Module 12

Toigo Co. purchased merchandise from a vendor in England on November 20 for 500,000 British pounds. Payment was due in British pounds on January 20. The spot rates to purchase one pound were as follows: November 20 $1.25 December 31 1.20 January 20 1.17 How should the foreign currency transaction gain be reported on Toigo's financial statements at December 31? A. A gain of $40,000 as a separate component of stockholders' equity. B. A gain of $40,000 in the income statement. C. A gain of $25,000 as a separate component of stockholders' equity. D. A gain of $25,000 in the income statement.

D

Which of the following could be the functional currency of a foreign subsidiary? I. The recording currency of the foreign subsidiary. II. The reporting currency of the subsidiary's parent. III. A currency other than either the recording currency of the foreign subsidiary or the reporting currency of the subsidiary's parent. A. I only. B. II only. C. I and II, only. D. I, II, and III.

D

Which of the following is not a characteristic associated with foreign currency transactions? A. Are denominated in a foreign currency. B. Can include contracts to exchange currencies. C. Are affected by changes in currency exchange rates. D. Occur only when initiated by a foreign entity.

D

Which one of the following is most likely a foreign currency import transaction by a U.S. company? A. Sale of goods to be collected in dollars. B. Purchase of goods to be paid in dollars. C. Sale of goods to be collected in a foreign currency. D. Purchase of goods to be paid in a foreign currency.

D

Term related to foreign exchange transactions, the domestic price of one unit of a foreign currency (1 euro = $1.24)

Direct Exchange Rate

Term related to foreign exchange transactions, the price of one unit of currency expressed in units of another currency

Exchange rate

True or False: Hedging eliminates all possible losses

False

Term for a transaction that will be settled in a foreign currency but is reported in USD

Foreign Exchange Denominated Transaction

Term related to foreign exchange transactions, the exchange rate today for delivery at a future date

Forward Rate

Term relating to foreign financial statements; the currency of the primary economic environment in which an entity operates and generates cash flows

Functional Currency

Term for when a local economy's cumulative inflation rate is > 100% over a 3 year period

Hyperinflationary Economy

Term related to foreign exchange transactions, the foreign price of one unit of a domestic currency (.806 euro = $1)

Indirect Exchange Rate

Term relating to foreign financial statements; the currency in which the foreign books and initial financial statements are prepared

Local Currency

Term relating to foreign financial statements; the currency in which the final financial statements are prepared (assume USD)

Reporting Currency

Term for a derivative contract entered into for profit

Speculative Contract

Term related to foreign exchange transactions, the exchange rate at the current date

Spot Rate

What general kind of hedge, if any, is the hedge of an available-for-sale investment denominated in a foreign currency? I. Fair value. II. Cash flow. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

A

Which of the following statements concerning the use of a forward contract for speculative purposes is/are correct? I. The forward contract is not intended to offset an existing risk. II. Changes in the value of the forward contract are deferred until the contract matures. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

A

Which one of the following would not be remeasured using a historic exchange rate? A. Cash. B. Inventories carried at cost. C. Property, plant, and equipment. D. Common stock.

A

Papco, a U.S. entity, has a subsidiary, Sapco, located in a foreign country. Sapco is essentially a sales unit for Papco. Which one of the following processes should Papco use to convert Sapco's financial statements to dollar-based statements for consolidation purposes? A. Translation. B. Remeasurement. C. Translation and then remeasurement. D. Remeasurement and then translation.

B

Remeasurement, based on the temporal method of conversion, converts foreign currency amounts to reporting currency amounts using different exchange rates for different accounts based on which of the following distinctions? A. Current and non-current. B. Monetary and non-monetary. C. Asset and liability. D. Income statement and balance sheet.

B

Soco plans to buy 100,000 Euros with U.S. dollars. The exchange rate is $1.00 = 0.75 Euro. Assuming no transaction cost, how much will Soco have to pay in dollars (rounded) for 100,000 Euros? A. $175,000 B. $133,333 C. $100,000 D. $75,000

B

Which one of the following best describes the currency in which the final consolidated financial statements are presented? A. The local currency. B. The reporting currency. C. The functional currency. D. The temporal currency.

