$820.
D. US$820.
At purchase date of inventory: US$1,000 x 0.82 = CDN$820.
7. At what amount would CDN record its liability to RNB at the time of purchase?
A. CDN$805.
B. CDN$810.
C. CDN$820.
D. US$820.
At purchase date of inventory: US$1,000 x 0.82 = CDN$820.
8. What would be the amount of the foreign exchange gain or loss recorded at the balance sheet date?
A. A CDN$15 exchange loss.
B. A CDN$10 exchange loss.
C. A CDN$10 exchange gain.
D. Nil
.
US$1,000 x [0.82 - 0.81] = CDN$10 exchange gain.Foreign exchange gain/loss is change in value of
monetary items, i.e., the Accounts Payable to the supplier:> carrying amount on B/S on July 1, 2018:
US$1,000 x 0.82 = CDN$820.> carrying amount on B/S on July 31, 2018: US$1,000 x 0.81 =
CDN$810.Thus, liability decreased by CDN$10, resulting in a CDN$10 foreign exchange gain
presented on the income statement in net income.
9. What would be the amount of the foreign exchange gain or loss recorded at the settlement date?
A. A CDN$15 exchange loss.
B. A CDN$10 exchange loss.
C. A CDN$5 exchange gain.
D. A CDN$10 exchange gain.
US$1,000 x [0.81 - 0.805] = CDN$5 exchange gain.(gain since the Accounts Payable liability has
decreased)
On January 1, 2019, Canadian Music International (CMI), a manufacturer of high-end recording equipment
based in Toronto, shipped US$120,000 worth of inventory to its main U.S. distributor in Chicago, with full
payment of these goods due by February 28, 2019. CMI has a January 31 year end. A list of significant dates
and exchange rates is shown below.
Transaction Date: January 1, 2019 US $1 = CDN $1.141

Year-End Date: January 31, 2019 US $1 = CDN $1.142
Settlement Date: February 28, 2019 US $1 = CDN $1.145
The invoice price billed by CMI was US$120,000.
10. At what value would CMI record the initial sale to its American distributor?
A. CDN$105,171
B. US$120,000
C. CDN$120,000.
D. CDN$136,920.
At initial sale date: US$120,000 x 1.141 = CDN$136,920.
11. What is the amount of CMI's foreign exchange gain or loss at year-end?
A. CDN$120 loss.
B. CDN$480 gain.
C. CDN$120 gain.
D. Nil
.
US$120,000 x [1.141 - 1.142] = CDN$120 exchange gain.(gain since the Accounts Receivable asset has
increased)Foreign exchange gain/loss is change in value of monetary items, i.e., the Accounts
Receivable to the customer:> carrying amount on B/S on January 1, 2019: US$120,000 x 1.141 =
CDN$136,920.> carrying amount on B/S on January 31, 2019: US$120,000 x 1.142 =
CDN$137,040.Thus, asset increased by CDN$120, resulting in a CDN$120 foreign exchange gain
12. What is the amount of cash (in Canadian funds) received by CMI on the settlement date?
A. CDN$136,920.
B. CDN$137,040.
C. CDN$137,400.
D. CDN$137,880.
At settlement date: US$120,000 x 1.145 = CDN$137,400.

