521 Chapter 7&8

On November 1, 20x1 Zamfir Company, a U.S. corporation, purchased minerals from a Russian company for 2,000,000 rubles, payable in 3 months. The relevant exchange rates between the U.S. and Russian currencies are given: The company's incremental borrowing rate provides a discount rate of 0.975 for three months. 29. If Zamfir does not attempt to hedge this transaction, what is the gain or loss that should be shown on the company's December 31, 20x1 financial statements? A. $22,000 loss B. $21,450 loss C. $8,000 gain D. $7,800 gain

A. $22,000 loss

What amount should be used to consolidate Placo's cost of goods sold into Limko's income statement under the temporal method? A. $443,900 B. $437,600 C. $432,500 D. $448,000

A. $443,900

Under FASB ASC 830, Foreign Currency Matters, when the temporal method is used, how are translation adjustments treated in the consolidated financial statements? A. As gains or losses on the current period consolidated income statement B. As prior period adjustments to retained earnings of the parent C. As part of other comprehensive income on the consolidated balance sheet D. None of the above because the temporal method is not allowed under FASB ASC 830.

A. As gains or losses on the current period consolidated income statement

Under U.S. GAAP, where are changes in the fair value of derivatives reported? A. As part of "Accumulated Other Comprehensive Income" on the Balance Sheet B. They are not recognized until the options are exercised C. Retained Earnings D. None of the above

A. As part of "Accumulated Other Comprehensive Income" on the Balance Sheet

When the parent company of a foreign subsidiary believes that all of its investment in the subsidiary is exposed to foreign exchange risk, what method of translation should be used in consolidating the financial statements? A. Current rate method B. Current/noncurrent method C. Monetary/nonmonetary method D. Temporal method

A. Current rate method

When accounting for forward contracts, what is meant by the term "executory contract"? A. No cash changes hands B. The CEO of the company is the only one authorized to engage in the contract C. There must be a price paid for the option D. The contract is valid if one of the parties sign it

A. No cash changes hands

What has occurred when one company purchases the right to buy a foreign currency sometime in the future at an exchange rate quoted today? A. The company has acquired a call option. B. The company has entered a forward contract. C. The currency has appreciated relative to the dollar. D. The company has acquired a put option.

A. The company has acquired a call option.

Which of the following is NOT among the four methods which have been used to translate foreign currency financial statements globally? A. The historic/non-historic method B. The monetary/nonmonetary method C. The temporal method D. The current/noncurrent method

A. The historic/non-historic method

What is foreign exchange risk exposure? A. The possibility of a loss because of changes in the value of a foreign currency B. Losses caused by paying for purchased goods in a foreign currency C. Losses caused by receiving payment in a foreign currency for goods sold D. All of the above

A. The possibility of a loss because of changes in the value of a foreign currency

What is a "foreign exchange rate?" A. The price to buy a foreign currency B. The price to buy foreign goods C. The difference between the price of goods in a foreign currency and the price in a domestic currency D. The cost to hold all monetary assets in a single currency

A. The price to buy a foreign currency

Homeko, Inc. is located in the U.S., but it has subsidiaries in Germany. When the euro appreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Homeko's financial statements? A. When there is net asset exposure, the translation adjustment will be positive. B. When there is net liability exposure, the translation adjustment will be positive. C. The direction of the adjustment is indeterminate. D. There will be no adjustment necessary unless the difference is realized.

A. When there is net asset exposure, the translation adjustment will be positive.

Under U.S. GAAP, foreign exchange losses should be recorded by: A. debiting "Foreign Exchange Loss". B. crediting "Foreign Exchange Loss". C. debiting "Retained Earnings". D. debiting "Sales Revenue".

A. debiting "Foreign Exchange Loss".

The number of Japanese yen (¥) required today to buy one U.S. dollar ($) today is called: A. the spot rate. B. the exact rate. C. the forward rate. D. the retail rate.

