Chapter 6 International accounting

True or false: A variety of factors determine the exchange rate between two currencies. The exchange rate fluctuates.

True

The exchange rate between Japanese yen and the U.S. dollar on May 2, Year 1 is: USD/JPY 0.0088. This is the indirect quote for ______.

USD

Eximco has a long-term relationship with its Spanish customer and can reliably forecast that the customer will require delivery of goods costing 1,000,000 euro in March 1 of Year 2, when the spot rate is $1.00. Confident that it will receive 1,000,000 euro on March 1, Year 2. Eximco hedges its forecasted foreign currency transaction by purchasing 1,000,000 euro put option on December 1, Year 1. The option has a strike price of $1.50 and a premium of $0.009 per euro. How much is the fair value of the option on December 1, Year 1? A. $9,000 B. $9,803 C. $15,000 D. $10,000

A. $9,000

The type(s) of hedging instrument include(s): 1. Forward contract 2. Option contract 3. Swap 4. Futures 5. Cash flow hedge A. 1, 2, 3, and 4 B. 2, 3, 4, and 5 C. 4 and 5 D. 1, 2, 3, 4, and 5

A. 1, 2, 3, and 4

A cash flow exposure exists for: 1. Recognized foreign currency assets and liabilities. 2. Foreign currency firm commitments. 3. Forecasted foreign currency transactions. A. 1, 2, and 3 B. 1 and 2 C. 1 and 3 D. 2 and 3

A. 1, 2, and 3

Which information is needed to determine the fair value of a forward contract: 1. The forward rate at the date the forward contract was entered into 2. The current forward rate for a contract that matures on the same date as the forward contract entered into 3. A discount rate—typically, the company's incremental borrowing rate A. 1, 2, and 3 B. 2 and 3 C. 1 and 3 D. 1 and 2

A. 1, 2, and 3

On November 1, Year 1, Black Lion Company forecasts the purchase of raw materials from an Argentinian supplier on February 1, Year 2, at a price of 200,000 Argentinian pesos. On November 1, Year 1, Black Lion pays $1,200 for a three-month call option on 200,000 Argentinian pesos with a strike price of $0.35 per peso. The option is properly designated as a cash flow hedge of a forecasted foreign currency transaction. On December 31, Year 1, the option has a fair value of $900. The following spot exchange rates apply: Date U.S. Dollar per Argentinian Peso November 1, Year 1 $0.35 December 31, Year 1 0.30 February 1, Year 2 0.36 What is the net impact on Black Lion Company's Year 1 net income as a result of this hedge of a forecasted foreign currency purchase? A. A $300 decrease in net income. B. An $800 decrease in net income. C. $0. D. A $200 increase in net income.

A. A $300 decrease in net income. Reason: (1,200-900) Incorrect

On December 1, Year 1, Tackett Company (a U.S.-based company) entered into a three-month forward contract to purchase 1 million Mexican pesos on March 1, Year 2. The following U.S. dollar-peso exchange rates apply: Date Spot Rate Forward Rate(to March 1, Year 2) December 1, Year 1 $0.088 $0.084 December 31, Year 1 0.080 0.074 March 1, Year 2 0.076 Tackett's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803. Which of the following correctly describes the manner in which Tackett Company will report the forward contract on its December 31, Year 1, balance sheet? A. As a liability in the amount of $9,803.00. B. As an asset in the amount of $3,921.20. C. As an asset in the amount of $7,842.40. D. As a liability in the amount of $13,724.20.

A. As a liability in the amount of $9,803.00. Reason: (.084-.074)(1,000,000)(.9803)

How is the fair value of a foreign currency forward contract determined? A. By reference to changes in the forward rate over the life of the contract, discounted to the present value B. By reference to changes in the forward rate over the next five years, discounted to the present value C. By reference to changes in the forward rate over the life of the contract D. By reference to changes in the spot rate across different markets, then take the average

A. By reference to changes in the forward rate over the life of the contract, discounted to the present value

If a company wishes to use hedge accounting, that company must designate its derivatives as: 1. Fair value hedge 2. Cash flow hedge 3. Exchange risk hedge A. Either 1 or 2 B. Either 1, 2, or 3 C. 1, 2, and 3 D. Both 2 and 3