13. What is the amount of CMI's foreign exchange gain or loss on February 28th?
A. CDN$360 loss.
B. CDN$120 gain.
C. CDN$360 gain.
D. CDN$480 gain.
CDN$137,040.> carrying amount on B/S on February 28, 2019: US$120,000 x 1.145 =
14. What is the total amount of CMI's foreign exchange gain or loss on this transaction?
A. CDN$360 loss.
B. CDN$120 gain.
C. CDN$360 gain.
D. CDN$480 gain.
CDN$136,920.> carrying amount on B/S on February 28, 2019: US$120,000 x 1.145 =
15. Which of the following statements accurately describes the manner in which transactions must be
translated under IAS 21 The Effects of Changes in Foreign Exchange Rates?
A. All individual transactions must be translated into the functional currency of the reporting entity.
B. All individual transactions must be converted into the local currency of the reporting entity.
C. All individual transactions are to be reported into the currency of the jurisdiction where the majority
of shareholders reside.
D. All individual transactions may be reported into the currency of the country where the corporation
does the majority of its business.
16. Which of the following statements is correct?
A. The historical rate is the exchange rate on the date of the transaction and the closing rate is the
exchange rate at the end of the reporting period.
B. The historical rate is the exchange rate on the date of the transaction and the closing rate is the rate
on which any hedge transactions mature.
C. The spot rate is the rate on the date of the transaction and the relevant forward rate is the exchange
rate used at the end of the reporting period.
D. None of the above are correct.
17. Some gains and losses arising on a revaluation of property plant and equipment are to be included in
other comprehensive income. When the asset is measured in a foreign currency, how would exchange
differences be treated?
A. As an item to be included in income or loss for the year.
B. As a reduction or increase in the carry cost of the asset.
C. As a contra account to be fully disclosed and to show the impact of foreign exchange differences.
D. The differences should be included in the calculation of other comprehensive income.
XYZ Corp. has a calendar year end. On January 1, 2016, the company borrowed $5,000,000 U.S. dollars from
an American Bank. The loan is to be repaid on December 31, 2019 and requires interest at 5% to be paid every
December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to
minimize its foreign exchange risk.
The following exchange rates were in effect throughout the term of the loan:
January 1, 2016 US $1 = CDN $1.1500
December 31, 2016 US $1 = CDN $1.1490
December 31, 2017 US $1 = CDN $1.1485
December 31, 2018 US $1 = CDN $1.1483
December 31, 2019 US $1 = CDN $1.1487
The average rates in effect for 2016 and 2017 were as follows:
2016: US $1 = CDN $1.1493
2017: US $1 = CDN $1.1487
18. At what amount (in Canadian Dollars) would XYZ record its initial Loan Liability on January 1, 2016?
A. $5,471,500.
B. $5,476,500.
C. $5,747,500.
D. $5,750,000.
Initial Loan Liability: US$5,000,000 x 1.15 = CDN$5,750,000.

19. What is the amount of interest expense (in Canadian Dollars) recorded for 2016?
A. $250,000.
B. $287,250.
C. $287,325.
D. $372,500.
Loan interest paid = US$5,000,000 x 5% = US$250,000.Convert to Canadian dollars at average rate in

effect during year when interest was incurred = US$250,000 x 1.1493 = CDN$287,325.
28. Atwhat amount (in Canadian Dollars) would RXN's sale be recorded initially?
A. $343,500.
B. $348,000.
C. $349,500.
D. $350,400.
Initial Accounts Receivable and Sale amount: US$300,000 x 1.165 = CDN$349,500.

29. What is the amount of RXN's foreign exchange gain or loss prior to its hedge?
A. A CDN$6,000 loss.
B. A CDN$6,000 gain.
C. A CDN$4,500 gain.
D. Nil
.
US$300,000 x [1.165 - 1.145] = CDN$6,000 exchange loss.(loss since the Accounts Receivable asset
has decreased)Foreign exchange gain/loss is change in value of monetary items, i.e., the Accounts
Receivable to the customer:> carrying amount on B/S on November 1, 2017: US$300,000 x 1.165 =
CDN$349,500.> carrying amount on B/S on December 1, 2017: US$300,000 x 1.145 =
CDN$343,500.Thus, asset decreased by CDN$6,000, resulting in a CDN$6,000 foreign exchange loss
30. Atwhat amount (in Canadian Dollars) would the forward contract with the bank be recorded, if recorded
gross?
A. $337,500.
B. $343,500.
C. $347,500.
D. $349,500.
Forward contract with the bank, if recorded at gross amount: US$300,000 x 1.125 3-month forward rate
= CDN$337,500.
31. How much (in Canadian Dollars) will RXN expect to receive from the bank when its forward contract is
settled?
A. $337,500.
B. $343,500.
C. $347,500.
D. $349,500.
Forward contract with the bank, if recorded at gross amount: US$300,000 x 1.125 3-month contracted
forward rate = CDN$337,500.
32. What is the amount of the discount on the forward contract?

