Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Chapter 11
Multinational Accounting: Foreign Currency Transactions and Financial
Instruments
Multiple Choice Questions

1. If 1 British pound can be exchanged for 180 cents of U.S. currency, what fraction should be
used to compute the indirect quotation of the exchange rate expressed in British pounds?
A. 1/180
B. 1/.56
C. 1.8/1
D. 1/1.8

Answer: D
LO: 11-01
Topic: Direct versus Indirect Exchange Rates
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

The following data applies to Questions 2 - 4:

Suppose the direct foreign exchange rates in U.S. dollars are:

1 Singapore dollar = $0.7025

1 Cyprus pound = $2.5132

2. Based on the information given above, the indirect exchange rates for the Singapore dollar and
the Cyprus Pound (from a U.S. perspective) are:
A. 1.7655 Singapore dollars and 1.4235 Cyprus pounds respectively.
B. 0.2975 Singapore dollars and 1.5132 Cyprus pounds respectively.
C. 2.1622 Singapore dollars and 0.4625 Cyprus pounds respectively.
D. 1.4235 Singapore dollars and 0.3979 Cyprus pounds respectively.

Answer: D
LO: 11-01
Topic: Direct versus Indirect Exchange Rates
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 1 Easy

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

3. Based on the information given above, how many U.S. dollars must be paid for a purchase of
citrus fruits costing 10,000 Cyprus pounds?
A. $25,132
B. $15,132
C. $3,979
D. $35,775

Answer: A
LO: 11-01
Topic: Direct versus Indirect Exchange Rates
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 1 Easy

4. Based on the information given above, how many Singapore dollars are required to purchase
goods costing 10,000 US dollars?
A. 7,025
B. 14,235
C. 17,655
D. 2,975

Answer: B
LO: 11-01
Topic: Direct versus Indirect Exchange Rates
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 1 Easy

The following data applies to Questions 5 – 7:

Suppose the direct foreign exchange rates in U.S. dollars are as follows:

1 Swiss franc = $1.0371

1 Swedish krona = $0.1526

5. Based on the information given above, the indirect exchange rates for the Swiss franc and the
Swedish krona (from a U.S. perspective) are
A. 0.9642 Swiss francs and 6.5531 Swedish krona respectively.
B. 1.6893 Swiss francs and 5.2563 Swedish krona respectively.
C. 1.0371 Swiss francs and 0.1527 Swedish krona respectively.
D. 0.8372 Swiss francs and 4.2713 Swedish krona respectively.

Answer: A

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
LO: 11-01
Topic: Direct versus Indirect Exchange Rates
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 1 Easy

6. Based on the information given above, how many U.S. dollars must be paid for a purchase of
goods costing 20,000 Swedish krona?
A. $131,062
B. $20,742
C. $19,285
D. $3.052

Answer: D
LO: 11-01
Topic: Direct versus Indirect Exchange Rates
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 1 Easy

7. Based on the information given above, how many Swiss francs are required to purchase goods
costing $5,000 U.S.?
A. 32,785
B. 5,186
C. 4,821
D. 763

Answer: B
LO: 11-01
Topic: Direct versus Indirect Exchange Rates
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 1 Easy

8. Upon arrival in Chile, Karen exchanged $1,000 of U.S. currency into 480,000 Chilean Pesos.
While returning after her two month visit, she exchanged her remaining 50,000 Pesos into $100
of U.S. currency. What amount of gain or a loss did Karen experience on the 50,000 pesos she
held during her visit and converted to U.S. dollars at the departure date?
A. Loss of $4.
B. Gain of $4.
C. Loss of $6.

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
D. No gain or loss.

Answer: A
LO: 11-01
Topic: Changes in Exchange Rates
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

9. Chicago based Corporation X has a number of importing transactions with companies based in
UK. Importing activities result in payables. If the settlement currency is the British Pound, which
of the following will happen by changes in the direct or indirect exchange rates?

Answer: B
LO: 11-01
Topic: Changes in Exchange Rates
Topic: Direct versus Indirect Exchange Rates
Blooms: Understand
AACSB: Reflective Thinking
AICPA: FN Decision Making
Difficulty: 2 Medium

10. Chicago based Corporation X has a number of exporting transactions with companies based
in Sweden. Exporting activities result in receivables. If the settlement currency is the Swedish
Krona, which of the following will happen by changes in the direct or indirect exchange rates?

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Answer: D
LO: 11-01
Topic: Changes in Exchange Rates
Topic: Direct versus Indirect Exchange Rates
Blooms: Understand
AACSB: Reflective Thinking
AICPA: FN Decision Making
Difficulty: 2 Medium

11. Corporation X has a number of exporting transactions with companies based in Vietnam.
Exporting activities result in receivables. If the settlement currency is the US dollar, which of the
following will happen by changes in the direct or indirect exchange rates?

