Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments Chapter 11 Multinational Accounting: Foreign Currency Transactions and Financial Instruments Multiple Choice Questions If British pound can be exchanged for 180 cents of U.S currency, what fraction should be used to compute the indirect quotation of the exchange rate expressed in British pounds? A 1/180 B 1/.56 C 1.8/1 D 1/1.8 Suppose the direct foreign exchange rates in U.S dollars are: Singapore dollar = $.7025 Cyprus pound = $2.5132 Based on the information given above, the indirect exchange rates for the Singapore dollar and the Cyprus Pound are: A 1.7655 Singapore dollars and 1.4235 Cyprus pounds respectively B 0.2975 Singapore dollars and 1.5132 Cyprus pounds respectively C 2.1622 Singapore dollars and 0.4625 Cyprus pounds respectively D 1.4235 Singapore dollars and 0.3979 Cyprus pounds respectively Based on the information given above, how many U.S dollars must be paid for a purchase of citrus fruits costing 10,000 Cyprus pounds? A $25,132 B $15,132 C $3,979 D $35,775 11-1 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments Based on the information given above, how many Singapore dollars are required to purchase goods costing 10,000 US dollars? A 7,025 B 14,235 C 17,655 D 2,975 Upon arrival in Chile, Karen exchanged $1,000 of U.S currency into 4,80,000 Chilean Pesos While returning after her two month visit, she exchanged her remaining 50,000 Pesos into $100 of U.S currency What amount of gain or a loss did Karen experience on the 50,000 pesos she held during her visit and converted to U.S dollars at the departure date? A Loss of $4 B Gain of $4 C Loss of $6 D No gain or loss Chicago based Corporation X has a number of importing transactions with companies based in UK Importing activities result in payables If the settlement currency is the British Pound, which of the following will happen by changes in the direct or indirect exchange rates? A Option A B Option B C Option C D Option D 11-2 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments Chicago based Corporation X has a number of exporting transactions with companies based in Sweden Exporting activities result in receivables If the settlement currency is the Swedish Krona, which of the following will happen by changes in the direct or indirect exchange rates? A Option A B Option B C Option C D Option D Corporation X has a number of exporting transactions with companies based in Vietnam Exporting activities result in receivables If the settlement currency is the US dollar, which of the following will happen by changes in the direct or indirect exchange rates? A Option A B Option B C Option C D Option D 11-3 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments Mint Corporation has several transactions with foreign entities Each transaction is denominated in the local currency unit of the country in which the foreign entity is located On October 1, 2008, Mint purchased confectionary items from a foreign company at a price of LCU 5,000 when the direct exchange rate was LCU = $1.20 The account has not been settled as of December 31, 2008, when the exchange rate has decreased to LCU = $1.10 The foreign exchange gain or loss on Mint's records at year-end for this transaction will be: A $500 loss B $500 gain C $378 gain D $5,500 loss 10 Mint Corporation has several transactions with foreign entities Each transaction is denominated in the local currency unit of the country in which the foreign entity is located On November 2, 2008, Mint sold confectionary items to a foreign company at a price of LCU 23,000 when the direct exchange rate was LCU = $1.08 The account has not been settled as of December 31, 2008, when the exchange rate has increased to LCU = $1.10 The foreign exchange gain or loss on Mint's records at year-end for this transaction will be: A $460 loss B $387 loss C $387 gain D $460 gain 11-4 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 11 On September 3, 2008, Jackson Corporation purchases goods for a U.S dollar equivalent of $17,000 from a Swiss company The transaction is denominated in Swiss francs (SFr) The payment is made on October 10 The exchange rates were: What entry is required to revalue foreign currency payable to U.S dollar equivalent value on October 10? A Option A B Option B C Option C D Option D 11-5 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 12 On March 1, 2008, Wilson Corporation sold goods for a U.S dollar equivalent of $31,000 to a Thai company The transaction is denominated in Thai bahts The payment is received on May 10 The exchange rates were: What entry is required to revalue foreign currency payable to U.S dollar equivalent value on May 10? A Option A B Option B C Option C D Option D On December 5, 2008, Texas based Imperial Corporation purchased goods from a Saudi Arabian firm for 100,000 riyals (SAR), to be paid on January 10, 2009 The transaction is denominated in Saudi riyals Imperial's fiscal year ends on December 31, and its reporting currency is the U.S dollar The exchange rates are: 11-6 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 13 Based on the preceding information, what journal entry would Imperial make on December 31, 2008, to revalue foreign currency payable to equivalent U.S dollar value? A Option A B Option B C Option C D Option D 14 Based on the preceding information, what journal entry would Imperial make on January 10, 2009, to revalue foreign currency payable to equivalent U.S dollar value? A Option A B Option B C Option C D Option D 11-7 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 15 Based on the preceding information, what was the overall foreign currency gain or loss on the accounts payable transaction? A $300 loss B $200 loss C $100 gain D $200 gain Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5, 2008, with payment due on December 2, 2008 Additionally, on September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850 The forward contract was acquired to manage