A. the spot rate.

Placo Ltd., a Scottish subsidiary of Limko, Inc., a U.S. company, showed cost of goods sold on its income statement for the year ended December 31, 2010. 29. What amount should be used to consolidate Placo's cost of goods sold into Limko's income statement under the current rate method? A. $417,600 B. $437,600 C. $448,000 D. $443,900

B. $437,600

What is the foreign currency exchange gain or loss on December 31, 20x1? A. $50,000 loss B. $50,000 gain C. $10,000 gain D. $10,000 loss

B. $50,000 gain

On December 1, 20x1 Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees. The customer has until March 1, 20x2 to pay. On December 1, 20x1, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 20x2, which was the spot rate on December 1, 20x1. On December 31, 20x1, the spot rate was $2.80 per 100 rupees and the option premium was $0.004 per 100 rupees. 31. What is the fair value of the option on December 1, 20x1? A. $0 B. $500 C. $400 D. $10,000

B. $500

Assume that on November 1, 20x1 Zamfir Company enters a forward contract to buy 2,000,000 rubles on February 1, 20x2. What is the fair value of the forward contract on December 31, 20x1? A. $8,000 B. $7,800 C. $22,000 D. $8,200

B. $7,800

In the years between 1990 and 2001 when global gross domestic product rose 27%, what was the growth in global exports? A. 25% B. 75% C. 35% D. 50%

B. 75%

Under the current rate method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold? A. Spot rate at the end of the year B. Average rate during the year C. Spot rate mid-year D. There is no single rate because beginning and ending inventory must be converted at different exchange rates than purchases.

B. Average rate during the year

What kind of exposure exists for recognized foreign currency assets and liabilities? A. Fair value exposure B. Cash flow exposure C. Both fair value exposure and cash flow exposure D. Neither fair value exposure nor cash flow exposure

B. Cash flow exposure

What is meant by the "translation" of foreign currency financial statements? A. Converting financial statements prepared under foreign GAAP into domestic GAAP B. Converting financial statements of a foreign currency into a domestic currency C. Converting the language used in financial statements from foreign to domestic D. Converting historic cost financial statements into current cost financial statements

B. Converting financial statements of a foreign currency into a domestic currency

The central bank of Country X buys and sells its own currency to ensure that the currency is always exchanged in a ratio of 2:1 with the currency of Country Y. What can we conclude about these two currencies? A. Country X is using the Euro. B. Country X has pegged its currency to the currency of Country Y. C. Country X has an undesirable currency. D. Country X allows its currency to float relative to the currency of Country Y.

B. Country X has pegged its currency to the currency of Country Y.

Essco Ltd, a foreign subsidiary of Peako Corp., has written down its inventory to current market value under a "lower of cost or market" rule. When consolidating Essco's balance sheet into Peako's balance sheet using the current rate method, what exchange rate should be used for the inventory under the temporal method? A. Historical rate B. Current rate C. Average rate D. Cannot be determined with the information given

B. Current rate

In hedge accounting, which of the following exposure should be hedged by foreign currency derivative? A. Temporal exposure B. Fair value exposure C. Derivative exposure D. Forward contract exposure

B. Fair value exposure

What term is used to describe the circumstances under which Amazing Corporation is entering the forward contract? A. Hedge of an unrecognized foreign currency firm commitment B. Hedge of a recognized foreign-currency-denominated asset C. Hedge of a forecast foreign-currency-denominated transaction D. Hedge of net investment in foreign operations

B. Hedge of a recognized foreign-currency-denominated asset

What is the "disappearing plant" problem that is addressed by FASB ASC 830, Foreign Currency Matters? A. This refers to the accelerated depreciation methods that are popular for fixed asset valuation. B. High inflation can result in extreme decreases in the reported amounts for foreign fixed assets. C. Cheap foreign currency results in U.S. companies moving factory operations offshore. D. Investment in fixed assets was not being reported on foreign subsidiary financial statements.

B. High inflation can result in extreme decreases in the reported amounts for foreign fixed assets.

Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary's dividends into parent company currency? A. Current rate B. Historical rate C. Average rate D. Any of the above methods can be used under both the temporal and current method.