A. Either 1 or 2

Which country pegs their currency to U.S. dollar? A. Hong Kong B. Australia C. Mexico D. Canada

A. Hong Kong

Which IAS provides guidance to account for the effects of changes in foreign exchange rates? A. IAS 21 B. IAS 38 C. IAS 2 D. IAS 16

A. IAS 21

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

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

Salisbury Trade Inc. is a U.S. corporation, buys goods from a Chinese company with payment to be made in U.S. dollars. Which type of exposure to foreign exchange risk does Salisbury Trade Inc. have? A. No exposure to foreign exchange risk B. Chinese Yuan exposure C. Export sale transaction exposure D. Import sale transaction exposure

A. No exposure to foreign exchange risk

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

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

Which method of accounting for changes in the value of a foreign currency transaction assumes that an export sale is not complete until the foreign currency receivable has been collected and converted into domestic currency? A. The one-transaction perspective B. The complete transaction perspective C. The payment collection perspective D. The two-transaction perspective

A. The one-transaction perspective

True or false: If Eximco elects to treat a forward contract as a fair value hedge, then the gain or loss on the forward contract is taken directly to net income and there is no separate amortization of the original discount on the forward contract. A. True B. False

A. True

True or false: The straight-line allocation of forward contract discounts and premiums is allowed by the FASB. A. True B. False

A. True

True or false: With a cash flow hedge, an expense equal to the original forward contract discount is recognized in net income over the life of the contract. A. True B. False

A. True

The journal entry to record the purchase of the foreign currency option at its fair value would include ______. A. a debit entry to Foreign Currency Option B. a debit entry to Foreign Currency Forward Contract C. a credit entry to Foreign Currency Forward Contract D. a credit entry to Foreign Currency Option

A. a debit entry to Foreign Currency Option

Eximco enters a forward contract to hedge an account receivable denominated in Japanese yen, a foreign currency to Eximco. If the spot rate is 1USD = 108 Japanese yen, and the forward rate is 1USD = 120 Japanese yen, then the Japanese yen is selling at ______. A. a discount B. a loss C. a premium D. a gain

A. a discount

Select the best answer to complete the following statement: "IAS 21 and FASB ASC 830 require companies to use the ______ to account for unrealized foreign exchange gains and losses. Under this approach, a firm report unrealized foreign exchange gains and losses in ______ in the period in which the exchange rate changes." A. accrual approach, net income B. deferral approach, other comprehensive income C. deferral approach, net income D. accrual approach, other comprehensive income

A. accrual approach, net income

If the hedging instrument does not qualify as a cash flow hedge, or if the company elects not to designate the hedging instrument as a cash flow hedge, then the hedge ______. A. is designated as a fair value hedge B. is considered either a swap or futures C. is considered as either a forward contract or an option contract D. is not qualified to be formally reported

A. is designated as a fair value hedge

Eximco designates a forward contract as a fair value hedge. The gain and loss on the forward contract is taken directly to ______. A. net income B. unrealized gains or losses C. a current asset item D. a current liability item

A. net income

Select the best answer to complete the following statement: "The hedging instrument is reported at fair value but because there is no gain or loss on the forecasted transaction to offset against, changes in the fair value of the hedging instrument are not reported as gains and losses in ______. Instead they are reported in ______. On the projected date of the forecasted transaction, the cumulative change in the fair value of the hedging instrument is transferred from ______ to ______. A. net income, other comprehensive income, other comprehensive income, net income B. other comprehensive income, net income, net income, other comprehensive income C. net income, other comprehensive income, net income, other comprehensive income D. other comprehensive income, net income, other comprehensive income, net income

A. net income, other comprehensive income, other comprehensive income, net income

In Year 1, Eximco enters into a foreign currency option contract to hedge against an exposure to foreign exchange risk of an account receivable denominated in foreign currency that is due in Year 2. Select the best answer to complete the following statement: "The accounting method for a foreign currency option, fair value hedge or cash flow hedge, would have ______ on cash flows ______ on the net amount of income recognized over the two-year period." A. no impact, or B. no impact, but significant impact C. significant impact, and D. significant impact, but no impact

