Advanced Financial Reporting and Accounting Concepts

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Advanced Financial Reporting and Accounting Concepts

Chapter 9 Problems; Week 5
Instructions: Submit answers to the 4 Foreign Currency problems below.  Please show your workings below your answer AND support your answer with accounting theory (No

less than 150 words). You MUST use theory from the FASB Codification, unless otherwise instructed.  Include a Reference List.

1.    On October 31, 2010, MNC Corporation negotiated a two-year 100,000 franc loan from a foreign bank at an interest rate of 3 percent per year. Interest payments

are made annually on October 31, and the principal will be repaid on October 31, 2012. MNC Corporation prepares U.S.-dollar financial statements and has a December 31

year-end.

Required: Prepare all journal entries related to this foreign currency borrowing assuming the following:

Journal Entries: 20 points   Theory: 10 points

2.     Expatriate Company (a U.S. company) made a sale to a foreign customer on September 15, 2011, for 100,000 stickles. Payment was received on October 15, 2011.

The following exchange rates applied:

Required:
Prepare all journal entries for Expatriate Co. in connection with this sale assuming that the company closes its books on September 30 to prepare interim financial

statements.

3.    For each of the following situations, select the best answer concerning accounting for foreign currency transactions:

Theory Answers: 1 Sentence each is sufficient.  Answers can be supported by your textbook.

(G) Results in a foreign exchange gain.
(L) Results in a foreign exchange loss.
(N) No foreign exchange gain or loss.
_____1. Export sale by a U.S. company denominated in dollars, foreign currency of buyer appreciates.
_____2. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates.
_____3. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates.
_____4. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer appreciates.
_____5. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates.
_____6. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer depreciates.
_____7. Export sale by a U.S. company denominated in dollars, foreign currency of buyer depreciates.
_____8. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates.

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4.    On October 1, 2011, RoundtheWorld Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU). Collection is

expected in four months. On October 1, 2011, a forward exchange contract was acquired whereby RoundtheWorld Co. was to pay 100,000 LCU in four months (on February 1,

2012) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows:

The company’s borrowing rate is 12%. The present value factor for one month is .9901.
Any discount or premium on the contract is amortized using the straight-line method.

Required: Assuming this is a fair value hedge; prepare journal entries for this sales transaction and forward contract.

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