A. CDN$1,000.
B. CDN$1,500.
C. CDN$3,000.
D. CDN$6,000.
Discount on the forward contract = US$300,000 x [1.145 December 1, spot rate - 1.125 December 1, 3-
month forward contract rate] = CDN$6,000.
33. Assuming that the accounts receivable balance was not adjusted on December 1, 2017, what adjustment
(if any) would be required to RXN's year-end accounts receivable balance?
A. A CDN$3,000 decrease.
B. A CDN$1,500 decrease.
C. A CDN$3,000 increase.
D. No adjustment is required.
US$300,000 x [1.165 - 1.16] = CDN$1,500 exchange loss.(loss since the Accounts Receivable asset has
decreased)Foreign exchange gain/loss is change in value of monetary items, i.e., the Accounts
Receivable to the customer:> carrying amount on B/S on November 1, 2017: US$300,000 x 1.165 =
CDN$349,500.> carrying amount on B/S on December 31, 2017: US$300,000 x 1.16 =
CDN$348,000.Thus, asset decreased by CDN$1,500, resulting in a CDN$1,500 foreign exchange loss
34. What is the amount of the exchange gain or loss from the recognition of the hedge discount recognized
during 2017?
A. A loss of CDN$4,500.
B. A loss of CDN$3,000.
C. A gain of $ CDN4,500.
D. Nil
.
On July 1, 2017, when the spot rate was US$1 = CDN$1.1445, North Inc., based in Alberta, ordered
merchandise from an American supplier for US$600,000. Delivery was scheduled for the month of
September, with payment to be made in full on November 15, 2017.
Once the order was placed, North entered into a forward contract with its bank to purchase US$600,000
on the settlement date at the forward rate of CDN$1.1625. The forward contract was designated as a
cash flow hedge of the cash flow required to settle with the American supplies.
The merchandise was received on October 1, 2017, when the spot rate was US$1 = CDN$1.1575. On
October 31, the company's year-end, the spot rate was $1.1690. North purchased the U.S. dollars to pay
its supplier on November 15, 2017 when the spot rate was CDN$1.1725. The forward rate to November
15, 2017, was CDN$1.165 on October 1 and CDN$1.17 on October 31.
35. What is the journal entry required to record the ordering of North's merchandise?
A. No entry is required.
B. Debit Credit
Merchandise Inventory CDN$686,700
Accounts Payable CDN$686,700
C. Debit Credit
D. Debit Credit
36. What is the amount of the forward contract in Canadian dollars?
A. $686,700.
B. $697,500.
C. $701,400.
D. $703,500.
37. What is the amount of the liability to the bank recorded on the commitment date if the forward contract
is recorded using the gross method?
A. CDN$686,700.
B. CDN$697,500.
C. CDN$701,400.
D. CDN$703,500.
38. What amount will be recorded as the value of the forward contract on the commitment date if the
forward contract is recorded using the net method?
A. A liability of CDN$6,000.
B. An asset of CDN$10,800.
C. An asset of CDN$6,000.
D. Nil
.
Nil.
39. At what amount would North record its inventory when received from its supplier, if the exchange gain
or loss is adjusted to the value of the inventory on the transaction date?
A. CDN$686,700.
B. CDN$693,000.
C. CDN$694,500.
D. CDN$696,000.
40. What is the amount of North's recognized exchange gain or loss arising from this transaction included in
its financial statements as at October 31, 2017?
A. CDN$3,900 loss.
B. CDN$3,900 gain .
C. CDN$3,000 gain.
D. Nil
.
41. What amount (in Canadian dollars) did North pay to its American supplier for the purchase of the
inventory?
A. $686,700.
B. $694,500.
C. $697,500.
D. $703,500.
Amount paid to American supplier in Canadian dollars for this inventory amount: US$600,000 x 1.1725
= CDN$703,500.
42. IAS 39 Financial Instruments: Recognition and Measurement on speculative forward exchange
contracts requires that the contract be:
A. revalued using spot rates throughout its life with any gains or losses to be deferred and amortized as
they occur.
B. revalued at fair value throughout its life with any gains or losses to be deferred and amortized as they
occur.
C. valued using spot rates throughout its life with any gains or losses to be taken into income as they
occur.
D. revalued at fair value throughout its life with any gains or losses to be taken into income as they
occur.
ABC Inc. sells thermal compressors throughout the world. On January 1, 2016, the company sold 500
compressors to an American supplier at a total cost US$60,000 when the spot rate was US$1 =
CDN$1.1750. Payment on the invoice was due by May 1, 2016. ABC entered into a 4-month hedge
with its bank at a forward rate of CDN$1.20 on January 2, 2016. The forward contract was declared to
be a fair value hedge of the fair value of the receivable from the American customer. ABC's year-end is
on January 31, and on that date in 2016, the spot rate in effect was CDN$1.1825 and the forward rate to
May 1, 2016 was CDN$1.1950.
ABC received payment from its supplier on May 1, 2016 when the spot rate was US$1 = CDN$1.1975.
43. What is the amount of the forward contract in Canadian dollars?
A. $70,500.
B. $70,950.
C. $71,850.
D. $72,000.
Forward contract with the bank: US$60,000 x 1.2 4-month contracted forward rate = $72,000.
44. What amount (in Canadian dollars) should ABC expect to receive from its bank on May 1, 2016?
A. $70,500.
B. $70,950.
C. $71,850.
D. $72,000.
Forward contract with the bank: US$60,000 x 1.2 4-month contracted forward rate = CDN$72,000.
45. What is the amount of the premium on this contract?
A. CDN$1,500.
B. $450.
C. $900.
D. Nil
.
Premium on the forward contract = US$60,000 x [1.175 January 1, spot rate - 1.2 January 2, 4-month
forward contract rate] = CDN$1,500.
46. What is the required adjustment to ABC's accounts receivable at year-end as a result of this
transaction?
A. CDN$450 decrease.
B. CDN$900 increase.
C. CDN$450 increase.
D. Nil
.
CDN$70,500.> carrying amount on B/S on January 31, 2016: US$60,000 x 1.1825 =
47. What is the required adjustment to the carrying value of the forward contract at the company's year-
end?
A. CDN$300 decrease.
B. CDN$375 increase.
C. CDN$300 increase.
D. Nil
.
US$60,000 x [1.20 - 1.1950] = CDN$300 decrease.
48. Which of the following statements is NOT correct?