A. no impact, or

Whether gains and losses from changes in the fair value of derivatives are recognized on the income statement as part of net income or on the balance sheet as a component of other comprehensive income depends on ______. A. whether the derivative is used for hedging purpose or for speculation B. the treatment method used by other companies in the same industry C. whether the gains or losses are significant D. the treatment method used by the company in prior years

A. whether the derivative is used for hedging purpose or for speculation

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

C. The company has entered a forward contract.

To hedge its exposure to a decline in the U.S. dollar value of the foreign currency commitment, Eximco purchases a put option to sell 1,000,000 euros on March 1, Year 2, at a strike price of $1.50 (the spot rate). Eximco elects to measure the fair value of a firm commitment through reference to changes in the U.S. dollar - euro spot rate. The spot rate between the U.S. dollar and the euro on December 31, Year 1 is $1.52 = 1 Euro. Assume the present value factor for two months at an annual interest rate of 12% is 0.9803. How much would be the fair value of the firm commitment on December 31, Year 1? A. $10,000 B. $19,606 C. $9,803 D. $21,000

B. $19,606

To hedge its exposure to a decline in the U.S. dollar value of the foreign currency commitment, Eximco purchases a put option to sell 1,000,000 euros on March 1, Year 2, at a strike price of $1.48. Eximco elects to measure the fair value of a firm commitment through reference to changes in the U.S. dollar - euro spot rate. The spot rate between the U.S. dollar and the euro on December 31, Year 1 is $1.51 = 1 euro. Assume the present value factor for two months at an annual interest rate of 12% is 0.9803. How much would be the fair value of the firm commitment on December 31, Year 1? A. $30,000 B. $29,409 C. $20,000 D. $19,606

B. $29,409

On December 1, 2001 Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees. The customer has until March 1, 2002 to pay. On December 1, 2001, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 2002, which was the spot rate on December 1, 2001. On December 31, 2001, the spot rate was $2.80 per 100 rupees and the option premium was $0.004 per 100 rupees. What is the foreign currency exchange gain or loss on December 31, 2001? A. $50,000 loss B. $50,000 gain C. $10,000 loss D. $10,000 gain

B. $50,000 gain Reason: (10,000.000/100)*(2.80-2.30)

The specific entries required to account for a foreign currency hedging relationship are determined by a combination of the following factor(s): 1. The type of item being hedged 2. The nature of the item being hedged 3. The type of hedging instrument being used 4. The nature of the hedged risk A. 1, 3, and 4 B. 1, 2, 3, and 4 C. Only 4 D. 2, 3, and 4

B. 1, 2, 3, and 4

A hedging contract qualifies for hedge account if it meets all of the following requirements for hedge effectiveness, EXCEPT: 1. There is an economic relationship between the eligible hedged item and the hedging instrument. 2. The effect of credit risk does not dominate the value changes that result from the economic relation between the eligible hedged item and the hedging instrument. 3. The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item. 4. The hedge contract must be formally documented on the date a foreign currency forward contract is entered into or a foreign currency option is acquired. A. 2 B. 4 C. 1 D. 3

B. 4

Under the one-transaction perspective, any change in the domestic currency value regarding to the foreign currency will be accounted for as an adjustment to ______. A. Income B. Accounts Receivable and Sales C. Accounts Receivable only D. Sales only

B. Accounts Receivable and Sales

Where are gains and losses arising from changes in the fair value of derivatives recognized initially? A. On the income statement as a part of net income or in assets for gains and in liabilities for losses B. Either on the income statement as a part of net income or on the balance sheet as a component of other comprehensive income C. On the balance sheet as a component of other comprehensive income D. In a note

B. Either on the income statement as a part of net income or on the balance sheet as a component of other comprehensive income

Which standard(s) require(s) companies to use the deferral approach to account for unrealized foreign exchange gains and losses? A. Both IFRS and U.S. GAAP B. Neither IFRS or U.S. GAAP C. U.S. GAAP D. IFRS

B. Neither IFRS or U.S. GAAP

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

B. On the difference between the buying and selling rates

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

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

B. The price to buy a foreign currency

Under International Accounting Standards Board rules, what method is required to account for foreign currency transactions? A. A sale is not recorded until payment is received in the foreign currency. 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 one-transaction perspective must be used.