B. Historical rate

What exchange rate should be used to translate the common stock of Essco Ltd, a foreign subsidiary of Peako Corp., when consolidating the financial statements using the current rate method? A. Current rate B. Historical rate C. Average rate D. Cannot be determined with the information given

B. Historical rate

Which of the following statements is true about hedge accounting under U.S. GAAP? A. Companies may choose whether to account for derivatives as cash flow hedges or fair value hedges. B. If a derivative qualifies as a cash flow hedge, the hedging instrument is adjusted to fair value on each balance sheet date. C. If a derivative is elected by the company not to be designated as a cash flow hedge, it must be accounted for as such. D. Hedge accounting is only advantageous when a foreign currency depreciates between the transaction date and the payment date.

B. If a derivative qualifies as a cash flow hedge, the hedging instrument is adjusted to fair value on each balance sheet date.

Using the temporal method of translating foreign currency financial statements, what basis should be employed when using the "lower of cost or market" rule for inventory valuation? A. Lower of parent currency cost or parent currency market at current exchange rate B. Lower of subsidiary currency cost or subsidiary currency market at appropriate exchange rate C. Lower of parent currency cost or parent currency market at appropriate exchange rate D. Lower of subsidiary currency cost or parent currency market at current exchange rate

C. Lower of parent currency cost or parent currency market at appropriate exchange rate

What is "hedge accounting?" A. Any record keeping related to purchase, sale, or valuation of derivatives. B. Recording options and other derivatives on the Balance Sheet. C. Matching gains or losses from hedging with losses or gains from the risk being hedged. D. Using multiple accounting methods to offset the effect of foreign currency exchange.

C. Matching gains or losses from hedging with losses or gains from the risk being hedged.

What is one problem in translating retained earnings using either the temporal or current rate method? A. There is no problem, since both methods use the historic rate method for stockholders' equity accounts. B. Dividends are based on an average cost method. C. Net income is calculated differently, depending upon which method is used. D. Dividends are based on the current exchange rate under the current rate method, while they are based on historical rates under the temporal method.

C. Net income is calculated differently, depending upon which method is used.

Of the following methods for translating foreign currency financial statements, which one maintains the underlying valuation method (i.e. historical cost or current value) used by the foreign subsidiary? A. Current rate method B. Current/Noncurrent method C. Temporal method D. Monetary/Nonmonetary method

C. Temporal method

What is the primary difference between a cash flow hedge and a fair value hedge? A. The fair value hedge must completely offset the variability in the cash flow from the foreign currency receivable or payable. B. The cash flow hedge can only be used to offset potential foreign currency losses on accounts receivable. C. The cash flow hedge must completely offset the variability in cash flow from the foreign currency receivable or payable. D. The fair value hedge can only be used to offset the variability in cash flow from long-term fixed assets related to foreign currency fluctuations.

C. The cash flow hedge must completely offset the variability in cash flow from the foreign currency receivable or payable.

What is a "strike price?" A. The exchange rate that is used to buy a foreign currency today B. The price that will be paid for goods in a forward contract C. The exchange rate that will be used if a foreign currency option is executed D. The difference between the wholesale rate and the retail rate for foreign currency exchange

C. The exchange rate that will be used if a foreign currency option is executed

How should U.S. companies record receivables and payables from international trade that are denominated in foreign currencies? A. All assets and liabilities of U.S. companies must be recorded in U.S. dollars. B. Conservatism would dictate that liabilities should be recorded in the currency in which they are payable, but assets should be recorded in U.S. dollars, regardless of what currency will be received. C. There should be separate receivable and payable accounts for each currency that is used by the company. D. The company should choose any one currency to use for recording receivable and payables so that there is consistency in the accounts.

C. There should be separate receivable and payable accounts for each currency that is used by the company.

Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange losses? A. They should be deferred on the Balance Sheet until the cash is paid. B. They should not be recognized until cash is received to complete the transaction. C. They should be recorded on the Income Statement in the period the exchange rate changes. D. They should be deferred on the Balance Sheet until an offsetting foreign exchange gain is realized.

