Question

Choose the correct answer for each of the following questions.
1. On November 15, 20X3, Chow Inc., a U.S. company, ordered merchandise FOB shipping point from a German company for €200,000. The merchandise was shipped and invoiced on December 10, 20X3. Chow paid the invoice on January 10, 20X4. The spot rates for euros on the respective dates were
November 15, 20X3 ... $0.4955
December 10, 20X3.... 0.4875
December 31, 20X3... 0.4675
January 10, 20X4 .... 0.4475
In Chow’s December 31, 20X3, income statement, the foreign exchange gain is
a. $9,600.
b. $8,000.
c. $4,000.
d. $1,600.
2. Stees Corporation had the following foreign currency transactions during 20X2. First, it purchased merchandise from a foreign supplier on January 20, 20X2, for the U.S. dollar equivalent of $90,000. The invoice was paid on March 20, 20X2, at the U.S. dollar equivalent of $96,000.
Second, on July 1, 20X2, Stees borrowed the U.S. dollar equivalent of $500,000 evidenced by a note that was payable in the lender’s local currency on July 1, 20X4. On December 31, 20X2, the U.S. dollar equivalents of the principal amount and accrued interest were $520,000 and
$26,000, respectively. Interest on the note is 10 percent per annum. In Stees’s 20X2 income statement, what amount should be included as a foreign exchange loss?
a. $0.
b. $6,000.
c. $21,000.
d. $27,000.
3. On September 1, 20X1, Cott Corporation received an order for equipment from a foreign customer for 300,000 LCUs when the U.S. dollar equivalent was $96,000. Cott shipped the equipment on October 15, 20X1, and billed the customer for 300,000 LCUs when the U.S. dollar equivalent was $100,000. Cott received the customer’s remittance in full on November 16, 20X1, and sold the 300,000 LCUs for $105,000. In its income statement for the year ended December 31, 20X1, Cott should report a foreign exchange gain of
a. $0.
b. $4,000.
c. $5,000.
d. $9,000.
4. On April 8, 20X3, Trul Corporation purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company’s local currency. Trul paid the bill in full on March 1, 20X4, when the spot rate was $0.45. The spot rate was $0.60 on April 8, 20X3, and was $0.55 on December 31, 20X3. For the year ended December 31, 20X4, Trul should report a transaction gain of
a. $1,500.
b. $1,000.
c. $500.
d. $0.
5. On October 1, 20X5, Stevens Company, a U.S. company, contracted to purchase foreign goods requiring payment in pesos one month after their receipt in Stevens’s factory. Title to the goods passed on December 15, 20X5. The goods were still in transit on December 31, 20X5. Exchange rates were 1 dollar to 22 pesos, 20 pesos, and 21 pesos on October 1, December 15, and December 31, 20X5, respectively. Stevens should account for the exchange rate fluctuations in 20X5 as
a. A loss included in net income before extraordinary items.
b. A gain included in net income before extraordinary items.
c. An extraordinary gain.
d. An extraordinary loss.
6. On October 2, 20X5, Louis Co., a U.S. company, purchased machinery from Stroup, a German company, with payment due on April 1, 20X6. If Louis’s 20X5 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. Caused a foreign currency gain to be reported as a contra account against machinery.
d. Caused a foreign currency translation gain to be reported as a separate component of stockholders’ equity.
7. Cobb Co. purchased merchandise for 300,000 pounds from a vendor in London on November 30, 20X5. Payment in British pounds (£) was due on January 30, 20X6. The exchange rates to purchase 1 pound were as follows:


In its December 31, 20X5, income statement, what amount should Cobb report as a foreign exchange gain?
a. $12,000.
b. $9,000.
c. $6,000.
d.$0.


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  • CreatedMay 23, 2014
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