Advanced Accounting Test Bank Chapter 07 Susan Hamlen

TEST BANK
CHAPTER 7
Foreign Currency Transactions and Hedging
MULTIPLE CHOICE
1. Topic: Valuation of forward contracts

LO 3
A U.S. company invests in a forward purchase contract for 100,000,000 yen with a
purchase price of $0.009/yen, for delivery in 45 days. The spot rate at the time the
contract is initiated is $0.0085/yen. At the end of the accounting year, the forward
contract is still outstanding. The year-end spot rate is $0.0088/yen. The year-end forward
rate for delivery at the contract date is $0.0092/yen. How is the forward contract
reported on the U.S. company’s balance sheet?
a. $20,000 asset
b. $20,000 liability
c. $30,000 asset
d. $30,000 liability
ANS: a
($0.0092 - $0.009) x 100,000,000 = $20,000
2. Topic: Cash flow hedge

LO 6
On August 1, a U.S. company enters into a forward contract, in which it agrees to buy
1,000,000 euros from a bank at a rate of $1.115 on December 1. Changes in the value of
the forward contract will be reported in other comprehensive income on the balance sheet
in which one of the following situations?
a. The U.S. company has receivables denominated in euros, with payment to be

received on December 1.
b. The U.S. company sold merchandise to a customer in Belgium on August 1, and
expects payment of 1,000,000 euros on December 1.
c. The U.S. company plans to sell merchandise to a customer in Belgium on August
1, with payment of 1,000,000 euros expected on December 1.
d. The U.S. company plans to purchase merchandise from a supplier in Belgium, with
payment of 1,000,000 euros expected to be paid on December 1.
ANS: d
©Cambridge Business Publishers, 2010

Test Bank, Chapter 7 1
Use the following information on the U.S. dollar value of the euro to answer questions 3 – 7
below:
Forward rate for

April 30, 2011
Spot rate delivery
October 30, 2010 $ 1.25 $ 1.30
December 31, 2010 1.28 1.32
April 30, 2011 1.26 1.26
On October 30, 2010, a company enters a forward contract to sell €100,000 on April 30, 2011.
The company’s accounting year ends December 31.
3. Topic: Hedge of export transaction

LO 4
The forward contract hedges an outstanding €100,000 account receivable due on April 30.
What is the net effect on income in 2010 and 2011?
2010 2011
a. $1,000 gain $4,000 gain
b. $1,000 loss $4,000 gain
c. $3,000 gain $6,000 gain
d. $2,000 loss $6,000 gain
ANS: a
2010: Gain on receivable, ($1.28 - $1.25) x €100,000 = $3,000

Loss on forward, ($1.32 - $1.30) x €100,000 = $2,000
Net gain $1,000
2011: Loss on receivable, ($1.28 - $1.26) x €100,000 = $2,000

Gain on forward, ($1.32 - $1.26) x €100,000 = $6,000
Net gain $4,000

2 Advanced Accounting, 1st
Edition
4. Topic: Hedge of firm commitment
LO 5
The forward contract hedges a sales order for €100,000, received October 30. The sale
was made and the €100,000 collected on April 30, 2011. Sales revenue recorded on April
30 is:
a. $126,000
b. $122,000
c. $130,000
d. $124,000
ANS: c
(€100,000 x $1.26) + ($1.30 - $1.26) x €100,000 = $130,000

LO 5
The forward contract hedges a sales order for €100,000, received October 30. The sale
was made and the €100,000 collected on April 30, 2011. The net effect on 2010 income
is:
a. No effect
b. $2,000 loss
c. $3,000 gain
d. $1,000 gain
ANS: a
The gain on the firm commitment and loss on the forward contract are ($1.32 - $1.30) x
€100,000 = $2,000, and they offset for a zero effect on 2010 income.

6. Topic: Hedge of forecasted transaction
LO 6
The forward contract hedges a forecasted sale for €100,000, expected at the end of April
2011. The net effect on 2010 income is:
a. No effect
b. $2,000 loss
c. $3,000 gain
d. $1,000 gain
ANS: a
The loss on the forward contract is reported in other comprehensive income.

LO 6
The forward contract hedges a forecasted sale for €100,000, expected at the end of April
2011. The sale takes place on April 30, 2011, €100,000 is collected, and the forward
contract is closed. Which statement is true, concerning the sale on April 30, 2011?
a. The $1,000 total loss on the forward contract is reclassified from other
comprehensive income as an adjustment to sales revenue.
b. The $4,000 total gain on the forward contract is reclassified from other
comprehensive income as an adjustment to sales revenue.
c. The 2011 $6,000 gain on the forward contract is recognized as a hedging gain on
the 2011 income statement.
d. The 2010 $2,000 loss on the forward contract is recognized as a hedging loss on
the 2010 income statement.
ANS: b
The total gain on the forward contract is ($1.30 - $1.26) x €100,000 = $4,000. Changes
in the value of the forward are reported in other comprehensive income until the hedged
forecasted transaction is reported in income. In this case, the forecasted transaction
results in sales revenue, reported in 2011.

Edition
8. Topic: Export transaction
LO 2
On May 20, 2012, when the spot rate is $1.30/€, a company sells merchandise to a
customer in Italy. The spot rate is $1.31/€ on June 30, the company’s year-end. Payment
of €100,000 is received on July 30, 2012, when the spot rate is $1.28/€. What is the effect
on fiscal 2012 and 2013 income?
Fiscal 2012 Fiscal 2013

a. $1,000 exchange loss $3,000 exchange gain
b. $1,000 exchange gain $3,000 exchange loss
c. No effect $2,000 exchange loss
d. No effect $2,000 exchange gain
ANS: b
Fiscal 2012 exchange gain = ($1.31 - $1.30) x €100,000 = $1,000

Fiscal 2013 exchange loss = ($1.31 - $1.28) x €100,000 = $3,000
9. Topic: Import transaction

LO 2
On May 20, 2012, when the spot rate is $1.30/€, a company purchases merchandise from
a supplier in Italy. The spot rate is $1.31/€ on June 30, the company’s year-end. Payment
of €100,000 is made on July 30, 2012, when the spot rate is $1.28/€. What is the effect on
fiscal 2012 and 2013 income?
Fiscal 2012 Fiscal 2013

a. $1,000 exchange loss $3,000 exchange gain
b. $1,000 exchange gain $3,000 exchange loss
c. No effect $2,000 exchange loss
d. No effect $2,000 exchange gain
ANS: a
Fiscal 2012 exchange loss = ($1.31 – $1.30) x €100,000 = $1,000

Fiscal 2013 exchange gain = ($1.31 – $1.28) x €100,000 = $3,000

Data for questions 10 and 11 are as follows:
On September 8, the Sealy Company purchased cotton at an invoice price of €20,000, when the
exchange rate was $1.32/€. Payment was to be made on November 8. On November 8, Sealy
purchased the €20,000 for $1.30/€, and paid the invoice.

LO 2
The cotton should be valued in Sealy's inventory at:
a. $20,000
b. $25,600
c. $26,000
d. $26,400
ANS: d
€20,000 x $1.32 = $26,400

LO 2
The exchange gain or loss recognized by Sealy as a result of this transaction is:
a. No gain or loss
b. $400 gain
c. $400 loss
d. $1,667 gain
ANS: b
€20,000 x ($1.32 - $1.30) = $400 gain

Edition
Data for questions 12 and 13 are as follows:
On June 5, Teneco Corporation sold merchandise at an invoice price of €100,000, when the
exchange rate was $1.36/€. Payment was to be received on August 16. On August 16, the
customer paid the €100,000. The exchange rate on that date was $1.39/€.