B

Which one of the following could not be translated using the weighted average exchange rate for the fiscal year? A. Rent expense. B. Cash. C. Sales. D. Wage expense.

B

Which one of the following is a direct exchange rate for a U.S. entity when buying Japanese Yen (JPY)? I. 0.89 JPY per $1.00. II. $.011 per 1.00 JPY. A. I only. B. II only. C. Both I or II. D. Neither I nor II.

B

A hedge to offset the risk of loss on a recognized asset or liability is which of the following types of hedge? A. Cash flow hedge. B. Fair value hedge. C. Either a cash flow hedge or a fair value hedge, at management's discretion. D. Neither a cash flow hedge nor a fair value hedge.

C

Determining a foreign subsidiary's functional currency will take into account which of the following? I. The extent to which the subsidiary operates, and generates and expends cash in the local foreign economy in which it is located. II. The cumulative inflation rate in the local foreign economy in which it is located. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

C

If a foreign currency exchange gain results from the effects of a change in exchange rates on an account receivable, where will the exchange gain be reported in the financial statements? A. As other comprehensive income. B. As an extraordinary gain. C. As an item of income from continuing operations. D. As a deferred gain.

C

On December 31, 20X8, the end of its fiscal year, Domco had a foreign currency account payable with a settlement amount greater than its previously recorded carrying amount. Which one of the following would Domco recognize for 20X8? A. No exchange gain or loss. B. Exchange gain. C. Exchange loss. D. Deferred gain.

C

On November 15, 20X5, Celt Inc., a U.S. company, ordered merchandise FOB shipping point from a German company for 200,000 euros. The merchandise was shipped and invoiced to Celt on December 10, 20X5. Celt paid the invoice on January 10, 20X6. The spot rates for euros on the respective dates are as follows: November 15, 20X5 $.4955 December 10, 20X5 .4875 December 31, 20X5 .4675 January 10, 20X6 .4475 In Celt's December 31, 20X5, income statement, the foreign exchange gain is: A. $9,600 B. $8,000 C. $4,000 D. $1,600

C

The specific method to be used to convert financial statements of a subsidiary expressed in a foreign currency into the domestic currency of the parent depends primarily on: A. The reporting currency of the subsidiary. B. The reporting currency of the parent. C. The functional currency of the subsidiary. D. The functional currency of the parent.

C

What general kind of hedge, if any, is the hedge of a recognized asset or liability? I. Fair value. II. Cash flow. A. I only. B. II only. C. Either I or II. D. Neither I nor II.

C

When a foreign entity's financial statements are converted to a reporting currency using remeasurement, how will the adjustment needed to make the converted balance sheet balance (the "translation adjustment") be reported? A. As an item of other comprehensive income. B. As an extraordinary item. C. As an item in income from continuing operations. D. As an asset or liability, depending on whether a debit or credit is needed to balance the balance sheet.

C

Which of the following is a foreign currency export transaction for a U.S. entity? A. Sale of goods to be collected in dollars. B. Purchase of goods to be paid in dollars. C. Sale of goods to be collected in a foreign currency. D. Purchase of goods to be paid in a foreign currency.

C

Which of the following is not associated with the general principles of accounting for foreign currency operating transactions? A. Transactions will be recorded in terms of the domestic currency. B. Gains and losses result from changes in currency exchange rates. C. Gains and losses are deferred until transactions are settled. D. Foreign currencies are converted using the current or spot exchange rate.

C

Which of the following statements concerning the determination of a functional currency is/are correct? I. The functional currency can be selected at management's discretion. II. The functional currency could be the recording currency of the foreign entity. III. The functional currency could be the reporting currency of a parent. A. I only. B. I and II, only. C. II and III, only. D. I, II, and III.

C

Which one of the following would be a foreign currency transaction for the U.S. entity? A. A U.S. entity purchases goods from a Swiss entity to be settled in dollars. B. A German entity purchases goods from a U.S. entity to be settled in dollars. C. A U.S. entity purchases goods from a British entity to be settled in pounds sterling. D. A U.S. entity sells goods to a Russian entity to be settled in dollars.

