Posted: August 9th, 2016

What is the overall impact to be recognized on net income at the end of Year One?

4. Bowman Company reported translation adjustments in its stockholders’ equity section of $2,000,000. These adjustments were added to the other items disclosed in Bowman’s stockholders’ equity. Bowman’s translation adjustments resulted from its 80% interest in the capital stock of a Danish subsidiary. Based upon the facts presented, which of the following statements is true?
a. The credits in dollars on the Danish trial balance exceeded the debits in dollars by $2,000,000.
b. The debits in dollars on the Danish trial balance exceeded the credits in dollars by $2,000,000.
c. The debits in dollars on the Danish trial balance exceeded the credits in dollars by $2,500,000.
d. The credits in dollars on the Danish trial balance exceeded the debits in dollars by $2,500,000.

5. On November 1, Year One, the Haynie Company signs a contract to receive one million Japanese yen on February 1, Year Two, for $10,000 based on the three-month forward exchange rate at that time of $1 for 100 Japanese yen (1,000,000 x 1/100 or $10,000). This contract is a derivative because its value is derived from the future value of the Japanese yen in relation to the US dollar. On December 31, Year One, the Haynie Company is producing financial statements. How is this forward exchange contract reported?
a. It is shown as an asset or a liability at its fair value.
b. It is shown only as an asset at its fair value.
c. It is shown only as a liability at its fair value.
d. It is only disclosed in the notes to the financial statements because it is a future transaction.

6. On November 1, Year One, the Abernethy Company signs a forward exchange contract to receive one million Japanese yen on February 1, Year Two, for $10,000 based on the three-month forward exchange rate at that time of $1 for 100 Japanese yen (1,000,000 x 1/100 or $10,000). On that same day, Abernethy agrees to acquire inventory for one million yen when it is delivered on February 1, Year Two. The forward exchange receivable is designated as a hedge for this commitment. On November 1, the spot (current) exchange rate is $1 for 94 Japanese yen but that rate change, by December 31, to $1 for 96 Japanese yen. As of December 31, Year One, the forward exchange rate to be paid one month in the future is $1 for 103 Japanese yen. What is the overall impact to be recognized on net income at the end of Year One?
a. -$0-
b. $71 loss
c. $221 gain
d. $292 loss

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