CHAPTER 11

 

MULTINATIONAL ACCOUNTING: FOREIGN CURRENCY TRANSACTIONS AND

FINANCIAL INSTRUMENTS

 

 

SOLUTIONS TO EXERCISES

 

E11-1 Exchange Rates

 

a. Indirect exchange rates for pounds and dollars:

$1.00 = .625 British pounds (1 pound / $1.60)

$1.00 = 1.3514 Canadian dollars (1 Canadian dollar / $.74)

 

 

b. FCU = $ = $8,000 = 5,000 British pounds

Direct Exchange Rate $1.60

 

 

c. 4,000 Canadian dollars x $.74 = $2,960

 


 

 

E11-2 Changes in Exchange Rates

 

a. Exchange rates:

 

Arrival Date Departure Date

 

Direct

Exchange Rate

1 florin = $.20

 

($200 / 1,000 florins)

1 florin = $.15

 

($15 / 100 florins)

 

Indirect

Exchange Rate

$1.00 = 5 florins

 

(1,000 florins / $200)

$1.00 = 6.67 florins

 

(100 florins / $15)

 

 

b. The direct exchange rate has decreased. This means that the dollar has strengthened during Mr. Alt's visit. For example, upon arrival, Mr. Alt had to pay $.20 per each florin. Upon departure, however, each florin is worth just $.15. This means that the relative value of the dollar has increased or, alternatively, the value of the florin has decreased.

 

 

c. The U.S. dollar equivalent values for the 100 florins are:

 

Arrival date

100 florins x $.20 = $20

Departure date

100 florins x $.15 = 15

Foreign Currency Transaction Loss $ 5

 

Mr. Alt held florins for a time in which the florin was weakening against the dollar. Thus, Mr. Alt experienced a loss by holding the weaker currency.
E11-3 Basic Understanding of Foreign Exposure

 

a. If the direct exchange rate increases, the U.S. dollar weakens relative to the foreign currency unit. If the indirect exchange rate increases, the U.S. dollar strengthens relative to the foreign currency unit.

 

 

b.

Settlement Direct Exchange Rate Indirect Exchange Rate

Transaction Currency Increases Decreases Increases Decreases

 

Importing Dollar NA NA NA NA

Importing LCU L G G L

Exporting Dollar NA NA NA NA

Exporting LCU G L L G
E11-6 Transactions with Foreign Companies

 

a. May 1 Inventory (or Purchases) 8,400

Accounts Payable 8,400

Foreign purchase denominated in U.S.

dollars.

 

June 20 Accounts Payable 8,400

Cash 8,400

Settle payable.

 

July 1 Accounts Receivable 10,000

Sales 10,000

Foreign sale denominated in U.S. dollars.

 

August 10 Cash 10,000

Accounts Receivable 10,000

Collect receivable.

 

b. May 1 Inventory (or Purchases) 8,400

Accounts Payable () 8,400

Foreign purchase denominated in yen:

$8,400 / $.0070 = 1,200,000

 

June 20 Foreign Currency Transaction Loss 600

Accounts Payable () 600

Revalue foreign currency payable to

U.S. dollar equivalent value:

$9,000 = 1,200,000 x $.0075 June 20 spot rate

-8,400 = 1,200,000 x $.0070 May 1 spot rate

$ 600 = 1,200,000 x ($.0075 - $.0070)

 

Accounts Payable () 9,000

Foreign Currency Units () 9,000

Settle payable denominated in yen.

 

July 1 Accounts Receivable (FF) 10,000

Sales 10,000

Foreign sale denominated in French

francs: $10,000 / $.20 = FF 50,000

 

August 10 Accounts Receivable (FF) 1,000

Foreign Currency Transaction Gain 1,000

Revalue foreign currency receivable

to U.S. dollar equivalent value:

$11,000 = FF 50,000 x $.22 Aug. 10 spot rate

-10,000 = FF 50,000 x $.20 July 1 spot rate

$ 1,000 = FF 50,000 x ($.22 - $.20)

 

Foreign Currency Units (FF) 11,000

Accounts Receivable (FF) 11,000

Receive francs in settlement

of receivable.

 

 

P11-30B Matching Key Terms __ Hedging and Derivatives

 

1. L

 

2. E

 

3. M

 

4. D

 

5. G

 

6. I

 

7. A

 

8. K

 

9. H

 

10. N

 

11. F

 

12. B

 

13. J

 

14. O

 

15. C