Answer: C
LO: 11-01
Topic: Changes in Exchange Rates
Topic: Direct versus Indirect Exchange Rates
Blooms: Understand
AACSB: Reflective Thinking
AICPA: FN Decision Making
Difficulty: 2 Medium

The following data applies to Questions 12 - 13:

Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reals on
December 1, 20X8, with payment due on January 20, 20X9. The exchange rates were:

December 1, 20X8 1 real = $0.5435

December 31, 20X8 1 real = 0.5192
January 20, 20X9 1 real = 0.5305

12. Based on the preceding information, which of the following is true of dollar's movement vis-
à-vis Brazilian real during the period?

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Answer: D
LO: 11-01
Topic: Changes in Exchange Rates
Blooms: Understand
AACSB: Reflective Thinking
AICPA: FN Decision Making
Difficulty: 2 Medium

13. Based on the preceding information, what is the Heavy's overall net gain or net loss from its
foreign currency exposure related to this transaction?
A. $4,860 loss
B. $2,600 loss
C. $9,018 gain
D. $2,260 gain

Answer: B
LO: 11-02
Topic: Basics of Foreign Currency Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

The following data applies to Questions 14 – 15:

Highland Company sold goods to an Egyptian company for 350,000 Egyptian pounds on
December 6, 20X3, with payment due on January 15, 20X4. The exchange rates were as
follows:

December 6, 20X3 1 Egyptian pound = $0.1593

December 31, 20X3 1 Egyptian pound = $0.1612
January 15, 20X4 1 Egyptian pound = $0.1604

14. Based on the preceding information, which of the following is true of the dollar’s movement
vis-à-vis the Egyptian pound during the period?

December 6 – 31 January 1 - 15
A. Dollar weakened Dollar strengthened
B. Dollar weakened Dollar weakened
C. Dollar strengthened Dollar strengthened
D. Dollar strengthened Dollar weakened

Answer: A
LO: 11-01
Topic: Changes in Exchange Rates

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Blooms: Understand
AACSB: Reflective Thinking
AICPA: FN Decision Making
Difficulty: 2 Medium

15. Based on the preceding information, what is Highland’s overall net gain or net loss from its
foreign currency exposure related to this transaction?
A. $280 loss
B. $302 loss
C. $385 gain
D. $665 gain

Answer: C
LO: 11-02
Topic: Basics of Foreign Currency Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

16. Mint Corporation has several transactions with foreign entities. Each transaction is
denominated in the local currency unit of the country in which the foreign entity is located. On
October 1, 20X8, Mint purchased confectionary items from a foreign company at a price of LCU
5,000 when the direct exchange rate was 1 LCU = $1.20. The account has not been settled as of
December 31, 20X8, when the exchange rate has decreased to 1 LCU = $1.10. The foreign
exchange gain or loss on Mint's records at year-end for this transaction will be:
A. $500 loss
B. $500 gain
C. $378 gain
D. $5,500 loss

Answer: B
LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

17. Mint Corporation has several transactions with foreign entities. Each transaction is
denominated in the local currency unit of the country in which the foreign entity is located. On
November 2, 20X8, Mint sold confectionary items to a foreign company at a price of LCU
23,000 when the direct exchange rate was 1 LCU = $1.08. The account has not been settled as of
December 31, 20X8, when the exchange rate has increased to 1 LCU = $1.10. The foreign
exchange gain or loss on Mint's records at year-end for this transaction will be:
A. $460 loss
B. $387 loss
C. $387 gain
D. $460 gain

Answer: D
LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

18. On September 3, 20X8, Jackson Corporation purchases goods for a U.S. dollar equivalent of
$17,000 from a Swiss company. The transaction is denominated in Swiss francs (SFr). The
payment is made on October 10. The exchange rates were:

What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on
October 10?

A. Foreign Currency Transaction Loss 1,000

Accounts Payable (SFr) 1,000

B. Accounts Payable (SFr) 850

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Foreign Currency Transaction Gain 850

C. Foreign Currency Transaction Loss 850

Accounts Payable (SFr) 850

D. Accounts Payable (SFr) 1,000

Foreign Currency Transaction Gain 1,000

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Answer: A
LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

19. On March 1, 20X8, Wilson Corporation sold goods for a U.S. dollar equivalent of $31,000 to
a Thai company. The transaction is denominated in Thai baht. The payment is received on May
10. The exchange rates were:

What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on
May 10?

A. Accounts Receivable (baht) 93

Foreign Currency Transaction Gain 93

B. Accounts Receivable (baht) 3,000

Foreign Currency Transaction Gain 3,000

C. Foreign Currency Transaction Loss 3,000

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Accounts Receivable (baht) 3,000

D. Sales 93

Foreign Currency Transaction Gain 93

Answer: B
LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
The following data applies to Questions 20 - 22:
On December 5, 20X8, Texas based Imperial Corporation purchased goods from a Saudi Arabian
firm for 100,000 riyals (SAR), to be paid on January 10, 20X9. The transaction is denominated
in Saudi riyals. Imperial's fiscal year ends on December 31, and its reporting currency is the U.S.
dollar. The exchange rates are:
December 5, 20X8 1 riyal = $0.265
December 31, 20X8 1 riyal = 0.262
January 10, 20X9 1 riyal = 0.264

20. Based on the preceding information, what journal entry would Imperial make on December
31, 20X8, to revalue foreign currency payable to equivalent U.S. dollar value?

