Question 1
For an upcoming trip, Pat wants to buy Euros at the local bank when the current exchange rate quoted in the Wall Street Journal was $1.563 per €1. What should Pat plan to pay for €1,000?
Answer
a. Exactly $1,563
b. More than $1,563
c. About $640
d. Less than $640
Question 2
Under U.S. GAAP, what is the proper treatment of unrealized foreign exchange losses?
Answer
a. They should be deferred on the Balance Sheet until the cash is paid.
b. They should not be recognized until cash is received to complete the transaction.
c. They should be recorded on the Income Statement in the period the exchange rate changes.
d. They should be deferred on the Balance Sheet until an offsetting foreign exchange gain is realized.
Question 3
What is "hedge accounting?"
Answer
a. Any record keeping related to purchase, sale, or valuation of derivatives
b. Recording options and other derivatives on the Balance Sheet
c. Matching gains or losses from hedging with losses or gains from the risk being hedged
d. Using multiple accounting methods to offset the effect of foreign currency exchange
Question 4
Amazing Corporation, a U.S. enterprise, sold product to a customer in Wales on October 1, 20x1 for £100,000 with payment required on April 1, 20x1. Relevant exchange rates are:
Spot Rate Forward Rate(to 4/1/X2)
October 1, 20X1 $1.87 $1.85
December, 31 20X1 $1.85 $1.84
April 1, 20X2 $1.90
The discount factor corresponding to the company's incremental borrowing rate for 6 months is 0.95.
Assuming that Amazing Corporation does not hedge this transaction, what is the amount of exchange gain or loss that it should show on its December 31, 20x1 income statement?
Answer
a. Loss $1,000
b. Loss $2,000
c. Gain $1,000
d. Gain $1,900
Question 5
Amazing Corporation, a U.S. enterprise, sold product to a customer in Wales on October 1, 20x1 for £100,000 with payment required on April 1, 20x1. Relevant exchange rates are:
The discount factor corresponding to the company's incremental borrowing rate for 6 months is 0.95.
Spot Rate Forward Rate(to 4/1/X2)
October 1, 20X1 $1.87 $1.85
December, 31 20X1 $1.85 $1.84
April 1, 20X2 $1.90
What term is used to describe the circumstances under which Amazing Corporation is entering the forward contract?
Answer
a. Hedge of an unrecognized foreign currency firm commitment
b. Hedge of a recognized foreign-currency-denominated asset
c. Hedge of a forecast foreign-currency-denominated transaction
d. Hedge of net investment in foreign operations
Question 6
When the parent company of a foreign subsidiary believes that all of its investment in the subsidiary is exposed to foreign exchange risk, what method of translation should be used in consolidating the financial statements?
Answer
a. Current rate method
b. Current/noncurrent method
c. Monetary/nonmonetary method
d. Temporal method
Question 7
Placo Ltd., a Scottish subsidiary of Limko, Inc., a U.S. company, showed cost of goods sold on its income statement for the year ended December 31, 2004.
|
Inventory, 1/1/04
|
£100,000
|
|
Purchases
|
900,000
|
|
Cost of Goods Available for sale
|
1,000,000
|
|
Inventory, 12/31/04
|
200,000
|
|
Cost of Goods Sold
|
£800,000
|
|
Exchange Rates/£1
|
|
December 31, 2004
|
$0.522
|
|
December 31, 2003
|
$0.560
|
|
2004 Average
|
$0.547
|
What amount should be used to consolidate Placo's cost of goods sold into Limko's income statement under the temporal method?
Answer
a. $443,900
b. $437,600
c. $432,500
d. $448,000
Question 8
Which method of translating foreign currency financial statements must be used according to Statement of Financial Accounting Standards 52 (SFAS 52)?
Answer
a. Temporal method for all subsidiaries
b. Current rate method for all subsidiaries
c. U.S. parent companies may choose between the temporal method and the current rate method.
d. Temporal method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not