Advanced Financial Accounting Canadian 7th Edition By Beechy - Test Bank

Advanced Financial Accounting Canadian 7th Edition By Beechy – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

1) What is the exchange rate in effect at the date of the transaction called?

1. A) Closing rate
2. B) Spot rate
3. C) Forward rate
4. D) Settlement rate

Answer:  B

Page Ref: 361

Learning Obj.:  8.1

Difficulty:  Easy

 

2) Which of the following statements is true?

1. A) The historical rate is the exchange rate at the beginning of the reporting period, and the closing rate is the exchange rate at the end of the reporting period.
2. B) The historical rate is the exchange rate at the date of the transaction, and the closing rate is the exchange rate at the end of the reporting period.
3. C) The spot rate is the exchange rate at the date of the transaction, and the closing rate is the exchange rate at the conclusion of a hedge instrument.
4. D) The historical rate is the exchange rate at the beginning of the reporting period, and the forward rate is the exchange rate at the end of the reporting period.

Answer:  B

Page Ref: 401

Learning Obj.:  7.1

Difficulty:  Moderate

 

3) Which of the following is not a major reason for fluctuating exchange rates?

1. A) Differences in inflation rates
2. B) Black market (illegal) trading of currencies
3. C) Differences in interest rates
4. D) Trade surpluses and deficits between countries

Answer:  B

Page Ref: 401-402

Learning Obj.:  8.1

Difficulty:  Moderate

 

4) Phan Ltd., a Canadian company, sold goods to a foreign customer for 1,000,000 foreign currency (FC) units, which was equivalent to $500,000 CAD. By the time the customer paid Phan, the exchange rates had changed and 1,000,000 FC units was equivalent to $515,000 CAD. How should the resulting $15,000 CAD difference between the sale and payment dates be treated?

1. A) As an increase in sales
2. B) As a decrease to cost of sales
3. C) As a realized gain
4. D) As an unrealized gain

Answer:  C

Page Ref: 402

Learning Obj.:  8.1

Difficulty:  Easy

5) Which approach to foreign currency transactions does IFRS support?

1. A) One-transaction approach
2. B) Two-transaction approach
3. C) Economic theory approach
4. D) Rate theory approach

Answer:  B

Page Ref: 403

Learning Obj.:  6.1

Difficulty:  Moderate

 

6) Which of the following statements is true about the two-transaction theory?

1. A) Exchange gains and losses usually flow through to net income in the period in which they are incurred.
2. B) Exchange gains and losses are attached to the sales or assets from the original transaction.
3. C) Exchange gains and losses are considered a cost of acquiring assets.
4. D) Exchange gains and losses affect the carrying value of acquired assets.

Answer:  A

Page Ref: 403

Learning Obj.:  8.1

Difficulty:  Moderate

 

7) Exchange gains and losses on accounts receivable/payable that are denominated in a foreign currency are ________.

1. A) deferred and reported upon settlement
2. B) reported as adjustments to the transaction prices
3. C) reported as equity adjustments from translation
4. D) recognized in the periods in which exchange rates change

Answer:  D

Page Ref: 403-404

Learning Obj.:  8.1

Difficulty:  Easy

 

8) What is the effect of fluctuations in exchange rates on accounts payable?

1. A) Deferred and amortized
2. B) Deferred to maturity
3. C) Recognized immediately in income
4. D) Recognized if losses, deferred if gains

Answer:  C

Page Ref: 403-405

Learning Obj.:  8.1

Difficulty:  Moderate

 

9) Under IFRS, how are monetary assets and liabilities defined?

1. A) Cash and assets and liabilities that are to be received or paid in a fixed or determinable amount of currency
2. B) Current assets and liabilities that are to be received or paid in a fixed or determinable amount of currency
3. C) Cash and long-term assets and liabilities that are to be received or paid in a fixed or determinable amount of currency
4. D) Long-term assets and liabilities that are to be received or paid in a fixed or determinable amount of currency

Answer:  A

Page Ref: 403-404

Learning Obj.:  8.1

Difficulty:  Moderate

 

10) Which of the following items is a non-monetary item?

1. A) Cash
2. B) Accounts receivable
3. C) Inventory
4. D) Accounts payable

Answer:  C

Page Ref: 405

Learning Obj.:  8.1

Difficulty:  Moderate

 

11) What exchange rate is usually used to report non-monetary assets on the statement of financial position?

1. A) Historical rate
2. B) Spot rate
3. C) Closing rate
4. D) Fair value

Answer:  A

Page Ref: 405

Learning Obj.:  8.1

Difficulty:  Moderate

 

12) What is a currency swap an example of?

1. A) A futures contract
2. B) A call option
3. C) A derivative instrument
4. D) A forward contract

Answer:  C

Page Ref: 408

Learning Obj.:  8.2

Difficulty:  Moderate

 

13) What does the holder of a put option on foreign currency have the right to do?

1. A) Right to buy the currency
2. B) Right to sell the currency
3. C) Right to do a currency swap
4. D) Right to acquire a forward contract

Answer:  B

Page Ref: 407

Learning Obj.:  8.2

Difficulty:  Easy

 

14) A business plans to acquire a forward contract to hedge a monetary liability. Which of the following statements about the forward contract is true?

