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advanced accounting baker test bank chap011

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

Suppose the direct foreign exchange rates in U.S. dollars are:
1 Singapore dollar = $.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 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.

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

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

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

5. Upon arrival in Chile, Karen exchanged $1,000 of U.S. currency into 4,80,000 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.
D. No gain or loss.

6. 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?

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



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

7. 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?

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

8. 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?

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

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

9. 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, 2008, 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, 2008, 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

10. 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, 2008, 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, 2008, 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

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

11. On September 3, 2008, 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. Option A
B. Option B
C. Option C
D. Option D

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

12. On March 1, 2008, Wilson Corporation sold goods for a U.S. dollar equivalent of $31,000
to a Thai company. The transaction is denominated in Thai bahts. 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. Option A
B. Option B
C. Option C
D. Option D

On December 5, 2008, Texas based Imperial Corporation purchased goods from a Saudi
Arabian firm for 100,000 riyals (SAR), to be paid on January 10, 2009. 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:

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

13. Based on the preceding information, what journal entry would Imperial make on December
31, 2008, to revalue foreign currency payable to equivalent U.S. dollar value?

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

14. Based on the preceding information, what journal entry would Imperial make on January
10, 2009, to revalue foreign currency payable to equivalent U.S. dollar value?

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

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

15. 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

Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian
pounds on September 5, 2008, with payment due on December 2, 2008. 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:

16. 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.

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

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

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

18. Detroit based Auto Corporation, purchased ancillaries from a Japanese firm on December 1,
2008, for 1,000,000 Yen, when the spot rate for Yen was $.0095. On December 31, 2008, the
spot rate stood at $.0096. On January 10, 2009 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, 2008 and 2009 of:

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

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

19. On November 1, 2008, Denver Company borrowed 500,000 local currency units (LCU)
from a foreign lender evidenced by an interest-bearing note due on November 1, 2009, which is
denominated in the currency of the lender. The U.S. dollar equivalent of the note principal was
as follows:

In its income statement for 2009, 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

20. Company X denominated a December 1, 2009, 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
unfavourably at December 31, 2009, resulting in a loss that should:
A. be included as a separate component of stockholders' equity at Dec. 31, 2009.
B. be included as a component of income from continuing operations for 2009.
C. be included as a deferred charge at December 31, 2009.
D. not be reported until January 10, 2010, the settlement date.

Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reals on
December 1, 2008, with payment due on January 20, 2009. The exchange rates were:

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

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

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

22. 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. $7,120 gain
D. $2,260 gain

Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$)
on January 1, 2009 with settlement to be in 60 days. On the same date, Alman entered into a 60day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order
to manage its exposed foreign currency receivable. The forward contract is not designated as a
hedge. The spot rates were:

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

23. 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.

24. 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

25. 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.

26. 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, 2008, for delivery on
January 31, 2009:

In its income statement for the year ended December 31, 2008, what amount of loss should
Levin report from this forward contract?
A. $0
B. $300
C. $200
D. $100

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

Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on
December 1, 2008. Payment is due on January 30, 2009. On December 1, 2008, 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:

27. Based on the preceding information, the entries on December 31, 2008, include a:
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.

28. Based on the preceding information, the entries on January 30, 2009, 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.

29. Based on the preceding information, the entries on January 30, 2009, 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.

30. Based on the preceding information, the entries on January 30, 2009, 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.

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

On December 1, 2008, 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:

Hedge had no other speculation transactions in 2008 and 2009. Ignore taxes.

31. Based on the preceding information, what is the effect of the British pound speculative
contract on 2008 net income?
A. $10,000 gain
B. $6,000 gain
C. $8,000 gain
D. $2,000 loss

32. Based on the preceding information, what is the overall effect of speculation on 2008 net
income?
A. $4,000 gain
B. $6,000 gain
C. $8,000 loss
D. $8,000 gain

33. Based on the preceding information, what is the effect of the euro speculative contract on
2009 net income?
A. $4,000 loss
B. $1,000 gain
C. $8,000 gain
D. $2,000 loss

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

34. Based on the preceding information, what is the overall effect of speculation on 2009 net
income?
A. $1,000 loss
B. $6,000 gain
C. $3,000 loss
D. $8,000 gain

35. 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

36. 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

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.

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

37. 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

38. 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.

39. 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.

40. 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

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

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

42. 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 variablerate 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.

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

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, 2008, 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, 2009, call date. The following is the
pricing information for the term of the call:

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

On February 1, 2009, AMAR sells the options at their value on that date and acquires 20,000
barrels of oil at the spot price. On April 1, 2009, AMAR sells the oil for $112 per barrel.

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

43. Based on the preceding information, which of the following adjusting entries would be
required on December 31, 2008?

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

44. Based on the preceding information, in the entry to record the increase in the intrinsic value
of the options on December 31, 2008,
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.

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

45. Based on the preceding information, which of the following entries will be required on
February 1, 2009?

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

46. Based on the preceding information, the entries made on April 1, 2009 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.

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

On December 1, 2008, 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, 2009. Selected information concerning the fair values of the investment
and the options follow:

Assume that Winston exercises the put option and sells Linked shares on February 20, 2009.

47. Based on the preceding information, what is the market price of Linked Corporation stock
on December 31, 2008?
A. $40
B. $37
C. $36
D. $38

48. Based on the preceding information, what is the market price of Linked Corporation stock
on February 20, 2009?
A. $35
B. $37
C. $36
D. $40

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

49. Based on the preceding information, the journal entry made on December 31, 2008 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.

50. Based on the preceding information, which of the following journal entries will be made on
February 20, 2009?

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

Essay Questions

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

51. 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, 2008, before adjustments for the effects of changes in
exchange rates during 2008, follows:

The spot rates on December 31, 2008, were:

The average exchange rates during the collection and payment period in 2009 are:

Required:
1) Prepare the adjusting entries on December 31, 2008.
2) Record the collection of the accounts receivable and the payment of the accounts payable in
2009.
3) What was the foreign currency gain or loss on the accounts receivable transaction
denominated in SFr for the year ended December 31, 2008? For the year ended December 31,
2009? 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, 2008? For the year ended December 31,
2009? Overall for this transaction?

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

52. On December 1, 2008, 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, 2008, through March 1, 2009, assuming the fiscal year ends on December 31,
2008.
2) Did the company gain or lose on its purchase of the forward contract?

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

53. On December 1, 2008, 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, 2008, to
purchase electronic goods on January 30, with payment due on March 31, 2008. The derivative
is designated as a fair value hedge. The direct exchange rates follow:

Required:
Prepare all journal entries for Denizen Corporation.

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