B. The two-transaction perspective must be used.

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

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

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 depreciated C. Yuan depreciated, Pound appreciated D. Yuan appreciated, Pound appreciated

B. Yuan depreciated, Pound depreciated

Select the best answer to complete the following statement: "To hedge an exposure to foreign exchange risk arising from a foreign currency account receivable of 1,000,00 euro, Eximco purchased a foreign currency put option. This put option will give Eximco the right ______ the obligation to ______ 1,000,000 euro on a certain date, at a predetermined strike price." A. and, sell B. but not, sell C. but not, buy D. and, buy

B. but not, sell

Select the best answer to complete the following statement: "Regarding the accounting for cash flow hedges, at each balance sheet date, the derivative hedging instrument is adjusted to ______, resulting in an asset or liability reported on the balance sheet, with the counterpart recognized as a change in ______." A. current risk, Other Comprehensive Income B. fair value, Accumulated Other Comprehensive Income C. fair value, Net Income D. current exchange rate, Net income

B. fair value, Accumulated Other Comprehensive Income

Select the best answer to complete the following statement: "The hedging relationship must be ______ at the ______ of the hedge, that is, on the date a foreign currency forward contract is entered into or a foreign currency option is acquired." A. formally measured, derecognition date B. formally documented, inception C. formally measured, inception D. formally documented, derecognition date

B. formally documented, inception

Select the best answer to complete the following statement: "It is quite common for companies to use foreign currency derivatives to ______ the exposure to ______ arising from forecasted foreign currency transactions." A. forecast, exchange rate fluctuations B. hedge, foreign exchange risk C. increase, foreign exchange risk D. speculate, exchange rate fluctuations

B. hedge, foreign exchange risk

Select the best answer to complete the following statement: "Assume that Eximco designates a foreign currency option as a cash flow hedge of a foreign-currency-denominated asset. The change in the fair value of the option is recognized in ______." A. current asset B. net income C. current liability D. long-term asset

B. net income

Select the best answer to complete the following statement: "Under fair value hedge accounting, the gain or loss on the hedging instrument is recognized currently in ______ and the gain or loss on the firm commitment attributable to the hedged risk is recognized currently in ______." A. current asset, net income B. net income, net income C. current asset, current asset D. net income, current asset

B. net income, net income

One of the reasons for a company to use a forward contract to hedge a recognized foreign-currency-denominate asset such as account receivable in a foreign currency is ______. A. the hedging company will recognize a gain resulting from the use of the forward contract B. the exact amount of the transaction loss is known in advance at the hedging date C. the hedging company will have a flexibility to sell the forward contract to a third party D. the hedging company can avoid to recognize a loss from the transaction denominated in a foreign currency

B. the exact amount of the transaction loss is known in advance at the hedging date

Eximco enters into a foreign currency put option to hedge a foreign exchange rate exposure of an account receivable denominated in a foreign currency. On the maturity date, if the spot rate is greater than the strike price, then the fair value of the foreign currency put option ______. A. would be the difference between the strike price and the spot rate times the quantity of the currency in the put option B. would be $0 C. would be the strike price times the quantity of the currency in the put option D. would be the spot rate times the quantity of the currency in the put option

B. would be $0

Which standard(s) require(s) companies to use a two-transaction perspective in accounting for foreign currency transactions? A. IFRS B. Neither IFRS or U.S. GAAP C. U.S. GAAP D. Both IFRS and U.S. GAAP

Both IFRS and U.S. GAAP

Which of the following combinations correctly describes the relationship between foreign currency transactions, exchange rate changes, and foreign exchange gains and losses? A) Export sale, Appreciates, Loss B) Import purchase, Appreciates, Gain C) Import purchase, Depreciates, Gain D) Export sale, Depreciates, Gain

C) Import purchase, Depreciates, Gain

The accounting treatment for the fair value hedge of an unrecognized foreign currency firm commitment requires: 1. Measuring the fair value of the firm commitment. 2. Recognizing the change in fair value in net income. 3. Reporting the firm commitment on the balance sheet as an asset or liability. A. Only 1 B. 2 and 3 C. 1, 2, and 3 D. 1 and 3

C. 1, 2, and 3

Which information is needed to determine the fair value of a forward contract: 1. The forward rate at the date the forward contract was entered into 2. The current forward rate for a contract that matures on the same date as the forward contract entered into 3. A discount rate—typically, the company's incremental borrowing rate A. 2 and 3 B. 1 and 3 C. 1, 2, and 3 D. 1 and 2