C. They should be recorded on the Income Statement in the period the exchange rate changes.

According to the World Trade Organization, what was the size of international trade in 2011? A. $7,000,000,000 (7 billion dollars) B. $70,000,000,000 (70 billion dollars) C. $37,000,000,000 (37 billion dollars) D. $18,000,000,000,000 (18 trillion dollars)

D. $18,000,000,000,000 (18 trillion dollars)

If the spot rate on March 1, 20x2 was $2.45 per 100 rupees, what is the foreign currency exchange gain or loss that should be recorded that day? A. $15,000 gain B. $15,000 loss C. $35,000 gain D. $35,000 loss

D. $35,000 loss

Which of the following items in the balance sheet is subject to accounting exposure? A. Only assets B. Only liabilities and owners' equity C. All accounts translated at historical exchange rates D. All accounts translated at current exchange rates

D. All accounts translated at current exchange rates

What information is needed to determine the fair value of a foreign currency forward contract? A. The forward rate at the date the contract was entered B. The current forward rate for a contract that matures on the same dates as the forward contract that was entered into C. A discount rate to determine the present value of the contract D. All of the above information is needed

D. All of the above information is needed

Under U.S. GAAP, which of the following conditions must be met to qualify for hedge accounting? A. There must be formal documentation of the hedging relationship. B. A derivative must be used specifically to hedge fair value exposure or cash flow exposure. C. The hedge must be effective. D. All of the above must be met in order to qualify for hedge accounting.

D. All of the above must be met in order to qualify for hedge accounting.

Assume that Amazing Corporation enters a forward contract on October 1, 20x1 to sell £100,000 six months hence, on April 1, 20x2. How should Amazing Corporation report the forward contract on its December 31, 20x1 financial statements? A. Asset $1,950 B. Liability $1,950 C. Asset $1,000 D. Asset $950

D. Asset $950

How does FASB ASC 830, Foreign Currency Matters define a "highly inflationary economy?" A. Inflation rate over 50% annually B. Inflation rate over 10% annually C. Cumulative three-year inflation over 26% D. Cumulative three-year inflation over 100%

D. Cumulative three-year inflation over 100%

Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary's additional paid-in capital into parent company currency? A. Closing rate B. Current rate C. Average rate D. Historical rate

D. Historical rate

Which of the following statements is true of the relationship between foreign currency transactions, exchange rate changes, and foreign exchange gains and losses? A. In an export sales, depreciation of the foreign currency causes a foreign exchange gain. B. In an import purchase, appreciation of the foreign currency causes a foreign exchange gain. C. In an import purchase, depreciation of the foreign currency causes a foreign exchange loss. D. In an export sales, appreciation of the foreign currency causes a foreign exchange gain.

D. In an export sales, appreciation of the foreign currency causes a foreign exchange gain.

Why must the two-transaction perspective be used for recording foreign currency transactions under U.S. GAAP? A. The two-transaction perspective is required under IFRS. B. U.S. GAAP requires conservatism in financial reporting. C. All other methods are excessively complicated to use and therefore obscure the essence of the transaction. D. Management made two decisions: one to sell and another to extend credit in a foreign currency.

D. Management made two decisions: one to sell and another to extend credit in a foreign currency.

A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone. The current exchange rate is $0.163/krone. Under the current rate method, how should the translated amount of the restated asset be interpreted? A. The U.S. parent would have to pay $16,300,000 to acquire the building today. B. The U.S. parent would have had to pay $13,200,000 to acquire the building in 2010. C. The building is worth $13,200,000 to the U.S. parent today. D. None of the above

D. None of the above

What is the cause of balance sheet exposure? A. Converting subsidiary account balances to balances denominated in the parent company's currency at historical exchange rates B. Completing international transactions in currency other than the currency of the home company C. Translating subsidiary account balances to amounts denominated in the parent company's currency D. None of the above

D. None of the above

Which of the following methods uses the current exchange rate to consolidate all accounts of a foreign subsidiary into the financial statements of its parent? A. Current rate method B. Temporal method C. Current/noncurrent method D. None of the above

D. None of the above

Which of the following statements is true about the Euro? A. It is the currency used by all countries in the European Union. B. It is pegged to the U.S. dollar. C. It is the currency required to be used in financial reporting under international accounting standards. D. None of the statements above is true.

