Solved by verified expert :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, 20×1 for £100,000 with payment required on April 1, 20×1. 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, 20×1
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, 20×1 for £100,000 with payment required on April 1, 20×1. 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