A. Accounts Payable (SAR) 300

Foreign Currency Transaction Gain 300

B. Accounts Payable (SAR) 100

Foreign Currency Transaction Gain 100

C. Foreign Currency Transaction Loss 300

Accounts Payable (SAR) 300

D. Foreign Currency Transaction Loss 200

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Accounts Payable (SAR) 200

Answer: A
LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

21. Based on the preceding information, what journal entry would Imperial make on January 10,
20X9, to revalue foreign currency payable to equivalent U.S. dollar value?

A. Accounts Payable (SAR) 300

Foreign Currency Transaction Gain 300

B. Accounts Payable (SAR) 100

Foreign Currency Transaction Gain 100

C. Foreign Currency Transaction Loss 100

Accounts Payable (SAR) 100

D. Foreign Currency Transaction Loss 200

Accounts Payable (SAR) 200

Answer: D

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

22. Based on the preceding information, what was the overall foreign currency gain or loss on
the accounts payable transaction?
A. $300 loss
B. $200 loss
C. $100 gain
D. $200 gain

Answer: C
LO: 11-02
Topic: Basics of Foreign Currency Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
The following data applies to Questions 23 - 24:
Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian
pounds on September 5, 20X8, with payment due on December 2, 20X8. Additionally, on
September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds
of E£ = $.1850. The forward contract was acquired to manage the exposed net liability position
in Egyptian pounds, but it was not designated as a hedge. The spot rates were:
September 5, 20X8 E£1 = $0.1835
December 2, 20X8 E£1 = $0.1865

23. Based on the preceding information, in the entry made on December 2nd to revalue foreign
currency receivable to current equivalent U.S. dollar value,
A. Accounts Payable will be debited for $18,350.
B. Foreign Currency Units will be debited for $18,500.
C. Foreign Currency Transaction Gain will be credited for $150.
D. Other Comprehensive Income will be credited for $300.

Answer: C
LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

24. Based on the preceding information, what is the entry required to settle foreign currency
payable on December 2?

A. Accounts Payable (E£) 18,800

Foreign Currency Units (E£) 18,800

B. Accounts Payable (E£) 18,500

Foreign Currency Units (E£) 18,500

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

C. Accounts Payable (E£) 18,650

Foreign Currency Units (E£) 18,650

D. Accounts Payable (E£) 18,350

Foreign Currency Units (E£) 18,350

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Answer: C
LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

25. Detroit based Auto Corporation, purchased ancillaries from a Japanese firm on December 1,
20X8, for 1,000,000 Yen, when the spot rate for Yen was $.0095. On December 31, 20X8, the
spot rate stood at $.0096. On January 10, 20X9 Auto paid 1,000,000 Yen acquired at a rate of
$.0094. Auto's income statements should report a foreign exchange gain or loss for the years
ended December 31, 20X8 and 20X9 of:

20X8 20X9

A. $0 $0

B. $100 loss $200 gain

C. $0 $100 gain

D. $100 gain $100 loss

Answer: B
LO: 11-02
Topic: Basics of Foreign Currency Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

26. On November 1, 20X8, Denver Company borrowed 500,000 local currency units (LCU)
from a foreign lender evidenced by an interest-bearing note due on November 1, 20X9, which is
denominated in the currency of the lender. The U.S. dollar equivalent of the note principal was as

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
follows:
7/1/X8 (date borrowed) $100,000
12/31/X8 (Denver’s year-end) 125,000
7/1/X9 (date repaid) 140,000

In its income statement for 20X9, what amount should Denver include as a foreign exchange
gain or loss on the note principal?
A. 15,000 gain
B. 25,000 gain
C. 15,000 loss
D. 40,000 loss

Answer: C
LO: 11-02
Topic: Basics of Foreign Currency Transactions
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

27. Company X denominated a December 1, 20X9, purchase of goods in a currency other than
its functional currency. The transaction resulted in a payable fixed in terms of the amount of
foreign currency, and was paid on the settlement date, January 10, 2010. Exchange rates moved
unfavorably at December 31, 20X9, resulting in a loss that should:
A. be included as a separate component of stockholders' equity at Dec. 31, 20X9.
B. be included as a component of income from continuing operations for 20X9.
C. be included as a deferred charge at December 31, 20X9.
D. not be reported until January 10, 2010, the settlement date.