A. In a fair value hedge, the entity uses a hedging instrument to hedge against the fluctuation in the fair
value of the hedged item. This method will be used when the hedged item will be valued at fair
value.
B. In a cash flow hedge, the entity uses a hedging instrument to hedge against the fluctuation in the
Canadian dollar value of future cash flows.
C. The gain or loss on the hedging instrument in a cash flow hedge is initially reported in other
comprehensive income and reclassified to profit and loss when the hedged item affects profit.
D. The gain or loss on the hedging instrument in a fair value hedge is initially recognized in other
comprehensive income and transferred to profit and loss when the hedged item has be revalued for
accounting purposes in accordance with IFRS.
49. In which of the following situations is a gain or loss recorded on a commitment assets or liability which
would not otherwise be recorded?
A. A speculative forward contract.
B. A fair value hedge of a firm commitment.
C. A fair value hedge of a recognized monetary item.
D. A cash flow hedge of a forecasted transaction.
50. Which of the following provides the best hedge against exchange variations in the value of a stream of
income in a foreign currency where the payments are expected to occur in equal amounts over a period
of five years?
A. Borrowing in the foreign currency with repayment due at the end of the five years.
B. Borrowing in Canadian dollars with repayment due at the end of the five years.
C. Borrowing in the foreign currency with annual repayments equal to the expected annual revenue
cash flows.
D. Borrowing in Canadian dollars with annual repayments equal to the expected annual revenue cash
flows.
Compucat is a Canadian manufacturing company that produces inexpensive personal and laptop
computers. The company has been generating progressively more of its sales from foreign markets.
During 2016, the company started purchasing most of its components from a supplier in Germany.
To deal with the uncertainty associated with foreign exchange fluctuations, all of Compucat's foreign
currency denominated receivables and payables are hedged with contracts with the company's bank.
Compucat's year-end is on December 31. The following transactions took place in 2016:
On September 1, 2016, Compucat purchased components from its German supplier for 100,000 Euros.
On that date AMC entered into a forward contract for 100,000 Euros at the 60 day forward rate of 1
Euro = CDN$1.50. The forward contract was designated as a fair value hedge of the amount payable to
the German supplier. Compucat settled with the bank and paid its supplier in full on December 1, 2016.
On December 1, 2016 Compucat also shipped a batch of laptop computers to an American client for
US$250,000. The invoice required that Compucat receive its payment in full by January 31, 2016. On
the date of the sale, the company entered into a forward contract for US$250,000 at the two-month
forward rate of US$1 = CDN$1.25. This forward contract was designated to be a fair value hedge of the
amount due from the American customer.
The dates and exchange rates relevant to these transactions are shown below.
Spot rate Forward rate
September 1, 2016: 1 Euro = CDN$1.4875 1 Euro = CDN$1.5000

