Advanced Financial Accounting, 13th Edition By The
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Test Bank For Advanced Financial Accounting, 13th
Edition By Theodore Christensen, Complete Chapters 1 -
20, Verified Newest Version
The foreign exchange rate for the immediate delivery of currencies exchanged is
called the:
A) forward rate.
B) historical rate.
C) spot rate.
D) market rate.
E) swap rate. - ANSWER:Spot Rate
On November 1 of the current year, Patriot Inc. purchased a container of electrical
components from its supplier in Japan. Patriot agreed to pay 15,000,000 ¥ in 90
days. The exchange rate on November 1 was $1 = 120 ¥. Patriot decided to hedge
the transaction and entered into a 90 day forward contract to purchase yen at a cost
of $1 = 125 ¥. The 60 day forward rate that would take Patriot to the December 31
fiscal year end was $1 = 127.50 ¥. On December 31, the spot rate was $1 = 118 ¥,
and the 30-day forward rate was $1 = 122 ¥. What is the balance in the forward
contract account on November 1 of the current year? (For purposes of this exercise,
use a present value factor of 1.)
A) $0
B) $5,000 debit
C) $5,000 credit
D) $2,353 debit
E) $7,353 credit - ANSWER:a) $0
The value of a forward contract on the day it is taken out is always $0.
On November 1 of the current year, Patriot Inc. purchased a container of electrical
components from its supplier in Japan. Patriot agreed to pay 15,000,000 ¥ in 90
days. The exchange rate on November 1 was $1 = 120 ¥. Patriot decided to hedge
the transaction and entered into a 90 day forward contract to purchase yen at a cost
of $1 = 125 ¥. The 60 day forward rate that would take Patriot to the December 31
fiscal year end was $1 = 127.50 ¥. On December 31, the spot rate was $1 = 118 ¥,
and the 30-day forward rate was $1 = 122 ¥. What is the balance in the forward
contract account on December 31 of the current year? (For purposes of this exercise,
use a present value factor of 1.)
A) $7,119 debit
B) $7,119 credit
C) $2,951 debit
D) $2,951 credit
E) $120,000 debit - ANSWER:C) $2,951 Credit
,Compare the forward contract rate to the currently available rate that will take us to
the due date.
a. Cost of a current 30 Day forward Contract (15,000,000/122) $122,951
b. Cost of Yen at the contracted rate (15,000,000/125) $120,000
Value of the forward contract a-b= $2,951
This is a debit balance because we are better off having hedged the transaction on
November 1 of the current year than we would be if we had waited until December
31 to hedge the transaction.
NOD Corp. (a U.S.-based company) sold parts to a Hong Kong customer on December
15 with payment of 100,000 Hong Kong dollars to be received in thirty days on
January 15. The following exchange rates apply:
Spot Forward Rate 1/15
12/15 $0.15 $0.16
12/31 $0.16 $0.17
1/15 $0.17 $0.18
Assuming no forward contract was entered into, how much foreign exchange gain or
loss should NOD report on its December 31 income statement with regard to this
transaction? (For purposes of this exercise, use a present value factor of 1.)
A) no gain or loss
B) $1,000 loss
C) $3,000 loss
D) $1,000 gain
E) $3,000 gain - ANSWER:D) $1,000
Dollar Value of receivable @ 12/31/CY (100,000 HK * $.16) 16,000
Dollar Value of receivable @ 12/15/CY (100,000 HK * $.15)
Increase $ 1,000 Gain
NOD Corp. (a U.S.-based company) sold parts to a Hong Kong customer on December
15 with payment of 100,000 Hong Kong dollars to be received in thirty days on
January 15. The following exchange rates apply:
Spot Forward Rate 1/15
12/15 $0.15 $0.16
12/31 $0.16 $0.17
1/15 $0.17 $0.18
Assuming a forward contract was entered into on December 15 to hedge this foreign
currency transaction, what would be the net impact on income for year ending
December 31? (For purposes of this exercise, use a present value factor of 1.)
A) no impact on income
B) $1,000 increase in income
C) $1,000 decrease in income
D) $2,000 increase in income
E) $2,000 decrease in income - ANSWER:A) no impact on income
, The fair value of the forward contract on December 31 of the current year is the
difference between the dollars NOD will receive as a result of entering into the
forward contract at December 15 of the current year (100,000 HK$ x $.16=$16,000)
and the dollars NOD would have received if the forward contract had been
established at December 31 (100,000 DM x $.17 = $17,000). The fair value of the
forward contract at December 31 of the current year is negative $1,000 which would
be recorded as a liability and as a loss on forward contract.
NOD Corp. (a U.S.-based company) sold parts to a Hong Kong customer on December
15 with payment of 100,000 Hong Kong dollars to be received in thirty days on
January 15. The following exchange rates apply:
Assuming a forward contract was entered into on December 15 to hedge this foreign
currency transaction, what would be the net impact on income that should be
recorded on January 15? (For purposes of this exercise, use a present value factor of
1.)
A) no impact on income
B) $1,000 increase in income
C) $1,000 decrease in income
D) $2,000 increase in income
E) $2,000 decrease in income - ANSWER:A) no impact on income
The fair value of the forward contract on January 15 is the difference between the
dollars NOD will receive as a result of entering into the forward contract at
December 15 of the current year (100,000 HK$ x $.17=$17,000) and the dollars NOD
would have received if the forward contract had been established at January 15
(100,000 HK $ x $.18 = $18,000). The fair value of the forward contract at January is a
negative $2,000. The $1,000 increase in loss needs to be recorded on the forward
contract. See 5 above for the calculation at year end.
See #4 for the dollar value of receivable at 12/31; The receivable value is now
$17,000 (100,000 HK $ x $.17=$17,000) and this $1,000 increase is an additional
foreign exchange gain.
The price today at which a foreign currency can be purchased or sold in the future.
A) forward rate.
B) historical rate.
C) spot rate.
D) market rate.
E) swap rate. - ANSWER:A) forward rate.
On December 15 of last year Duster Inc. entered into a forward contract to purchase
100,000 yen in sixty days. The relevant exchange rates are as follows:
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