advanced accounting Chapter 11Solution Manual.docx
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advanced accounting Chapter 11Solution Manual.docx
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advancedaccountingChapter11SolutionManual
CHAPTER11
MULTINATIONALACCOUNTING:
FOREIGNCURRENCYTRANSACTIONSAND
FINANCIALINSTRUMENTS
ANSWERSTOQUESTIONS
Q11-1 Indirectanddirectexchangeratesdifferbywhichcurrencyisdesiredtobeexpressedinanothercurrency.Anindirectexchangerateisthenumberofforeigncurrencyunitsthatmaybeobtainedforonelocalcurrencyunit.Theindirectexchangeratehastheforeigncurrencyunitinthenumerator.Asafraction,theindirectexchangerateisexpressedasfollows:
Numberofforeigncurrencyunits
Onelocalcurrencyunit
Adirectexchangerateisthenumberoflocalcurrencyunitsneededtoacquireoneforeigncurrencyunit.Thedirectexchangeratehasthelocalcurrencyunitsinthenumerator(theU.S.dollarforthedirectexchangeratefortheU.S.dollar).Asafraction,thedirectexchangerateisexpressedasfollows:
Numberoflocalcurrencyunits
Oneforeigncurrencyunit
Theindirectanddirectexchangeratesareinverselyrelatedandbothstatethesamerelationshipbetweentwocurrencies.
Q11-2 Thedirectexchangeratecanbecalculatedbytakingtheinverseoftheindirectexchangerate.Suchacomputationfollows:
Numberofforeigncurrencyunits
=
C$1.3623(Canadiandollars)
Onelocalcurrencyunit
$1.00(U.S.dollars)
Theinverseoftheindirectexchangerateis:
$1.00(U.S.dollars)
=
C$1.36(Canadiandollars)
$0.7340
Q11-3 WhentheU.S.dollarstrengthensagainsttheEuropeaneuro,importsfromEuropeintotheU.S.willbelessexpensiveinU.S.dollars.Thedirectexchangeratedecreases,indicatingthatittakesfewerdollarstoacquireEuropeaneuros.
Q11-4 Aforeigntransactionisatransactionthatdoesnotinvolvetheexchangeofcurrenciesonthepartofthereportingentity.AnexampleofaforeigntransactionisthesaleofequipmentbyaU.S.company(thereportingentity)toaJapanesefirmthatisdenominatedinU.S.dollars.
Aforeigncurrencytransactionisatransactionthatdoesinvolvetheexchangeofcurrenciesonthepartofthereportingentity.AnexampleofaforeigncurrencytransactionisthesaleofequipmentbyaU.S.company(thereportingentity)toaJapanesefirmthatisdenominatedinJapaneseyen.
Q11-5 Therearemanytypesofeconomicfactorsthataffectcurrencyexchangerates,amongwhicharethelevelofinflation,thebalanceofpayments,changesininterestratesandinvestmentlevels,andthestabilityandprocessofgovernance.OneexampleofaneconomicfactorthatresultsinaweakeningoftheU.S.dollarversustheEuropeaneuroisahigherlevelofinflationintheU.S.relativetotheinflationinEurope.
Q11-6 AssetsandliabilitiesdenominatedinaforeigncurrencyaremeasuredaccordingtotherequirementsinFASB52(ASC830)forthosearisingfromnormalpurchaseandsaletransactions,andbyFASB133(ASC815)forforwardexchangecontractsandhedgingactivities.FASB52(ASC830)specifiesthatthevaluationatthetransactiondateandeachsubsequentbalancesheetdateshouldbeatthelocalcurrencyequivalentusingthespotrateofexchange.Forwardexchangecontractsarevaluedatfairvalue,typicallybyusingtheforwardratefortheremainderofthetermoftheforwardcontract.
Q11-7 Foreigncurrencytransactiongainsorlossesarerecognizedinthefinancialstatementsintheperiodinwhichtheexchangeratechanges.Thesegainsorlossesarereportedontheincomestatement.
Q11-8 Ifthedirectexchangerateincreases,theSunCompanywillexperienceaforeigncurrencytransactionlossonits$200,000accountpayablethatisdenominatedinCanadiandollars.TheincreaseinthedirectexchangerateshowsthattheU.S.dollarhasweakenedrelativetotheCanadiandollar,requiringmoreU.S.dollarsbeusedtopaythedebtowed.
Q11-9 FourwaysaU.S.companycanmanagetheriskofchangesintheexchangeratesforforeigncurrenciesareto
(1)useaforwardcontracttooffsetanexposedforeigncurrencyposition,
(2)hedgeafirmforeigncurrencycommitmentasafairvaluehedge,(3)hedgeananticipatedforeigntransactionasacashflowhedge,or(4)speculateinforeigncurrencymarkets.OneexampleofaU.S.companyhedgingagainsttheriskofchangesintheexchangeratesforforeigncurrenciesistouseaforwardexchangereceivablecontracttopartiallyoffsettheeffectsofchangesintheexchangeratesoftheforeigncurrencyliability.
Q11-10 Anexposednetassetpositionoccurswhenacompany'stradereceivablesandotherassetsdenominatedinaforeigncurrencyaregreaterthanitsliabilitiesdenominatedinthatcurrency.Anexposednetliabilitypositionoccursifacompany'sliabilitiesdenominatedinaforeigncurrencyexceedreceivablesdenominatedinthatcurrency.
Q11-11 Adifferenceusuallyexistsbetweenacurrency'sspotrateandforwardratebecauseofthe
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