Midterm Study Guide Chapter 15

On October 4, 2014, Sooty Corporation borrowed 250,000 British pounds from a London bank, evidenced by an interest-bearing note payable due in one year. The note was payable in pounds. Exchange rates for pounds were: October 4, 2014 $1.59 December 31, 2014 $1.55 October 4, 2015 $1.61 What is the final amount of the loan payable that Sooty repaid? Answers: $402,500 $287,500 $397,500 $250,000

$402,500

On May 1, 2014, Deerfield Corporation purchased merchandise from a German firm for 78,000 euros when the spot rate for the euro was 1.48 euro per dollar. The account payable was denominated in the euro. Deerfield settled the account on August 1 when the spot rate for the euro was 1.39 euro per dollar. How much cash will Deerfield have to disburse to settle the account? Answers: $52,702.72 $108,420.00 $115,440.00 $56,115.11

$56,115.11

On December 5, 2014, Unca Corporation, a U.S. firm, bought inventory items from Skagerrak Corporation of Norway for 1,000,000 Norwegian kroner when the spot rate for kroner was $0.166. The purchase was denominated in kroner. At Unca's fiscal year end, December 31, 2014, the spot rate was $0.171. On January 4, 2015, Unca purchased 1,000,000 kroner for $167,500 and paid the invoice. How much gain or (loss) did Unca report in its 2014 and 2015 income statements, respectively? Answers: $0 and ($3,500) ($5,000) and $3,500 $(5,000) and $1,500 $0 and ($1,500)

($5,000) and $3,500

A direct quote for the U.S. dollar is given at $1.45 per 1 foreign currency unit (fcu). The respective indirect quote for the U.S. dollar would be reported as Selected Answer: Incorrect 1.45 fcu = $1.00. Answers: 1.45 fcu = $1.00. 1.00 fcu = $1.45. 1.45 fcu = $.6897. Correct .6897 fcu = $1.00.

.6897 fcu = $1.00.

With respect to exchange rates, which of the following statements is true? Answers: A government cannot set an exchange rate for their currency that is lower (strengthens their currency) than the quoted interbank market rate. An official exchange rate is the "market" rate resulting from the supply and demand for a currency. A floating exchange rate is the "market" rate resulting from the supply and demand for a currency. A government cannot set an exchange rate for their currency that is higher (weakens their currency) than the quoted interbank market rate.

A floating exchange rate is the "market" rate resulting from the supply and demand for a currency.

Which of the following statements is true regarding forward contracts, futures contracts, options and swaps? A forward contract can be purchased on the open market and is recorded at its historical cost, then adjusted for changes in the market. An option is a contract requiring the holder to either "put" or "call" an underlying asset at a specified point in time. A swap is a contract between two parties to exchange an ongoing stream of cash flows. A futures contract is negotiated between two parties who are betting in the opposite direction on the movement of the underlying price.

A swap is a contract between two parties to exchange an ongoing stream of cash flows.

A put option requires the seller to buy an asset at market price and the buyer of the put option has the option to sell the asset at market. True False

False

Forward contracts are negotiated contracts between three or more parties for the delivery or purchase of a commodity or foreign currency at a preagreed delivery date. Answers: True False

False

Forward contracts are very standardized and easily traded in the markets. Answers: True False

False

Gains and losses on foreign currency transactions can be deferred until the foreign currency is converted into U.S. dollars. Answers: True False

False

Ulysses Company purchases goods from China amounting to 372,372 Yuan (the transaction is denominated in the Chinese Yuan). Assume the Yuan is trading at $0.154 at the date the goods are ordered, and the Yuan is trading at $0.155 at the date the goods are received. When the invoice is paid a month later, the Yuan is trading at $.156. Assume all three dates are in the same fiscal year. Which of the following is true? Answers: The entry to record the purchase will include a credit to Accounts Payable of $57,717.66. The entry to record the payment will include a gain of $372.37. The entry to record the purchase will include a credit to Accounts Payable of $57,345.29. The entry to record the payment will include a gain of $744.74.

The entry to record the purchase will include a credit to Accounts Payable of $57,717.66.

On November 14, 2014, Scuby Company (a U.S. corporation) enters into a transaction which is denominated in the Canadian dollar. Assume the exchange rate at November 14 is $1.03, and at the December 31 year-end reporting date, the exchange rate is $1.07. On January 27, 2015, when the transaction is settled, the exchange rate is $1.05. At the date of settlement, which of the following is correct? The historical rate = $1.03, and the spot rate at which it is settled is the same as the current rate at $1.06. The historical rate = $1.03, the current rate for reporting at December 31, 2014 is $1.07, and the spot rate at which it is settled is $1.05. The historical rate = $1.05, the current rate for reporting at December 31, 2014 is $1.07, and the spot rate at which it is settled is $1.03. The historical rate = $1.05, and the spot rate at which it is settled is the same as the current rate at $1.07.

The historical rate = $1.03, the current rate for reporting at December 31, 2014 is $1.07, and the spot rate at which it is settled is $1.05.