Answer: B
LO: 11-02
Topic: Basics of Foreign Currency Transactions
Blooms: Remember
AACSB: Reflective Thinking
AICPA: FN Reporting
Difficulty: 1 Easy

(Note: Question 23 is a Kaplan CPA Review Question)

28. On September 1, 20X1, Bain Corp. received an order for equipment from a foreign customer
for 300,000 local currency units (LCU) when the U.S. dollar equivalent was $96,000. Bain
shipped the equipment on October 15, 20X1, and billed the customer for 300,000 LCU when the
U.S. dollar equivalent was $100,000. Bain received the customer's remittance in full on
November 16, 20X1, and sold the 300,000 LCU for $105,000. In its income statement for the
year ended December 31, 20X1, Bain should report a foreign exchange gain of
A. $9,000

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
B. $4,000
C. $0
D. $5,000

Answer: D
LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

(Note: Question 29 is a Kaplan CPA Review Question)

29. On September 22, 20X1, Yumi Corp. purchased merchandise from an unaffiliated foreign
company for 10,000 units of the foreign company's local currency. On that date, the spot rate was
$.55. Yumi paid the bill in full, six months later, on March 20, 20X2, when the spot rate was
$.65. The spot rate was $.70 on December 31, 20X1. What amount should Yumi report as a
foreign currency transaction loss in its income statement for the year ended December 31, 20X1?
A. $500
B. $0
C. $1,500
D. $1,000

Answer: C
LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

30. On November 6, 20X7, Zucor Corp. purchased merchandise from an unaffiliated foreign
company for 50,000 units of the foreign company’s local currency. On that date, the spot rate
was $1.259. Zucor paid the bill in full three months later when the spot rate was $1.258. The
spot rate was $1.255 on December 31, 20X7. What amount should Zucor report as a foreign
currency transaction gain in its income statement for the year ended December 31, 20X7?
A. $0
B. $50
C. $150
D. $200

Answer: D
LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Apply

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

(Note: Question 31 is a Kaplan CPA Review Question)

31. Hunt Co. purchased merchandise for 300,000 British pounds from a vendor in London on
November 30, 20X1. Payment in British pounds was due on January 30, 20X2. The exchange
rates to purchase one pound were as follows:

November 30, 20X1 December 31, 20X1

Spot-rate $1.65 $1.62
30-day rate 1.64 1.59
60-day rate 1.63 1.56

In its December 31, Year One, income statement, what amount should Hunt report as foreign
exchange gain?
A. $9,000
B. $12,000
C. $6,000
D. $0

Answer: A
LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

(Note: Question 32 is a Kaplan CPA Review Question)

32. Sphinx Co. (Sphinx) records its transactions in U.S. dollars. A sale of goods resulted in a
receivable denominated in Japanese yen, and a purchase of goods resulted in a payable
denominated in Euros. Sphinx recorded a foreign exchange transaction gain on collection of the
receivable and an exchange transaction loss on the settlement of the payable. The exchange rates
are expressed as so many units of foreign currency to one dollar. Did the number of foreign
currency units exchangeable for a dollar increase or decrease between the contract and settlement
dates?

Yen exchangeable for $1 Euros exchangeable for $1

A. Decrease Increase
B. Increase Increase
C. Decrease Decrease
D. Increase Decrease

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Answer: C
LO: 11-02
LO: 11-01
Topic: Foreign Currency Import and Export Transactions
Topic: Direct versus Indirect Exchange Rates
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

The following data applies to Questions 33 - 35:

Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on
January 1, 20X9 with settlement to be in 60 days. On the same date, Myway entered into a 60-
day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to
manage its exposed foreign currency receivable. The forward contract is not designated as a
hedge. The spot rates were:

33. Based on the preceding information, the entry to revalue foreign currency payable to current
U.S. dollar value on March 1 will have:
A. a credit to Foreign Currency Transaction Gain for $1,500.
B. a debit to Foreign Currency Transaction Loss for $2,500.
C. a debit to Foreign Currency Transaction Loss for $1,500.
D. a credit to Foreign Currency Transaction Gain for $1,000.

Answer: D
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

34. Based on the preceding information, what is the overall effect on net income of Myway's use
of the forward exchange contract?
A. Net loss of $1,000
B. Net gain of $1,500
C. Net loss of $500
D. No effect

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Answer: C
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

35. Based on the preceding information, had Myway not used the forward exchange contract, net
income for the year would have:
A. increased by $1,000.
B. increased by $500.
C. decreased by $1,000.
D. decreased by $1,500.

Answer: D
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

The following data applies to Question 36 – 38:

Robert Company sold inventory to an Australian company for 50,000 Australian dollars on April
1, 20X0 with settlement to be in 60 days. On the same date, Robert entered into a 60-day
forward contract to sell 50,000 Australian dollars at a forward rate of $1.164 in order to manage
its exposed foreign currency receivable. The forward contract is not designated as a hedge. The
spot rates were as follows:

April 1 1 Australian dollar = $1.167

May 31 1 Australian dollar = $1.16

36. Based on the preceding information, the entry to revalue the foreign currency payable to
current U.S. dollar value on May 31 will include a
A. credit to Foreign Currency Transaction Gain for $350.
B. credit to Foreign Currency Transaction Gain for $200.
C. debit to Foreign Currency Transaction Loss for $550.
D. debit to Foreign Currency Transaction Loss for $350.