D. None of the statements above is true.

A bank exchanging foreign currency makes its profit in what manner? A. On the difference between the spot rate and the foreign rate B. A bank is forbidden, by law, to charge a premium in foreign currency exchange C. On the present value of the forward rate discounted to the date an option is purchased D. On the difference between the buying and selling rates

D. On the difference between the buying and selling rates

Under FASB ASC 830, Foreign Currency Matters, what group is responsible for determining the functional currency of a foreign subsidiary for many cases? A. Financial Accounting Standards Board B. International Accounting Standards Board C. Securities and Exchange Commission D. Parent company management

D. Parent company management

Which of the following methods for translating foreign currency financial statements attempts to produce consolidated financial statements as if a foreign subsidiary had actually used the parent company's currency for all its transactions? A. Current/Noncurrent method B. Monetary/Nonmonetary method C. Current rate method D. Temporal method

D. Temporal method

Which method of translating foreign currency financial statements must be used according to FASB ASC 830, Foreign Currency Matters? A. Temporal method for all subsidiaries B. Current rate method for all subsidiaries C. U.S. parent companies may choose between the temporal method and the current rate method D. Temporal method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not

D. Temporal method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not

Under FASB ASC 830, Foreign Currency Matters, what is the definition of "functional currency?" A. The primary currency used by the parent company B. The currency that minimizes the translation adjustment on the consolidated financial statements C. The currency in which the subsidiary does its financial reporting D. The primary currency of the foreign entity's operating environment

D. The primary currency of the foreign entity's operating environment

Under the temporal method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold? A. Spot rate at the end of the year B. Average rate during the year C. Spot rate mid-year D. There is no single rate that can be used for this purpose

D. There is no single rate that can be used for this purpose

Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange gains? A. They should be deferred on the Balance Sheet until cash is received. B. The principle of conservatism requires that they should never be recognized. C. They should not be recorded until cash is received and the exchange transaction is completed. D. They should be recognized in income on the date the exchange rate changes.

D. They should be recognized in income on the date the exchange rate changes.

Northland Corporation recorded £1,000,000 in Accounts Receivable for sales to customers in the United Kingdom and recorded Accounts Payable of 2,000,000 Yuan for product purchased from China. If Northland recorded a foreign currency exchange loss on its receivables and a foreign currency gain on its payables, what must have happened to each currency? A. Yuan appreciated, Pound depreciated B. Yuan depreciated, Pound appreciated C. Yuan appreciated, Pound appreciated D. Yuan depreciated, Pound depreciated

D. Yuan depreciated, Pound depreciated

On 1 January, 2015, Hikers Inc., a U.S.-based company, borrowed £200,000 on a two-year note at a per annum interest of 4.5%. The spot rate on this day was $1.65 per pound. The spot rate on 31 December, 2015, was $1.64 per pound. The journal entries to account for this foreign currency borrowing will include: A. a debit to Cash for $200,000 on January 1, 2015. B. a credit to Notes Payable for $330,000 on December 31, 2015. C. a debit to Foreign Exchange Loss for $90 on December 31, 2015. D. a debit to Interest Expense for $14,760 on December 31, 2015.

D. a debit to Interest Expense for $14,760 on December 31, 2015.

A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2010 for 100,000,000 krone, when the exchange rate was $0.132/krone. The current exchange rate is $0.163/krone. Under the temporal method, how should the translated amount of the restated asset be interpreted? A. The U.S. parent would have to pay $16,300,000 to acquire the building today. B. The U.S. parent would have had to pay $13,200,000 to acquire the building in 2010. C. The building is worth $13,200,000 to the U.S. parent today. D. None of the above

b. The U.S. parent would have had to pay $13,200,000 to acquire the building in 2010.

King's Bank, a British company, purchases market research services from Harris Interactive, a U.S. company. As per the terms of the contract, payment is to be made three months later in U.S. dollars when the report is delivered. How would King's Bank like to see the exchange rate move, assuming it isn't hedging the transaction? A. It hopes that the U.S. dollar appreciates in value against the British pound. B. It hopes that the British pound appreciates in value against the U.S. dollar. C. It makes no difference, since they are the customer and the sale takes place in the U.K. D. It hopes that there is no change between the spot rate and the forward rate.

