ACC 501 Exam Prep Test Questions with Complete
Solutions
spot rate
rate at which currencies can be exchanged today
forward rate
rate at which currencies can be exchanged at some future date
forward exchange contract
a contract to exchange currencies of different countries on a stipulated future date, at a specified
rate (forward rate)
two-transaction approach
- a sale/purchase & gain/loss are viewed as separate transactions
- gain/loss reported as FOREIGN CURRENCY TRANSACTION G/L
(Ex: equipment) equipment recorded at time of purchase and any subsequent changes in A/P are
another transaction
Hedge
The U.S. firm can hedge, meaning it can safeguard itself from adverse shifts in theexchange rate
through the use of derivatives, such as forward contracts and options.
Derivatives are now recognized on the balance sheet at their fair value resulting in apayable
position for one party and a receivable position for the other.
,A sale of goods by a U.S. company was denominated in a foreign currency. The sale
resulted in a receivable that was fixed in terms of the amount of foreign currency that
would be received. Exchange rates between the dollar and the currency in which the
transaction was denominated changed so that a loss was incurred. This loss should be
included as a(n)
a. Extraordinary item in the income statement.
b. Component of income from continuing operations.
c. Separate component of stockholders' equity.
d. Deferred item in the balance sheet
b. Component of income from continuing operations.
McNeil, a U.S. corporation, bought inventory items from a supplier in Denmark on
November 5,2014, for 100,000 Krones, when the spot rate was $.4395. December 31, 2014,
year-end, the spot ratewas $.4345. On January 15, 2015, McNeil bought 100,000 Krones at
the spot rate of $.4445 and paid theinvoice. How much should McNeil report on its income
statement for 2014 and 2015 as transaction gainor loss?
2014 2015
a. $ 0 $ 500 loss
b. $ 500 loss $ 0
c. $ 500 loss $ 1,000 gain
d. $ 500 gain $ 1,000 loss
d. $ 500 gain $ 1,000 loss
Purpose of a Forward Exchange Contract
, an agreement to exchange currencies of two different parties at a specified rate (forward rate) on
a future date
Types of hedges
- base case (no forward contract)
- foreign currency exposed liability (no hedge accounting)
- fair value: hedge of an unrecognized firm commitment
-cash flow: hedge of forecasted transaction
On December 1, 2014, SMC entered into a transaction to import raw materials from a
foreign country. The account is to be settled on March 1 with the payment of 50,000 euros.
The spot rates and the forward rates on various dates are as follows:
Date Spot Rate $ per Euro Forward Rate (March 1 Settlement)
Dec. 1 $1.00 $1.03
March 1 $1.04 $1.04
If SMC uses a forward contract to hedge the payable, what is the overall transaction gain
or loss on thecompany from using the hedge?
a. $2,000 gain
b. $1,500 loss
c. $1,500 gain
d. $2,000 loss
b. $1,500 loss
On October 1, 2013, Short Company ordered some equipment from a supplier for 200,000
Euros. Delivery and payment are to occur on November 30, 2014. The spot rates on
Solutions
spot rate
rate at which currencies can be exchanged today
forward rate
rate at which currencies can be exchanged at some future date
forward exchange contract
a contract to exchange currencies of different countries on a stipulated future date, at a specified
rate (forward rate)
two-transaction approach
- a sale/purchase & gain/loss are viewed as separate transactions
- gain/loss reported as FOREIGN CURRENCY TRANSACTION G/L
(Ex: equipment) equipment recorded at time of purchase and any subsequent changes in A/P are
another transaction
Hedge
The U.S. firm can hedge, meaning it can safeguard itself from adverse shifts in theexchange rate
through the use of derivatives, such as forward contracts and options.
Derivatives are now recognized on the balance sheet at their fair value resulting in apayable
position for one party and a receivable position for the other.
,A sale of goods by a U.S. company was denominated in a foreign currency. The sale
resulted in a receivable that was fixed in terms of the amount of foreign currency that
would be received. Exchange rates between the dollar and the currency in which the
transaction was denominated changed so that a loss was incurred. This loss should be
included as a(n)
a. Extraordinary item in the income statement.
b. Component of income from continuing operations.
c. Separate component of stockholders' equity.
d. Deferred item in the balance sheet
b. Component of income from continuing operations.
McNeil, a U.S. corporation, bought inventory items from a supplier in Denmark on
November 5,2014, for 100,000 Krones, when the spot rate was $.4395. December 31, 2014,
year-end, the spot ratewas $.4345. On January 15, 2015, McNeil bought 100,000 Krones at
the spot rate of $.4445 and paid theinvoice. How much should McNeil report on its income
statement for 2014 and 2015 as transaction gainor loss?
2014 2015
a. $ 0 $ 500 loss
b. $ 500 loss $ 0
c. $ 500 loss $ 1,000 gain
d. $ 500 gain $ 1,000 loss
d. $ 500 gain $ 1,000 loss
Purpose of a Forward Exchange Contract
, an agreement to exchange currencies of two different parties at a specified rate (forward rate) on
a future date
Types of hedges
- base case (no forward contract)
- foreign currency exposed liability (no hedge accounting)
- fair value: hedge of an unrecognized firm commitment
-cash flow: hedge of forecasted transaction
On December 1, 2014, SMC entered into a transaction to import raw materials from a
foreign country. The account is to be settled on March 1 with the payment of 50,000 euros.
The spot rates and the forward rates on various dates are as follows:
Date Spot Rate $ per Euro Forward Rate (March 1 Settlement)
Dec. 1 $1.00 $1.03
March 1 $1.04 $1.04
If SMC uses a forward contract to hedge the payable, what is the overall transaction gain
or loss on thecompany from using the hedge?
a. $2,000 gain
b. $1,500 loss
c. $1,500 gain
d. $2,000 loss
b. $1,500 loss
On October 1, 2013, Short Company ordered some equipment from a supplier for 200,000
Euros. Delivery and payment are to occur on November 30, 2014. The spot rates on