December 1, 2016: 1 Euro = CDN$1.4800
US$1 = CDN$1.2600 US$1 = CDN$1.2500
December 31, 2016: US$1 = CDN$1.2700 US$1 = CDN$1.2600

51. Prepare the 2016 journal entries to record the above transactions. In addition, prepare any adjusting
journal entries that you deem necessary.
September 1, 2016 Debit Credit

Inventory $148,750
Accounts Payable $148,750
[ 100,000 Euros x 1.4875 spot rate = CDN$148,750 ]
Forward Contract $150,000

Payable to Bank $150,000
[ 100,000 Euros x 1.50 forward rate = CDN$150,000 ]
December 1, 2016
Accounts Receivable $315,000

Sales $315,000
[ US$250,000 x 1.26 spot rate = CDN$315,000 ]
Receivable from Bank $312,500

[ US$250,000 x 1.25 forward rate = CDN$312,500 ]
Accounts payable $750

Exchange gain $750
[ 100,000 Euros x (1.4875 September 1 spot rate - 1.48 December 1 spot rate) ]
Exchange loss $2,000

Forward contract $2,000
[ 100,000 Euros x (1.50 September 1 forward rate - 1.48 December 1 spot/forward rate) ]

Cash $150,000
Cash (Euros) $148,000

[ 100,000 Euros x 1.48 ]

Cash $148,000
[ 100,000 Euros x 1.48 ]
December 31, 2016
Accounts receivable $2,500

Exchange gains $2,500
[ US$250,000 x (1.26 December 1 spot rate - 1.27 December 31 spot rate) ]
Exchange loss $2,500

[ US$250,000 x (1.25 December 1 forward rate - 1.26 December 31 forward rate) ]
52. Prepare the December 31, 2016 Balance Sheet Presentation of the Receivable from the American client
and the accounts associated with the hedge.
Compucat Inc.
Balance Sheet as at December 31, 2016
Assets
Accounts Receivable [US$250,000 x 1.27 spot rate] $317,500
Liabilities
Forward contract $1,250*
* Receivable from Bank (US$250,000 @ $1.25) $312,500

Less: Forward Contract (US$250,000 @ $1.26) $315,000
Deferred Foreign Exchange Credit $2,500
Canada Corp. sells raw lumber to a number of countries around the world. On December 1, 2016 the
company shipped some lumber to a client in Japan. The selling price was established at 500,000 Yen
with payment to be received on March 1, 2017.
On December 3, 2016 the company entered into a hedge with a Canadian Bank at the 90 day forward
rate of 1 Yen = CDN$1.185. The forward contract was designated as a fair value hedge of the receivable
from the Japanese customer.
Canada Corp received the payment from its Japanese client on March 1, 2017. Canada Corp's year end
is on December 31.
Selected spot rates were as follows:

