REFERENCE: Ref.09_07 Winston Corp. ,A U.S.company,had the Following Foreign Currency Transactions During

question 78

Multiple Choice

REFERENCE: Ref.09_07
Winston Corp. ,a U.S.company,had the following foreign currency transactions during 2008:
(1. ) Purchased merchandise from a foreign supplier on July 16,2008 for the U.S.dollar equivalent of $47,000 and paid the invoice on August 3,2008 at the U.S.dollar equivalent of $54,000.
(2. ) On October 15,2008 borrowed the U.S.dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15,2008.The U.S.dollar equivalent of the note amount was $295,000 on December 31,2008,and $299,000 on October 15,2009.
-On August 31,Ram Corporation,a U.S.company,expects to order merchandise from a German supplier in three months,denominating the transaction in euros.On August 31,the spot rate is $1.19 per euro,and Quality enters into a three-month forward contract to purchase 600,000 euros at a rate of $1.20.At the end of three months,the spot rate is $1.21 per euro,and Ram orders and receives the merchandise,paying 600,000 euros.What are the effects on net income from these transactions?

• A)$6,000 Discount Expense plus a $6,000 negative Adjustment to Net Income when the merchandise is sold.
• B)$ 6,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise is sold.
• C)$ 6,000 Premium Expense plus a $6,000 negative Adjustment to Net Income when the merchandise is sold.
• D)$ 12,000 Premium Expense plus a $6,000 positive Adjustment to Net Income when the merchandise is sold.
• E)$ 12,000 Discount Expense plus an $12,000 positive Adjustment to Net Income when the merchandise is sold.

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Definitions:

Assignee

In a contract, the party who receives the rights of another party (an assignor) to collect what was contractually agreed on in the original contract.

Prenuptial Agreement

An agreement two parties enter into before marriage that clearly states the ownership rights each party enjoys in the other party’s property. To be enforceable, the agreement must be in writing.

Subrogation

The legal right of a third party, usually an insurance company, to pursue recovery of amounts paid for a claim from a liable party.

Federal Statute

A law enacted by the national government that applies across the whole country.