LO 2
The sale should be reported on Teneco's books at:
a. $136,000
b. $139,000
c. $ 73,530
d. $ 71,942
ANS: a
€100,000 x $1.36 = $136,000

LO 2
The exchange gain or loss recognized by Teneco as a result of this transaction is:
a. -0-
b. $3,000 gain
c. $3,000 loss
d. $3,919 loss
ANS: b
€100,000 x ($1.39 - 1.36) = $3,000 gain

14. Topic: Analysis of foreign currency risks
LO 3
A U.S. exporter has made a sale to a customer in another country. The customer is
obligated to remit payment in his local currency in 90 days. The direct spot rate is now
$1.54. The 90-day forward rate is $1.60. At which spot rate at the time the customer
remits payment would the company have been better off not hedging the export
transaction with a forward contract?
a. $1.52
b. $1.54
c. $1.59
d. $1.62
ANS: d
Any rate above $1.60 leads to higher U.S. dollar value of payment received than under the
forward contract.
15. Topic: Foreign currency options

LO 3
A company invests $200 in a foreign exchange option with the following terms: The
company may purchase 1,000,000 zloty at a price of $.25/zloty on December 20, 2014.
Which statement is true?
a. If the spot price for zloty is $.36 on December 20, the company will gain $359,800
on the option.
b. If the spot price for zloty is $.24 on December 20, the company will lose $200 on
the option.
c. If the spot price for zloty is $.27 on December 20, the company will lose $20,200
on the option.
d. If the spot price for zloty is $.30 on December 20, the company will gain $24,800
on the option.
ANS: b
The option gives the holder the option to buy 1,000,000 zloty for $250,000. At a spot
price of $.24/zloty, the option has no value and the holder loses its $200 investment.

Edition
16. Topic: Hedge of import transaction
LO 4
A U.S. import company purchases boomerangs from an Australian supplier on October 1,
2013 for 100,000 Australian dollars (A$), payable February 1, 2014. On October 1, 2013,
the company enters into a forward contract to hedge the foreign currency risk resulting
from this purchase. Exchange rates are as follows:
Forward
rate for 2/1
Spot rate delivery
October 1, 2013 $0.89 $0.85
December 31, 2013 0.88 0.84
February 1, 2014 0.82 0.82
For the import company, what is the income statement effect of the above information?
a. No effect in 2013, $4,000 gain in 2014

b. $1,000 gain in 2013, $6,000 gain in 2014
c. $1,000 loss in 2013, $6,000 loss in 2014
d. No effect in 2013, $4,000 loss in 2014
ANS: a
2013:
forward contract: ($.85 - $.84) x A$100,000 = $1,000 loss
payable: ($.89 - $.88) x A$100,000 = 1,000 gain
-0-
2014:
forward contract: ($.84 - $.82) x A$100,000 = $2,000 loss
payable: ($.88 - $.82) x A$100,000 = 6,000 gain
$4,000 gain

LO 5
ABC Corporation issues a purchase order for 1,000,000 semiconductors to a foreign
supplier. The agreed upon total price is FC1,200,000, and the current spot rate is $1/FC.
Suppose a forward contract is taken out when the purchase order is issued, at a rate of
$0.95/FC, for delivery when the semiconductors are received. If the spot rate rises to
$1.05 when the semiconductors are received and paid for by ABC, at what value will the
semiconductors be reported on ABC’s books?
a. $1,020,000
b. $1,140,000
c. $1,200,000
d. $1,260,000
ANS: b
$1.05 x FC1,200,000 = $1,260,000
($1.05 - $.95) x FC1,200,000 = (120,000)
$1,140,000
Use the following information to answer questions 18 and 19 below.
A U.S. company purchases a 60-day certificate of deposit from an Italian bank on October 15.
The certificate has a face value of €1,000,000, costs $1,200,000 (the spot rate is $1.20/€), and
pays interest at an annual rate of 6 percent. On December 14, the certificate of deposit matures
and the company receives principal and interest of €1,010,000. The spot rate on December 14 is
$1.18/€. The average spot rate for the period October 15 – December 14 is $1.19/€.
18. Topic: Foreign currency lending

LO 2
The exchange gain or loss on this investment is:
a. $20,200 gain
b. $20,200 loss
c. $20,000 gain
d. $20,000 loss
ANS: d
€1,000,000 x ($1.20 - $1.18) = $20,000 loss

Edition
19. Topic: Foreign currency lending
LO 2
Interest income on the investment is reported at:
a. $0
b. $11,800
c. $11,900
d. $12,000
ANS: b
€10,000 x $1.18 = $11,800
Use the following information to answer questions 20 – 22 below:
A U.S. company anticipates that it will purchase merchandise for €10,000,000 at the end of July,
and pay for it at the end of September. On March 1, it enters a forward contract to buy
€10,000,000 on September 30. The forward contract qualifies as a cash flow hedge. The
company’s accounting year ends December 31. The company actually purchases the merchandise
on July 30 and closes the forward contract and pays for the merchandise on September 30. It still
holds the merchandise at the end of the year. Exchange rates are as follows:
Forward rate
for 9/30 delivery
Spot rate
March 1 $1.40 $1.41
July 30 1.42 1.415
September 30 1.43 1.43

LO 6
The merchandise is reported on the year-end balance sheet at:
a. $14,100,000
b. $14,150,000
c. $14,200,000
d. $14,300,000
ANS: c
Changes in the value of the forward contract remain in other comprehensive income
until the merchandise is sold. The merchandise is reported at the spot rate at the date of
purchase, $1.42.

LO 6
What is the net effect on income for the year?
a. No effect
b. $100 loss
c. $100 gain
d. $50 gain
ANS: a
Changes in the value of the forward are reported in other comprehensive income.
The $100 loss on the payable is exactly offset by a reclassification of $100 out of other
comprehensive income, so there is no net effect on income.

Edition
LO 6
When the merchandise is sold, what amount is reported for cost of goods sold?
a. $14,100,000
b. $14,150,000
c. $14,200,000
d. $14,300,000
ANS: a
At the end of the year, other comprehensive income has a credit balance of $100. When
the merchandise is sold, it is reclassified as a reduction in cost of goods sold; $14,100,000
= $14,200,000 - $100,000.
Journal entries related to questions 20 – 22 (in thousands):
July 30
Inventory 14,200
Accounts payable 14,200
Investment in forward 50
Other comprehensive income 50
September 30
Exchange loss 100
Accounts payable 100


Exchange gain 100

Cash 14,100
When merchandise is sold:

Cost of goods sold 14,100
Inventory 14,200

Use the following information on the U.S. dollar value of the euro to answer questions 23 – 25:
Forward rate for

March 20, 2012
Spot rate delivery
November 30, 2011 $ 1.30 $ 1.29
December 31, 2011 1.33 1.31
March 20, 2012 1.35 1.35
23. Topic: Speculative forward purchase contract

LO 7
On November 30, 2011, a U.S. company, with a December 31 year-end, enters a forward
purchase contract for €100,000 to be delivered on March 20, 2012. The forward
contract does not qualify as a hedge. The company closes the contract at its expiration
date. Which statement is true?
a. No gain or loss is reported until the forward is closed on March 20

b. A gain of $2,000 is reported in 2012
c. A gain of $4,000 is reported in 2012
d. A gain of $6,000 is reported in 2012
ANS: c
The change in value of the forward is reported in income as the forward rate changes. For
2012, the gain is ($1.35 - $1.31) x €100,000 = $4,000.
24. Topic: Speculative forward sale contract

LO 7
sale contract for €100,000 to be delivered on March 20, 2012. The forward contract
does not qualify as a hedge. The company closes the forward contract on December 31.
Which statement is true?
a. No gain or loss is reported

b. A loss of $1,000 is reported in 2011
c. A loss of $3,000 is reported in 2011
d. A loss of $2,000 is reported in 2011
ANS: d
The change in value of the forward is reported in income as the forward rate changes. For
2011, the loss is ($1.31 - $1.29) x €100,000 = $2,000

Edition
25. Topic: IFRS for hedge of a forecasted purchase
LO 8
purchase contract for €100,000 to be delivered on March 20, 2012. The contract hedges
a forecasted purchase of equipment. The forward is closed and the equipment purchased
on March 20. If the company follows IFRS and reports gains and losses on hedges of
forecasted transactions as basis adjustments, total depreciation expense over the life of
the equipment is:
a. $129,000
b. $130,000
c. $131,000
d. $135,000
ANS: a
The equipment is recorded at the spot rate of $1.35 x €100,000 = $135,000, adjusted for
the $6,000 [= $1.35 - $1.29) x €100,000] gain on the forward contract.
26. Topic: Exchange rates

LO 1
The value of the euro changes from $1.39 to $1.43. Which statement is true concerning
changes in the value of the euro in relation to the U.S. dollar?
a. Each U.S. dollar can be exchanged for more euros.

b. Each euro can be exchanged for fewer U.S. dollars.
c. The U.S. dollar has strengthened with respect to the euro.
d. A $10 product can be purchased with fewer euros.
ANS: d
27. Topic: Exchange rates

