Choose the correct answer for each of the following questions. 1. On November 15, 20X3, Chow Inc.,

Question:

Choose the correct answer for each of the following questions.

1. On November 15, 20X3, Chow Inc., a U.S. company, ordered merchandise FOB shipping point from a German company for 200.000 marks. The merchandise was shipped and invoiced on December 10, 20X3. Chow paid the invoice on January 10, 20X4. The spot rates for marks on the respective dates were:

image text in transcribed

In Chow's December 31, 20 3 , income statement, the foreign exchange gain is:

a. $\$ 9.600$.

b. $\$ 8,000$.

c. $\$ 4,000$.

d. $\$ 1.600$.
2. Stees Corporation had the following foreign currency transactions during $20 \mathrm{X} 2$ :
(1) Merchandise was purchased from a foreign supplier on January 20, 20X2, for the U.S. dollar equivalent of $\$ 90,000$. The invoice was paid on March 20, 20X2, at the U.S. dollar equivalent of $\$ 96,000$.
(2) On July 1.20X2. Srees borrowed the U.S. dollar equivalent of $\$ 500,000$ evidenced by a note that was payable in the lender's local currency on July 1, 20X4. On December 31,

$20 \mathrm{X} 2$, the U.S. dollar equivalents of the principal amount and accrued interest were $\$ 520,000$ and $\$ 26,000$, respectively. Interest on the note is 10 percent per annum.
In Stees $20 \times 2$ income statement, what amount should be included as a foreign exchange loss?

a. $\$ 0$.

b. $\$ 6,000$.

c. $\$ 21,000$.

d. $\$ 27,000$.
3. On September 1, 20X1, Cott Corporation received an order for equipment from a foreign customer for 300,000 local currency units (LCU) when the U.S. dollar equivalent was $\$ 96,000$. Cott shipped the equipment on October 15, 20X1, and billed the customer for $300,000 \mathrm{LCU}$ when the U.S. dollar equivalent was $\$ 100,000$. Cott received the customer's remittance in full on November 16, 20X1, and sold the 300,000 LCU for $\$ 105,000$. In its income statement for the year ended December 31, 20X1, Cott should report a foreign exchange gain of:

a. $\$ 0$.

b. $\$ 4,000$.

c. $\$ 5,000$.

d. $\$ 9,000$.
4. On April 8, 20X3, Trul Corporation purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company's local currency. Trul paid the bill in full on March 1, 20X4, when the spot rate was $\$ .45$. The spot rate was $\$ .60$ on April 8, 20X3, and was $\$ .55$ on December 31, 20X3. For the year ended December 31, 20X4, Trul should report a transaction gain of:

a. $\$ 1,500$.

b. $\$ 1.000$.

c. $\$ 500$.

d. $\$ 0$.
5. On October 1, 20X5, Stevens Company, a U.S. company, contracted to purchase foreign goods requiring payment in francs one month after their receipt in Stevens' factory. Title to the goods passed on December 15, 20X5. The goods were still in transit on December 31, 20X5. Exchange rates were 1 dollar to 22 francs, 20 francs, and 21 francs on October 1, December 15, and December 31, 20X5, respectively. Stevens should account for the exchange rate fluctuations in $20 \times 5$ as

a. A loss included in net income before extraordinary items.

b. A gain included in net income before extraordinary items.

c. An extraordinary gain.

d. An extraordinary loss.
6. On October 2, 20X5, Louis Co., a U.S. company, purchased machinery from Stroup, a German company, with payment due on April 1, 20X6. If Louis's 20X5 operating income included no foreign exchange gain or loss, then the transaction could have

a. Resulted in an extraordinary gain.

b. Been denominated in U.S. dollars.

c. Caused a foreign currency gain to be reported as a contra account against machinery.

d. Caused a foreign currency translation gain to be reported as a separate component of stockholders' equity.
7. Cobb Co. purchased merchandise for 300,000 pounds from a vendor in London on November 30, 20X5. Payment in British pounds was due on January 30, 20X6. The exchange rates to purchase I pound were as follows:

image text in transcribed