ACG5205 SOLUTIONS – Christensen Adv Financial Acctg 12e -- Chap.

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E11-5 Determining Year-End Account Balances for Import and Export Transactions

Foreign Currency Foreign Currency

Accounts Accounts Transaction Transaction
Receivable Payable      Exchange Loss   Exchange Gain

Case 1       NA       $16,000(a)       NA       $2,000(b)

Case 2 $38,000(c)       NA             NA       $2,000(d)

Case 3       NA       $27,000(e)  $3,000(f)       NA     

Case 4 $6,250(g)       NA        $1,250(h)       NA     

(a) LCU 40,000 x $0.40

(b) LCU 40,000 x ($0.40 - $0.45)

(c) LCU 20,000 x $1.90

(d) LCU 20,000 x ($1.90 - $1.80)

(e) LCU 30,000 x $0.90

(f) LCU 30,000 x ($0.90 - $0.80)

(g) LCU 2,500,000 x $0.0025

(h) LCU 2,500,000 x ($0.0025 - $0.003)

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

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 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.

E11-6 (continued)

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

Accounts Payable (¥) 8,400

Foreign purchase denominated in yen: $8,400 / $0.0070 = ¥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 $0.0075 June 20 spot rate

- 8,400 = ¥1,200,000 x $0.0070 May 1 spot rate

$   600 = ¥1,200,000 x ($0.0075 - $0.0070)

Foreign Currency Units (¥) 9,000

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 Cash 9,000

Purchase of yen to settle account payable at June 20 spot rate.

Accounts Payable (¥) 9,000

Foreign Currency Units (¥) 9,000

Settle payable denominated in yen.

July 1 Accounts Receivable (BRL) 10,000

Sales 10,000

Foreign sale denominated in Brazilian reals:

$10,000 / $0.20 = BRL50,000

August 10 Accounts Receivable (BRL) 1,000

Foreign Currency Transaction Gain 1,000

Revalue foreign currency receivable to U.S. dollar equivalent value:

$ 11,000 = BRL50,000 x $0.22 Aug. 10 spot rate

- 10,000 = BRL50,000 x $0.20 July 1 spot rate

$  1,000 = BRL50,000 x ($0.22 - $0.20)

Foreign Currency Units (BRL) 11,000

Accounts Receivable (BRL) 11,000

Receive Brazilian reals in settlement of receivable.

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E11-11 Foreign Currency Transactions – Multiple-Choice [AICPA Adapted]

1. d   20X1     20X2   

$0.4895 x €30,000 $14,685 $0.4845 x €30,000 $14,535 

$0.4845 x €30,000   14,535 $0.4945 x €30,000   14,835 

Gain $    150 Loss $    (300)

2. b January 15

Foreign Currency Units (LCU) 300,000

Exchange Loss 15,000

Accounts Receivable (LCU) 315,000

Collect foreign currency receivable and recognize foreign currency

transaction loss for changes in exchange rates:

$300,000 = (LCU 900,000 / LCU 3) Jan. 15 value

- 315,000 = Dec. 31 U.S. dollar equivalent

$ 15,000 Foreign currency transaction loss

3 d $120,000  = July 1, 20X1, U.S. dollar equivalent value

.

$140,000  = December 31, 20X1, U.S. dollar equivalent value

(LCU 840,000 / $140,000) = LCU 6 / $1

-105,000  = July 1, 20X2, U.S. dollar equivalent value

                (LCU 840,000 / 8) = $105,000

$ 35,000 Foreign currency transaction loss

4 c C$1 / $0.90 (C$1.11 = $1.00)

.

5 d $280,000 = July 1, 20X5, U.S. dollar equivalent value

.

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 -240,000 = December 31, 20X4, U.S. dollar equivalent value

$ 40,000 Foreign currency transaction loss

6 d Regardless of whether it is a gain or a loss, the effect of the change will always be
. included as a component of income.

b. (a) Incorrect. When the exchange rate in the transaction changes, the
effect flows through the income, not in stockholders' equity.
c. (b) Incorrect. When the exchange rate in the transaction changes, the
effect flows through the income, not in stockholders' equity.
d. (c) Incorrect. The effect is recorded as a component of income for both
gains and losses.

7 d The resulting loss is required to be included as a component of income, and will

. be recorded for the year in which it occurred.

e. (a) Incorrect. The loss must be included in 20X6.

f. (b) Incorrect. It must be recorded as a component of income during 20X6.
g. (c) Incorrect. A deferred charge would not result. Instead, the loss is
recorded during 20X6 as a component of income.

E11-14 Foreign Currency Transactions [AICPA Adapted]

1. c $4,000

Accounts Payable (€)

(200,000 x $0.4875) 12/10/X3 97,500

AJE 4,000

(200,000 x $0.4675) 12/31/X3 93,500

Accounts Payable (€) 4,000

Foreign Exchange Gain 4,000

2. d $27,000 = $6,000 + $20,000 + $1,000

Accounts Payable (FCU)

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 1/20/X2 90,000

AJE 6,000

3/20/X2 96,000

Foreign Exchange Loss 6,000

Accounts Payable (FCU) 6,000

Notes Payable (FCU)

7/01/X2 500,000

AJE 20,000

12/31/X2 520,000

Foreign Exchange Loss 20,000

Notes Payable (FCU) 20,000

Interest Payable (FCU)

($500,000 x .10 x 1/2 year) 25,000

AJE 1,000

12/31X2 26,000

Foreign Exchange Loss 1,000

Interest Payable (FCU) 1,000

3. c $5,000

Accounts Receivable (FCU)

10/15/X1 100,000

AJE 5,000

11/16/X1 105,000 Settlement 11/16/X1 105,000

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 Accounts Receivable (FCU) 5,000

Foreign Exchange Gain 5,000

Note: The receivable is recorded on October 15, 20X1, when the goods were
shipped, not on September 1, 20X1, when the order was received.

E11-14 (continued)

4. b $1,000

Accounts Payable (FCU)

(10,000 x
$0.60) 4/08/X3 6,000

X3 AJE 500

(10,000 x 12/31/X3 5,500

$0.55)

X4 AJE 1,000

(10,000 x 3/01/X4 4,500

$0.45)

Settlement 4,500         

Bal. -0-

X4 AJE Accounts Payable (FCU) 1,000

Foreign Exchange Gain 1,000

5. b A gain should be reported because the peso weakened from December 15

(the transaction date) to the balance sheet date (December 31, 20X5).
Stevens would not record the purchase until title transferred on December 15,
20X5. The accounts payable recorded on December 15 are denominated in
pesos when the indirect exchange rate was $1 = 20 pesos. On December 31,
20X5, the indirect exchange rate was $1 = 21 pesos, meaning that the dollar
strengthened and the peso weakened. Therefore, a foreign currency
transaction gain would be reported for 20X5. This gain would be included in
net income before discontinued operations.

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6. b Foreign currency transaction gains and losses are reported on the income
statements of U.S. companies when receivables and payables are
denominated in foreign currencies. Since Louis did not report any foreign
exchange gains or losses, the payable to the German company was
denominated in U.S. dollars, not European euros.

7. b $9,000 = 300,000 pounds x ($1.65 - $1.62). The foreign currency transaction

gain is computed using spot rates on the transaction date (November 30,
20X5) and the balance sheet date (December 31, 20X5). The forward
exchange rates are not used because the transaction was not hedged.