Multi ch. 7
According to the World Trade Organization, what was the size of international trade in 2011?
$18,000,000,000,000 (trillion)
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?
Yuan depreciated, Pound depreciated
When two parties from different countries enter into a transaction:
the two parties are free to decide the currency that should be used to settle the transaction
Under International Accounting Standards Board rules, what method is required to account for foreign currency transactions?
the two-transaction perspective must be used
Under U.S. GAAP, what method is required to account for foreign currency transactions?
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?
there should be separate receivable and payable accounts for each currency that is used by the company
What is the requirement for reporting derivatives under international accounting standards and U.S. GAAP?
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?
they should be recognized in income on the date the exchange rate changes
Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange losses?
they should be recorded on the income statement in the period the exchange rate changes
How is the fair value of a foreign currency option calculated?
using the modified Black-Scholes pricing model
Which of the following statements is true of intrinsic value of options?
when the option strike price is less than the spot rate the intrinsic value is zero.
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?
debit foreign currency option for $500
Under U.S. GAAP, foreign exchange losses should be recorded by:
debiting "foreign exchange loss"
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: *image not shown* The company's incremental borrowing rate provides a discount rate of 0.975 for three months. 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?
$22,000 loss
*same info as in previous flashcard* 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?
$35,000 loss
*same info as in previous flashcard* What is the fair value of the option on December 31, 20x1?
$400
*same info as previous flashcard* What is the foreign currency exchange gain or loss on December 31, 20x1?
$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. What is the fair value of the option on December 1, 20x1?
$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?
$7,800
What information is needed to determine the fair value of a foreign currency forward contract?
- the forward rate at the date the contract was entered - the current forward rate for a contract that matures on the same dates as the forward contract that was entered into - a discount rate to determine the present value of the contract
In the years between 1990 and 2001 when global gross domestic product rose 27%, what was the growth in global exports?
75%
Under U.S. GAAP, what method of amortizing discounts or premiums on forward contracts must be used?
effective interest rate method or straight line method
What is a foreign currency transaction?
it is a business deal denominated in a currency other than a company's domestic currency
Why is the accrual method of accounting for unrealized foreign exchange gains sometimes criticized?
it violated the principle of conservatism
What is "asset exposure" to foreign exchange risk?
the possibility that an asset denominated in domestic currency will decline in value because of changes in the foreign exchange rate
What is a "foreign exchange rate?"
the price to buy a foreign currency
The number of Japanese yen (¥) required today to buy one U.S. dollar ($) today is called:
the spot rate
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 debit to interest expense for $14,760 on december 31, 2015
Under U.S. GAAP, which of the following conditions must be met to qualify for hedge accounting?
all: - there must be formal documentation of the hedging relationship - a derivative must be used specifically to hedge fair value exposure or cash flow exposure - the hedge must be effective
How should discounts or premiums on forward contracts be treated if the derivative is hedging a foreign-currency-denominated asset?
amortized over the life of the forward contract
Under U.S. GAAP, where are changes in the fair value of derivatives reported?
as part of "accumulated other comprehensive income" on the B/S
*same info as flashcard beforehand* 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?
asset $950
What kind of exposure exists for foreign currency firm commitments?
both fair value exposure and cash flow exposure
What kind of exposure exists for recognized foreign currency assets and liabilities?
cash flow exposure
Why was there very little fluctuation in the foreign exchange rate in the period 1945- 1973?
countries linked their currency to the US dollar, which was backed by gold reserves
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?
country X has pegged its currency to the currency of country Y
In hedge accounting, which of the following exposure should be hedged by foreign currency derivative?
fair value exposure
noncancelable sales order that specifies foreign currency price and date of delivery is known as a:
foreign currency firm commitment
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:
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:
have independent float
What term is used to describe the circumstances under which Amazing Corporation is entering the forward contract?
hedge of a recognized foreign-currency-denominated asset
Which of the following statements is true about hedge accounting under U.S. GAAP?
if a derivative qualifies as a cash flow hedge, the hedging instrument is adjusted to fair value on each balance sheet date
Which of the following statements is true of the relationship between foreign currency transactions, exchange rate changes, and foreign exchange gains and losses?
in an export sales, appreciation of the foreign currency causes a foreign exchange gain
What term is used for an option with a positive intrinsic value?
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?
increases or decreases in a derivative's fair value are recorded in accumulated other comprehensive income
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?
it hopes that the British pound appreciates in value against the US dollar
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: *image not shown* The discount factor corresponding to the company's incremental borrowing rate for 6 months is 0.95. 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?
loss $2,000
Why must the two-transaction perspective be used for recording foreign currency transactions under U.S. GAAP?
management made two decisions: one to sell and another to extend credit in a foreign currency
What is "hedge accounting?"
matching gains or losses from hedging with losses or gains from the risk being hedged
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?
more than $1,563
When accounting for forward contracts, what is meant by the term "executory contract"?
no cash changes hands
Which of the following statements is true about the Euro?
none of the above False statements were: -It is the currency used by all countries in the EU - It is pegged to the US dollar - It is the currency required to be used in financial reporting under international accounting standards
A bank exchanging foreign currency makes its profit in what manner?
on the difference between the buying and selling rates
What is the primary difference between a cash flow hedge and a fair value hedge?
the cash flow hedge must completely offset the variability in cash flow from the foreign currency receivable or payable
What has occurred when one company purchases the right to buy a foreign currency sometime in the future at an exchange rate quoted today?
the company has acquired a call option
What has occurred when one company arranges to buy a foreign currency sometime in the future, at an exchange rate quoted today?
the company has entered a forward contract
What is a "strike price?"
the exchange rate that will be used if a foreign currency option is executed
The number of U.S. dollars ($) today to buy one U.K. pound (£) six months from now is called:
the forward rate
What is the intrinsic value of a foreign currency option?
the gain that could be realized if the option was exercised immediately
What is foreign exchange risk exposure?
the possibility of a loss because of changes in the value of a foreign currency
