Accounting for the Global Financial Markets Foreign Currencies Transactions 1. When a transaction is to be settled by the receipt or payment of a fixed amount of a specified currency, the receivable or payable is said to be: a. Converted in that currency. b. Denominated in that currency. c. Measured in that currency. d. Translated in that currency. 2. A future or forward rate of exchange will apply if: a. Delivery of the exchanged currency is desired at a specified date. b. Delivery of the exchanged currency is made now but at future rates c. Future rates are known d. Future rates can be estimated. 3. On August 1, 2003, Import Cars, Inc., purchases 10 Volvos from the manufacturer for 780,000 Swedish Krona. The terms are n/30. The exchange rate for the Swedish krona is $1=SKr 6.50 on August 1 and $1= Skr 6.45 on August 31. On its August income statement, Import Cars should report a foreign exchange gain (loss) of: a. $(930) b. $0 c. $930 d. $39,000 4. On December 1, 2002, the Peanut Company sells 10,000 jars of salted peanuts to a Japanese importer for 1,500,000 yen. The terms are n/60. The exchange rates on December 1, December 31, and January 30,2003 are 1 yen =$.0066, $.0067 and $.0061, respectively. On its income statement for the year ended December 31, 2002 Peanut Company should report a foreign exchange gain (loss) of: a. $0 b. $150 loss c. $150 gain d. $1,500 gain 5. On May 1, 2002, the City Museum purchases an original Picasso drawing for 100,000 Euro, payable in 30 days. On May 1 the spot rate is Euro 6.2315 and the 30 day forward rate is Euro 6.1825 per dollar. On May 30, when the bill is paid, the spot rate is Euro 6.2500=$1. The cost of the drawing should be recorded at: a. $16,000 b. $16,048 c. $16,175 d. $623,150 6. On July 1, 2005, Sweet Tooth Company purchases 1,000 pounds of Swiss chocolate for 50,000 Swiss francs, payable in 60 days. On July 1, a Swiss franc is worth $.6498, by August 30, the day of payment, one Swiss franc is worth $.6256. The 60-day forward rate on July 1 is SFr 1=$.6612. Sweet Tooth should record the cost of the chocolate at: a. $31,280 b. $31,885 c. $32,490 d. $33,060 7. Ball Corp. had the following foreign currency transactions during 2009: Merchandise was purchased from a foreign supplier on January 20, 2009, for the U.S. dollar equivalent of $90,000. The invoice was paid on March 20, 2009 at the U.S. dollar equivalent of $96,000 On July 1, 2009, Ball borrowed the U.S. dollar equivalent of $500,000, evidenced by a note that was payable in the lenders local currency on July 1, 2011, On December 31, 2009, 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 Balls 2009 income statement, what amount should be included as foreign exchange loss? a. $0 b. $6,000 c. $21,000 d. $27,000 8. Lindy, a U.S. corporation, bought inventory items from a supplier in Germany on November 5, 2007 for 100,000 Euro when the spot rate was $.4295. At Lindys December 31, 2007 year-end, the spot rate was $.4245. On January 15, 2008, Lindy bought 100,000 Euro at the spot rate of $.4345 and paid the invoice. How much should Lindy report in its income statements for 2007 and 2008 as foreign exchange gain or loss? 2007 2008 a. $500 ($1,000) b. $0 ($500) c. ($500) $0 d. ($1,000) $500 9. On September 1, 2007, Bain Corp. 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. Bain shipped the equipment on October 15, 2007, and billed the customer for 300,000 LCU when the U.S. dollar equivalent was $100,000. Bain received the customers remittance in full on November 16, 2007, and sold the 300,000 LCU for $105,000. In its income statement for the year ended December 31, 2007, Bian should report a foreign exchange gain of: a. $0 b. $4,000 c. $5,000 d. $9000 10. On July 15, Wallis Enterprises, a calendar year U.S. manufacturer, purchased 100 million yen worth of parts from the Yokoyama Company paying 20 percent down, the balance to be paid in three months. Interest at the annual rate of 10 percent is payable on the unpaid foreign currency balance. The exchange rate on July 15 was $1.00 = Y125. On October 15, the exchange rate was $1,00 = Yen 110. Required: Prepare journal entries in U.S. dollars to record the incurrence and settlement of this foreign currency transaction assuming: (1) a single transaction approach. (2) A two-transaction approach. 11. Write journal entries for the following series of foreign currency transactions: a. On September 18, 2003, when the yen was valued at 225 to the dollar, a U.S. firm purchased transistors from a Japanese firm, and agreed to pay 6,750,000 yen on November 15, 2003. b. On October 26, 2003, the same firm purchased leather goods from a Mexican company, agreeing to pay 4 million pesos on December 15, 2003. On October 26, 2003, one peso was worth $.004. c. On November 24, 2003, the U.S. firm sold 375,000 worth of cotton to a British firm when the pound was worth $1.45. Payment was to be received on January 15, 2004. d. The following exchange rates prevailed on the dates below: __________________________________________________________________ November 15, 2003.$1.00 = 200 yen December 15, 2003 $1.00 = 275 pesos December 31, 2003...$1.48 = 1 pound January 15, 2004...$1.42 = 1 pound Assume a December 31 fiscal year-end.