the exposed net liability position in Egyptian pounds, but it was not designated as a hedge The spot rates were: 16 Based on the preceding information, in the entry made on December 2nd to revalue foreign currency receivable to current equivalent U.S dollar value, A Accounts Payable will be debited for $18,350 B Foreign Currency Units will be debited for $18,500 C Foreign Currency Transaction Gain will be credited for $150 D Other Comprehensive Income will be credited for $300 11-8 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 17 Based on the preceding information, what is the entry required to settle foreign currency payable on December 2? A Option A B Option B C Option C D Option D 18 Detroit based Auto Corporation, purchased ancillaries from a Japanese firm on December 1, 2008, for 1,000,000 Yen, when the spot rate for Yen was $.0095 On December 31, 2008, the spot rate stood at $.0096 On January 10, 2009 Auto paid 1,000,000 Yen acquired at a rate of $.0094 Auto's income statements should report a foreign exchange gain or loss for the years ended December 31, 2008 and 2009 of: A Option A B Option B C Option C D Option D 11-9 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 19 On November 1, 2008, Denver Company borrowed 500,000 local currency units (LCU) from a foreign lender evidenced by an interest-bearing note due on November 1, 2009, which is denominated in the currency of the lender The U.S dollar equivalent of the note principal was as follows: In its income statement for 2009, what amount should Denver include as a foreign exchange gain or loss on the note principal? A 15,000 gain B 25,000 gain C 15,000 loss D 40,000 loss 20 Company X denominated a December 1, 2009, purchase of goods in a currency other than its functional currency The transaction resulted in a payable fixed in terms of the amount of foreign currency, and was paid on the settlement date, January 10, 2010 Exchange rates moved unfavourably at December 31, 2009, resulting in a loss that should: A be included as a separate component of stockholders' equity at Dec 31, 2009 B be included as a component of income from continuing operations for 2009 C be included as a deferred charge at December 31, 2009 D not be reported until January 10, 2010, the settlement date Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reals on December 1, 2008, with payment due on January 20, 2009 The exchange rates were: 11-10 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 11-53 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments AACSB: Analytic AICPA: Measurement 11-54 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 52 On December 1, 2008, Secure Company bought a 90-day forward contract to purchase 200,000 euros (€) at a forward rate of €1 = $1.35 when the spot rate was $1.33 Other exchange rates were as follows: Required 1) Prepare all journal entries related to Secure Company's foreign currency speculation from December 1, 2008, through March 1, 2009, assuming the fiscal year ends on December 31, 2008 2) Did the company gain or lose on its purchase of the forward contract? 11-55 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 2) Secure Company experienced a net loss of $4,000 ($2,000 gain in 2008 less a $6,000 loss in 2009) AACSB: Analytic AICPA: Measurement 11-56 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 53 On December 1, 2008, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$) Denizen's fiscal year ends on December 31 The forward contract was to hedge a firm commitment agreement made on December 1, 2008, to purchase electronic goods on January 30, with payment due on March 31, 2008 The derivative is designated as a fair value hedge The direct exchange rates follow: Required: Prepare all journal entries for Denizen Corporation 11-57 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 11-58 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 11-59 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments AACSB: Analytic AICPA: Measurement 11-60 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 54 On December 1, 2008, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$) Denizen's fiscal year ends on December 31 The forward contract was to hedge an anticipated purchase of electronic goods on January 30, 2009 The purchase took place on January 30, with payment due on March 31, 2009 The derivative is designated as a cash flow hedge The company uses the forward exchange rate to measure hedge effectiveness The direct exchange rates follow: Required: Prepare all journal entries for Denizen Corporation 11-61 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 11-62 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 11-63 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments AACSB: Analytic AICPA: Measurement 11-64 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 55 On December 1, 2008, Merry Corporation acquired 100 shares of Venus Corporation at a cost of $60 per share Merry classifies them as available-for-sale securities On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $400, an at-the-money put option to sell the 100 shares at $60 per share The option expires on February 20, 2009 Selected information concerning the fair values of the investment and the options follow: Assume that Merry exercises the put option and sells Venus shares on February 20, 2009 Required: 1) Prepare the entries required on December 1, 2008, to record the purchase of the Venus stock and the put options 2) Prepare the entries required on December 31, 2008, to record the change in intrinsic value and time value of the options, as well as the revaluation of the available-for-sale securities 3) Prepare the entries required on February 20, 2008, to record the exercise of the put option and the sale of the securities at that date 11-65 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments 11-66 Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments AACSB: Analytic AICPA: Measurement 11-67