LO 1
Informal markets contracting for future delivery of foreign currencies are called:
a. Spot markets
b. Forward markets
c. Futures markets
d. Direct markets
ANS: b

28. Topic: Forward sale hedging foreign currency receivable
LO 4
A U.S. company has euro-denominated receivables that it hedges with a forward sale of
euros. The euro weakens against the U.S. dollar. Which statement is true?
a. The gain on the receivables and the loss on the forward are reported on the income
statement.
b. The gain on the receivables and the loss on the forward are reported in other
comprehensive income.
c. The loss on the receivables and the gain on the forward are reported on the income
statement.
d. The loss on the receivables and the gain on the forward are reported in other
ANS: c
29. Topic: Forward purchase hedging foreign currency payable

LO 4
A U.S. company has payables to suppliers denominated in euros, and hedges these
payables with foreign currency forward purchase contracts. The euro strengthens against
the U.S. dollar. Which statement is true?
a. The gain on the payables and the loss on the forward are reported on the income
statement.
b. The gain on the payables and the loss on the forward are reported in other
c. The loss on the payables and the gain on the forward are reported on the income
statement.
d. The loss on the payables and the gain on the forward are reported in other
ANS: c

Edition
30. Topic: Forward sale hedging forecasted transaction
LO 6
A U.S. company sells its products to customers in Japan, priced in yen. It hedges a
forecasted sale to a Japanese customer with a forward sale of yen. Changes in the value of
the hedge investment are:
a. Reported in other comprehensive income until the products are produced

b. Reported as adjustments to selling and administrative expenses when the products
are sold
c. Reported in income as the changes occur
d. Reported in other comprehensive income until the products are sold
ANS: d
31. Topic: Special hedge accounting, cash flow hedges

LO 3, 6
Changes in the market value of forward foreign currency contracts used to hedge
forecasted sales of merchandise to customers are:
a. Reported on the income statement if the forwards qualify for special hedge
accounting and in other comprehensive income if they don’t qualify.
b. Reported as a direct adjustment to retained earnings if they qualify for special
hedge accounting and on the income statement if they don’t qualify.
c. Reported in other comprehensive income if they qualify for special hedge
accounting and on the income statement if they don’t qualify.
d. Not reported if they qualify for special hedge accounting and reported on the
income statement if they don’t qualify.
ANS: c

32. Topic: Cash flow hedges
LO 3, 6
Which one of the following is a cash flow hedge for a U.S. company?
a. A hedge of euro-denominated receivables

b. A hedge of a planned purchase of inventory, denominated in pesos
c. A hedge of a sales order from a customer in the U.K., denominated in pounds
d. A hedge of payables denominated in U.S. dollars
ANS: b
33. Topic: Identification of hedge investments

LO 3
Which of the following is not a hedge investment?
a. A U.S. company issues a purchase order to a supplier in Mexico who requires

payment in pesos, and invests in a put option in pesos.
b. A U.S. company has debt denominated in euros, and invests in a forward purchase
of euros.
c. A U.S. company’s customers owe it several million pesos from credit sales, and the
company invests in a forward sale of pesos.
d. A U.S. company invests in corporate bonds denominated in euros and enters a put
option in euros.
ANS: a

LO 3
You are a U.S. investor and you expect that the value of the euro, in U.S. dollar terms,
will increase. Which of the following investments would you make?
a. Short position in euro futures.

b. Put option in euros.
c. Borrow from a bank in Italy, payment denominated in euros.
d. Forward purchase of euros.
ANS: d

Edition
35. Topic: Derivatives disclosures
LO 7
SFAS 161, effective at the end of 2008, provides that:
a. Hedges reported as assets be combined with hedges reported as liabilities.

b. All hedged items be carried at market value.
c. Additional footnote disclosures detail hedging gains and losses by hedge type.
d. Hedging gains and losses be separately displayed on the income statement and not
combined with other accounts.
ANS: c

LO 3
Which of the following is the real hedge?
a. A call option in euros, used to hedge a forecasted sale to a customer, denominated

in euros
b. A call option in euros, used to hedge an investment in securities, denominated in
euros
c. A put option in euros, used to hedge a receivable denominated in euros
d. A forward sale in euros, used to hedge debt denominated in euros
ANS: c
37. Topic: Hedge accounting

LO 3
On August 1, a U.S. company enters into a forward contract, in which it agrees to buy
1,000,000 euros from a bank at a rate of $1.45 on December 1. Changes in the value of
the forward contract will be reported on the income statement in which one of the
following situations?
a. The U.S. company uses the forward contract to hedge a loan denominated in
euros.
b. The U.S. company uses the forward contract to hedge a forecasted purchase of
merchandise from a French supplier.
c. The U.S. company uses the forward contract to hedge a planned purchase of
commodities from an Italian supplier.
d. The U.S. company uses the forward contract to hedge an expected acquisition of
commodities from a Belgian company.
ANS: a

38. Topic: Hedging financial risk
LO 1, 3
Which statement below best describes the process of hedging using financial derivatives?
a. You have inside information that the $/yen rate is going to rise, so you invest in a
financial derivative that allows you to gain if the $/yen rate rises.
b. You have inside information that the $/euro rate is going to fall, so you invest in a
financial derivative that allows you to gain if the $/euro rate falls.
c. As part of your normal business transactions, you are exposed to financial risk.
You invest in financial derivatives to increase potential gains from financial risk.
d. As part of your normal business transactions, you are exposed to financial risk.
You invest in financial derivatives to reduce that risk.
ANS: d
39. Topic: Hedging financial risk

LO 1, 3
A U.S. manufacturing company imports parts from a supplier in Germany. The company is
required to pay the supplier in euros. Which investment will hedge the manufacturing
company's foreign exchange risk?
a. Call option in euros

b. Short position in euros
c. Forward sale of euros
d. Borrowing from a German bank
ANS: a

LO 3
How are investments in financial derivatives valued on the balance sheet?
a. Market value
b. Cost
c. Lower of cost or market value
d. Not reported
ANS: a

Edition
LO 3
On December 1, a U.S. company agrees to buy euros on February 1 at a contract price of
$1.40. The company did not pay anything for this contract. The exchange rate for euros
declines to $1.38 (U.S. dollar strengthens) between December 1 and December 31, when
the company’s reporting year ends. How is this contract reported on the company’s year-
end balance sheet?
a. In the asset section

b. In the liability section
c. As a contra asset
d. The contract is not reported on the balance sheet
ANS: b
42. Topic: Hedges of firm commitments

LO 5
On July 10, 2012, a U.S. company with a December 31 year-end enters a forward contract
that locks in the selling price of won, for delivery on August 15. The forward contract
hedges a firm commitment to sell merchandise to a customer in Korea, with payment
denominated in won. The sale is made on August 1, 2012 and payment is received from
the customer on August 15. Where is the value of the firm commitment to sell reported in
the year-end financial statements for 2012?
a. Asset or liability on the balance sheet

b. Increase or decrease in other comprehensive income
c. Adjustment to sales revenue
d. Adjustment to cost of goods sold
ANS: c

43. Topic: Foreign currency borrowing
LO 2
The XYZ Company borrows 100,000,000 euros by issuing bonds to German investors
when the spot rate is $1.25/€. The interest rate is 10 percent per annum. When XYZ
accounts for this loan, which of the following will not be true?
a. A decrease in the exchange rate will generate an exchange gain on the bonds
payable
b. If the spot rate rises to $1.35/€ one year hence, when the interest payment is
accrued, the interest expense will be recorded at $13,500,000
c. If XYZ desires to hedge these bonds, it will have to purchase euros forward
d. The bonds payable will be carried at $125,000,000 until they mature
ANS: d
44. Topic: Foreign currency borrowing

LO 2
Interest expense on a loan denominated in another currency is translated at:
a. The average spot rate for the period the interest covers
b. The spot rate when the loan was made
c. The spot rate when the interest is recorded
d. The forward rate for delivery when the interest must be paid
ANS: c
45. Topic: Hedging strategy

LO 3
U.S. manufacturers that sell to customers in other countries, priced in the currency of the
customer’s country, often adjust their hedging strategy depending on which way they
believe foreign currency rates are headed. Which statement best represents the adjustment
they make, if the U.S. dollar is expected to weaken?
a. Reduce the percentage of receivables hedged

b. Reduce the percentage of payables hedged
c. Increase the percentage of receivables hedged
d. Increase the percentage of payables hedged
ANS: a