C. 1, 2, and 3

Eximco enters into a peso put option contract on December 1st, 2017, to hedge against an exposure to foreign exchange risk of an account receivable denominated in pesos due on Mar 1, 2018. Eximco decides to designate a foreign currency option as a cash flow hedge. Assume that the fair value of the option has gone down from December 1st to December 31st, 2017 and that the option strike price is less than the spot rate so its intrinsic value is $0. What would be the entry to adjust the fair value of the option on December 31, 2017? A. A debit entry to Foreign Currency Option and a credit entry to Loss on Foreign Currency Option B. A debit entry to Foreign Currency Option and a credit entry to AOCI C. A debit entry to AOCI and a credit entry to Foreign Currency Option D. a debit entry to Loss on Foreign Currency Option, and a credit entry to Foreign Currency Option

C. A debit entry to AOCI and a credit entry to Foreign Currency Option

On December 1, Year 1, Eximco enters into a forward contract used as fair value hedge of a firm commitment to sell 1,000,000 euro on March 1, Year 2 at $1,475,000. On December 31, Year 1, the forward rate for a contract to deliver euro on March 1, Year 2 is $1.496 = 1 euro. Assume that 0.9803 is the present value factor for 2 months at an annual interest rate of 12% per year. How much is the gain or loss on the firm commitment on December 31, Year 1? A. A loss of $20,586 B. A gain of $21,000 C. A gain of $20,586 D. A loss of $21,000

C. A gain of $20,586

To hedge an exposure to foreign exchange risk arising from a foreign currency account receivable of 1,000,00 euro, Eximco purchased a foreign currency put option. This put option will give Eximco ______. A. The obligation to sell 1,000,000 euro B. The obligation to buy 1,000,000 euro C. the right to sell 1,000,000 euro D. The right to buy 1,000,000 euro

C. the right to sell 1,000,000 euro

On September 1, Year 1, Keefer Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. The machine was shipped and payment was received on March 1, Year 2. On September 1, Year 1, Keefer Company purchased a put option giving it the right to sell 100,000 Canadian dollars on March 1, Year 2, at a price of $75,000. Keefer Company properly designates the option as a fair value hedge of the Canadian-dollar firm commitment. The option cost $1,700 and had a fair value of $2,800 on December 31, Year 1. The fair value of the firm commitment is measured through reference to changes in the spot rate. The following spot exchange rates apply: Date U.S. Dollar per Canadian Dollar September 1, Year 1 $0.75 December 31, Year 1 0.73 March 1, Year 2 0.71 Keefer Company's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803. What was the net impact on Keefer Company's Year 1 income as a result of this fair value hedge of a firm commitment? A. A $1,100.00 increase in income. B. A $1,960.60 increase in income. C. An $860.60 decrease in income. D. $0.

C. An $860.60 decrease in income. Reason: Fair value of the option - foreign currency option - lost of firm commitment ((dec-sep)(price*.9803)) 2,800-1,700-1,960.60=(860.60)

How should cash flows arising from hedging instruments be classified in statements of cash flows? A. As long-term or short-term activities based on the length of the hedge contracts B. As current or non-current activities based on the hedged item C. As operating, investing or financing activities, based on the classification of the cash flows from the hedged item D. As available for sale or non-available for sale based on the current market conditions

C. As operating, investing or financing activities, based on the classification of the cash flows from the hedged item

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 allows its currency to float relative to the currency of Country Y. B. Country X has an undesirable currency. C. Country X has pegged its currency to the currency of Country Y. D. Country X is using the Euro.