1. A) If the contract is acquired at a premium, a loss results, and if the contract is acquired at a discount, a gain results.
2. B) If the contract is acquired at a premium, a gain results, and if the contract is acquired at a discount, a loss results.
3. C) Since the contract is to hedge a monetary liability, a loss results, regardless of whether the contract is acquired at a premium or a discount.
4. D) Since the contract is to hedge a monetary liability, a gain results, regardless of whether the contract is acquired at a premium or a discount.

Answer:  A

Page Ref: 411

Learning Obj.:  8.2

Difficulty:  Moderate

 

15) On December 1, 20X5, Gillard Ltd. sold goods to International Traders Ltd., a company located in Switzerland, for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 20X6, Gillard received full payment from International Traders and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 20X6, was CHF1 = $1.0287. What amount should Gillard record for the sale?

1. A) $500,000
2. B) $514,300
3. C) $515,750
4. D) $516,450

Answer:  D

Page Ref: 409

Learning Obj.:  8.2

Difficulty:  Moderate

 

16) On December 1, 20X5, Gillard Ltd. sold goods to International Traders Ltd., a company located in Switzerland, for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 20X6, Gillard received full payment from International Traders and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 20X6, was CHF1 = $1.0287. What is the net exchange gain (loss) on the forward contract?

1. A) $(2,100)
2. B) $(700)
3. C) $700
4. D) $1,400

Answer:  B

Page Ref: 410-411

Learning Obj.:  8.2

Difficulty:  Moderate

 

17) On November 2, 20X9, Henry Company purchased a machine for 100,000 Swiss francs (CHF) with payment required on March 30, 20X10. To eliminate the risk of foreign exchange losses on this payable, Henry entered into a forward exchange contract on November 3, 20X9, to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30, 20X10. The spot rate was CHF1 = $1.95 on November 2, 20X9, and CHF1 = $1.97 on December 1, 20X9. What is the amount of the premium or discount on the forward exchange contract on December 1, 20X9?

1. A) A premium of $3,000
2. B) A discount of $3,000
3. C) A premium of $5,000
4. D) A discount of $5,000

Answer:  C

Page Ref: 410-411

Learning Obj.:  8.2

Difficulty:  Moderate

 

18) On November 2, 20X9, Henry Company purchased a machine for 100,000 Swiss francs (CHF) with payment required on March 30, 20X10. To eliminate the risk of foreign exchange losses on this payable, Henry entered into a forward exchange contract on November 3, 20X9, to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30, 20X10. The spot rate was CHF1 = $1.95 on November 2, 20X9, and CHF1 = $1.97 on December 1, 20X9. How should the premium or discount on the forward exchange contract be accounted for?

1. A) It should be expensed on the inception date of the forward exchange contract.
2. B) It should be expensed over the five-month term of the forward exchange contract.
3. C) It should be expensed on the maturity date of the forward exchange contract.
4. D) It should be added to the cost of the machine.

Answer:  C

Page Ref: 409-412

Learning Obj.:  8.2

Difficulty:  Moderate

 

19) On December 1, 20X5, Gillard Ltd. sold goods to International Traders Ltd., a company located in Switzerland, for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 20X6, Gillard received full payment from International Traders and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 20X6, was CHF1 = $1.0287. Assume that Gillard has a December 31 year-end and that the spot rate on that date was CHF1 = $1.0302. At December 31, the forward rate for a 60-day contract was CHF1 = 1.0394. At December 31, what is the balance of Gillard’s accounts receivable?

1. A) $515,100
2. B) $515,700
3. C) $516,450
4. D) $517,800

Answer:  A

Page Ref: 414-415

Learning Obj.:  8.2

Difficulty:  Moderate

 

20) On December 1, 20X5, Gillard Ltd. sold goods to International Traders Ltd., a company located in Switzerland, for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 20X6, Gillard received full payment from International Traders and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 20X6, was CHF1 = $1.0287. Assume that Gillard has a December 31 year-end and that the spot rate on that date was CHF1 = $1.0302. At December 31, the forward rate for a 60-day contract was CHF1 = 1.0394. At December 31, what is the balance of Gillard’s forward contract payable?

1. A) $515,000
2. B) $515,650
3. C) $515,750
4. D) $515,850

Answer:  B

Page Ref: 414-415

Learning Obj.:  8.2

Difficulty:  Moderate

 

 

21) On June 1, 20X4, Chua (Canada) Co. entered into a 90-day forward contract to sell $500,000 Singapore dollars (SGD) to its bank on August 29, 20X4. The following information has been provided:

 

June 1, 90-day forward rate SGD$1 = $0.7750

July 1, 60-day forward rate SGD$1 = $0.7630

August 29, spot rate SGD$1 = $0.748

 

Chua has a June 30 year-end. What is the exchange gain (loss) at June 30, 20X4?

1. A) $(6,000)
2. B) $0
3. C) $1,500
4. D) $6,000

Answer:  D

Page Ref: 414-415

Learning Obj.:  8.2

Difficulty:  Moderate

22) On June 1, 20X4, Chua (Canada) Co. entered into a 90-day forward contract to sell $500,000 Singapore dollars (SGD) to its bank on August 29, 20X4. The following information has been provided:

 

June 1, 90-day forward rate SGD$1 = $0.7750

July 1, 60-day forward rate SGD$1 = $0.7630

August 29, spot rate SGD$1 = $0.748

 

Chua has a June 30 year-end. What is the net exchange gain (loss) on the contract?