B. It hopes that the British pound appreciates in value against the U.S. dollar

Why is the accrual method of accounting for unrealized foreign exchange gains sometimes criticized? A. Foreign exchange gains almost never occur, so there is no reason to have an accounting standard for it. B. It violates the principle of conservatism. C. It is not objective. D. There is no reliable method for measuring unrealized foreign exchange gains.

B. It violates the principle of conservatism.

Amazing Corporation, a U.S. enterprise, sold product to a customer in Wales on October 1, 20x1 for £100,000 with payment required on April 1, 20x2. Relevant exchange rates are: The discount factor corresponding to the company's incremental borrowing rate for 6 months is 0.95. 26. Assuming that Amazing Corporation does not hedge this transaction, what is the amount of exchange gain or loss that it should show on its December 31, 20x1 income statement? A. Loss $1,000 B. Loss $2,000 C. Gain $1,000 D. Gain $1,900

B. Loss $2,000

Which of the following is true of monetary assets? A. Monetary assets are translated at historical exchange rates under all translation methods. B. Monetary assets are those assets whose values do not fluctuate over time. C. Monetary assets include current assets like marketable securities. D. Monetary assets are always translated at current exchange rates.

B. Monetary assets are those assets whose values do not fluctuate over time.

What has occurred when one company arranges to buy a foreign currency sometime in the future, at an exchange rate quoted today? A. The company has purchased a foreign currency option. B. The company has entered a forward contract. C. The currency has been devalued. D. None of the above

B. The company has entered a forward contract.

What is the intrinsic value of a foreign currency option? A. The difference between the spot rate and the strike price B. The gain that could be realized if the option was exercised immediately C. The chance that a currency will rise over time to make the option in the money D. The difference between a call option and a put option

B. The gain that could be realized if the option was exercised immediately

What is "asset exposure" to foreign exchange risk? A. The possibility that an asset denominated in domestic currency will decline in value because of changes in the foreign exchange rate B. The possibility that an asset denominated in a foreign currency will change in value because of a change in the foreign exchange rate C. The loss resulting from an import purchase when a foreign currency appreciates D. The loss resulting from an import purchase when a foreign currency depreciates

B. The possibility that an asset denominated in a foreign currency will change in value because of a change in the foreign exchange rate

Under International Accounting Standards Board rules, what method is required to account for foreign currency transactions? A. A one-transaction perspective must be used. B. The two-transaction perspective must be used. C. A sale is not recorded until payment is received and converted to U.S. dollars. D. A sale is not recorded until payment is received in the foreign currency.

B. The two-transaction perspective must be used.

Under U.S. GAAP, what method is required to account for foreign currency transactions? A. A one-transaction perspective must be used. B. The two-transaction perspective must be used. C. A sale is not recorded until payment is received and converted to U.S. dollars. D. A sale is not recorded until payment is received in the foreign currency.

B. The two-transaction perspective must be used.

What is the requirement for reporting derivatives under international accounting standards and U.S. GAAP? A. They may be shown on the balance sheet or they may be treated as off-balance sheet investments. B. They must be shown on the balance sheet at fair value. C. They must be shown on the balance sheet at historical cost. D. They may be shown on the balance sheet at historical cost or at net realizable value.

B. They must be shown on the balance sheet at fair value.

What is the primary difference between transaction exposure and accounting exposure? A. Transaction exposure results from changes in currency exchange rates, whereas accounting exposure is the result of changes in accounting method. B. Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow. C. Transaction exposure must be hedged, but accounting exposure does not need to be hedged. D. Transaction exposure affects only monetary assets and liabilities, whereas accounting exposure affects all assets and liabilities.

B. Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow.

How is the fair value of a foreign currency option calculated? A. By using the Box-Jenkins technique B. Using the modified Black-Scholes pricing model C. Through an arms-length transaction D. Using quotes given daily in the Wall Street Journal

B. Using the modified Black-Scholes pricing model

A noncancelable sales order that specifies foreign currency price and date of delivery is known as a: A. hedge. B. foreign currency firm commitment. C. forward contract. D. put option.