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

Which IFRS replaced IAS 39 requirements for classification, measurement, impairment, hedge accounting, and derecognition? A. IFRS 19, Financial Instruments B. IFRS 10, Financial Statement: Recognition and Measurement C. IFRS 9, Financial Instruments D. IFRS 11, Financial Instruments: Disclosure and Presentation

C. IFRS 9, Financial Instruments

The value of the currency is allowed to fluctuate freely according to market forces, with little or no intervention from the central bank. Which exchange rate mechanism is it? A. Pegged to another currency B. Open-market mechanism C. Independent float D. Market-oriented mechanism

C. Independent float

Eximco enters into a put option to hedge a foreign exchange rate exposure of an account receivable denominated in a foreign currency. On the maturity date of the put option, the spot rate is greater than the strike price, Eximco should ______. A. exercise the option and then ask for the option fees to be reimbursed B. exercise the option to gain the difference between the spot rate and the strike price C. allow the option to expire unexercised and sell its foreign currency at the spot rate D. not pay the put option fees because the strike price is lower than the spot rate

C. allow the option to expire unexercised and sell its foreign currency at the spot rate

Select the best answer to complete the following statement: "The fundamental requirement is that all derivatives must be carried on the balance sheet date at their fair value. Derivatives are reported on the balance sheet as ______ when they have a positive fair value and as ______ when they have a negative fair value." A. unrealized gains, deferred losses B. liabilities, assets C. assets, liabilities D. assets, deferred losses

C. assets, liabilities

To meet the requirement of hedge documentation, the hedge contract must ______. A. show that the effect of credit risk does not dominate the value changes B. have an economic relationship with the eligible hedged item C. be formally documented at the inception of the hedge D. be formally documented on the derecognition date of the hedge

C. be formally documented at the inception of the hedge

To qualify as a cash flow hedge, the hedging instrument must ______. A. completely offset the negative cash flows but maintain the positive cash flows associated with the foreign currency receivable or payable B. maximize the positive cash flows and minimize the negative cash flows associated with the foreign currency receivable or payable C. completely offset the variability in the cash flows associated with the foreign currency receivable or payable D. generate positive cash flows net of the hedging fees

C. completely offset the variability in the cash flows associated with the foreign currency receivable or payable

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

C. debiting "Foreign Exchange Loss".

Select the best answer to complete the following statement: "According to IFRS 9, Financial Instruments, all derivatives should be reported on the balance sheet at ______. Off-balance-sheet treatment is ______." A. the value on the date of purchase, acceptable B. fair value, acceptable C. fair value, not acceptable D. the value on the date of purchase, not acceptable

C. fair value, not acceptable

The two most common derivatives used to hedge foreign exchange risk are ______. A. foreign currency swap and foreign currency option contracts B. foreign currency swap and foreign currency forward contracts C. foreign currency forward and foreign currency option contracts D. foreign currency call option and foreign currency put option contracts

C. foreign currency forward and foreign currency option contracts

Select the best answer to complete the following statement: "There probably are as many different corporate strategies regarding hedging ______ as there are companies exposed to that risk. Some companies simply require hedges of all ______ currency transactions. Others require the use of a forward contract hedge when the forward rate results in a greater cash ______ or smaller cash ______ than with the spot rate." A. foreign exchange risk, domestic, outflow, inflow B. domestic currency risk, foreign, outflow, inflow C. foreign exchange risk, foreign, inflow, outflow D. domestic currency risk, domestic, inflow, outflow

C. foreign exchange risk, foreign, inflow, outflow

Select the best answer to complete the following statement: "Regarding the accounting for cash flows, at each balance sheet date, an amount equal to the foreign exchange gain or loss recognized in ______ is then transferred to ______, to offset any gain or loss on the hedged asset or liability." A. net income, other comprehensive income B. other comprehensive income, accumulated other comprehensive income C. net income, accumulated other comprehensive income D. other comprehensive income, net income

C. net income, accumulated other comprehensive income

Eximco has a long-term relationship with its Spanish customer and can reliably forecast that the customer will require delivery of goods costing 1,000,000 euro in March 1 of Year 2, when the spot rate is $1.00. Confident that it will receive 1,000,000 euro on March 1, Year 2. Eximco hedges its forecasted foreign currency transaction by purchasing 1,000,000 euro put option on December 1, Year 1. The option has a strike price of $1.50 and a premium of $0.085 per euro. How much is the fair value of the option on December 1, Year 1? A. $13,500 B. $10,000 C. $1,500 D. $8,500