Answer: B
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Understand
AACSB: Analytic

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
AICPA: FN Measurement
Difficulty: 2 Medium

37. Based on the preceding information, what is the overall effect on net income of Robert’s use
of the forward exchange contract?
A. No effect
B. Net loss of $150
C. Net loss of $200
D. Net gain of $350

Answer: B
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

38. Based on the preceding information, had Robert not used the forward exchange contract,
what would have been the foreign currency transaction gain or loss for the year?
A. Gain of $200
B. Gain of $150
C. Loss of $350
D. Loss of $200

Answer: C
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

39. Levin company entered into a forward contract to speculate in the foreign currency. It sold
100,000 foreign currency units under a contract dated November 1, 20X8, for delivery on
January 31, 20X9:

In its income statement for the year ended December 31, 20X8, what amount of loss should
Levin report from this forward contract?
A. $0
B. $300
C. $200
D. $100

Answer: B
LO: 11-03
Topic: Case 4: Speculation in Foreign Currency Markets
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

The following data applies to Questions 40 - 43:

Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on
December 1, 20X8. Payment is due on January 30, 20X9. On December 1, 20X8, the company
also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward
contract is not designated as a hedge. The rates were as follows:

Spot Rate Forward Rate

December 1, 20X8 $0.89 $0.90 (60 days)

December 31, 20X8 0.91 0.93 (30 days)

January 30, 20X9 0.92

40. Based on the preceding information, the entries on December 31, 20X8, include a:

11-25
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
A. Credit to Foreign Currency Payable to Exchange Broker, $4,000.
B. Debit to Foreign Currency Receivable from Exchange Broker, $6,000.
C. Debit to Foreign Currency Receivable from Exchange Broker, $186,000.
D. Debit to Foreign Currency Transaction Gain, $4,000.

Answer: B
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

41. Based on the preceding information, the entries on January 30, 20X9, include a:
A. Debit to Dollars Payable to Exchange Broker, $180,000.
B. Credit to Cash, $184,000.
C. Credit to Premium on Forward Contract, $4,000.
D. Credit to Foreign Currency Receivable from Exchange Broker, $180,000.

Answer: A
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

42. Based on the preceding information, the entries on January 30, 20X9, include a:
A. Credit to Foreign Currency Units (SFr), $184,000.
B. Credit to Cash, $180,000.
C. Debit to Foreign Currency Transaction Loss, $4,000.
D. Debit to Dollars Payable to Exchange Broker, $184,000.

Answer: B
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

43. Based on the preceding information, the entries on January 30, 20X9, include a:
A. Debit to Dollars Payable to Exchange Broker, $184,000.
B. Credit to Foreign Currency Transaction Gain, $4,000.
C. Credit to Foreign Currency Receivable from Exchange Broker, $180,000.
D. Debit to Foreign Currency Units (SFr), $184,000.

11-26
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Answer: D
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

The following data applies to Questions 44 – 47:

Tinitoys, Inc., a domestic company, purchased inventory from a Brazilian company for 500,000
Brazilian reals (Br. reals) on May 1, 20X2. Payment is due on June 30, 20X2. On May 1, 20X2,
Tinitoys also entered into a 60-day forward contract to purchase 500,000 Brazilian reals. The
forward contract is not designated as a hedge. Tinitoys’ fiscal year ends on May 31. The direct
exchange rates were as follows:

Spot Rate Forward Rate

May 1, 20X2 $0.523 $0.525 (60 days)
May 31, 20X2 $0.516 $0.52 (30 days)
June 30, 20X2 $0.508

44. Based on the preceding information, the entries on May 31, 20X2, include a
A. credit to Foreign Currency Payable to Exchange Broker, $3,500.
B. debit to Foreign Currency Transaction Loss, $3,500.
C. credit to Foreign Currency Receivable from Exchange Broker, $2,500.
D. credit to Foreign Currency Receivable from Exchange Broker, $260,000.

Answer: C
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

45. Based on the preceding information, the entries on June 30, 20X2, include a
A. debit to Dollars Payable to Exchange Broker, $262,500.
B. credit to Cash, $254,000.
C. credit to Premium on Forward Contract, $6,000.
D. credit to Foreign Currency Receivable from Exchange Broker, $262,500.

Answer: A
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Apply

11-27
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

46. Based on the preceding information, the entries on June 30, 20X2, include a
A. debit to Foreign Currency Transaction Loss, $4,000
B. credit to Foreign Currency Units (Br. reals), $262,500
C. credit to Cash, $262,500.
D. debit to Dollars Payable to Exchange Broker, $254,000

Answer: C
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

47. Based on the preceding information, the entries on June 30, 20X2, include a
A. credit to Foreign Currency Transaction Gain, $6,000.B. debit to Dollars Payable to Exchange
Broker, $254,000.
C. debit to Foreign Currency Units (Br. reals), $254,000.
D. credit to Foreign Currency Receivable from Exchange Broker, $262,500.

Answer: C
LO: 11-03
Topic: Case 1: Not a Designated Hedging Instrument
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

The following data applies to Questions 48 - 53:

On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to
sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased a
60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42.

The rates are as follows:

Date Spot Rate Forward Rate for Spot Rate Forward Rate for

11-28
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Feb 1 Feb 1

December 1, 20X8 £1 = $1.76 $1.78 €1 = $1.40 $1.42

December 31, 20X8 £1 = 1.73 1.74 €1 = 1.38 1.40

February 1, 20X9 £1 = 1.75 €1 = 1.41

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes.

