Exam: United States Dollar and Forward Contract

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Name: _________________________________________

Instructions:

The exam is composed of ten problems.

Make sure you have all pages in your exam. Including this cover page, you should have ten pages.

Each problem has its own set of instructions. You may use abbreviations for labels to save time.

Unclear responses will receive 0 points. Partial credit will be awarded.

If you need additional space for your answer, use the back of the page.

Problem 15 Points

Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On November 2, 2009, Mint sold confectionary items to a foreign company at a price of LCU 23,000 when the direct exchange rate was 1 LCU = $1.08. The account has not been settled as of December 31, 2009 (the company’s year-end), when the exchange rate has decreased to 1 LCU = $1.10. Calculate the amount of gain or loss that Mint will record on its financial statements related to this transaction. Be sure to clearly indicate if it is a gain or a loss.

$460 Gain

Problem 25 Points

On June 30, 2009, String Corporation incurred a $220,000 net loss from disposal of a business component. Also, on June 30, 2009, String paid $60,000 for property taxes assessed for the calendar year 2009. What amount of the preceding items should be included in the determination of String’s net income or loss for the six-month interim period ended June 30, 2009?

Loss220,000
Property Tax 30,000

Problem 315 Points

On January 1, 2008, Yang Corporation acquired 20% of the outstanding shares of Spiel Corporation for $100,000 cash (at underlying book value). Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 2008 and 2009. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 2008 and 2009, respectively.

Calculate the amount Yang will report as income from its investment in Spiel for 2009 assuming it uses: a) Cost Method (5 Points)

6,000

b) Equity Method (5 Points)

15,000

c) Fair Value Method (5 Points)

1,000

Problem 420 Points

Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5, 2009, with payment due on December 2, 2009. Additionally, on September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds at $0.1850. The forward contract was acquired to manage the exposed net liability position in Egyptian pounds, but it was not designated as a hedge. The spot rates were:

|September 5, 2009 |1 Egyptian Pound = $0.1835 | |December 2, 2009 |1 Egyptian Pound = $0.1865 |

Prepare all journal entries required on September 5th and December 2nd related to the above transactions.

|9/5 |Inventory |18,350 | | | | A/P | |18350 | | |Foreign Currency Receivable |18,500 | | | | $ Payable to Broker | |18,500 | |12/2 |Foreign Exchange Loss |300 | | | | A/P | |300 | | |Foreign Currency Receivable |150 |...
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