Edition
46. Topic: Hedge accounting
LO 3
Two major goals of SFAS 133 are:
a. Disclose the fair values of derivatives investments in the footnotes of the financial
statements, and report hedged assets and liabilities at fair value on the balance
sheet.
b. Report the fair values of derivatives investments on the balance sheet, and report
hedged assets and liabilities at fair value on the balance sheet.
c. Report the fair values of derivatives investments on the balance sheet, and match
gains and losses on hedge investments and hedged assets and liabilities on the same
income statement.
d. Report hedged assets and liabilities at fair value on the balance sheet, and match
gains and losses on hedge investments and hedged assets and liabilities on the same
income statement.
ANS: c

LO 6
A U.S. company hedges an anticipated sale of merchandise to a foreign customer. When
are gains and losses on the hedge investment reported on the income statement?
a. When the customer pays for the merchandise

b. When the anticipated sale becomes a firm commitment
c. When the hedge investment is determined to be an effective hedge
d. When the merchandise is sold
ANS: d
48. Topic: Speculative investments

LO 7
A U.S. company enters a forward purchase contract that does not qualify as a hedge
investment. When are gains and losses on the hedge investment reported on the income
statement?
a. When the forward contract changes in market value

b. When the forward contract is closed
c. When the forward contract is determined to be an effective hedge
d. When the merchandise is sold
ANS: a

49. Topic: Hedge of foreign-currency-denominated payable
LO 4
A U.S. company has entered into a forward purchase contract to hedge a reported foreign
currency obligation. If the U.S. dollar weakens against the foreign currency:
a. The forward contract appears as a current asset on the company’s balance sheet.
b. The forward contract’s reported value exactly offsets the reported foreign currency
obligation, with no net balance sheet disclosure.
c. The gain on the forward contract adds to other comprehensive income.
d. The gain on the foreign currency obligation adds to other comprehensive income.
ANS: a
50. Topic: IFRS for foreign currency hedging

LO 8
IFRS allows which reporting practice, not allowed under U.S. GAAP?
a. Reporting foreign currency derivative positions at cost rather than at market value
b. Reporting gains and losses on cash flow hedges as adjustments to the carrying
value of related asset acquisitions
c. Reporting gains and losses on firm commitment hedges as adjustments to the
carrying value of related asset acquisitions
d. Reporting foreign currency derivative positions at market rather than at cost
ANS: b

Edition
PROBLEMS
1. Topic: Fair value hedge of receivables and payables, cash flow hedge of
forecasted transaction
LO 4, 6
Use the following exchange rates for the Canadian dollar to answer the three questions
below concerning a U.S. company’s foreign exchange activities. The company’s
accounting year ends December 31.
Forward rate for

Spot rate March 31, 2011 delivery
October 31, 2010 $ 0.82 $ 0.81
December 31, 2010 0.85 0.86
March 31, 2011 0.83 0.83
Required
Answer the following questions.
a. The company sells merchandise to a Canadian customer for C$100,000 on October

31, 2010, and receives payment from the customer, in Canadian dollars, on March
31, 2011. What are the following balances?
i. Sales revenue for 2010
ii. Accounts receivable, December 31, 2010
iii. Exchange gain or loss for 2011
b. The company sells merchandise to a Canadian customer for C$100,000 on October

31, 2010, and receives payment from the customer, in Canadian dollars, on March
31, 2011. On October 31, 2010 it enters a forward contract to lock in the selling
price of Canadian dollars, for March 31, 2011 delivery. On March 31, 2011, it
delivers the Canadian dollars and closes the forward contract. What are the
balances?
i. Investment in forward , December 31, 2010
ii. Amount of U.S. dollars received March 31, 2011
c. The company enters a forward contract on October 31, 2010 to hedge a forecasted
purchase of merchandise for C$100,000 on March 31, 2011. On March 31 it takes
delivery of the merchandise, closes the forward and pays for the merchandise. It
sells the merchandise in May. What are the balances?
i. Investment in forward, December 31, 2010
ii. Cost of goods sold on May sale

ANS:
a. i. C$100,000 x $.82 = $82,000

ii. C$100,000 x $.85 = $85,000
iii. C$100,000 x ($.85 - $.83) = $2,000 loss
b. i. C$100,000 x ($.81 - $.86) = $5,000 liability

ii. C$100,000 x $.81 = $81,000
c. i. C$100,000 x ($.81 - $.86) = $5,000 asset

ii. $83,000 – ($.83 - $.81)(C$100,000) = $81,000
2. Topic: Unhedged foreign currency transactions, hedges of firm commitments

LO 2, 4, 5
A U.S. company buys merchandise from suppliers in the U.K., and pays for the
merchandise in pounds sterling. Its accounting year ends December 31. Use the following
information on $/£ to answer the questions below.
Forward rate for delivery

Spot rate March 1, 2013
October 1, 2012 $1.29 $1.28
November 1, 2012 1.30 1.32
December 31, 2012 1.35 1.34
March 1, 2013 1.37 1.37
Required
Answer the following questions:
a. The U.S. company takes delivery of merchandise costing £1,000,000 on November

1, 2012. The company pays for the merchandise, in pounds, on March 1, 2013.
No hedging is involved. The company sells the merchandise on June 1, 2013.
What amounts will appear on the financial statements of the U.S. company for:
i. Accounts payable, December 31, 2012 balance sheet
ii. Exchange gain or loss, 2012 income statement
iii. Cost of goods sold, 2013 income statement
b. Assume the same facts as in a. above, but the U.S. company issues a purchase
order on October 1, 2012 before taking delivery on November 1. On October 1
the company also enters a forward contract to hedge its FX risk, for delivery of
pounds on March 1, 2013. What amounts will appear on the financial statements
of the U.S. company for:
i. Investment in forward contract, December 31, 2012 balance sheet
ii. Cost of goods sold, 2013 income statement

Edition
ANS:
a. i. £1,000,000 x $1.35 = $1,350,000

ii. £1,000,000 x ($1.30 - $1.35) = $50,000 loss
iii. £1,000,000 x $1.30 = $1,300,000
b. i. £1,000,000 x ($1.28 - $1.34) = $60,000 asset

ii. £1,000,000 x $1.30 – [£1,000,000 x ($1.28 - $1.32)] = $1,260,000
3. Topic: Unhedged foreign currency transactions, hedges of import and

forecasted transactions
LO 2, 4, 6
Following are exchange rates for the euro (U.S. $/€) . Import Express is a U.S. company
whose accounting year ends on December 31.
Forward rate for

May 31, 2011
Spot rate delivery
November 30, 2010 $ 1.25 $ 1.30
December 31, 2010 1.28 1.32
May 31, 2011 1.26 1.26
Required
Answer the following questions.
a. On November 30, 2010, Import Express takes delivery of merchandise on credit

from an Italian supplier for €1,000. It pays for the merchandise on May 31, 2011.
It sells the inventory to a U.S. customer during 2011. What are the correct
amounts that will appear on Import Express’ financial statements for each of the
following items?
i. Accounts payable, December 31, 2010 balance sheet
ii. Cost of goods sold, 2011 income statement
iii. Foreign exchange loss, 2010 income statement
b. On November 30, 2010, Import Express takes delivery of merchandise on credit

from an Italian supplier for €1,000. On the same day, it agrees to buy €1,000
(forward purchase) for delivery on May 31, 2011. Import Express closes the
forward on May 31 and pays for the merchandise. It sells the inventory to a U.S.
customer during 2011. What are the correct amounts that will appear on Import
Express’ financial statements for each of the following items?
i. Investment in forward contract, December 31, 2010 (asset)
ii. Loss on forward contract, 2011
Gain on accounts payable, 2011

c. On November 30, 2010, Import Express forecasts that it will need to buy
merchandise for €1,000 from an Italian supplier at the end of May, 2011. It plans
to pay for the merchandise as soon as it is delivered. On November 30, 2010,
Import Express agrees to buy €1,000 (forward purchase) for delivery on May 31,
2011. The forward contract qualifies as a cash flow hedge of the forecasted
purchase of merchandise. The merchandise is actually delivered on May 31, 2011.
Import Express closes the forward and immediately pays the supplier. The
merchandise is subsequently sold to a U.S. customer later in 2011. Make the
journal entries necessary to record these events:
i. December 31, 2010: Adjust the investment in forward contract.
ii. May 31, 2011:
(1) Adjust the investment in forward contract.
(2) Close out the forward contract.
(3) Take delivery of the merchandise and pay for it.
iii. Record cost of sales for 2011.
ANS:
a. Entries (not required):
11/30
Inventory 1,250
12/31
Exchange loss 30
Accounts payable 30
5/31
Accounts payable 20
Exchange gain 20