D. $8,500

The accounting for a hedge of a forecasted transaction differs from the accounting for a hedge of a foreign currency firm commitment. The difference(s) include(s): 1. Unlike the accounting for a firm commitment, there is no recognition of the forecasted transaction or gains and losses on the forecasted transaction. 2. The hedging instrument is reported at fair value but because there is no gain or loss on the forecasted transaction to offset against, changes in the fair value of the hedging instrument are not reported as gains and losses in net income. Instead they are reported in other comprehensive income. On the projected date of the forecasted transaction, the cumulative change in the fair value of the hedging instrument is transferred from other comprehensive income to net income. A. 2 B. 1 C. Neither 1 nor 2 D. 1 and 2

D. 1 and 2

A hedging contract qualifies for hedge account if it meets the following requirements for hedge effectiveness: 1. There is an economic relationship between the eligible hedged item and the hedging instrument. 2. The effect of credit risk does not dominate the value changes that result from the economic relation between the eligible hedged item and the hedging instrument. 3. The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item. A. 1 and 2 B. 1 and 3 C. 2 and 3 D. 1, 2, and 3

D. 1, 2, and 3

Hedge accounting for foreign currency derivatives may be used only if which of the following conditions are satisfied? 1. The derivative is used to hedge either a fair value exposure or cash flow exposure to foreign exchange risk (nature of the hedge risk). 2. The derivative is highly effective in offsetting changes in the fair value or cash flows related to the hedged item (hedge effectiveness). 3. The derivative is properly documented as a hedge (hedge document). A. 1 and 3 B. 2 and 3 C. 1 and 2 D. 1, 2, and 3

D. 1, 2, and 3

The three conditions to use hedge accounting for foreign currency derivatives include: 1. Nature of the hedge risk 2. Hedge effectiveness 3. Hedge documentation 4. Types of hedging contracts 5. The length of the hedging contracts A. 3, 4, and 5 B. 1, 2, and 5 C. 2, 3, and 4 D. 1, 2, and 3

D. 1, 2, and 3

On December 1, Year 1, Eximco enters into a forward contract used as fair value hedge of a firm commitment to sell 1,000,000 euro on March 1, Year 2 at $1,485,000. On December 31, Year 1, the forward rate for a contract to deliver euro on March 1, Year 2 is $1.496 = 1 euro. Assume that 0.9803 is the present value factor for 2 months at an annual interest rate of 12% per year. How much is the gain or loss on the firm commitment on December 31, Year 1? A. A gain of $11,000 B. A loss of $11,000 C. A loss of $10,783 D. A gain of $10,783

D. A gain of $10,783

Which type of option refers to the purchase of foreign currency by the holder of the option? A. Selling B. Put C. Holder D. Call

D. Call

Gracie Corporation had a Japanese yen receivable resulting from exports to Japan and a Brazilian real payable resulting from imports from Brazil. Gracie recorded foreign exchange gains related to both its yen receivable and real payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date? Yen Real A. Decrease Decrease B. Decrease Increase C. Increase Increase D. Increase Decrease

D. Increase Decrease

Which type of option refers to the sale of foreign currency by the holder of the option? A. Selling B. Holder C. Call D. Put

D. Put

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

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

What are the two methods of accounting for changes in the value of a foreign currency transaction? A. The spot rate perspective and forward rate perspective B. The market value perspective and the historical cost perspective C. The direct quote perspective and indirect quote perspective D. The one-transaction perspective and the two-transaction perspective

D. The one-transaction perspective and the two-transaction perspective

On December 1st, Year 1, assume that Eximco designates a forward contract as a cash flow hedge of a foreign-currency-denominated asset. On December 1st, Year 1 how would Eximco prepare a entry to record the forward contract if there is no cash changes hand and the forward contract has a fair value of zero? A. A debit entry to Foreign Exchange Gain, a credit entry to Account Receivable B. A debit entry to Account Receivable, a credit entry to Accumulated Other Comprehensive Income C. A debit entry to Account Receivable, a credit entry to Foreign Exchange Gain D. There is no formal entry for the forward contract.