B. foreign currency firm commitment.

For an upcoming trip, Pat wants to buy Euros at the local bank when the current exchange rate quoted on OANDA.com was $1.563 per €1. What should Pat plan to pay for €1,000? A. exactly $1,563 B. more than $1,563 C. about $640 D. less than $640

B. more than $1,563

What is the fair value of the option on December 31, 20x1? A. $0 B. $500 C. $400 D. $10,000

C. $400

How should discounts or premiums on forward contracts be treated if the derivative is hedging a foreign-currency-denominated asset? A. Carried on the balance sheet until the contract is completed B. Included in income in the period the derivative is acquired C. Amortized over the life of the forward contract D. None of the above

C. Amortized over the life of the forward contract

Which of the following statements is true of nonlocal currency balances in the foreign currency financial statements of foreign operations? A. These are not reported in the consolidated financial statements. B. Any gain is shown in the balance sheet of the company as an asset. C. Any loss is reflected in the measurement of consolidated net income. D. No gain or loss is reported in the financial statements.

C. Any loss is reflected in the measurement of consolidated net income.

Under FASB ASC 830, Foreign Currency Matters, when the current rate method is used, how are translation adjustments treated in the consolidated financial statements? A. As gains or losses on the current period consolidated income statement B. As prior period adjustments to retained earnings of the parent C. As part of other comprehensive income on the consolidated balance sheet D. None of the above because the temporal method is not allowed under FASB ASC 830.

C. As part of other comprehensive income on the consolidated balance sheet

What kind of exposure exists for foreign currency firm commitments? A. Fair value exposure B. Cash flow exposure C. Both fair value exposure and cash flow exposure D. Neither fair value exposure nor cash flow exposure

C. Both fair value exposure and cash flow exposure

Why was there very little fluctuation in the foreign exchange rate in the period 1945-1973? A. This was a period when the world economy was very stable. B. There was very little growth in the world economy between 1945 and 1973. C. Countries linked their currency to the U.S. dollar, which was backed by gold reserves. D. Most currencies were pegged to the British pound, which could be converted to sterling silver.

C. Countries linked their currency to the U.S. dollar, which was backed by gold reserves.

Companies must choose between which exchange rates for consolidating foreign subsidiaries? A. Spot rate and forward rate B. Spot rate and closing rate C. Current rate and historical rate D. Domestic rate and international rate

C. Current rate and historical rate

On May 1, 20x1, Ustar purchased a put option to sell £50,000 on April 30, 20x2 at a strike price equal to $2, which was the spot rate on May 1, 20x1. Ustar paid a premium of $0.01 per pound. How should the option be recorded on May 1, 20x1? A. Debit Foreign Currency Option for $100,500. B. Credit Foreign Currency Option for $100,500. C. Debit Foreign Currency Option for $500. D. Debit Hedge Expense for $500.

C. Debit Foreign Currency Option for $500.

Under U.S. GAAP, what method of amortizing discounts or premiums on forward contracts must be used? A. Weighted average method or accelerated method B. Sum of digit method only C. Effective interest rate method or straight line method D. Straight line method only

C. Effective interest rate method or straight line method

Which of the following is a limitation of using the temporal method for translating foreign currency financial statements? A. The translated asset and liability amounts have no meaningful interpretation. B. The translation adjustment will usually have a negative impact on income. C. Financial ratios after translation will be distorted. D. All of the above are limitations of the temporal method.

C. Financial ratios after translation will be distorted.

Under the temporal method of consolidating foreign currency financial statements, what exchange rate should be used for translating the depreciation expense recorded by a subsidiary? A. Average rate B. Current rate C. Historical rate D. Forward rate

C. Historical rate

What term is used for an option with a positive intrinsic value? A. Put option B. Over the counter C. In the money D. Call option

C. In the money

Which of the following is done when accounting for a cash flow hedge, but is not done when accounting for a fair value hedge? A. The hedged asset or liability is adjusted to fair value. B. Foreign exchange gains or losses on the hedged asset or liability are recorded in net income. C. Increases or decreases in a derivative's fair value are recorded in accumulated other comprehensive income. D. Gains or losses resulting from adjusting the fair value of a derivative are recorded in net income.

