accounts data bank

PROBLEM

1.
Describe the risks and uncertainty a U.S. company
faces when purchasing goods from a foreign corporation and settling the
transaction in the foreign currency.

2.
On September 15, 20X2, Wall Company, a U.S. firm,
purchased a piece of equipment from a foreign firm for 500,000 FCs. Payment for
the equipment was to be made in FCs on January 15, 20X3. The spot rates on
selected dates were as follows:

Date

Spot

Rate

9/15/X2…………………………..

1

FC =

$0.30

12/31/X2………………………….

1

FC =

$0.33

1/15/X3…………………………..

1

FC =

$0.315

Required:

a.
Assuming that the US Corp. has a December 31 year
end, prepare the necessary journal entries to account for the series of
transactions involving the purchase.

b. Prepare all
the necessary journal entries assuming that the US Corp. will be paying for the
equipment in U.S. dollars.

3.
On November 1, 20X1, DEMO Corp., a U.S. firm, sold
merchandise to a foreign firm for 60,000 FCs. DEMO will be paid on January 31,
20X2, in FCs. The spot rates on selected dates were as follows:

Date

Spot

Rate

November
1, 20X1…………………………..

1

FC =

$0.50

December
31, 20X1………………………….

1

FC =

$0.55

January
31, 20X2…………………………..

1

FC =

$0.53

Required:

Assuming
that DEMO has a December 31 year end, prepare the necessary journal entries to
account for the series of transactions involving the sale.

4.
A U.S. Corp. purchased a computer from a French firm
on July 1, 20X5, when a Euro cost $0.25. The U.S. firm will be required to pay
the French manufacturer 75,000 Euros on August 1, 20X5, when the Euro costs
$0.23.

Required:

Make the necessary journal entries for the U.S. firm on July 1
and August 1.

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Chapter 10

5.
On January 1, 20X1, a U.S. firm bought a truck from
a foreign firm for 10,000 FCs, to be paid on March 1 in FCs. The spot rate was
1 FC = $1.25 on January 1 and 1 FC = $1.265 on March 1. To protect themselves
from exchange rate changes, the U.S. firm entered into a forward exchange
contract on January 1 to buy FCs on March 1 for $1.28.

Required:

Make all the necessary journal entries to record the
transactions for the U.S. firm on January 1 and March 1.

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Chapter 10

6.
Explain how the risks differ for holders and writers
of foreign exchange options. Additionally, describe the difference between
American and European options. Finally, how is the intrinsic value of an option
calculated?

7.
For a hedge on an exposed position, describe the
process of valuing the forward contract as the fiscal period end date.