1. A) $(13,500)
2. B) $(6,000)
3. C) $6,000
4. D) $13,500

Answer:  D

Page Ref: 414-416

Learning Obj.:  8.2

Difficulty:  Moderate

 

23) Which of the following statements about hedge accounting is true?

1. A) Hedge accounting is mandatory.
2. B) Hedge accounting is optional.
3. C) Hedge accounting is applicable only if a receivable is being hedged.
4. D) Hedge accounting is applicable only if a liability is being hedged.

Answer:  B

Page Ref: 416-417

Learning Obj.:  8.3

Difficulty:  Easy

 

 

24) Fransen Co. does a lot of businesses in Denmark. It has numerous trade accounts receivables and accounts payables that are to be settled in Danish krones. What type of hedge does Fransen have?

1. A) Fair-value hedge
2. B) Cash-flow hedge
3. C) Natural hedge
4. D) Hedge instrument

Answer:  C

Page Ref: 417

Learning Obj.:  8.3

Difficulty:  Easy

 

25) Which of the following is not one of the conditions that must be met to qualify for hedge accounting?

1. A) The hedge relationship must be designated and documented.
2. B) The hedge is expected to be effective.
3. C) The effectiveness of the hedge can easily be determined.
4. D) The hedge is assessed at the beginning and at the end of the hedging period.

Answer:  D

Page Ref: 416-417

Learning Obj.:  8.3

Difficulty:  Moderate

26) Which of the following cannot usually be a hedged item?

1. A) Accounts receivable
2. B) Accounts payable
3. C) Derivative instrument
4. D) Purchase order

Answer:  C

Page Ref: 417

Learning Obj.:  8.3

Difficulty:  Easy

 

27) Under IFRS, which of the following statements about hedging a foreign currency risk of an accepted purchase order is true?

1. A) It must be accounted for using a fair-value hedge.
2. B) It must be accounted for using a cash-flow hedge.
3. C) It can be accounted for using either a fair-value hedge or a cash-flow hedge.
4. D) It is not eligible for hedge accounting until it becomes an accounts payable.

Answer:  C

Page Ref: 419

Learning Obj.:  8.4

Difficulty:  Moderate

 

 

28) On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore) Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided:

 

Date	Spot Rate	Forward rate to July 31, 20X2
March 1, 20X2	.7686	.7810
April 30, 20X2	.7702	.7818
June 1, 20X2	.7940	.7985
July 31, 20X2	.7995	n/a

 

Assume that the transaction qualifies as a fair-value hedge. On March 1, at what amount should the forward contract be recorded?

1. A) $307,440
2. B) $312,400
3. C) $317,600
4. D) $319,800

Answer:  B

Page Ref: 420-422

Learning Obj.:  8.4

Difficulty:  Moderate

29) On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore) Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided:

 

Date	Spot Rate	Forward rate to July 31, 20X2
March 1, 20X2	.7686	.7810
April 30, 20X2	.7702	.7818
June 1, 20X2	.7940	.7985
July 31, 20X2	.7995	n/a

 

Assume that the transaction qualifies as a fair-value hedge. At what amount should McBride record the drilling machine?

1. A) $307,440
2. B) $312,400
3. C) $317,600
4. D) $319,800

Answer:  A

Page Ref: 420-422

Learning Obj.:  8.4

Difficulty:  Moderate

 

 

30) On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore) Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided:

 

Date	Spot Rate	Forward rate to July 31, 20X2
March 1, 20X2	.7686	.7810
April 30, 20X2	.7702	.7818
June 1, 20X2	.7940	.7985
July 31, 20X2	.7995	n/a

 

Assume that the transaction qualifies as a fair-value hedge. What amount of exchange gain (loss) should be recognized at April 30, 20X2?

1. A) $(640)
2. B) $(320)
3. C) $ 0
4. D) $320

Answer:  B

Page Ref: 420-422

Learning Obj.:  8.4

Difficulty:  Moderate

31) On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore) Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided:

 

Date	Spot Rate	Forward rate to July 31, 20X2
March 1, 20X2	.7686	.7810
April 30, 20X2	.7702	.7818
June 1, 20X2	.7940	.7985
July 31, 20X2	.7995	n/a

 

Assume that the transaction qualifies as a fair-value hedge. What is the cost of the hedge?

1. A) $2,200
2. B) $4,640
3. C) $4,960
4. D) $6,680

Answer:  C

Page Ref: 420-422

Learning Obj.:  8.4

Difficulty:  Difficult

 

 

32) Where is the ineffective portion of a cash-flow hedge recognized on the financial statements?

1. A) As part of net income
2. B) As part of other comprehensive income
3. C) As a separate component of equity
4. D) It does not appear on the financial statements.

Answer:  A

Page Ref: 423

Learning Obj.:  8.4

Difficulty:  Difficult

 

33) Under IFRS, which of the following statements is true?

