Question

1. Which of the following combinations correctly describes the relationship between foreign currency transactions, exchange rate changes, and foreign exchange gains and losses?

.:.
2. In accounting for foreign currency transactions, which of the following approaches is used in the United States?
a. One-transaction perspective; accrue foreign exchange gains and losses.
b. One-transaction perspective; defer foreign exchange gains and losses.
c. Two-transaction perspective; defer foreign exchange gains and losses.
d. Two-transaction perspective; accrue foreign exchange gains and losses.

3. On October 1, 2011, Mud Co., a U.S. company, purchased parts from Terra, a Portuguese company, with payment due on December 1, 2011. If Mud’s 2011 operating income included no foreign exchange gain or loss, the transaction could have
a. Resulted in an extraordinary gain.
b. Been denominated in U.S. dollars.
c. Generated a foreign exchange gain to be reported as a deferred charge on the balance sheet.
d. Generated a foreign exchange loss to be reported as a separate component of stockholders’ equity.

4. Post, Inc., had a receivable from a foreign customer that is payable in the customer’s local currency.
On December 31, 2011, Post correctly included this receivable for 200,000 local currency units (LCU) in its balance sheet at $110,000. When Post collected the receivable on February 15, 2012, the U.S. dollar equivalent was $95,000. In Post’s 2012 consolidated income statement, how much should it report as a foreign exchange loss?
a. $–0–.
b. $10,000.
c. $15,000.
d. $25,000.

5. On July 1, 2011, Houghton Company borrowed 200,000 euros from a foreign lender evidenced by an interest-bearing note due on July 1, 2012. The note is denominated in euros. The U.S. dollar equivalent of the note principal is as follows:
Date .................... Amount
July 1, 2011 (date borrowed) . . . . . . . . . . . . . . . . . . $195,000
December 31, 2011 (Houghton’s year-end) . . . . . . . 220,000
July 1, 2012 (date repaid) . . . . . . . . . . . . . . . . . . . . 230,000

In its 2012 income statement, what amount should Houghton include as a foreign exchange gain or loss on the note?
a. $35,000 gain.
b. $35,000 loss.
c. $10,000 gain.
d. $10,000 loss.

6. Slick Co. had a Swiss franc receivable resulting from exports to Switzerland and a Mexican peso payable resulting from imports from Mexico. Slick recorded foreign exchange gains related to both its franc receivable and peso payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?
...Franc .... Peso
a. Increase .... Increase
b. Decrease .. Decrease
c. Decrease ... Increase
d. Increase ... Decrease

7. Grete Corp. had the following foreign currency transactions during 2011:
• Purchased merchandise from a foreign supplier on January 20, 2011, for the U.S. dollar equivalent of $60,000 and paid the invoice on April 20, 2011, at the U.S. dollar equivalent of $68,000.
• On September 1, 2011, borrowed the U.S. dollar equivalent of $300,000 evidenced by a note that is payable in the lender’s local currency on September 1, 2012. On December 31, 2011, the U.S. dollar equivalent of the principal amount was $320,000.
In Grete’s 2011 income statement, what amount should be included as a foreign exchange loss?
a. $4,000.
b. $20,000.
c. $22,000.
d. $28,000.

8. A U.S. exporter has a Thai baht account receivable resulting from an export sale on April 1 to a customer in Thailand. The exporter signed a forward contract on April 1 to sell Thai baht and designated it as a cash flow hedge of a recognized Thai baht receivable. The spot rate was $0.022 on that date, and the forward rate was $0.023. Which of the following did the U.S. exporter report in net income?
a. Discount expense.
b. Discount revenue.
c. Premium expense.
d. Premium revenue.



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