Foreign currency transaction

Question 1

On December 12, 20X1, Imp Co. entered into three forward exchange contracts, each to purchase 100,000 francs in 90 days. The relevant exchange rates are as follows:

                                            Forward Rate
                                   Spot Rate       (for March 12, 20X2)
                                          ---------       -------------------- December 12, 20X1                 $.88                  $.90 December 31, 20X1                   .98                   .93

Imp entered into the second forward contract to hedge a commitment to purchase equipment being manufactured to Imp’s specifications. At December 31, 20X1, what amount of net foreign currency transaction gain should Imp include in income from this forward contract?

Answer 1

WATCH OUT FOR THIS QUESTION!! this is a trick question there should be no gain/loss on a hedge commitment to purchase items. Since this is a perfect hedge no gain/loss should be reported

Question 2

Certain balance sheet accounts of a foreign subsidiary of Rowan, Inc., at December 31, have been trans­lated into U.S. dollars as follows:

                                                  Translated at          
                                    Current Rates   Historical Rates  Note receivable, LT            $240,000         $200,000  Prepaid rent                              85,000           80,000  Patent                                      150,000          170,000   Total                                       $475,000         $450,000
                                             ========         ========

The subsidiary’s functional currency is the currency of the country in which it is located. What total amount should be included in Rowan’s December 31 consolidated balance sheet for the above accounts?

Answer 2

Note: BE CAREFUL QUESTION ASKS FOR “TRANSLATED” use the current rate for transalation