1. A) The hedge of a forecasted transaction is accounted for using a fair-value hedge.
2. B) The hedge of a firm commitment is accounted for using a cash-flow hedge.
3. C) The gain or loss on a hedging instrument under a cash-flow hedge is first reported as other comprehensive income and then reclassified to income when the hedged item affects income.
4. D) The gain or loss on a hedging instrument under a fair-value hedge is first reported as other comprehensive income and then reclassified to income when the hedged item affects income.

Answer:  C

Page Ref: 423

Learning Obj.:  8.4

Difficulty:  Moderate

34) On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore) Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided:

 

Date	Spot Rate	Forward rate to July 31, 20X2
March 1, 20X2	.7686	.7810
April 30, 20X2	.7702	.7818
June 1, 20X2	.7940	.7985
July 31, 20X2	.7995	n/a

 

Assume that the transaction qualifies as a cash-flow hedge. What amount should be recognized as other comprehensive income at April 30, 20X2?

1. A) $ 320
2. B) $ 640
3. C) $4,640
4. D) $5,280

Answer:  A

Page Ref: 423-425

Learning Obj.:  8.4

Difficulty:  Moderate

 

 

35) On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore) Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided:

 

Date	Spot Rate	Forward rate to July 31, 20X2
March 1, 20X2	.7686	.7810
April 30, 20X2	.7702	.7818
June 1, 20X2	.7940	.7985
July 31, 20X2	.7995	n/a

 

Assume that the transaction qualifies as a cash-flow hedge. What is the carrying value of the machine?

1. A) $307,440
2. B) $310,600
3. C) $312,400
4. D) $317,600

Answer:  B

Page Ref: 423-425

Learning Obj.:  8.4

Difficulty:  Difficult

36) On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore) Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided:

 

Date	Spot Rate	Forward rate to July 31, 20X2
March 1, 20X2	.7686	.7810
April 30, 20X2	.7702	.7818
June 1, 20X2	.7940	.7985
July 31, 20X2	.7995	n/a

 

Assume that the transaction qualifies as a cash-flow hedge. What is the net exchange gain (loss) that McBride should recognize in the period from May 1 to July 31, 20X2?

1. A) $(2,200)
2. B) $(1,800)
3. C) $ 0
4. D) $400

Answer:  B

Page Ref: 423-425

Learning Obj.:  8.4

Difficulty:  Moderate

 

 

37) On March 1, 20X2, McBride Ltd. issued a purchase order to Tao Heavy Machines (Singapore) Inc. to acquire a drilling machine for $400,000 SGD. On the same day, McBride entered into a forward contract to receive $400,000 SGD on July 31, 20X2. The machine was delivered on June 1, 20X2, and payment was made July 31, 20X2. McBride has an April 30 year-end. The following information has been provided:

 

Date	Spot Rate	Forward rate to July 31, 20X2
March 1, 20X2	.7686	.7810
April 30, 20X2	.7702	.7818
June 1, 20X2	.7940	.7985
July 31, 20X2	.7995	n/a

 

Assume that the transaction qualifies as a cash-flow hedge. What is the cost of the hedge?

1. A) $ 1,800
2. B) $ 2,200
3. C) $ 4,960
4. D) $12,360

Answer:  C

Page Ref: 423-425

Learning Obj.:  8.4

Difficulty:  Moderate

38) Under accounting standards for private enterprises, what exchange rate is used for non-monetary items carried at fair value?

1. A) The exchange rate at the date the item was ordered
2. B) The exchange rate at the date the item was received
3. C) The exchange rate at the date of payment for the item
4. D) The exchange rate at the statement of financial position date

Answer:  D

Page Ref: 428

Learning Obj.:  8.4

Difficulty:  Moderate

 

39) Under accounting standards for private enterprises, which of the following can be used as hedging instruments?

1. A) Options
2. B) Forward contracts
3. C) Futures contracts
4. D) Currency swaps

Answer:  B

Page Ref: 428

Learning Obj.:  8.4

Difficulty:  Moderate

 

 

40) HCB, a Canadian public company, entered into the following transactions late in 20X6:

• Transaction #1: On October 15, HCB purchased inventory from a Mexican supplier for 800,000 pesos (Ps). On the same day, HCB entered into a forward contract for Ps 800,000 at the 60-day forward rate of Ps1 = $0.399. The company has designated this as a fair-value hedge. The Mexican supplier was paid in full on December 15, 20X6.
• Transaction #2: On November 1, HCB contracted to sell inventory to a customer in Switzerland at a selling price of CHF 400,000. The contract called for the merchandise to be delivered to the customer on December 1, with payment to be received in Swiss francs by January 31, 20X7. On November 1, HBC arranged a forward contract to deliver CHF 400,000 on January 31, 20X7, at a rate of CHF1 = $1.20. The company has designated this as a fair value hedge on a firm commitment.
• On December 1, 20X6, the forward rate on the Swiss francs to January 31, 20X7, was CHF1 = $1.21.
• The company has a December 31, 20X6, year-end. On this date the forward rate for the Swiss franc was CHF1 = $1.23.