December 1, 2016: 1 Yen = CDN$1.155
December 3, 2016: 1 Yen = CDN$1.155
December 31, 2016: 1 Yen = CDN$1.1625
March 1, 2017: 1 Yen = CDN$1.1750
The two-month forward rate on December 31, 2016 was 1Yen = CDN$1.1800.
53. Prepare any and all journal entries arising from this transaction.
December 1, 2016 Debit Credit

Sales $577,500
[ 500,000 Yen x 1.155 spot rate = CDN$577,500 ]

[ 500,000 Yen x 1.185 forward rate = CDN$592,500 ]
December 31, 2016

Exchange Gain $3,750

Exchange gain $2,500
March 1, 2017


Cash - Yen $587,500

[ 500,000 Yen x 1.175 spot rate = CDN$587,500 ]

Cash - Yen $587,500
Cash $592,500
54. Prepare a partial Balance Sheet for Canada Corp on December 31, 2016 showing the account receivable
from the Japanese client as well as the accounts associated with the hedge.
Canada Corp.
Assets
Accounts Receivable [500,000 Yen x 1.1625 spot rate] $581,250

* Forward Contract $590,000

Less: Receivable from Bank $592,500
Deferred Foreign Exchange Debit $2,500
55. Prepare the journal entries to record the receipt of the 500,000 Yen on March 1, 2017, assuming that
Canada Corp did not enter into a hedge transaction in December 2016.
Cash - Yen $587,500

Exchange gain $ 6,250
Cash $587,500
Cash -Yen $587,500
On January 1, 2014, GRL Inc. purchased, in U.S. Funds $500,000 of Bonds of the OBY Company. On
that date, the Bonds were trading at par. These Bonds pay 10% interest annually each December 31. The
Bonds mature on December 31, 2016. The following exchange rates were applicable between 2014 and
2016. The rates indicate the cost (in Canadian dollars) of purchasing 1 U.S. dollar:
January 1, 2014 CDN $1.4565

Average rate for 2014 CDN $1.4570
December 31, 2014 CDN $1.4725
December 31, 2015 CDN $1.4425
December 31, 2016 CDN $1.4575
56. Prepare GRL's journal entries for each of 2014, 2015 and 2016.
January 1, 2014
Investment in Bonds $728,250

Cash $728,250
[ US$500,000 x 1.4565 spot rate = CDN$728,250 ]
December 31, 2014
Cash $72,850
Exchange loss $775
Interest Revenue $73,625

[ US$500,000 x (1.4565 - 1.4725) = CDN$8,000 ]
December 31, 2015
Cash $72,125
Exchange Loss $15,000

[ US$500,000 x (1.4725 - 1.4425) = CDN$15,000 ]
December 31, 2016
Cash $72,875
Exchange gain $375

[ US$500,000 x (1.4425 - 1.4575) = CDN$7,500 ]
57. Compute the carrying value of the investment at the end of each year:
2014: ($728,250 + $8,000) or ($500,000 @ $1.4725) $736,250

2015: ($736,250 - $15,000) or ($500,000 @ $1.4425) $721,250
2016: ($721,250 + $7,500) or ($500,000 @ $1.4575) $728,750
Prairie Dog Inc. borrowed US$10,000,000 on January 1, 2014 at an annual rate of 8%. The loan is due
December 31, 2017 and interest is payable annually each December 31. The exchange rates on selected
dates throughout the life of the loan are shown below:
January 1, 2014 CDN $1.4415

December 31, 2014 CDN $1.4325
December 31, 2015 CDN $1.4575
December 31, 2016 CDN $1.4435
December 31, 2017 CDN $1.4525
Assume that the average annual exchange rate was equal to the December 31st spot rates.
58. Prepare the journal entries for 2014.
January 1, 2014
Cash $14,415,000
Loan Payable $14,415,000
[ US$10,000,000 x 1.4415 spot rate = CDN$14,415,000 ]
December 31, 2014
Interest Expense $1,146,000

Cash $1,146,000
[ US$10,000,000 x 8% x 1.4325 spot rate = CDN$1,146,000 ]
Loan Payable $90,000