48. Based on the preceding information, what is the effect of the British pound speculative
contract on 20X8 net income?
A. $10,000 gain
B. $6,000 gain
C. $8,000 gain
D. $2,000 loss

Answer: C
LO: 11-03
Topic: Case 4: Speculation in Foreign Currency Markets
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

49. Based on the preceding information, what is the overall effect of speculation on 20X8 net
income?
A. $4,000 gain
B. $6,000 gain
C. $8,000 loss
D. $8,000 gain

11-29
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Answer: B
LO: 11-03
Topic: Case 4: Speculation in Foreign Currency Markets
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

50. Based on the preceding information, what is the effect of the euro speculative contract on
20X9 net income?
A. $4,000 loss
B. $1,000 gain
C. $8,000 gain
D. $2,000 loss

Answer: B
LO: 11-03
Topic: Case 4: Speculation in Foreign Currency Markets
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

51. Based on the preceding information, what is the overall effect of speculation on 20X9 net
income?
A. $1,000 loss
B. $6,000 gain
C. $3,000 loss
D. $8,000 gain

Answer: A
LO: 11-03
Topic: Case 4: Speculation in Foreign Currency Markets
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

52. Based on the preceding information, what is the net gain or loss on the British pound
speculative contract?
A. $8,000 gain
B. $6,000 gain
C. $3,000 loss
D. $10,000 gain

11-30
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Answer: B
LO: 11-03
Topic: Case 4: Speculation in Foreign Currency Markets
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

53. Based on the preceding information, what is the net gain or loss on the euro speculative
contract?
A. $8,000 gain
B. $6,000 gain
C. $3,000 loss
D. $1,000 loss

Answer: D
LO: 11-03
Topic: Case 4: Speculation in Foreign Currency Markets
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

54. Which of the following observations is true of forward contracts?

A. Substantial margin is required to initiate a contract.
B. Must be completed either with the underlying's future delivery or net cash settlement.
C. Cannot be customized; for a specific amount at a specific date.
D. Usually settled with a net cash amount prior to maturity date.

Answer: B
LO: 11-03
Topic: Forward Exchange Contracts
Blooms: Remember
AACSB: Reflective Thinking
AICPA: FN Decision Making
Difficulty: 1 Easy

11-31
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
(Note: Question 55 is a Kaplan CPA Review Question)

55. On September 1, 20X1, Brady Corp. entered into a foreign exchange contract for speculative
purposes by purchasing 50,000 deutsche marks for delivery in 60 days. The rates to exchange $1
for 1 deutsche mark follow:

9/1/20X1 9/30/20X1
Spot-rate 0.75 0.70
30-day forward rate 0.73 0.72
60-day forward rate 0.74 0.73

In its September 30, 20X1 income statement, what amount should Brady report as foreign
exchange loss?
A. $1,000
B. $2,500
C. $1,500
D. $500

Answer: A
LO: 11-03
Topic: Case 4: Speculation in Foreign Currency Markets
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

56. All of the following are true statements when measuring hedge effectiveness except:
A. Effectiveness means there is an approximate offset with the range of 80% to 125% of the
changes in the fair value of the cash flows
B. Effectiveness means there is an approximate offset in fair value to the risk being hedged.
C. A Company may elect to choose from several different measures for assessing hedge
effectiveness.
D. Effectiveness must be assessed at least annually when the company reports their annual
financial statements.

Answer: D
LO: 11-04
Topic: Measuring Hedge Effectiveness
Blooms: Remember
AACSB: Reflective Thinking
AICPA: FN Decision Making
Difficulty: 1 Easy

11-32
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
57. All of the following are management tools available for a U.S. company to hedge its net
investment in a foreign affiliate except for:
A. Forward exchange contracts
B. Foreign currency commitments
C. Intercompany financing arrangements including intercompany transactions
D. None of the above.

Answer: D
LO: 11-04
Topic: Hedges of a Net Investment in a Foreign Entity
Blooms: Remember
AACSB: Reflective Thinking
AICPA: FN Decision Making
Difficulty: 1 Easy

The following data applies to Questions 58 - 59:

The fair market value of a near-month call option with a strike price of $45 is $5, when the stock
is trading at $48.

58. Based on the preceding information, which of the following is true of the intrinsic and time
values associated with this option.

A. Option A
B. Option B
C. Option C
D. Option D

Answer: C
LO: Appendix 11B
Topic: Option Contracts
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

59. Based on the preceding information, the call option:

A. has no intrinsic value currently.
B. is at the money.
C. is out of the money.
D. is in the money.

11-33
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Answer: D
LO: Appendix 11B
Topic: Option Contracts
Blooms: Understand
AACSB: Reflective Thinking
AICPA: FN Decision Making
Difficulty: 1 Easy

60. An investor purchases a put option with a strike price of $100 for $3. This option is
considered “in the money” if the underlying is trading:
A. below $100.
B. at $100.
C. above $100.
D. above $103.