 

HBC has a year-end of December 31. Spot rates were as follows during this period of time:

 

October 15, 20X6                       Ps1 = $0.396                SF1 = $1.19

November 1, 20X6                   Ps1 = $0.391                SF1 = $1.17

December 1, 20X6                    Ps1 = $0.389                SF1 = $1.20

December 15, 20X6                  Ps1 = $0.388                SF1 = $1.19

December 31, 20X6                  Ps1 = $0.381                SF1 = $1.21

January 31, 20X7                       Ps1 = $0.376                SF1 = $1.19

 

Required:

The company uses the net method to record hedging transactions. Prepare the journal entries that HCB should make to record the events described above.

Answer:

Transaction #1

October 15, 20X6

 

Inventory (Ps800,000 × 0.396)                                            316,800

Accounts payable                                                                                          316,800

 

No entry for the forward contract

 

December 15, 20X6

 

Accounts payable                                                                  316,800

Exchange gains and losses                                                                          6,400

Cash (Ps800,000 × 0.388)                                                                          310,400

 

Cash (re. Forward contract receivable                           310,400

(Ps800,000 × 0.388)

Exchange gains and losses                                                      8,800

Cash (re forward contract payable)                                                    319,200

(Ps800,000 × 0.399)

 

Transaction #2

November 1, 20X6

 

No journal entry for the purchase order or the forward contract.

 

December 1, 20X6

The forward contract is re-valued with the change in value being $4,000 (CHF 400,000 × (1.21 – 1.20))

Exchange gains and losses                                                      4,000

Forward contract payable                                                                           4,000

 

Exchange gain/loss on sales order is (CHF 400,000 × (1.20 – 1.17))

Sales order commitment receivable                                  12,000

Exchange gains and losses                                                                           12,000

 

Accounts receivable (CHF400,000 × 1.20)                     480,000

Sales order commitment receivable                                                      12,000

Sales (CHF400,000 × 1.17)                                                                       468,000

 

December 31, 20X6

 

Accounts receivable (CHF400,000 × (1.21 – 1.20))           4,000

Exchange gains and losses                                                                          4,000

 

The forward contract is re-valued with the change in value being $8,000 (CHF 400,000 × (1.23-1.21))

Exchange gains and losses                                                      8,000

Forward contract payable                                                                               8,000

 

January 31, 20X7

 

Cash (CHF400,000 × 1.19)                                                   476,000

Exchange gains and losses                                                      8,000

Accounts receivable (480,000 + 4,000)                                                484,000

 

Cash (SF400,000 × 1.20)                                                       480,000

Forward contract payable                                                    12,000

Exchange gains and losses                                                                       16,000

Cash–Forward contract (CHF400,000 × 1.19)                                   476,000

Page Ref: 419-423

Learning Obj.:  8.4

Difficulty:  Difficult

 

 

41) HCB, a Canadian public company, entered into the following transactions late in 20X6:

• Transaction #1: On October 15, HCB purchased inventory from a Mexican supplier for 800,000 pesos (Ps). On the same day, HCB entered into a forward contract for Ps 800,000 at the 60-day forward rate of Ps1 = $0.399. The company has designated this as a fair value hedge. The Mexican supplier was paid in full on December 15, 20X6.
• Transaction #2: On November 1, HCB contracted to sell inventory to a customer in Switzerland at a selling price of CHF 400,000. The contract called for the merchandise to be delivered to the customer on December 1, with payment to be received in Swiss francs by January 31, 20X7. On November 1, HBC arranged a forward contract to deliver CHF 400,000 on January 31, 20X7, at a rate of CHF1 = $1.20. The company has designated this as a fair-value hedge on a firm commitment.
• On December 1, 20X6, the forward rate on the Swiss francs to January 31, 20X7 was CHF1 = $1.21.
• The company has a December 31, 20X6, year-end. On this date the forward rate for the Swiss franc was CHF1 = $1.23.

 

HBC has a year-end of December 31. Spot rates were as follows during this period of time:

 

October 15, 20X6                       Ps1 = $0.396                    SF1 = $1.19

November 1, 20X6                   Ps1 = $0.391                    SF1 = $1.17

December 1, 20X6                    Ps1 = $0.389                    SF1 = $1.20

December 15, 20X6                  Ps1 = $0.388                    SF1 = $1.19

December 31, 20X6                  Ps1 = $0.381                    SF1 = $1.21

January 31, 20X7                       Ps1 = $0.376                    SF1 = $1.19

 

Required:

The company uses the gross method to record hedging transactions. Prepare the journal entries that HCB should make to record the events described above.

 

 

Answer:

Transaction #1

October 15, 20X6

 

Inventory (Ps800,000 × 0.396)                                        316,800

Accounts payable                                                                                  316,800

 

Forward contract receivable                                          319,200

Forward contract payable                                                                  319,200

To record the forward contract using forward rate: (Ps800,000 × 0.399

 

December 15, 20X6

 

Accounts payable                                                              316,800

Exchange gains and losses                                                                      6,400

Cash (Ps800,000 × 0.388)                                                                     310,400

 

Forward contract payable                                              319,200

Cash                                                                                                           319,200

 

Cash                                                                                       310,400

(Ps800,000 × 0.388)

Exchange gains and losses                                                  8,800

Forward contract receivable                                                                  319,200

 

Transaction #2

November 1, 20X6

To record forward contract at forward rate: (CHF 400,000 × (1.20))

