c. fix the basis of cost of goods sold to the date of commitm

29 Jun c. fix the basis of cost of goods sold to the date of commitm

Question
17. On August 1, 20X1, an American firm purchased a machine costing 200,000,000 yen from a Japanese firm to be paid for on October 1, 20X1. Also on August 1, 20X1, the American firm entered into a contract to purchase 200,000,000 yen to be delivered on October 1, 20X1, at a forward rate of 1 Yen = $0.00783. The exchange rates were as follows:

……………………

August 1, 20X1

Spot

1

Yen = $0.00781

August 31,

20X1……………………

1

Yen = $0.00777

October 1,

20X1……………………

1

Yen = $0.00779

Which of the following statements is incorrect concerning the accounting treatment of these transactions?

a. The machine’s final recorded value was $1,558,000.

b. The beginning balance in the accounts payable was $1,562,000.

c. An exchange gain on the accounts payable of $4,000 was recognized on October 1, 20X1.

d. The value of the accounts payable just before payment, on October 1, 20X1, was $1,558,000.

18. Questions 18 and 19 utilize the following information.

On 6/1/X2, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/X2. Also on 6/1/X2, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 8/1/X2. The exchange rates were as follows:

6/1/X2

Spot

Forward

……………………….

1

CD = $0.73

1

CD = $0.74

6/30/X2 ……………………….

1

CD = $0.70

1

CD = $0.75

8/1/X2 ……………………….

1

CD = $0.68

1

CD = $0.68

The American firms fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%.

What is the value of the Forward Contract Receivable-FC on 6/1/X2?

a. $73,000

b. $74,000

c. $68,000

d. $70,000

10-5

Chapter 10

19. What is the value of the Forward Contract Receivable-FC on 6/30/X2?

a. $75,000

b. $75,693

c. $74,693

d. $74,993

20. The purpose of a hedge on an identifiable commitment where the US company is selling goods is to:

a. fix the basis of sales revenue to the date of the commitment

b. eliminate all exchange gains/losses from the date of commitment to the date of settlement

c. fix the basis of cost of goods sold to the date of commitment

d. eliminate any exchange gains/losses from the transaction date to the settlement date

21. Which of the following statements is not true regarding forward contracts that cover periods of time different from the settlement period (transaction date to the settlement date)?

a. If the forward contract expires before the settlement date, the gain or loss will partially offset the gain or loss on the foreign currency transaction.

b. If the forward contract expires after the settlement date, post-settlement date gains and losses are not recognized as components of current operating income.

c. Premium and discount are amortized over the life of the contract.

d. All of these statements are true.

10-6

Chapter 10

22. Questions 22 & 23 use the following information:

On 4/1/X3, a US Company commits to sell a piece of equipment to a French customer. At that time, the US company enters into a forward contract to sell foreign currency on 8/1/X3(120 days). Delivery will take place 7/1/X3 with payment due on 8/1/X3. The fiscal year end for the company is 6/30/X3. The sales price of the equipment is 200,000 Euro