Cash 1,260
i. Accounts payable, December 31, 2010 balance sheet $1,280

ii. Cost of goods sold, 2011 income statement $1,250
ii. Exchange loss, 2010 income statement $ 30

Edition
b. Entries (not required):
11/30
Inventory 1,250
12/31
Exchange loss 30
Accounts payable 30
Exchange gain 20
5/31
Accounts payable 20
Exchange gain 20
Exchange loss 60
Foreign currency 1,260
Cash 1,300
i. Investment in forward contract, December 31, 2010 (asset) $20

ii. Loss on forward contract, 2011 $60
Gain on accounts payable, 2011 $20

c. i.
ii. (1)
(2)
Cash 1,300
(3)
Inventory 1,260
iii.
Inventory 1,260

Edition
4. Topic: Forward purchase, cash flow hedge that becomes a fair value hedge
LO 4, 5, 6
Use the following information on exchange rates for the euro to answer the question
below.
Forward
rate for
Spot 4/30/12
rate delivery
October 1, 2011 $1.45 $1.48
December 31, 2011 1.50 1.53
January 31, 2012 1.52 1.55
March 31, 2012 1.56 1.58
April 30, 2012 1.60 1.60
On October 1, 2011, a U.S. company forecasts that it will take delivery of merchandise
from a supplier in Portugal for €10,000,000 around the end of March, 2012, with payment
expected to be made, in euros, about one month later. The company closes its books on
December 31. The following events occur:
1. October 1, 2011: The company enters a forward purchase agreement for delivery
of €10,000,000 on April 30, 2012. This position qualifies as a hedge of the
forecasted transaction described above. No initial investment is required.
2. December 31, 2011: The company closes its books.
3. January 31, 2012: The company issues a purchase order to the supplier for
€10,000,000 in merchandise, to be delivered March 31, 2012.
4. March 31, 2012: The company takes delivery of the merchandise.
5. April 30, 2012: The company closes the forward contract and pays the supplier
€10,000,000.
6. May 15, 2012: The company sells the merchandise to a U.S. customer for
$22,500,000.
Required
Prepare the journal entries to record the above events on the indicated dates.

ANS:
December 31, 2011: End of year adjusting entry:

Investment in forward 500,000
Other comprehensive
income 500,000
January 31, 2012: Adjust the investment:

Other comprehensive
income 200,000
March 31, 2012: Adjust for the period January 31 - March 31, and take delivery of
the merchandise.
Other comprehensive
income 300,000
Exchange loss 300,000

Firm commitment 300,000
Other comprehensive income 300,000

Exchange gain 300,000
Inventory 15,300,000
Accounts payable 15,600,000

Edition
April 30, 2012: Adjust for the period March 31 to April 30, close the forward
contract and pay the supplier.
Other comprehensive
income 200,000


Foreign currency 16,000,000

Investment in forward 1,200,000
Cash 14,800,000

Cost of goods sold 14,800,000


LO 5
Following is information on $/€ exchange rates:

Spot rate August 15, 2012
March 1, 2012 $1.50 $1.55
June 30, 2012 1.60 1.62
August 15, 2012 1.65 1.65
A U.S. company buys from suppliers in Germany, and pays the suppliers in euros. The
U.S. company’s accounting year ends June 30. On March 1, 2012, the company sends a
purchase order to a German supplier for €1,000,000 in merchandise, payable in euros,
delivery to take place August 15, 2012. On the same day the company enters into a
forward contract for delivery of €1,000,000 on August 15. The forward qualifies as a
hedge of a firm commitment. On August 15, the company closes the forward contract,
takes delivery of the merchandise, and pays the supplier. The company sells the
merchandise to its customers on August 31, 2012.
Required
What amounts will appear on the financial statements of the U.S. company for:
a. Investment in forward contract, June 30, 2012 balance sheet

b. Cost of goods sold, fiscal 2013 income statement
ANS:
a. €1,000,000 x ($1.62 - $1.55) = $70,000

b. Value of firm commitment = €1,000,000 x ($1.65 - $1.55) = $100,000 credit
Currency paid = $1,650,000 - firm commitment offset $100,000 = $1,550,000

Edition
LO 5
On November 1, 2012, a U.S. company issues a purchase order to buy merchandise for
€1,000,000. The company expects to take delivery of the merchandise on January 10,
2008, and will pay the supplier on March 1, 2013. To hedge its FX risk, on November 1,
2012 the company invests in a forward contract for delivery of €1,000,000 on March 1,
2013. The company sells the merchandise to a U.S. customer for $2,000,000 in cash on
April 1, 2013. Assume the forward contract qualifies as a fair value hedge of the firm
commitment to buy merchandise.
Exchange rates for the euro ($/€) are below.
Forward rate for

November 1, 2012 $ 1.40 $1.42
December 31, 2012 1.41 1.43
January 10, 2013 1.44 1.435
March 1, 2013 1.45 1.45
Required
For each date below, prepare the necessary journal entries to record the events and/or
adjustments needed.
a. December 31, 2012 (end of year closing)

b. January 10, 2013 (takes delivery of merchandise)
c. March 1, 2013 (closes the forward and pays the bill)
d. April 1, 2013 (sells the merchandise to a U.S. customer). Assume the company
uses the perpetual inventory method.

ANS:
a. December 31, 2012


Rate changes from $1.42 to $1.43.
b. January 10, 2013

Exchange gain 5,000
Exchange loss 5,000

Inventory 1,425,000
c. March 1, 2013


Cash 1,420,000

d. April 1, 2013
Cash 2,000,000
Sales revenue 2,000,000

Inventory 1,425,000

Edition
7. Topic: Import and export transactions
LO 2
Following is information on $/€ exchange rates:
Spot rate
November 1, 2013 $1.42
December 31, 2013 1.38
February 15, 2014 1.36
March 1, 2014 1.35
Required
Answer the following questions:
a. A U.S. company sells merchandise to customers in euro countries, with payment to

be received in euros. Sales totaling €1,000,000 occur on November 1, 2013.
Payment is made on March 1, 2014. The U.S. company’s accounting year ends
December 31. What amounts will appear on the financial statements of the U.S.
company for:
i. Sales revenue, 2013 income statement
ii. Accounts receivable, 12/31/13 balance sheet
iii. Exchange gain or loss, 2013 income statement
b. A U.S. company buys merchandise from suppliers in euro countries, payable in

euros. Purchases of €1,000,000 are made on November 1, 2013. The U.S.
company pays the suppliers on February 15, 2014. The U.S. company sells the
merchandise to its customers on March 1, 2014. The U.S. company’s accounting
year ends December 31. What amounts will appear on the financial statements of
the U.S. company for:
i. Accounts payable, 12/31/13 balance sheet
ii. Exchange gain or loss, 2014 income statement
iii. Cost of goods sold, 2014 income statement
ANS:
a. i. €1,000,000 x $1.42 = $1,420,000

ii. €1,000,000 x $1.38 = $1,380,000
iii. €1,000,000 x ($1.38 - $1.42) = $40,000 loss
b. i. €1,000,000 x $1.38 = $1,380,000

ii. €1,000,000 x ($1.38 - $1.36) = $20,000 gain
iii. €1,000,000 x $1.42 = $1,420,000

8. Topic: Hedges of export transactions
LO 4
A U.S. company sells merchandise to a Greek customer on February 1, 2010 for
€1,000,000. The customer pays the bill on May 1, 2010. To hedge foreign exchange risk,
on February 1, 2010 the U.S. company enters a forward sale contract for €1,000,000 with
a May 1 delivery date. On May 1 the company collects the €1,000,000 from the customer
and closes the forward contract. Relevant rates are as follows:
Spot 5/1 Forward

February 1, 2010 $1.345 $1.348
May 1, 2010 1.330 1.330
Required
Make the journal entries to record the following transactions, including appropriate
adjusting entries:
a. February 1 sale to the Greek customer.

b. May 1 collection of the receivable and closing of the contract.
ANS:
a.
Accounts receivable 1,345,000
Sales revenue 1,345,000
b.
Accounts receivable 15,000


Accounts receivable 1,330,000
Cash 1,348,000

Edition
LO 5
On February 1, 2010, a U.S. company issues a purchase order to buy merchandise from a
Greek supplier for €1,000,000. On February 1, 2010 the U.S. company enters a forward
purchase contract for €1,000,000 with a July 1 delivery date. The forward qualifies as a
hedge of the firm commitment to buy the merchandise. On May 1, 2010, the company
takes delivery of the merchandise. On July 1, 2010, the company closes the forward and
pays the bill. Relevant exchange rates are as follows:
7/1 forward
Spot rate rate
February 1, 2010 $1.345 $1.350
May 1, 2010 1.340 1.344
July 1, 2010 1.330 1.330
Required
a. Make the journal entries to record the following transactions, including
appropriate adjusting entries:
i. May 1 delivery of merchandise.
ii. July 1 closing of forward contract and payment of bill.
b. Assume the U.S. company sells the merchandise to a U.S. customer for
$1,600,000. What is the reported gross margin (sales revenue minus cost of goods
sold) on the sale?
ANS:
a. i.
Exchange loss 6,000

Exchange gain 6,000
Inventory 1,346,000

ii.


