Derivative Instruments and Hedging Activities Paper 1

1

On September 1, year 1, Cano & Co., a US corporation, sold merchandise to a foreign firm for 250,000 Botswana pula. Terms of the sale require payment in pula on February 1, year 2. On September 1, year 1, the spot exchange rate was $.20 per pula. At December 31, year 1, Cano’s year-end, the spot rate was $.19, but the rate increased to $.22 by February 1, year 2, when payment was received. How much should Cano report as foreign exchange transaction gain or loss as part of year 2 income?






2

Lindy, a US corporation, bought inventory items from a supplier in Argentina on November 5, year 1, for 100,000 Argentine pesos, when the spot rate was $.4295. At Lindy’s December 31, year 1 year-end, the spot rate was $.4245. On January 15, year 2, Lindy bought 100,000 pesos at the spot rate of $.4345 and paid the invoice. How much should Lindy report as part of net income for year 1 and year 2 as foreign exchange transaction gain or loss?
Year 1....... Year 2






3

Ball Corp. had the following foreign currency transactions during year 1:
• Merchandise was purchased from a foreign supplier on January 20, year 1, for the US dollar equivalent of $90,000. The invoice was paid on March 20, year 1, at the US dollar equivalent of $96,000.
• On July 1, year 1, Ball borrowed the US dollar equivalent of $500,000 evidenced by a note that was payable in the lender’s local currency on July 1, year 3. On December 31, year 1, the US dollar equivalents of the principal amount and accrued interest were $520,000 and $26,000, respectively. Interest on the note is 10% per annum.
In Ball’s year 1 income statement, what amount should be included as foreign exchange transaction loss as part of net income?






4

On November 30, year 1, Tyrola Publishing Company, located in Colorado, executed a contract with Ernest Blyton, an author from Canada, providing for payment of 10% royalties on Canadian sales of Blyton’s book. Payment is to be made in Canadian dollars each January 10 for the previous year’s sales. Canadian sales of the book for the year ended December 31, year 2, totaled $50,000 Canadian. Tyrola paid Blyton his year 2 royalties on January 10, year 3. Tyrola’s year 2 financial statements were issued on February 1, year 3. Spot rates for Canadian dollars were as follows:
November 30, year 1 $.87
January 1, year 2 $.88
December 31, year 2 $.89
January 10, year 3 $.90
How much should Tyrola accrue for royalties payable at December 31, year 2?






5

Shore Co. records its transactions in US dollars. A sale of goods resulted in a receivable denominated in Japanese yen, and a purchase of goods resulted in a payable denominated in euros. Shore recorded a foreign exchange transaction gain on collection of the receivable and an exchange transaction loss on settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar. Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates?
Yen exchangeable for $1
Euros exchangeable for $1






6

On October 1, year 1, Mild Co., a US company, purchased machinery from Grund, a German company, with payment due on April 1, year 2. If Mild’s year 1 operating income included no foreign exchange transaction gain or loss, then the transaction could have






7

On October 1, year 1, Velec Co., a US company, contracted to purchase foreign goods requiring payment in Qatari riyals, one month after their receipt at Velec’s factory. Title to the goods passed on December 15, year 1. The goods were still in transit on December 31, year 1. Exchange rates were one dollar to twentytwo riyals, twenty riyals, and twenty-one riyals on October 1, December 15, and December 31, year 1, respectively. Velec should account for the exchange rate fluctuation in year 1 as






8

Derivatives are financial instruments that derive their value from changes in a benchmark based on any of the following except






9

Derivative instruments are financial instruments or other contracts that must contain






10

The basic purpose of derivative financial instruments is to manage some kind of risk such as all of the following except






Result

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