Answer: A
LO: Appendix 11B
Topic: Option Contracts
Blooms: Remember
AACSB: Reflective Thinking
AICPA: FN Decision Making
Difficulty: 1 Easy

61. Which of the following observations is true of futures contracts?

A. Contracted through a dealer, usually a bank.
B. Customized to meet contracting company's terms and needs.
C. Typically no margin deposit required.
D. Traded on an exchange and acquired through an exchange broker

Answer: D
LO: Appendix 11B
Topic: Futures Contracts
Blooms: Remember
AACSB: Reflective Thinking
AICPA: FN Decision Making
Difficulty: 1 Easy

11-34
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

62. Company X issues variable-rate debt but wishes to fix its interest rates because it believes the
variable rate may increase. Company Y has a fixed-rate bond but is looking for a variable-rate
interest because it assumes the interest rates may decrease. The two companies agree to exchange
cash flows. Such an arrangement is called:
A. a futures contract.
B. a forward contract.
C. a swap.
D. an option.

Answer: C
LO: Appendix 11B
Topic: Swaps
Blooms: Understand
AACSB: Reflective Thinking
AICPA: FN Decision Making
Difficulty: 1 Easy

The following data applies to Questions 63 - 66:

Spiralling crude oil prices prompted AMAR Company to purchase call options on oil as a price-
risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil.
On November 30, 20X8, AMAR purchases call options for 20,000 barrels of oil at $100 per
barrel at a premium of $4 per barrel, with a February 1, 20X9, call date. The following is the
pricing information for the term of the call:

Futures Price
Date Spot Price (for Feb 1, 20X9, delivery)

November 30, 20X8 $100 $101

December 31, 20X8 105 106

February 1, 20X9 110

The information for the change in the fair value of the options follows:

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Date Time Value Intrinsic Value Total Value

November 30, 20X8 $80,000 $0 $ 80,000

December 31, 20X8 30,000 100,000 130,000

February 1, 20X9 0 200,000 200,000

On February 1, 20X9, AMAR sells the options at their value on that date and acquires 20,000
barrels of oil at the spot price. On April 1, 20X9, AMAR sells the oil for $112 per barrel.

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

63. Based on the preceding information, which of the following adjusting entries would be
required on December 31, 20X8?

A. Loss on Hedge Activity 30,000

Purchased Call Options 30,000

B. Loss on Hedge Activity 50,000

Purchased Call Options 50,000

C. Loss on Hedge Activity 80,000

Purchased Call Options 80,000

D. Loss on Hedge Activity 100,000

Purchased Call Options 100,000

Answer: B

11-37
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
LO: Appendix 11B
Topic: Option Contracts
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

64. Based on the preceding information, in the entry to record the increase in the intrinsic value
of the options on December 31, 20X8,
A. Purchased Call Options will be credited for $100,000.
B. Purchased Call Options will be debited for $130,000.
C. Retained Earnings will be credited for $100,000.
D. Other Comprehensive Income will be credited for $100,000.

Answer: D
LO: Appendix 11B
Topic: Option Contracts
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

11-38
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

65. Based on the preceding information, which of the following entries will be required on
February 1, 20X9?

A. Loss on Hedge Activity 80,000

Purchased Call Options 80,000

B. Purchased Call Options 100,000

Other Comprehensive Income 100,000

C. Cash 80,000

Purchased Call Options 80,000

D. Oil Inventory 2,000,000

Cash 2,000,000

Answer: B

11-39
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
LO: Appendix 11B
Topic: Option Contracts
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

66. Based on the preceding information, the entries made on April 1, 20X9 will include:
A. a debit to Other Comprehensive Income for $200,000.
B. a debit to Cost of Goods Sold for $2,240,000.
C. a credit to Oil Inventory for $2,240,000.
D. a credit to Cost of Goods Sold for $100,000.

Answer: A
LO: Appendix 11B
Topic: Option Contracts
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

The following data applies to Questions 67 - 70:

On December 1, 20X8, Winston Corporation acquired 100 shares of Linked Corporation at a cost
of $40 per share. Winston classifies them as available-for-sale securities. On this same date, it
decides to hedge against a possible decline in the value of the securities by purchasing, at a cost
of $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on
February 20, 20X9. Selected information concerning the fair values of the investment and the
options follow:

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

December 1, December 31, February 20,

20X8 20X8 20X9

Linked Corporation

Per Share: $40 ? ?

Put Option (100 shares)

Market Value $250 $400 $400

Intrinsic Value 0 ? 400

Time Value $ 250 $ 100 ?

Assume that Winston exercises the put option and sells Linked shares on February 20, 20X9.

67. Based on the preceding information, what is the market price of Linked Corporation stock on
December 31, 20X8?
A. $40
B. $37
C. $36
D. $38

11-41
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Answer: B
LO: Appendix 11B
Topic: Option Contracts
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

68. Based on the preceding information, what is the market price of Linked Corporation stock on
February 20, 20X9?
A. $35
B. $37
C. $36
D. $40

Answer: C
LO: Appendix 11B
Topic: Option Contracts
Blooms: Understand
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 2 Medium

11-42
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

69. Based on the preceding information, the journal entry made on December 31, 20X8 to record
decrease in the time value of the options will include:
A. a debit to Loss on Hedge Activity for $150.
B. a credit to Put Option for $300.
C. a debit to Loss on Hedge Activity for $300.
D. a credit to Put Option for $100.