[ US$10,000,000 x (1.4415 - 1.4325) = CDN$90,000 ]
59. Calculate the exchange gains or losses that would be reported in the net income of the company for each
year over the life of the loan.
Date Exchange Rate Gain (Loss)

January 1, 2014 CDN $1.4415 -
December 31, 2014 CDN $1.4325 $90,000
December 31, 2015 CDN $1.4575 ($250,000)
December 31, 2016 CDN $1.4435 $140,000
December 31, 2017 CDN $1.4525 ($90,000)
Total Gain (Loss) ($110,000)
On July 1, 2016, Great White North (GWN) Inc. purchased merchandise from a supplier in the U.S. for
US$800,000 with terms requiring full payment by October 31, 2016. On July 2, GWN entered into a
forward contract to purchase US$800,000 on October 31, 2016 at a rate of CDN$1.2275. The forward
contract was designated as a hedge of the fair value of the amount due to the supplier.
On October 31, GWN paid its supplier in full. Selected dates and spot rates are shown below:
July 1, 2016 CDN $1.2150

July 31, 2016 CDN $1.2175
October 31, 2016 CDN $1.22
GWN has a July 31st year end. On that date the forward rate for US dollars for three months was CDN
$1.2225.
60. Prepare any and all journal entries you deem necessary to record the above transaction.
July 1, 2016
Inventory $972,000
[ US$800,000 x 1.215 spot rate = CDN$972,000 ]
July 2, 2016

July 31, 2016
Exchange Gains and Losses $2,000


October 31, 2017



Cash $982,000
Cash - U.S. Dollars $976,000

[ US$800,000 x 1.22 spot rate = CDN$976,000 ]

61. Prepare a July 31, 2016 Partial Trial Balance, indicating how each account balance would appear on the
company's financial statements.
Partial Trial Balance: Debit Credit

Inventory (if not yet sold) $972,000 B/S
Accounts Payable $974,000 B/S
Exchange gains and losses $6,000 I/S
Forward Contract (U.S. dollars) $978,000

Totals $1,956,000 $1,956,000
The forward contract and amount payable to the bank will be shown as a net $4,000 liability on the
balance sheet at July 31, 2016.
62. Prepare the journal entries assuming that no forward contract was entered into.
Debit Credit
July 1, 2016
Inventory $972,000
[ US$800,000 x 1.215 spot rate = CDN$972,000 ]
July 31, 2016

[ US$800,000 x (1.215 - 1.2175) = CDN$2,000 ]
October 31, 2017

[ US$800,000 x (1.2175 - 1.22) = CDN$2,000 ]

Cash $976,000
[ US$800,000 x 1.22 spot rate = CDN$976,000 ]

Maplehauff Inc. sells lumber to a number of clients around the world. On December 1, 2015 the
company shipped some lumber to a client in the U.S. The selling price was established at US$600,000
with payment to be received on March 1, 2016. On December 3, 2015 the company entered into a hedge
with a Canadian Bank at the 90 day forward rate of US$1 = CDN$1.275. The forward contract was
designated as a fair value hedge of the amount due from the American customer.
Maplehauff Inc. received the payment from its American client on March 1, 2016. The company's year-
end is on December 31. The two-month forward rate for US dollars was CDN$1.255 on that date.
Selected spot rates were as follows:
December 1, 2015: US$1 = CDN$1.2355

December 3, 2015: US$1 = CDN$1.2355
December 31, 2015: US$1 = CDN$1.2455
March 1, 2016: US$1 = CDN$1.2480
63. Prepare any and all journal entries arising from this transaction.
Debit Credit
December 1, 2015

Sales $741,300
[ US$600,000 x 1.2355 spot rate = CDN$741,300 ]
December 3, 2015

December 31, 2015

[ US$600,000 x (1.2355 - 1.2455) = CDN$6,000 ]

[ US$600,000 x (1.275 - 1.255) = CDN$12,000 ]
March 1, 2016

[ US$600,000 x (1.2455 - 1.248) = CDN$1,500 ]

[ US$600,000 x (1.255 - 1.248) = CDN$4,200 ]

