BAGNPES – Quiz 6

1. Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$)on January 1, 2009
with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell
100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency
receivable. The forward contract is not designated as a hedge. The spot rates were:
January 1 1 C$ = $0.945
March 1 1 C$ = $0.930
Based on the preceding information, the entry to revalue foreign currency payable to current U.S. dollar value on
March 1 will have:
a. a credit to Foreign Currency Transaction Gain for $1,500
b. a debit to Foreign Currency Transaction Loss for $2,500
c. a debit to Foreign Currency Transaction Loss for $1,500
d. a credit to Foreign Currency Transaction Gain for $1,000
2. Based on the preceding information, what is the overall effect on net income of Myway's use of the forward
exchange contract?
a. Net loss of $1,000 b. Net gain of $1,500 c. Net loss of $500 d. No effect
3. Based on the preceding information, had Myway not used the forward exchange contract, net income for the year
would have:
a. increased by $1,000 b. increased by $500 c. decreased by $1,000 d. decreased by $1,500

Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 2008. Payment is
due on January 30, 2009. On December 1, 2008, the company also entered into a 60-day forward contract to purchase
200,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:
Spot rate Forward Rate
December 1, 2008 $0.89 $0.90 (60 days)
December 31, 2008 0.91 0.93 (30 days)
January 30, 2009 0.92

4. Based on the preceding information, the entries on December 31, 2008, include a:
a. Credit to Foreign Currency Payable to Exchange Broker, $4,000
b. Debit to Foreign Currency Receivable from Exchange Broker, $6,000
c. Debit to Foreign Currency Receivable from Exchange Broker, $186,000
d. Debit to Foreign Currency Transaction Gain, $4,000
5. Based on the preceding information, the entries on January 30, 2009, include a:
a. Debit to Dollars Payable to Exchange Broker, $180,000
b. Credit to Cash, $184,000
c. Credit to Premium on Forward Contract, $4,000
d. Credit to Foreign Currency Receivable from Exchange Broker, $180,000
6. Based on the preceding information, the entries on January 30, 2009, include a:
a. Credit to Foreign Currency Units (SFr), $184,000
b. Credit to Cash, $180,000
c. Debit to Foreign Currency Transaction Loss, $4,000
d. Debit to Dollars Payable to Exchange Broker, $184,000
7. Based on the preceding information, the entries on January 30, 2009, include a:
a. Debit to Dollars Payable to Exchange Broker, $184,000
b. Credit to Foreign Currency Transaction Gain, $4,000
c. Credit to Foreign Currency Receivable from Exchange Broker, $180,000
d. Debit to Foreign Currency Units (SFr), $184,000
8. When the local currency of the foreign subsidiary is the functional currency, a foreign subsidiary's inventory
carried at cost would be converted to Phil pesos by:
a. translation using historical exchange rates
b. remeasurement using historical exchange rates
c. remeasurement using the current exchange rate

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 d. translation using the current exchange rate
9. When the local currency of the foreign subsidiary is the functional currency, a foreign subsidiary's income
statement accounts would be converted to U.S. dollars by:
a. translation using historical exchange rates
b. remeasurement using current exchange rates at the time of statement preparation
c. translation using average exchange rate for the period
d. remeasurement using the current exchange rate at the time of statement preparation
10. If the U.S. dollar is the currency in which the foreign affiliate's books and records aremaintained, and the U.S.
dollar is also the functional currency
a. the translation method should be used for restatement
b. the remeasurement method should be used for restatement
c. either translation or remeasurement could be used for restatement
d. no restatement is required
11. All of the following stockholders' equity accounts of a foreign subsidiary are translated athistorical exchange rates
except:
a. retained earnings b. common stock c. additional paid-in capital d. preferred stock
12. Dividends of a foreign subsidiary are translated at:
a. the average exchange rate for the year
b. the exchange rate on the date of declaration
c. the current exchange rate on the date of preparation of the financial statement
d. the exchange rate on the record date
13. If the functional currency is the local currency of a foreign subsidiary, what exchange ratesshould be used to
translate the items below, assuming the foreign subsidiary is in a countrywhich has not experienced
hyperinflation over three years?
Equipment Inventories Dep’n Expense – Equipment
a. Current rate Current rate Average rate
b. Historical rate Current rate Historical rate
c. Current rate Current rate Historical rate
d. Historical rate Average rate Average rate
14. If the functional currency is the local currency of a foreign subsidiary, what exchange rates should be used to
translate the items below, assuming the foreign subsidiary is in a country which has not experienced
hyperinflation over three years?
Common stock Premium on Bonds Pay Sales
a. Current rate Historical rate Average rate
b. Historical rate Current rate Average rate
c. Historical rate Historical rate Current rate
d. Current rate Current rate Current rate
15. Which combination of accounts and exchange rates is correct for the translation of a foreign entity's financial
statements from the functional currency to U.S. dollars?
Exchange rates Accounts
a. Current Salary expense, Sales, Depreciation
b. Current Accounts payable, Inventories, Investments
c. Historical Common stock, Dividends payable, Retained earnings
d. Weighted average Retained earnings, Land, Inventories
16. The assets listed below of a foreign subsidiary have been converted to U.S. dollars at both current and historical
exchange rates. Assuming that the local currency of the foreign subsidiary is the functional currency, what total
amount should appear for these assets on the U.S. company's consolidated balance sheet?
Asset Historical rates Current rates
Prepaid insurance $60,000 $48,000
Buildings (net) 480,000 240,000
Inventories at cost 300,000 288,000
Investments at cost 120,000 60,000
Total $960,000 $636,000

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 a. $636,000 b. $648,000 c. $708,000 d. $960,000

Stark, Inc. placed an order for inventory costing 500,000 foreign currency (FC) with a foreign vendor on April 15 when
the spot rate was 1 FC = P0.683. Stark received the goods on May 1 when the spot rate was 1 FC = P0.687. Also on May
1, Stark entered into a 90-day forward contract to purchase 500,000 FC at a forward rate of 1 FC = P0.693. Payment was
made to the foreign vendor on August 1 when the spot rate was 1 FC = P0.696. Stark has a June 30 year-end. In that
date, the spot rate was 1 FC = P0.691 and the forward rate on the contract was 1 FC = P0.695. Changes in the current
value of the forward contract are measured as the present value of changes in the forward over time. The relevant
discount rate is 6%

17. The foreign exchange gain or loss on hedging instrument (forward contract) on June 30 amounted to
a. P2,000 b. P1,000 c. P995 d. Zero
18. The net income effect on June 30 amounted to
a. P2,000 b. P1,000 c. P1,005 d. Zero
19. The foreign exchange gain due to hedging instrument (forward contract) on August 1 amounted to
a. P2,500 b. P2,000 c. P1,500 d. P505

Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 20x4 have been restated into
pesos as follows:
Assets Current Rates Historical Rates
Cash P47,500 P45,000
Accounts receivable 95,000 90,000
Inventory, at market 76,000 72,000
Land 57,000 54,000
Equipment (net) 142,500 135,000
Total P418,000 P396,000
20. Assuming the functional currency of the subsidiary is the peso, what total should be included in Parker’s
consolidated balance sheet at December 31, 20x4, for the above items?
a. P407,500 b. P418,000 c. P396,000 d. P403,500 e. P398,500
21. Assuming the functional currency of the subsidiary is the local currency, what total should be included in Parker’s
consolidated balance sheet at December 31, 20x4, for the above items?
a. P407,500 b. P418,000 c. P396,000 d. P403,500 e. P398,500