C. Increases or decreases in a derivative's fair value are recorded in accumulated other comprehensive income.

What is a foreign currency transaction? A. It is another name for an international transaction. B. It is a transaction that involves payment at a date sometime in the future. C. It is a business deal denominated in a currency other than a company's domestic currency. D. It is an economic event measured in a currency other than U.S. dollars.

C. It is a business deal denominated in a currency other than a company's domestic currency.

Under the current rate method of translating foreign currency financial statements, what is the amount of the balance sheet exposure? A. It is equal to the amount of assets recorded by the subsidiary. B. It is equal to the amount of liabilities recorded by the subsidiary. C. It is equal to the foreign operation's net asset position. D. It is equal to total assets plus total liabilities.

C. It is equal to the foreign operation's net asset position.

When would the balance sheet exposure arising from the current rate method become realized? A. It is realized once the financial statements of the foreign operation and the parent are consolidated. B. It is realized any time the historical exchange rate is different from the spot rate at the balance sheet date. C. It is realized when the foreign operation is sold at book value and the proceeds are converted into parent company currency. D. It can never be realized because it is only the result of the choice of accounting methods and does not reflect real exposure.

C. It is realized when the foreign operation is sold at book value and the proceeds are converted into parent company currency.

In their research published in 1988 related to translating foreign currency financial statements, Doupnik and Evans found that U.S. multinationals were biased in favor of using a foreign currency as the functional currency. What reason did the researchers give for this management decision? A. It was easier than proving to the FASB that a subsidiary's functional currency was the U.S. dollar. B. Doing so allowed companies greater latitude in selecting the method of translating foreign currency financial statements. C. This allows the use of the current method, which defers recognizing translation gains or losses in income. D. This allows the use of the temporal method, which defers recognizing transaction adjustments in income.

C. This allows the use of the current method, which defers recognizing translation gains or losses in income.

What is another term for "balance sheet exposure?" A. Transaction exposure B. Exchange exposure C. Translation exposure D. Negative exposure

C. Translation exposure

Which of the following statements is true of intrinsic value of options? A. When the option strike price is more than the spot rate, the intrinsic value is zero. B. When the option strike price is equal to the spot rate, the intrinsic value is positive. C. When the option strike price is less than the spot rate, the intrinsic value is zero. D. When the option strike price is more than the spot rate, the intrinsic value is negative.

C. When the option strike price is less than the spot rate, the intrinsic value is zero.

Excellent Inc. is located in the U.S., but it has subsidiaries in Japan. When the yen depreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Excellent's financial statements? A. When there is net asset exposure, the translation adjustment will be positive. B. There will be no adjustment necessary unless the difference is realized. C. When there is net liability exposure, the translation adjustment will be positive. D. The direction of the adjustment is indeterminate.

C. When there is net liability exposure, the translation adjustment will be positive.

Nonmonetary assets DO NOT include: A. fixed assets. B. inventory. C. accounts receivable. D. customer deposits.

C. accounts receivable.

Excel Sources Inc. is a U.S. incorporated company. Due to change in exchange rate, it receives $150,000 as payment against a sale of $165,000. Under the two-transaction perspective: A. no journal entry will be prepared on the date of sale. B. the sale will be recorded at $150,000 on the date of sale. C. foreign exchange loss will be recorded for $15,000. D. Accounts Receivable will be debited for $15,000 on the date of payment.

C. foreign exchange loss will be recorded for $15,000.

When a currency is allowed to increase or decrease freely according to market forces, the currency is said to: A. be pegged to another currency. B. be less valuable. C. have independent float. D. devalue.

C. have independent float.

The number of U.S. dollars ($) today to buy one U.K. pound (£) six months from now is called: A. the spot rate. B. the exact rate. C. the forward rate. D. the prime rate.

C. the forward rate.

When two parties from different countries enter into a transaction: A. the currency to be used for settling the transaction is set by the government. B. a third country's currency must be used to denominate the transaction. C. the two parties are free to decide the currency that should be used to settle the transaction. D. the domestic currency of the buyer must be used to settle the transaction.

C. the two parties are free to decide the currency that should be used to settle the transaction.