Answer: A
LO: Appendix 11B
Topic: Option Contracts
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

70. Based on the preceding information, which of the following journal entries will be made on
February 20, 20X9?

A. Cash 4,000

Available-for-Sale Securities 4,000

B. Cash 4,000

Put Option 400

Available-for-Sale Securities 3,600

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Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

C. Loss on Hedge Activity 150

Put Option 150

D. Loss on Hedge Activity 400

Available-for-Sale Securities 400

Answer: B
LO: Appendix 11B
Topic: Option Contracts
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

11-44
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Essay Questions

71. Quantum Company imports goods from different countries. Some transactions are
denominated in U.S. dollars and others in foreign currencies. A summary of accounts receivable
and accounts payable on December 31, 20X8, before adjustments for the effects of changes in
exchange rates during 20X8, follows:

The spot rates on December 31, 208, were:

The average exchange rates during the collection and payment period in 20X9 are:

Required:
1. Prepare the adjusting entries on December 31, 20X8.
2. Record the collection of the accounts receivable and the payment of the accounts payable in
20X9.
3. What was the foreign currency gain or loss on the accounts receivable transaction
denominated in SFr for the year ended December 31, 20X8? For the year ended December 31,
20X9? Overall for this transaction?
4. What was the foreign currency gain or loss on the accounts receivable transaction
denominated in ¥? For the year ended December 31, 20X8? For the year ended December 31,
20X9? Overall for this transaction?

11-45
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Problem 71 (continued):
Answer:

11-46
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Problem 71 (continued):

LO: 11-02
Topic: Foreign Currency Import and Export Transactions
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

11-47
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

72. On December 1, 20X8, Secure Company bought a 90-day forward contract to purchase
200,000 euros (€) at a forward rate of €1 = $1.35 when the spot rate was $1.33. Other exchange
rates were as follows:

Required
1. Prepare all journal entries related to Secure Company's foreign currency speculation from
December 1, 20X8, through March 1, 20X9, assuming the fiscal year ends on December 31,
20X8.
2. Did the company gain or lose on its purchase of the forward contract?

Answer:

11-48
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Problem 72 (continued):

2. Secure Company experienced a net loss of $4,000 ($2,000 gain in 20X8 less a $6,000 loss in
20X9).

LO: 11-03
Topic: Case 4: Speculation in Foreign Currency Markets
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

11-49
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

73. On December 1, 20X8, Denizen Corporation entered into a 120-day forward contract to
purchase 200,000 Canadian dollars (C$). Denizen's fiscal year ends on December 31. The
forward contract was to hedge a firm commitment agreement made on December 1, 20X8, to
purchase electronic goods on January 30, with payment due on March 31, 20X8. The derivative
is designated as a fair value hedge. The direct exchange rates follow:

Required:
Prepare all journal entries for Denizen Corporation.

Answer:

11-50
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Problem 73 (continued):

11-51
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Problem 73 (continued):

LO: 11-03
Topic: Case 2: A Foreign Currency Fair Value Hedge
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

11-52
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

74. On December 1, 20X8, Denizen Corporation entered into a 120-day forward contract to
purchase 200,000 Canadian dollars (C$). Denizen's fiscal year ends on December 31. The
forward contract was to hedge an anticipated purchase of electronic goods on January 30, 20X9.
The purchase took place on January 30, with payment due on March 31, 20X9. The derivative is
designated as a cash flow hedge. The company uses the forward exchange rate to measure hedge
effectiveness. The direct exchange rates follow:

Required:
Prepare all journal entries for Denizen Corporation.

11-53
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Problem 74 (continued):
Answer:

11-54
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

11-55
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Problem 74 (continued):

11-56
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Problem 74 (continued):

LO: 11-03
Topic: Case 3: A Foreign Currency Cash Flow Hedge
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

75. On December 1, 20X8, Merry Corporation acquired 100 shares of Venus Corporation at a
cost of $60 per share. Merry classifies them as available-for-sale securities. On this same date, it
decides to hedge against a possible decline in the value of the securities by purchasing, at a cost
of $400, an at-the-money put option to sell the 100 shares at $60 per share. The option expires on
February 20, 20X9. Selected information concerning the fair values of the investment and the
options follow:

Assume that Merry exercises the put option and sells Venus shares on February 20, 20X9.

Required:
1. Prepare the entries required on December 1, 20X8, to record the purchase of the Venus stock
and the put options.
2. Prepare the entries required on December 31, 20X8, to record the change in intrinsic value and
time value of the options, as well as the revaluation of the available-for-sale securities.
3. Prepare the entries required on February 20, 20X8, to record the exercise of the put option and
the sale of the securities at that date.

11-57
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Problem 75 (continued):
Answer:

11-58
Chapter 11 - Multinational Accounting: Foreign Currency Transactions and Financial Instruments
Problem 75 (continued):

LO: Appendix 11B

Topic: Option Contracts
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
Difficulty: 3 Hard

11-59