UNIVERSITY OF LA SALETTE College of Accountancy NPO Midterm Examination Multiple Choice. Strictly NO ERASURES. 1.

. Levin company entered into a forward contract to speculate in the foreign currency. It sold 100,000 foreign currency units under a contract dated November 1, 2008, for delivery on January 31, 2009:

In its income statement for the year ended December 31, 2008, what amount of loss should Levin report from this forward contract? A. $0 B. $300 C. $200 D. $100 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 100,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:

2. 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.

3. 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. 4. 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. 5. 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.

On December 1, 2008, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds () at a forward rate of 1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros () at a forward rate of 1 = $1.42. The rates are as follows:

Hedge had no other speculation transactions in 2008 and 2009. Ignore taxes.

6. Based on the preceding information, what is the effect of the British pound speculative contract on 2008 net income? A. $10,000 gain B. $6,000 gain C. $8,000 gain D. $2,000 loss 7. Based on the preceding information, what is the overall effect of speculation on 2008 net income? A. $4,000 gain B. $6,000 gain C. $8,000 loss D. $8,000 gain

8. Based on the preceding information, what is the effect of the euro speculative contract on 2009 net income? A. $4,000 loss B. $1,000 gain C. $8,000 gain D. $2,000 loss 9. Based on the preceding information, what is the overall effect of speculation on 2009 net income? A. $1,000 loss B. $6,000 gain C. $3,000 loss D. $8,000 gain 10. Based on the preceding information, what is the net gain or loss on the British pound speculative contract? A. $8,000 gain B. $6,000 gain C. $3,000 loss D. $10,000 gain 11. Based on the preceding information, what is the net gain or loss on the euro speculative contract? A. $8,000 gain B. $6,000 gain C. $3,000 loss D. $1,000 loss

The fair market value of a near-month call option with a strike price of $45 is $5, when the stock is trading at $48. 12. Based on the preceding information, which of the following is true of the intrinsic and time values associated with this option.

13. Based on the preceding information, the call option: A. has no intrinsic value currently. B. is at the money. C. is out of the money. D. is in the money. 14. An investor purchases a put option with a strike price of $100 for $3. This option is considered "in the money" if the underlying is trading: A. below $100. B. at $100. C. above $100. D. above $103. 15. Which of the following observations is true of futures contracts? A. Contracted through a dealer, usually a bank. B. Customized to meet contracting company's terms and needs. C. Typically no margin deposit required. D. Traded on an exchange and acquired through an exchange broker 16. Which of the following observations is true of forwards contracts? A. Substantial margin is required to initiate a contract. B. Must be completed either with the underlying's future delivery or net C. cash settlement. D. Cannot be customized; for a specific amount at a specific date. E. Usually settled with a net cash amount prior to maturity date. 17. Company X issues variable-rate debt but wishes to fix its interest rates because it believes the variable rate may increase. Company Y has a fixed-rate bond but is looking for a variable-rate interest because it assumes the interest rates may decrease. The two companies agree to exchange cash flows. Such an arrangement is called: A. a futures contract. B. a forward contract. C. a swap. D. an option. Spiralling crude oil prices prompted AMAR Company to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 2008, AMAR purchases call options for 20,000 barrels of oil at $100 per barrel at a premium of $4 per barrel, with a February 1, 2009, call date. The following is the pricing information for the term of the call:

The information for the change in the fair value of the options follows:

On February 1, 2009, AMAR sells the options at their value on that date and acquires 20,000 barrels of oil at the spot price. On April 1, 2009, AMAR sells the oil for $112 per barrel.

18. Based on the preceding information, which of the following adjusting entries would be required on December 31, 2008? 19. Based on the preceding information, in the entry to record the increase in the intrinsic value of the options on December 31, 2008, A. Purchased Call Options will be credited for $100,000. B. Purchased Call Options will be debited for $130,000. C. Retained Earnings will be credited for $100,000. D. Other Comprehensive Income will be credited for $100,000. 20. Based on the preceding information, which of the following entries will be required on February 1, 2009?

Problem Solving.

1. Quantum Company imports goods from different countries. Some transactions are denominated in U.S. dollars and others in foreign currencies. A summary of accounts receivable and accounts payable on December 31, 2008, before adjustments for the effects of changes in exchange rates during 2008, follows:

The spot rates on December 31, 2008, were:

The average exchange rates during the collection and payment period in 2009 are:

Required: 1) Prepare the adjusting entries on December 31, 2008. 2) Record the collection of the accounts receivable and the payment of the accounts payable in 2009. 3) What was the foreign currency gain or loss on the accounts receivable transaction denominated in SFr for the year ended December 31, 2008? For the year ended December 31, 2009? Overall for this transaction? 4) What was the foreign currency gain or loss on the accounts receivable transaction denominated in ? For the year ended December 31, 2008? For the year ended December 31, 2009? Overall for this transaction?