Cash 1,350,000

b. $1,600,000 - $1,346,000 = $254,000

LO 6
A U.S. corporation purchases merchandise from a German supplier on a regular basis. On
November 8, 2012, the corporation purchased €100,000 for delivery on March 8, 2013,
in anticipation of an expected purchase of merchandise for €100,000 at the beginning of
March. The forward contract qualifies as a hedge of a forecasted transaction. The
corporation took delivery of the merchandise, settled the forward contract, and paid the
German supplier €100,000 on March 8, 2013. The merchandise was subsequently sold on
April 10, 2013 to a U.S. customer for $200,000. The corporation’s accounting year ends
on December 31. Relevant exchange rates are as follows:

Spot rate March 8, 2013
November 8, 2012 1.25 1.26
December 31, 2012 1.27 1.28
March 8, 2013 1.24 1.24
April 10, 2013 1.23 N/A
Required
a. Prepare the adjusting entry necessary to update the investment in forward at
December 31, 2012.
b. Prepare the entries necessary to take delivery of the merchandise and close the
forward on March 8, 2013.
c. Prepare the entry necessary to record cost of goods sold on April 10, 2013.

Edition
ANS:
a.
b.

Cash 126,000
Inventory 124,000
c.
Inventory 124,000

11. Topic: Valuation of forward contracts, hedging entries
LO 3, 4, 6
A U.S. company enters into the following forward contracts on October 15, 2011:
1. Agreement to sell 100,000,000 yen on January 15, 2012 at $0.0088

2. Agreement to buy 1,000,000 new shekels on February 15, 2012 at $0.221
Forward and spot rates for yen and shekels are as follows:
Forward rate
Forward rate Spot rate for 2/15/12
Spot rate for 1/15/12 for new delivery of new
for yen delivery of yen shekels shekels
October 15, 2011 $ .0086 $ .0088 $.220 $ .221
December 31,2011 .0084 .0085 .222 .219
Required
a. How are the forward contracts valued on the company’s December 31, 2011
balance sheet? For each contract, specify the amount and whether it is a current
asset or a current liability.
b. Assume that the forward contract to sell yen is an effective hedge of a 100,000,000
yen forecasted sale to customers in Japan. Make the adjusting entry for this
contract at December 31, 2011.
c. Assume the forward contract to buy new shekels is an effective hedge of a
1,000,000 new shekel obligation currently on the company’s books. Make the
adjusting entry for this contract at December 31, 2011.
ANS:
a. Forward sale in yen: ($.0088 - $.0085) x 100,000,000 = $30,000 current asset

Forward purchase in new shekels: ($.221 - $.219) x 1,000,000 = $2,000 current
liability
b.
c.
Exchange loss 2,000

Edition
LO 5
On March 1, 2011, a U.S. company issued a purchase order to a supplier in the Cayman
Islands for goods with a price of KYD 5,000,000. The goods will be delivered July 1,
2011, and payment will be made on September 1, 2011. On March 1, 2011, the company
purchased KYD 5,000,000 for delivery September 1, 2011. The forward contract is an
effective hedge of the firm commitment to purchase goods from the Cayman Islands. The
goods are delivered as expected on July 1, and the company follows through on the
forward contract and makes the payment to the supplier on September 1. The company’s
accounting year ends on December 31.
Spot and forward rates are as follows ($/KYD):

Spot Rate on September 1, 2011
March 1, 2011 $1.22 $1.21
July 1, 2011 1.21 1.20
September 1, 2011 1.19 1.19
Required
Answer the following questions regarding how the above information is reported on the
company’s financial statements:
a. What is the net hedging gain or loss for 2011?

b. Suppose the goods purchased from the Cayman Islands are sold to a U.S.
customer for $8,000,000. What is the gross margin (sales revenue less cost of
goods sold) on the sale? Show calculations clearly.
ANS:
a. Loss on forward: ($1.21 - $1.19) x 5,000,000 = $100,000 loss

Gain on firm commitment: ($1.21 - $1.20) x 5,000,000 = 50,000 gain
Gain on accounts payable: ($1.21 - $1.19) x 5,000,000 = 100,000 gain
Net $ 50,000 gain
b. Inventory is recorded as follows when the goods are delivered on July 1:
Inventory 6,100,000
The gross margin on the sale is:
Sales $8,000,000
Gross margin $1,900,000

13. Topic: Forward purchase, cash flow hedge that becomes a fair value hedge
LO 4, 5, 6
A U.S. company purchases merchandise from a Hong Kong supplier on a regular basis.
The following events occur:
 October 1, 2012: The company purchased $H1,000,000 for delivery on May 1,

2013, in anticipation of an expected payment of $H for a forecasted merchandise
purchase.
 December 1, 2012: The company issued a purchase order for $H1,000,000 in
merchandise from the supplier.
 March 1, 2013: The company took delivery of the merchandise.
 May 1, 2013: The company closed the forward contract and paid the supplier.
 May 31, 2013: The company sold the merchandise to a U.S. customer for
$200,000.
Exchange rates ($/H) are as follows:
Forward rate for

Spot rate delivery 5/1/13
October 1, 2012 $0.125 $0.127
December 1, 2012 0.127 0.129
December 31, 2012 0.128 0.131
March 1, 2013 0.131 0.1315
May 1, 2013 0.132 0.132
Required
Prepare the journal entries to record the above transactions, including necessary adjusting
entries. Assume the hedge qualifies for special hedge accounting.

Edition
ANS:
Adjusting entries at December 31, 2012:

To record increase in value of forward contract ($.127 to $.131)
Exchange loss 2,000

To record loss on firm commitment ($.129 to $.131)

Exchange gain 2,000
To reclassify other comprehensive income to income to match against loss on firm
commitment.
March 1, 2013
To mark the forward to market ($.131 to $.1315)
Exchange loss 500

Firm commitment 500
To mark the firm commitment to market ($.131 to $.1315)

Exchange gain 500
To reclassify other comprehensive income to income to match against firm commitment
loss.
Inventory 128,500
To record delivery of merchandise, adjusted for firm commitment balance.

May 1, 2013
To mark the forward to market ($.1315 to $.132)
Exchange loss 1,000

To mark accounts payable to market ($.131 to $.132)

Exchange gain 1,000
To reclassify other comprehensive income to income to match against accounts payable
loss.

Cash 127,000
To close forward contract.

To pay the supplier.
May 31, 2013

Inventory 128,500
Note: Remaining other comprehensive income balance is $4,000 - $2,000 + $500 - $500 +
$500 - $1,000 = $1,500 gain.

