Multiple Choice Questions
1. On May 20, 2013, when the spot rate is $1.28/€, a U.S. company buys merchandise from a supplier in Italy, LO 1 at a cost of €100, 000. The spot rate is $1.25/€ on June 30, the company's year-end. Payment of €100, 000 is made on July 30, 2013, when the spot rate is $1.32/€. What is the effect on fiscal 2013 and fiscal 2014 income?
Fiscal 2013 Fiscal 2014
a. No effect .................................... $4, 000 exchange loss
b. $3, 000 exchange loss ..................... $7, 000 exchange gain
c. No effect ................................... $4, 000 exchange gain
d. $3, 000 exchange gain ..................... $7, 000 exchange loss
2. On April 10, 2013, when the spot rate is $1.30/€, a U.S. company sells merchandise to a customer in Italy. The spot rate is $l.3l/€ on June 30, the company's year-end. Payment of €100.000 is received on August 10, 2013, when the spot rate is $1.28/€. What is the effect on fiscal 2013 and 2014 income?
Fiscal 2013 Fiscal 2014
a. $1, 000 exchange loss ..................... $3, 000 exchange gain
b. No effect ................................... $2, 000 exchange loss
c. No effect ................................... $2, 000 exchange gain
d. $1, 000 exchange gain .................... $3, 000 exchange loss
9. On March 1, 2014, a U.S. company enters a forward contract locking in the selling price of C$1, 000, 000, for delivery on April 15, 2014. The contract does not qualify for hedge accounting. What is the gain or loss on the forward contract that is reported on the company's 2014 income statement?
a. $ 5, 000 loss
b. $20, 000 gain
c. $25, 000 loss
d. $ 5, 000 gain
10. A UK company hedges its U.S. dollar purchase of equipment from a U.S. supplier using a forward contract exchanging pounds for U.S. dollars at a fixed rate. The forward qualifies as a hedge of a forecasted transaction. The company reports gains on the forward, and then closes the forward and buys the equipment. The company follows IFRS, and it uses the gain as a basis adjustment to the reported cost of the equipment. Which statement is true?
a. The IFRS company will report a lower equipment value on its balance sheet than if it followed U.S. GAAP.
b. The IFRS company will report less total depreciation expense on the equipment than if it followed U.S. GAAP.
c. The IFRS company will report a higher equipment value on its balance sheet than if it followed U.S. GAAP.
d. The IFRS company will report more total depreciation expense on the equipment than if it followed U.S. GAAP.