[ US$600,000 x 1.248 spot rate = CDN$748,800 ]
Cash $765,000
[ US$600,000 x 1.275 contracted forward rate = CDN$765,000 ]

[ US$600,000 x 1.248 spot rate = CDN$748,800 ]
64. Prepare a partial Balance Sheet for Maplehauff Inc. on December 31, 2015 showing the Account
Receivable from the American client as well as the accounts associated with the hedge.
Maplehauff Inc.
Assets
Accounts Receivable [US$600,000 x 1.2355] $741,300

* Forward Contract $753,000

Less: Receivable from Bank $765,000
Net foreign exchange position (dr) $12,000
65. Prepare the journal entries to record the receipt of the US$600,000 on March 1, 2016, assuming that
Maplehauff Inc did not enter into a hedge transaction in December 2015.
Cash - U.S. Dollars [ US$600,000 x 1.248 March 1 spot rate = CDN$748,800 ] $748,800
Exchange Gain [ US$600,000 x (1.248 - 1.2455) = CDN$4,200 ] $1,500
Accounts Receivable [ US$600,000 x 1.2455 December 31 spot rate = CDN$748,800 ] $747,300
Cash $748,800
[ US$600,000 x 1.248 spot rate = CDN$748,800 ]

Chapter 10

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 10

Uploaded by

Copyright:

Available Formats

c10

2. Which of the following statements is correct?

At settlement date: US$1,000 x 0.805 = CDN$805.

At purchase date of inventory: US$1,000 x 0.82 = CDN$820.

At purchase date of inventory: US$1,000 x 0.82 = CDN$820.

Transaction Date: January 1, 2019 US $1 = CDN $1.141

The invoice price billed by CMI was US$120,000.

At initial sale date: US$120,000 x 1.141 = CDN$136,920.

At settlement date: US$120,000 x 1.145 = CDN$137,400.

Initial Loan Liability: US$5,000,000 x 1.15 = CDN$5,750,000.

Loan interest paid = US$5,000,000 x 5% = US$250,000.Convert to Canadian dollars at average rate in

Initial Accounts Receivable and Sale amount: US$300,000 x 1.165 = CDN$349,500.

32. What is the amount of the discount on the forward contract?

US$60,000 x [1.20 - 1.1950] = CDN$300 decrease.

48. Which of the following statements is NOT correct?

Spot rate Forward rate

September 1, 2016: 1 Euro = CDN$1.4875 1 Euro = CDN$1.5000

US$1 = CDN$1.2600 US$1 = CDN$1.2500

December 31, 2016: US$1 = CDN$1.2700 US$1 = CDN$1.2600

September 1, 2016 Debit Credit

Forward Contract $150,000

Accounts Receivable $315,000

Receivable from Bank $312,500

Accounts payable $750

Exchange loss $2,000

Payable to Bank $150,000

Cash (Euros) $148,000

Accounts Payable $148,000

December 31, 2016

Accounts receivable $2,500

Exchange loss $2,500

Accounts Receivable [US$250,000 x 1.27 spot rate] $317,500

Forward contract $1,250*

* Receivable from Bank (US$250,000 @ $1.25) $312,500

Selected spot rates were as follows:

December 1, 2016 Debit Credit

Receivable from Bank $592,500

December 31, 2016

Accounts Receivable $3,750

Forward contract $2,500

Accounts receivable $6,250

Forward Contract $2,500

Cash - Yen $587,500

Forward contract $587,500

Accounts Receivable [500,000 Yen x 1.1625 spot rate] $581,250

* Forward Contract $590,000

Cash - Yen $587,500

January 1, 2014 CDN $1.4565

Investment in Bonds $728,250

December 31, 2014

Investment in Bonds $8,000

December 31, 2015

Exchange Loss $15,000

December 31, 2016

Investment in Bonds $7,500

2014: ($728,250 + $8,000) or ($500,000 @ $1.4725) $736,250

January 1, 2014 CDN $1.4415

December 31, 2014

Interest Expense $1,146,000

Loan Payable $90,000

Date Exchange Rate Gain (Loss)

July 1, 2016 CDN $1.2150

Forward Contract $982,000

July 31, 2016