Edition
14. Topic: Cash flow hedge accounting versus regular accounting
LO 3, 6
Following is information on exchange rates for the euro:
Spot rate Forward rate for 4/30/12 delivery

October 1, 2011 $1.45 $1.48
December 31, 2011 1.50 1.53
January 31, 2012 1.52 1.55
March 31, 2012 1.56 1.58
April 30, 2012 1.60 1.60
On October 1, 2011, a U.S. company forecasts that it will buy merchandise from a
supplier in Portugal for €10,000,000 around the end of March, 2012, with payment
expected to be made, in euros, about one month later. The company closes its books on
December 31. The following events occur:
1. October 1, 2011: The company enters a forward purchase agreement for delivery
of €10,000,000 on April 30, 2012. No initial investment is required.
2. December 31, 2011: The company closes its books.
3. January 31, 2012: The company issues a purchase order to the supplier for
€10,000,000 in merchandise, to be delivered March 31, 2012.
4. March 31, 2012: The company takes delivery of the merchandise.
5. April 30, 2012: The company closes the forward contract and pays the supplier
€10,000,000.
6. May 15, 2012: The company sells the merchandise to a U.S. customer for
$22,500,000.
Required
Fill in the schedule below, showing the amounts related to the above events that will be
reported in the company’s annual reports for 2011 and 2012. Show related journal entries
in the next schedule. Show liabilities and gains in parenthesis.

ANS:
Forward contract qualifies as a

hedge of the forecasted The forward contract does not
Account title transaction qualify as a hedge
2011 2012 2011 2012
Investment in forward $ 500,000 -- $ 500,000 --
(balance sheet)
Other comprehensive (500,000) -- -- --
income (Balance sheet)
(Gains) and losses (income -- -- (500,000) $ (200,000)
statement) (300,000)
(200,000)
400,000
$ (300,000)
Cost of goods sold (income -- $14,800,000 -- $15,600,000
statement)

Edition
Forward contract is a qualified hedge Forward contract is not a qualified hedge
December 31
Investment in forward 500,000 Investment in forward 500,000
OCI 500,000 Exchange gain 500,000
January 31
March 31
Exchange loss 300,000 --
OCI 300,000 --
Gain 300,000
Inventory 15,300,000 Inventory 15,600,000
Firm commitment 300,000 A/P
A/P 15,600,000 15,600,000
April 30
OCI 200,000 Investment in forward 200,000
Exchange loss 400,000 Exchange gain
A/P 400,000 200,000
OCI 400,000 Exchange loss 400,000
Exchange gain 400,000 A/P
Foreign currency 16,000,000 400,000
Cash 14,800,000 --
Investment in for. 1,200,000
A/P 16,000,000 Foreign currency 16,000,000
Foreign currency 16,000,000 Cash
14,800,000
May 15 Investment in for. 1,200,000
CGS 14,800,000 A/P 16,000,000
OCI 500,000 Foreign currency 16,000,000
CGS 15,600,000
Inventory
15,600,000

15. Topic: Cash flow hedge accounting versus regular accounting
LO 3, 6
Following are exchange rates for the Canadian dollar.
Forward rate for March 31,

Spot rate 2012 delivery
October 31, 2011 $ 0.80 $ 0.81
December 31, 2011 0.84 0.86
March 31, 2012 0.82 0.82
A U.S. company enters a forward contract on October 31, 2011 to hedge a forecasted
purchase of merchandise for C$1,000,000 on March 31, 2012. On March 31 it takes
delivery of the merchandise, closes the forward and pays for the merchandise. It sells the
merchandise in May. The company’s accounting year ends December 31.
Required
What are the balances for the following accounts, assuming the forward contract qualifies
as a hedge of the forecasted transaction for the period October 31, 2011 to March 31,
2012, and also if the forward contract does not qualify as a hedge?
a. Other comprehensive income balance, December 31, 2011

b. Gain/loss on forward contract, 2011 income statement
c. Gain/loss on forward contract, 2012 income statement
d. 2012 cost of goods sold
ANS:
Qualifies as hedge Does not qualify

Other comprehensive income, December
31, 2011 (gain) $ 50,000 $ 0
2011 income statement
gain on forward contract 0 50,000
2012 income statement
loss on forward contract 0 40,000
2012 cost of goods sold 810,000 820,000

Edition
16. Topic: Hedge of firm commitment, import transaction, speculation
LO 2, 5, 7
Electronic Importers, a U.S. company, has the following outstanding balances as of
December 31, 2011, its accounting year-end.
Forward purchase contract dated December 1, 2011 for 20,000,000 yen to hedge a firm
commitment to purchase computer hardware for 20,000,000 yen in 90 days ending on
March 1, 2012.
Account payable for 70,000,000 yen for unpaid merchandise acquired on December 16,
2011 and due on January 15, 2012.
Forward sale contract dated December 16, 2011 for 30,000,000 yen to speculate in
exchange rate changes and due on January 15, 2012.
Exchange rates quoted in the U.S. for Japanese yen are:
12/1/11 12/16/11 12/31/11 1/15/12 3/1/12

Spot rate $.00620 $.00610 $.00600 $.00593 $.00580
90-day forward .00630 .00620 .00610 .00600 .00590
60-day forward .00620 .00610 .00603 .00590 .00580
30-day forward .00610 .00600 .00590 .00580 .00570
15-day forward .00615 .00605 .00595 .00585 .00575
Required
a. Calculate the gain or loss on Electronic Importers' 2011 income statement due to
the above items. Specify the amount and whether it is a gain or loss.
b. Calculate the balances at which the forward purchase contract and the forward sale
contract would be reported in the December 31, 2011 balance sheet.
c. At what amount (U.S. dollars) should the computer hardware be valued on March
1, 2012?

ANS:
a. Forward purchase contract: no income effect due to offsetting gain and loss on
contract and firm commitment.
Accounts payable 70,000,000 x ($.00610 - $.00600) = $7,000 gain

Forward sale 30,000,000 x ($.00600 - $.00595) = 1,500 gain
$8,500 gain
b. Forward purchase contract:

($.0063 - $.00603) x 20,000,000 = $5,400 current liability
Forward sale contract:

($.006 - $.00595) x 30,000,000 = $1,500 current asset
c.
($.0058 x 20,000,000) = $116,000
Plus firm commitment balance:
($.0063 - $.0058) x 20,000,000 10,000
Hardware balance, 3/1/12 $126,000

Edition
17. Topic: Import transactions, hedge of firm commitment, hedge of forecasted
transaction, speculation
LO 2, 5, 6, 7
Each of the following situations is independent of the others. Acme Importers is a U.S.
company with a December 31 year-end. Use the following information on exchange rates
(US$/$Canadian) to answer each question.
Forward rate
for delivery on
Spot rate 2/1/13
September 1, 2012 $.80 $.82
October 1, 2012 .78 .79
December 31, 2012 .75 .74
February 1, 2013 .69 .69
Required
For each situation, (1) make the journal entries necessary to record the events, including
year-end adjustments, and (2) calculate the effect on Acme's income in the year 2012, and
in the year 2013. Show the amounts and whether they are gains or losses.
a. On September 1, 2012 Acme Importers agrees to buy merchandise from Montreal

Suppliers. Delivery will take place on October 1, 2012, and Acme will pay
Montreal Suppliers C$5,000 on February 1, 2013.
b. On September 1, 2012, Acme Importers makes a firm commitment to buy
merchandise from Montreal Suppliers. Delivery will take place on October 1,
2012, and Acme will pay Montreal Suppliers C$5,000 on February 1, 2013. On
October 1, 2012, Acme enters into a forward purchase contract with ABC
Exchange Dealers for the purchase of C$5,000, to be delivered February 1, 2013.
c. On September 1, 2012, Acme Importers makes a firm commitment to buy
merchandise from Montreal Suppliers. Delivery will take place on October 1,
2012, and Acme will pay Montreal Suppliers C$5,000 on February 1, 2013. On
September 1, 2012, Acme enters into a forward purchase contract with ABC
Exchange Dealers for the purchase of C$5,000, to be delivered February 1, 2013.
The merchandise remains in Acme's inventory as of December 31, 2013.
d. The CFO at Acme Importers believes that the U.S. dollar will continue to
strengthen with respect to the Canadian dollar. On October 1, 2012, he enters into
a speculative forward sale contract with ABC Exchange Dealers for delivery of
C$5,000 on February 1, 2013.
e. On September 1, 2012, Acme Importers forecasts that it will buy merchandise
from a Canadian supplier. Delivery and payment of C$5,000 is expected to take
place on October 1, 2012. On September 1, 2012, Acme enters into a forward
purchase contract with ABC Exchange Dealers for the purchase of C$5,000 for
$0.76, to be delivered October 1, 2012. The merchandise purchase occurs as
forecasted, and the merchandise remains in Acme’s inventory as of December 31,
2013.