Floating exchange rates reflect fluctuating market prices for a currency based on supply and demand in the world currency markets. Answers: True False

True

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

True

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

True

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

True

The common characteristic of derivatives is the contract's value to the investor has a direct relationship to fluctuations in price, rate and other variables. Selected Answer: False Answers: CorrectTrue False

True

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

True

If a U.S. company is preparing a journal entry for a recent purchase, foreign-currency-denominated purchases must be measured in ________ at the purchase date using the foreign currency ________ rate on the purchase date. Selected Answer: Incorrect U.S. dollars; forward Answers: U.S. dollars; forward foreign currency; future foreign currency; spot U.S. dollars; spot

U.S. dollars; spot

On October 4, 2014, Sooty Corporation borrowed 250,000 British pounds from a London bank, evidenced by an interest-bearing note payable due in one year. The note was payable in pounds. Exchange rates for pounds were: October 4, 2014 $1.59 December 31, 2014 $1.55 October 4, 2015 $1.61 What exchange gain or loss appeared on Sooty's 2014 income statement? Selected Answer: Correct a gain of $10,000 Answers: Correct a gain of $10,000 a loss of $15,000 a loss of $10,000 a gain of $15,000

a gain of $10,000

On October 4, 2014, Sooty Corporation borrowed 250,000 British pounds from a London bank, evidenced by an interest-bearing note payable due in one year. The note was payable in pounds. Exchange rates for pounds were: What exchange gain or loss appeared on Sooty's 2015 income statement? Answers: a gain of $15,000 a loss of $15,000 a loss of $5,000 a gain of $5,000

a loss of $15,000

On November 1, 2014, Rolleks Corporation sold merchandise to Watchem Corporation, a Swiss firm. Rolleks measured and recorded the account receivable from the sale at $107,100. Watchem paid for this account on November 30, 2014. Spot rates for Swiss francs on November 1 and November 30, respectively, were $1.05 and $1.02. If the sale of merchandise is denominated in dollars, the November 30 entry to record receipt of the payment from Watchem included a debit to Exchange Loss for $3,060. credit to Exchange Gain for $3,060. debit to Cash for $107,100. credit to Accounts Receivable for $104,040.

debit to Cash for $107,100.

On November 1, 2014, Rolleks Corporation sold merchandise to Watchem Corporation, a Swiss firm. Rolleks measured and recorded the account receivable from the sale at $107,100. Watchem paid for this account on November 30, 2014. Spot rates for Swiss francs on November 1 and November 30, respectively, were $1.05 and $1.02. If the sale of the merchandise was denominated in Swiss francs, the November 30 entry to record the receipt of payment from Watchem included a Answers: credit to Exchange Gain for $3,060. credit to Accounts Receivable for $104,040. debit to Cash for $107,100. debit to Exchange Loss for $3,060.

debit to Exchange Loss for $3,060.

A U.S. importer that purchased merchandise from a South Korean firm would be exposed to a net exchange gain on the unpaid balance if the dollar weakened relative to the Korean won and the won was the denominated currency. dollar weakened relative to the Korean won and the dollar was the denominated currency. dollar strengthened relative to the Korean won and the won was the denominated currency. dollar strengthened relative to the Korean won and the dollar was the denominated currency.

dollar strengthened relative to the Korean won and the won was the denominated currency

When the billing for a U.S. company's sale to a company in a foreign country is denominated in U.S. dollars, ________ is required when preparing journal entries for the sale. Answers: translation to U.S. dollars no translation translation to a foreign currency conversion to a foreign currency

no translation

The exchange rates between the Australian dollar and the U.S. dollar were as follows: This chart shows a Selected Answer: strengthening Australian Dollar which makes it less expensive for Americans to buy Australian goods. Answers: weakening Australian dollar which makes it less expensive for Americans to buy Australian goods. weakening Australian dollar which makes it more expensive for Americans to buy Australian goods. strengthening Australian Dollar which makes it less expensive for Americans to buy Australian goods. strengthening Australian dollar which makes it more expensive for Americans to buy Australian goods.

strengthening Australian dollar which makes it more expensive for Americans to buy Australian goods.

If a sale on account by a U.S. company is made with a foreign company, and the U.S. company has no foreign currency risk, then Answers: the U.S. company has measured the transaction in U.S. dollars. the U.S. company has denominated the transaction in U.S. dollars. the foreign company has denominated the transaction in their own currency. the foreign company has measured the transaction in their own currency.

the U.S. company has denominated the transaction in U.S. dollars.

Gains or losses on foreign currency transactions are recorded before the related receivable or payable is settled when Answers: the fiscal year ends after the settlement of the receivable or payable. the government cannot set an exchange rate for the foreign currency. the foreign currency is unknown. the fiscal year ends before the settlement of the receivable or payable.

the fiscal year ends before the settlement of the receivable or payable.

At the date the transaction is recognized, the transaction shall be measured and recorded in Answers: the functional currency of the foreign country in which it is denominated. the functional currency of the foreign country in which it is measured. the functional currency of the recording entity. the functional currency of the recording entity by using the exchange rate in effect at that date.

the functional currency of the recording entity by using the exchange rate in effect at that date.