 

Forward contract receivable                                          480,000

Forward contract payable                                                                  480,000

 

December 1, 20X6

The forward contract is re-valued with the change in value being $4,000 (CHF 400,000 × (1.21-1.20))

Exchange gains and losses                                                  4,000

Forward contract payable                                                                       4,000

 

Exchange gain/loss on sales order is (CHF 400,000 × (1.20-1.17))

Sales order commitment receivable                              12,000

Exchange gains and losses                                                                       12,000

 

Accounts receivable (CHF400,000 × 1.20)                 480,000

Sales order commitment receivable                                                  12,000

Sales (CHF400,000 × 1.17)                                                                   468,000

 

December 31, 20X6

 

Accounts receivable (CHF400,000 × (1.21 – 1.20))        4,000

Exchange gains and losses                                                                      4,000

 

The forward contract is re-valued with the change in value being $8,000 (CHF 400,000 × (1.23-1.21))

Exchange gains and losses                                                  8,000

Forward contract payable                                                                       8,000

 

January 31, 20X7

 

Cash (CHF400,000 × 1.19)                                               476,000

Exchange gains and losses                                                  8,000

Accounts receivable (480,000 + 4,000)                                            484,000

 

Cash                                                                                       480,000

Forward contract receivable                                                              480,000

 

Forward contract payable                                              492,000

Exchange gains and losses                                                                   16,000

Cash–Forward contract (CHF400,000 × 1.19)                               476,000

Page Ref: 419-423

Learning Obj.:  8.4

Difficulty:  Difficult

 

 

42) Helvetia Corp., a Swiss firm, bought merchandise from Bouchard Company of Quebec on December 15, 20X7, for 20,000 CHF, payable on January 14, 20X8. Bouchard and Helvetia both close their books on December 31. The 20,000 CHF was paid on January 14, 20X8. The exchange rates for CHF1 were:

 

December 15, 20X7 spot                                         C$.9740

December 15, 20X7 30-day forward                   C$.9800

December 31, 20X7                                                  C$.9700

December 31, 20X7 14-day forward                   C$.9730

January 14, 20X8                                                       C$.9720

 

The account was hedged by Bouchard through a 30-day forward contract. Bouchard uses the gross method to record hedge transactions. Bouchard reports under IFRS.

 

Required:

Provide the journal entries for Bouchard (the seller) at each of the above dates, as required.

Answer:  December 15, 20X7

Accounts receivable         19,480

Sales (20,000 @ .9740)                      19,480

 

December 15, 20X7

Forward receivable           19,600

Forward payable                                                 19,600

20,000 CHF × 0.98

 

December 31, 20X7

Exchange gains and loses                         80

Accounts receivable                                                    80

20,000 CHF × (0.97-0.974)

 

Forward payable                                       140

Exchange gains and losses                                     140

20,000 CHF × (0.973 – 0.98)

 

January 14, 20X8

Cash [20,000 × (.972)]                          19,440

Exchange gains and losses                                       40

A/R [19,480 – 80]                                                   19,400

 

Cash                                                         19,600

Forward receivable                                             19,600

 

Forward payable                                 19,460

Exchange gains and losses                                       20

Cash 20,000 × 0.972                                             19,440

Page Ref: 416-423

Learning Obj.:  8.4

Difficulty:  Moderate

43) Helvetia Corp., a Swiss firm, bought merchandise from Bouchard Company of Quebec on December 15, 20X7, for 20,000 CHF, payable on January 14, 20X8. Bouchard and Helvetia both close their books on December 31. The 20,000 CHF was paid on January 14, 20X8. The exchange rates for CHF1 were:

 

December 15, 20X7 spot                                         C$.9740

December 15, 20X7 30-day forward                   C$.9800

December 31, 20X7                                                   C$.9700

December 31, 20X7 14-day forward                   C$.9730

January 14, 20X8                                                       C$.9720

 

Required:

1. Provide the journal entries for Bouchard (the seller) at each of the above dates, as required. The account was not hedged by Bouchard.
2. What is hedging and why might Bouchard have decided not to hedge this transaction? What risk is Bouchard incurring?

Answer:  1.                            December 15, 20X7

Accounts receivable (20,000 × 0.974)     19,480

Sales                                                                                 19,480

 

December 31, 20X7

Exchange gains and loses                                 80

Accounts receivable (20,000 × (.97-.974)                       80

 

January 14, 20X8

Cash (20,000 × .972)                                     19,440

Accounts receivable                                                    19,400

Exchange gains and losses                                                40

 

2. Hedging is a practice used to mitigate a risk–in this example, foreign currency risk. In this case, Bouchard is incurring a foreign currency exchange risk–the risk that the rate will change between the date the Bouchard sells the merchandise and the date when the CHF are actually received and can be converted into Canadian dollars.

Page Ref: 401-408

Learning Obj.:  8.1, 8.2

Difficulty:  Easy

 

 

44) Part 1: Helvetia Corp., a Swiss firm, bought merchandise from Bouchard Company of Quebec on December 15, 20X7, for 20,000 CHF, payable on January 14, 20X8. Bouchard and Helvetia both close their books on December 31. The 20,000 CHF was paid on January 14, 20X8. The exchange rates for CHF1 were:

 

December 15, 20X7 spot                                                 C$.9740

December 15, 20X7 30-day forward                           C$.9800

December 31, 20X7                                                          C$.9700

December 31, 20X7 14-day forward                           C$.9730

January 14, 20X8                                                              C$.9720

 

Required:

Provide the journal entries for Helvetia (the buyer) at each of the above dates, as required.