C

Which one of the following would best describe the functional currency of a foreign subsidiary of a U.S. parent? A. The currency in which the subsidiary maintains its books. B. The dollar - the functional currency of the parent. C. The currency of the primary economic environment in which the subsidiary operates and generates most of its net cash flow. D. The currency of the country in which the foreign subsidiary is located.

C

Which one of the following would not be translated using either the spot exchange rate as of the balance sheet date or the weighted average exchange rate for the period? A. Cash. B. Accounts payable. C. Common stock. D. Investments held-for trading.

C

Which one of the following would not be translated using the spot (or current) exchange rate as of the balance sheet date? A. Cash. B. Accounts payable. C. Common stock. D. Investments held-for-trading.

C

Term relating to foreign financial statements; when a US entity converts financial statements expressed in a foreign currency to USD

Conversion

A December 15, 20X8, purchase of goods was denominated in a currency other than the entity's functional currency. The transaction resulted in a payable that was fixed in terms of the amount of foreign currency and was paid on the settlement date, January 20, 20X9. The exchange rate of the currency in which the transaction was denominated changed at December 31, 20X8, resulting in a loss that should: A. Not be reported until January 20, 20X9, the settlement date. B. Be included as a component of comprehensive income for 20X8. C. Be included as a deferred charge at December 31, 20X8. D. Be included as a component of income from continuing operations for 20X8.

D

A sale of goods, denominated in a currency other than the entity's functional currency, resulted in a receivable that was fixed in terms of the amount of foreign currency that would be received. Exchange rates between the functional currency and the currency in which the transaction was denominated changed. The resulting gain should be included as a: A. Translation gain reported as a component of comprehensive income. B. Translation gain reported as a component of income from continuing operations. C. Transaction gain reported as a component of comprehensive income. D. Transaction gain reported as a component of income from continuing operations.

D

If $1.00 will buy 0.76 Euros, then how many dollars will one Euro buy (rounded)? A. $0.24 B. $0.76 C. $1.00 D. $1.32

D

In converting financial statements from a foreign currency to a reporting currency, which one of the following accounts would not be translated using an exchange rate? A. Accounts receivable. B. Bonds payable. C. Common stock. D. Retained earnings.

D

In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary's functional currency is the currency: A. In which the subsidiary maintains its accounting records. B. Of the country in which the subsidiary is located. C. Of the country in which the parent is located. D. Of the environment in which the subsidiary primarily generates and expends cash.

D

In which of the following hedges using a forward contract will at least a portion of any currency exchange gain or loss on the hedging instrument be reported as a translation adjustment in other comprehensive income? A. Forecasted transaction hedge. B. Firm commitment hedge. C. Investment in available-for-sale securities hedge. D. Net investment in foreign operations hedge.

D

In which one of the following independent circumstances would the local foreign currency of a country least likely be the functional currency for a manufacturing subsidiary of a U.S. company located in that country? A. The subsidiary's operations are relatively self-contained and integrated in the foreign country, which is not experiencing hyperinflation. B. The economy of the foreign country in which the subsidiary is located has experienced an inflationary rate of between 15% and 20% each of the last 5 years. C. The subsidiary generates most of its cash flows from sales and other activities in the foreign country in which it is located. D. The subsidiary makes all of its product for sale to and for use by its U.S. parent.

D

On September 1, 20X5, Cano & Co., a U.S. corporation, sold merchandise to a foreign firm for 250,000 francs. Terms of the sale require payment in francs on February 1, 20X6. On September 1, 20X5, the spot exchange rate was $.20 per franc. At December 31, 20X5, Cano's year end, the spot rate was $.19, but the rate increased to $.22 by February 1, 20X6, when payment was received. How much should Cano report as a foreign exchange gain or loss in its 20X6 income statement? A. $0 B. $2,500 loss C. $5,000 gain D. $7,500 gain

D

True or False: Hedging generally involves two transactions for which a loss on one would be offset at least in part by a gain on the other

True