Multiple Choice Questions
1. Which of the following combinations correctly describes the relationship between foreign currency transactions, exchange rate changes, and foreign exchange gains and losses?

2. Assuming no forward contract was entered into, how much foreign exchange gain or loss should Reiter report on its Year 1 income statement with regard to this transaction?
a. A $5,000 gain.
b. A $3,000 gain.
c. A $2,000 loss.
d. A $1,000 loss.
Reiter Corp. (a U.S.-based company) sold parts to an Israeli customer on December 1, Year 1, with payment of 100,000 Israeli shekels to be received on March 31, Year 2. The following exchange rates apply:

Reiter's incremental borrowing rate is 12 percent. The present value factor for three months at an annual interest rate of 12 percent (1 percent per month) is 0.9706.
3. Gracie Corporation had a Japanese yen receivable resulting from exports to Japan and a Brazilian real payable resulting from imports from Brazil. Gracie recorded foreign exchange gains related to both its yen receivable and real payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?

4. On December 1, Year 1, Tackett Company (a U.S.-based company) entered into a three-month forward contract to purchase 1 million Mexican pesos on March 1, Year 2. The following U.S. dollar per peso exchange rates apply:

Tackett's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803.
Which of the following correctly describes the manner in which Tackett Company will report the forward contract on its December 31, Year 1, balance sheet?
a. As an asset in the amount of $3,921.20.
b. As an asset in the amount of $7,842.40.
c. As a liability in the amount of $13,724.20.
d. As a liability in the amount of $9,803.00.

Transcribed Image Text:

Foreign Currency Appreciates Appreciates Depreciates Depreciates Type of Foreign Exchange Transaction a. Export sale b. Import purchase c. Import purchase d. Export sale Gain or Loss Loss Gain Gain Gain Forward Rate Date December , Year 1.. December 31, Year 1 Spot Rate $0.24 0.22 0.25 (to March 31, Year2) $0.23 0.20 ix Real a. Increase Increase b. Decrease Decrease c. Decrease Increase d. Increase Decrease Yen Forward Rate Date December 1, Year1 December 31, Year 1 March 1, Year 2 Spot Rate $0,088 0.080 0.076 (to March 1, Year 2) $0,084 l - 0.074