 

Part 2: Helvetia also had the following balances on its SFP at December 31, 30X7:

• Inventory purchased from a Canadian company for $50,000 on December 15, 20X7, for cash
• 1,000 shares of B C Inc., purchased on December 15, 20X7, for $40 per share. On December 31, 20X7, the B. C. Inc. shares were trading at $42 per share. These shares are classified at FVTPL.
• Helvetia purchased an investment property in Canada on December 15, 20X7, for $5.5 million. On December 31, 20X7, this property was valued at $5.6 million. Helvetia uses the fair-value method to report its investment properties.

For each of the above assets, explain the value that would be recognized on its SFP as at its year-end of December 31, 20X7, and any related amounts reported on the SCI.

Answer:

Part 1: All amounts in CHF

 

December 15, 20X7

Purchases                               20,000

Accounts payable                                20,000

 

December 31, 20X7

No entry

 

January 14, 20X8

Accounts payable                20,000

Cash                                                         20,000

 

 

Part 2:

The inventory is a non-monetary asset that is recorded at historical cost. Its value on December 15, 20X7, at its date of purchase, and at the year-end would be $50,000/0.974 = CHF51,335. The value will not change on December 31, 20X7. There is no impact on the SCI due to changes in the exchange rate.

The FVTPL investment must be reported at fair value at each reporting period, and the gains and losses reported in the SCI. On December 15, the shares would have been purchased for $40 × 1,000/0.974 = CHF41,068. On December 31, 20X7, these shares would be reported at $42 × 1,000/0.97 = CHF43,299. Helvetia would report a gain of CHF2,231.

The investment property is reported at fair value at each reporting period. It was originally purchased for CHF5.647 million ($5.5 million/0.974). On December 31 20X7, this property is now worth CHF5.773 million ($5.6 million/0.97). Helvetia will report a change in fair value of investment property of CHF 0.126 million.

Page Ref: 401-402

Learning Obj.:  8.1

Difficulty:  Moderate

 

 

45) Beauty Care Limited (BCL) manufactures and distributes leather furniture to various companies in Europe. On April 2, 20X6, BCL entered into a sales contract with a company in Germany to sell 1,000 sofas. The contract price is €2,000 per sofa. Five hundred sofas are to be delivered in May 15, 20X6, and the remaining half is to be delivered on December 20, 20X6. Payment is due in two instalments, with half due on August 31, 20X6, and the remaining half due January 30, 20X7. However, the customer has the right to cancel the contract with 30 days’ notice.

BCL entered into a forward contract to hedge against the euro exchange rate for €1 million, coming due on January 30, 20X7. BCL has a December 31 year-end.

Delivery of the furniture occurred on the dates specified and the company collected the receivables due and settled the forward contract at January 30, 20X7.

The exchange rates were as follows:

 

Canadian equivalent of euro	Spot rate	Forward rate to January 30, 20X7
April 2, 20X6	1.50	1.54
June 30, 20X6	1.51	1.57
August 31, 20X6	1.53	1.58
December 20, 20X6	1.55	1.56
December 31, 20X6	1.54	1.55
January 30, 20X7	1.56	settled

 

Required:

Assume that the forward contract is designated as a cash flow hedge, since the sale is highly probable. Prepare the journal entries to record the sales and the derivative. Use the gross method to record the journal entries. BCL reports under IFRS.

 

Answer:

Page Ref: 423-426

Learning Obj.:  8.4

Difficulty:  Difficult

 

46) Beauty Care Limited (BCL) manufactures and distributes leather furniture to various companies in Europe. On April 2, 20X6, BCL entered into a sales contract with a company in Germany to sell 1,000 sofas. The contract price is €2,000 per sofa. Five hundred sofas are to be delivered in May 15, 20X6, and the remaining half is to be delivered on December 20, 20X6. Payment is due in two instalments, with half due on August 31, 20X6, and the remaining half due January 30, 20X7. However, the customer has the right to cancel the contract with 30 days’ notice.

BCL entered into a forward contract to hedge against the euro exchange rate for €1 million, each coming due on January 30, 20X7. BCL has an October 31 year-end.

Delivery of the furniture occurred on the dates specified and the company collected the receivables due and settled the forward contract January 30, 20X7.

The exchange rates were as follows:

 

Canadian equivalent of euro	Spot rate	Forward rate to January 30, 20X7
April 2, 20X6	1.50	1.54
June 30, 20X6	1.51	1.57
August 31, 20X6	1.53	1.58
October 31, 20X6	1.55	1.56
December 20, 20X6	1.59	1.61
January 30, 20X7	1.63	settled

 

Required:

Assume that the forward contract is designated as a cash flow hedge, since the sale is highly probable. Prepare the journal entries to record the sales and the hedge. Use the net method to record the journal entries. BCL reports under IFRS.