ANS:
1a.
10/1 Merchandise 3,900
(5,000 x $.78)
12/31 Accounts payable 150

10/1
Exchange gain 150
[($.78 - $.75) x 5,000]

Exchange gain 300
[($.75 - $.69) x 5,000]
2/1 Accounts payable 3,450

Cash 3,450
(5,000 x $.69)
b.

Exchange gain 150
12/31 Exchange loss 250

[($.79 - $.74) x 5,000]

Exchange gain 300

[($.74 - $.69) x 5,000]
2/1 Foreign currency 3,450

Cash 3,950
2/1 Accounts payable 3,450


Edition
c.
[($.82 - $.79) x 5,000]
10/1 Firm commitment 150

Exchange gain 150

10/1 Merchandise 150

Firm commitment 150


Exchange gain 150

Accounts payable 300
2/1
Exchange gain 300

2/1
Cash 3,950
2/1

d.
12/31 Investment in forward 250
Exchange gain 250
[($.79 - $.74) x 5,000]

Exchange gain 250
[($.74 - $.69) x 5,000]

Cash 3,450
Cash 3,950
2/1
e.
Other comprehensive
income 100
[($.78-.76) x 5,000]

Cash 3,800
Merchandise 3,900
10/1
2. Income effects:
2012 2013
(a) $150 gain $300 gain
(b) 100 loss 50 gain
(c) 100 loss 50 gain
(d) 250 gain 250 gain
(e) -0- -0-

Edition
18. Topic: Borrowing in foreign currency
LO 2
A U.S. company purchases a 60-day certificate of deposit from a German bank on October
15. The certificate has a face value of €10,000,000, costs $13,800,000 (the spot rate is
$1.38/€ on October 15), and pays interest at an annual rate of 8 percent. On December
14, the certificate of deposit matures and the company receives principal and interest due
to it. The spot rate on December 14 is $1.40/€. The average spot rate for the period
October 15 - December 14 is $1.39/€.
Required
Prepare all necessary journal entries to record the above events on the U.S. company's
books.
ANS:
10/15
Temporary investments 13,800,000
Cash 13,800,000
12/14
Temporary investments 200,000
$200,000 = ($1.40 - $1.38) x €10,000,000.

Temporary
investments 14,000,000
Interest income 186,667
$186,667 = (10,000,000 x 8% x 2/12) x $1.40

19. Topic: Speculation in forward contracts
LO 7
On November 1, 2013, a U.S. company thinks the exchange rate for the euro will fall, so it
enters into a forward contract in the amount of €1,000,000, for delivery on March 15,
2014. This is a speculative contract. The company’s accounting year ends December 31.
The company closes the contract on February 1, 2014. Exchange rates are as follows ($/
€):
Forward rate for

November 1, 2013 $ 1.42 $ 1.43
December 31, 2013 1.46 1.45
February 1, 2014 1.47 1.48
March 15, 2014 1.50 1.50
Required
a. Does the company enter a forward purchase or a forward sale contract? Explain.
b. Prepare the journal entries necessary on December 31, 2013 and February 1, 2014
to record the above events.
ANS:
a. A forward sale locks in the selling price. If the rate falls, as the company expects,
it will gain by buying euros at the lower price and selling at the higher contract
price.
b. December 31, 2013

Loss 20,000
To adjust the forward contract to fair value; $20,000 = ($1.45 - $1.43) x
€1,000,000.
February 1, 2014
Loss 30,000
To adjust the forward contract to fair value; $30,000 = ($1.48 - $1.45) x
€1,000,000.
The company closes the forward by entering a forward purchase for delivery on March 15,
2014, at $1.48/€. So the company sells at $1.43 and buys at $1.48, for a net cash outflow
of ($1.48 - $1.43) x €1,000,000 = $50,000.

Cash 50,000
To close the forward contract on February 1, 2014.

Edition
20. Topic: IFRS for hedging forecasted transactions
LO 8
On February 15, 2011, an Italian company, with a June 30 year-end, enters a forward
purchase contract for $1,000,000 to be delivered on August 1, 2011. The contract hedges
a forecasted purchase of equipment. The forward is closed and the equipment purchased
on August 1. The equipment has a 2-year life, and is straight-line depreciated. Following
is information on exchange rates (€/$):
Forward rate for August 1,

Spot rate 2011 delivery
February 15, 2011 €0.80 €0.81
June 30, 2011 0.74 0.76
August 1, 2011 0.72 0.72
The company follows IFRS and uses the basis adjustment approach to reporting cash flow
hedges.
Required
Prepare the journal entries to record the following events:
a. June 30, 2011 adjusting entry

b. August 1, 2011 adjusting entries and transactions
c. June 30, 2012 adjusting entry for the equipment
d. If the company followed U.S. GAAP, how would the June 30, 2012 entry differ?

ANS:
a. June 30, 2011

To adjust the forward contract to fair value; €50,000 = (€.81 - €.76) x $1,000,000.
b. August 1, 2011
To adjust the forward contract to fair value; €40,000 = (€.76 - €.72) x $1,000,000.

Cash 810,000
To close the forward contract.
Equipment 720,000
To purchase the equipment.
Equipment 90,000
To adjust the equipment for the accumulated loss on the forward.
c. June 30, 2012

Depreciation expense 371,250
Equipment, net 371,250
To record depreciation expense for fiscal 2012; €371,250 = (€810,000/2) x 11/12.
d. June 30, 2012

Equipment, net 330,000
To record depreciation expense for fiscal 2012; €330,000 = (€720,000/2) x 11/12.

To reclassify other comprehensive income as an adjustment of depreciation
expense for fiscal 2012; €41,250 = (€90,000/2) x 11/12.

Edition

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TEST BANK

1. Topic: Valuation of forward contracts

($0.0092 - $0.009) x 100,000,000 = $20,000

2. Topic: Cash flow hedge

a. The U.S. company has receivables denominated in euros, with payment to be

©Cambridge Business Publishers, 2010

Forward rate for

3. Topic: Hedge of export transaction

2010: Gain on receivable, ($1.28 - $1.25) x €100,000 = $3,000

2011: Loss on receivable, ($1.28 - $1.26) x €100,000 = $2,000

©Cambridge Business Publishers, 2010

(€100,000 x $1.26) + ($1.30 - $1.26) x €100,000 = $130,000

5. Topic: Hedge of firm commitment

©Cambridge Business Publishers, 2010

The loss on the forward contract is reported in other comprehensive income.

7. Topic: Hedge of forecasted transaction

©Cambridge Business Publishers, 2010

Fiscal 2012 Fiscal 2013

Fiscal 2012 exchange gain = ($1.31 - $1.30) x €100,000 = $1,000

9. Topic: Import transaction

Fiscal 2012 Fiscal 2013

Fiscal 2012 exchange loss = ($1.31 – $1.30) x €100,000 = $1,000

©Cambridge Business Publishers, 2010

10. Topic: Import transaction

€20,000 x $1.32 = $26,400

11. Topic: Import transaction

©Cambridge Business Publishers, 2010

12. Topic: Export transaction

€100,000 x $1.36 = $136,000

13. Topic: Export transaction

€100,000 x ($1.39 - 1.36) = $3,000 gain

©Cambridge Business Publishers, 2010

15. Topic: Foreign currency options

©Cambridge Business Publishers, 2010

a. No effect in 2013, $4,000 gain in 2014

©Cambridge Business Publishers, 2010

Use the following information to answer questions 18 and 19 below.

18. Topic: Foreign currency lending

€1,000,000 x ($1.20 - $1.18) = $20,000 loss

©Cambridge Business Publishers, 2010

€10,000 x $1.18 = $11,800

Use the following information to answer questions 20 – 22 below:

©Cambridge Business Publishers, 2010

21. Topic: Hedge of forecasted transaction

©Cambridge Business Publishers, 2010

Journal entries related to questions 20 – 22 (in thousands):

Investment in forward 150

Other comprehensive income 100

Accounts payable 14,300

When merchandise is sold:

©Cambridge Business Publishers, 2010

Forward rate for

23. Topic: Speculative forward purchase contract

a. No gain or loss is reported until the forward is closed on March 20

24. Topic: Speculative forward sale contract

a. No gain or loss is reported

©Cambridge Business Publishers, 2010

26. Topic: Exchange rates

a. Each U.S. dollar can be exchanged for more euros.

27. Topic: Exchange rates

©Cambridge Business Publishers, 2010

29. Topic: Forward purchase hedging foreign currency payable

©Cambridge Business Publishers, 2010