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1Copyright©2012PearsonEducation,Inc.PublishingasPrenticeHallAdvancedAccounting,11e(Beams/Anthony/Bettinghaus/Smith)Chapter13AccountingforDerivativesandHedgingActivitiesMultipleChoiceQuestions1)Whichofthefollowinghedgingstrategieswouldabusinessmostlikelyuse?A)Animporterwillwanttohedgehisforeigndenominatedaccountsreceivableandwillpurchaseforwardcontractstohedgeanexposednetassetposition.B)Animporterwillwanttohedgehisforeigndenominatedaccountspayableandwillpurchaseforwardcontractstohedgeanexposednetliabilityposition.C)Anexporterwillwanttohedgehisforeigndenominatedaccountsreceivableandwillpurchaseforwardcontractstohedgeanexposednetliabilityposition.D)Anexporterwillwanttohedgehisforeigndenominatedaccountspayableandwillpurchaseforwardcontractstohedgeanexposednetliabilityposition.Answer:BObjective:LO2Difficulty:Easy2)Ahighly-effectivehedgeofanexistingassetorliabilitythatisreportedonthebalancesheetwouldberecordedusingA)ModifiedCashBasisAccounting.B)CriticalTermHedgeAnalysis.C)FairValueHedgeAccounting.D)HedgeofNetInvestmentinForeignSubsidiary.Answer:CObjective:LO2Difficulty:Easy3)Whichofthefollowingisnotanapproachappropriateforhedgeaccounting?A)CashFlowHedgeAccountingB)CriticalTermHedgeAccountingC)FairValueHedgeAccountingD)HedgeofNetInvestmentinForeignSubsidiaryAnswer:BObjective:LO1,2Difficulty:Easy4)Ifafinancialinstrumentisclassifiedasacashflowhedge,thenA)itsgainsorlossesarereportedintheincomestatementifafiscalyear-endoccursbeforethesettlementdate.B)itisclassifiedasaheld-to-maturityasset.C)itdoesnotrequireanotionalamount.D)itsgainsorlossesarereportedinthebalancesheetifafiscalyear-endoccursbeforethesettlementdate.Answer:DObjective:LO1Difficulty:Easy2Copyright©2012PearsonEducation,Inc.PublishingasPrenticeHall5)Whenacashflowhedgeisappropriate,theeffectiveportionofthegainorlossonthederivativeisA)deferredusingothercomprehensiveincome.B)recognizedimmediatelyatthetimetheagreementismade.C)recognizedovertime,amortizedovertheperiodoftheagreement.D)recognizedovertime,offsetbythefluctuationinthevalueofthehedgedassetorliability.Answer:AObjective:LO1Difficulty:Easy6)BarnesCompanyenteredintoaforwardcontractduringthecurrentyeartohedgetheriskofamaterialsupplycostincrease.Basedonthecurrentmarket,atyear-endthepresentvalueoftheestimatedamounttheywillhavetopayintenmonthsis$750,000.Whatentrywouldberecordedatyear-endclosing,assumingthatnoamountwasrecordedforthiscontractuntilthistime?A)ForwardContract(+A)$750,000OtherComprehensiveIncome(+SE)$750,000B)ForwardContract(+A)$750,000Earnings(+SE)$750,000C)OtherComprehensiveIncome(-SE)$750,000Earnings(+SE)$750,000D)OtherComprehensiveIncome(-SE)$750,000ForwardContract(+L)$750,000Answer:DObjective:LO3Difficulty:Moderate7)AforwardcontractusedasacashflowhedgewillberecordedasanassetifA)theholderisexpectingtoreceiveapaymentasaresultofthecontract.B)theholderisaccountingforthehedgedinstrumentasafairvaluehedge.C)theholderishedgingthenetinvestmentinaforeignentity.D)theholderisusingthealternateaccountingmethodanddeferringallgainsorlossesfromthehedge.Answer:AObjective:LO1Difficulty:Easy3Copyright©2012PearsonEducation,Inc.PublishingasPrenticeHall8)AfairvaluehedgediffersfromacashflowhedgebecauseafairvaluehedgeA)cannotbeusedforfirmpurchaseorsalescommitments.B)isnotrecordedunlessitisahighly-effectivehedge.C)recordsgainsorlossesinthevalueofthederivativedirectlytoearningsofthecompany.D)defersthegainsorlossesinthevalueofthederivativeusingOtherComprehensiveIncome.Answer:CObjective:LO3Difficulty:Easy9)ThepurchasepriceofanoptioncontractistypicallyrecordedasA)anexpense.B)anasset.C)anamortizedcost.D)acomponentofshareholdersequity.Answer:BObjective:LO3Difficulty:Easy10)TaydusCorporation,aU.S.corporation,soldgoodsonDecember2toacompanyoverseas,andisnowcarryingareceivabledenominatedineuros.Taydussigneda60-dayforwardcontractonthatsamedatetoselleuros.Thespotratewas$1.40onthedatetheysignedthecontractandthe60-dayforwardratewas$1.36.Attheendofthatmonthwhentheyclosedthebooksattheirfiscalyear-end,thespotratewas$1.42andthe30-dayforwardratewas$1.40.Assumethisisafairvaluehedge.Theforwardcontractwillnotbesettlednet.WhatwouldbereportedbyTaydusfortheyearendingDecember31?A)NetexchangegainB)NetexchangelossC)DeferredexchangegainD)DeferredexchangelossAnswer:BExplanation:B)Thespotrateincreased$.02,resultinginagainonthereceivable.Theforwardrateincreased$.04,resultinginalargerlossontheforward,thustheyexperiencedanetexchangeloss.Objective:LO4Difficulty:Moderate11)CirtusCorporation,aU.S.corporation,placedanorderforinventoryfromaMexicansupplieronSeptember18whenthespotratewas$0.0840=1peso.Theinvoicepricewillbedenominatedinpesos.Atthattime,theyenteredintoa30-dayforwardcontract(designatedasafairvaluehedgeofthefirmcommitmenttopurchase)topurchase860,000pesosataforwardrateof$0.0810.OnOctober18whentheinventorywasreceived,thespotratewas$0.0890.AtwhatamountshouldtheinventorybecarriedonCirtus'books?A)$69,660B)$72,240C)$76,540D)$860,000Answer:AExplanation:A)Inventory=860,000×.081=$69,660Objective:LO4Difficulty:Moderate4Copyright©2012PearsonEducation,Inc.Pub