D. There is no formal entry for the forward contract.

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

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

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

On December 1st, Year 1, assume that Eximco designates a forward contract as a cash flow hedge of a 1,000,000 euro account receivable. The spot rate is $1.50 = 1 euro. The forward rate is $1.40 = 1 euro. On December 31st, Year 1, the new spot rate is $1.51 = 1 euro. The journal entry to adjust the value of the euro receivable to the new spot rate and a foreign exchange gain resulting fro the appreciation of the euro since December 1st, Year 1 would include ______. A. a credit entry to Foreign Exchange Gain of $110,000 B. a debit entry to Foreign Exchange Gain of $110,000 C. a debit entry to Foreign Exchange Gain of $10,000 D. a credit entry to Foreign Exchange Gain of $10,000

D. a credit entry to Foreign Exchange Gain of $10,000

Select the best answer to complete the following statement: "According to IFRS 9, Financial Instruments, hedging accounting is ______ for those derivatives used for hedging purposes provided the hedging relationship is clearly ______, ______, and ______." A. unacceptable, defined, measurable, actually effective B. acceptable, measured, realizable, theoretically effective C. unacceptable, measured, realizable, actually effective D. acceptable, defined, measurable, actually effective

D. acceptable, defined, measurable, actually effective

Select the best answer to complete the following statement: "Regarding the accounting for fair value hedge, at each balance sheet date, the derivative hedging instrument is adjusted to fair value, resulting in ______ reported on the balance sheet, with the counterpart recognized as a gain or loss in ______." A. a current or non-current item, net income B. a current or non-current item, other comprehensive income C. an asset or liability, other comprehensive income D. an asset or liability, net income

D. an asset or liability, net income

Select the best answer to complete the following statement: "To avoid the uncertainty related to foreign exchange rates, companies often use foreign currency ______ to ______ against the effect of unfavorable changes in the value of foreign currencies." A. derivatives, compete B. exchange rates, compete C. exchange rates, hedge D. derivatives, hedge

D. derivatives, hedge

Select the best answer to complete the following statement: "Regarding the accounting for fair value hedge, at each balance sheet date, the hedged asset or liability is adjusted to ______ according to changes in the ______, and a foreign exchange gain or loss is recognized in net income." A. current exchange rate, forward exchange rate B. marketable value, forward exchange rate C. fair value, forward exchange rate D. fair value, spot exchange rate

D. fair value, spot exchange rate

Select the best answer to complete the following statement: "Cash flows arising from hedging instruments are classified as ______, on the basis of the classification of the cash flows arising from the hedged item." A. short-term or long-term activities B. available or non-available for sale C. current or non-current activities D. operating, investing, or financing activities

D. operating, investing, or financing activities

The two issues related to derivatives accounting include ______. A. the treatment of the realized and unrealized gains and losses of the derivatives B. the determination of fair value and the treatment of the realized gains and losses from the sales of the derivatives C. the determination of the date of transaction and the treatment of the realized gains and losses from the sales of the derivatives D. the determination of fair value and the treatment of the unrealized gains and losses that arise from the fair value adjustments

D. the determination of fair value and the treatment of the unrealized gains and losses that arise from the fair value adjustments

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

D. the forward rate.

Select the best answer to complete the following statement: "A foreign currency option gives the holder of the option ______ to trade foreign currency in the future." A. the obligation but not the right B. the obligation or the right C. the right and the obligation D. the right but not the obligation

D. the right but not the obligation

The exchange rate between the euro and the U.S. dollar on January 15, Year 1 is EUR/USD 0.867. This is the direct quote for ______. A. USD B. EUR

EUR

Eximco is a U.S. exporter, sells goods to a Japanese customer with payment to be made in Japanese yen. Which type of exposure to foreign exchange risk does Eximco have? A. Japanese Yen exposure B. Export sale transaction exposure C. No transaction exposure D. Import sale transaction exposure

Export sale transaction exposure

The spot rate for Australian dollar today is US$0.892, and the one-month forward rate is $0.882. In the one-month forward market, the Australian dollar is sold at ______.

a discount

Select the best answer to complete the following statement: "The major issue in accounting for foreign currency transactions is how to deal with the change in the domestic-currency value of the account receivable resulting from the ______ and the account payable resulting from an ______ when foreign currency ______ in value." A. export, import, changes B. import, export, fluctuates C. import, export, changes D. export, export, fluctuates

export, import, changes

The major issue in accounting for foreign currency transactions is ______.

how to deal with the change in the domestic-currency value when the foreign currency changes in value

If the forward rate of a foreign currency (1 Australian dollar = $0.8) exceeds the spot rate (1 Australian dollar = $0.7) on a given date, the foreign currency is sold at ______.

premium