 

Answer:

Page Ref: 423-426

Learning Obj.:  8.4

Difficulty:  Difficult

47) Short Link Company (SLC) issued a purchase order to buy a machine from Frankfurt Ltd., a German company, on April 2, 20X6. The contract price is €650,000 and delivery is to occur on August 31, 20X6. Payment is due on October 15, 20X6.

SCL entered into a forward contract to hedge against the euro exchange rate for €650,000, coming due on August 31, 20X6. SLC has a December 31 year-end.

Delivery of the machine occurred on the date specified and the company paid the amount and settled the forward contract October 15, 20X6.

The exchange rates were as follows:

 

Canadian equivalent of euro	Spot rate	Forward rate to January 30, 20X7
April 2, 20X6	1.50	1.59
August 31, 20X6	1.63	1.67
October 15, 20X6	1.66	settled

 

Required:

SLC reports under ASPE.

1. Explain how the forward contract will be accounted for under ASPE.
2. Prepare the journal entries to record the above transactions.

Answer:

1. Under ASPE, the forward contract is allowed as a hedge since it is a hedge of an anticipated transaction that will occur in a foreign currency. The hedge is also allowed since the forward contract is for the same currency and matures within 30 days of the date of the anticipated transaction. The forward contract is not recorded until maturity, at which time the gain or loss arising on the forward contract is adjusted to the carrying value of the hedged item–in this case, the machine.
2. Below are the journal entries to record the transactions.

 

April 2, 20X6

No entry for the purchase order or the forward contract.

 

August 31, 20X6–To record delivery of machine.

Machine	1,059,500
Accounts Payable		1,059,500

(€650,000 × 1.63)

 

October 15, 20X6–Settlement of payable and forward contract

Accounts payable	1,059,500
Exchange gains and losses	19,500
Cash euros		1,079,000

(€650,000 × 1.66)

 

Cash (euros)	1,079,000
Machine		45,500
Cash C$’s (€650,000 × 1.59)		1,033,500

 

Page Ref: 427-429

Learning Obj.:  8.4

Difficulty:  Moderate

48) Under IFRS, a hedging relationship qualifies for special hedge accounting rules only if it meets five conditions.

 

Required:

Explain the conditions that must be met for a derivative to qualify for special hedge accounting. Identify what qualifies as a hedged item. Identify what qualifies as a hedging instrument. Outline the conditions required for a hedge to be effective.

Answer:   The following conditions must be met for a hedging relationship to qualify for special hedge accounting:

1. The hedge relationship includes only eligible hedging instruments and hedged items.
2. The hedging relationship is formally designated and documented at the inception and is within the company’s overall risk management strategy.
3. The hedge is anticipated to be highly effective–i.e., the changes in the fair values of the cash flows of the hedging instrument and the hedged item are offsetting.

 

The hedging item can be an asset, liability, unrecognized future commitment, highly probable forecast transaction, or net investment in a foreign subsidiary.

The hedging instrument offsets the risk and is normally a derivative, which could include a forward contract, futures contract, option, or swap. For currency hedges, a non-derivative financial asset or liability can also qualify as a hedging instrument.

 

For a hedge to be effective, there must be an economic relationship existing between the hedging item and the hedged item, and the designation is based on the relative quantities of the hedged item and the hedging instrument.

Page Ref: 416-417; 426

Learning Obj.:  8.3, 8.4

Difficulty:  Moderate

 

49) Compare and contrast accounting for foreign currency transactions and hedge accounting under IFRS and ASPE.

Answer:  ASPE and IFRS are similar in their methods of accounting for foreign exchange transactions and balances. Monetary items are translated using the spot rate at the date of the SFP, and gains and losses are reported in net earnings. For non-monetary items carried at historical cost, these are translated at the historical exchange rate.

For non-monetary assets carried at fair value, IFRS uses the exchange rate on the date the fair value was determined. Under ASPE, the exchange rate used is the spot rate on the balance sheet date. In both cases, any exchange gains and losses are reported in net earnings.

 

Hedge accounting under ASPE is more simplified than under IFRS. In both cases, hedge accounting is optional and requires documentation. (Documentation under ASPE is less onerous that under IFRS.) IFRS requires that hedges be classified as fair-value hedges or cash-flow hedges. The gains and losses on fair-value hedges are reported in earnings. Gains and losses on cash-flow hedges are reported in OCI until the related anticipated transaction takes place, at which time the gains and losses are either transferred to earnings or included in the carrying cost of the asset. For both fair-value hedges and cash-flow hedges, the derivatives are fair valued at each reporting period. Forward contracts, futures contracts, options, and swaps can all qualify as hedging instruments under IFRS.

 

Under ASPE, hedge accounting can only be used for anticipated transactions. Derivatives that are not designated as hedges must be fair valued at each reporting period and any gains and losses are reported in net earnings. Only forward contracts can be used to hedge foreign currency transactions. If the forward contract is designated as a hedge, it is not recognized until maturity. At maturity, the gain or loss is adjusted to the carrying value of the hedged item.

Disclosure is required under both ASPE and IFRS, although ASPE disclosure is less extensive.

Page Ref: 402-406; 416-419; 427-429

Learning Obj.:  8.1, 8.3

Difficulty:  Moderate