Exam 35: Accounting for Foreign Currency Transactions

Safety Ltd purchased goods for £20,000 from a British supplier on 1 April 2005. The amount owing on the purchase is payable on 30 July 2005. On 1 May 2005 a forward-exchange contract for the delivery of £20,000 on 30 July 2005 is taken out with Aus Bank. Safety Ltd's reporting date is 30 June. Exchange rates are as follows: What entries are required to report these transactions in accordance with AASB 121 (rounded to the nearest whole $A)?

If the foreign currency exchange rate between Australia and the US was $A1.00 = US$0.55 on 1 October 2004 and moved to be $A1.00 = US$0.60 one month later, the Australian dollar has decreased relative to the foreign currency:

For a cash flow hedge relating to the purchase of a particular asset, foreign exchange gains and losses made on the hedging instrument:

The spot rate is defined in AASB 121 as:

In selecting the appropriate foreign currency exchange rates to apply in translating foreign currency transactions, the accountant exercises an important element of judgement about whether the rates are overvaluing or undervaluing the reporting currency:

Which of the following items is not within the scope of AASB 112 "The effects of changes in foreign exchange rates"?

AASB 121 requires foreign currency monetary items that are expected to be settled in the short term to be translated at the spot rate at reporting date, but does not require this treatment for long-term monetary items denominated in foreign currencies: FALSE

Which of the following statements is correct with respect to AASB 121 "The effects of changes in foreign exchange rates"?

What is the required treatment for long-term monetary items denominated in a foreign currency according to AASB 121 and what is a concern that has been raised about the treatment?

On 5 September 2004 Russell Ltd places an order for €500,000 of inventory from a Swedish supplier. The terms for the purchase of the goods are that they are f.o.b. shipping point and they are to be paid for on 5 November. The financial controller of Russell Ltd enters into a forward-exchange contract on 5 September and designates it as a hedge for the purchase. The forward-exchange contract is for €500,000 to be supplied by the bank on 5 November 2004. The goods are shipped on 5 October 2004 and are paid for on 5 November. What are the journal entries to record the above transactions from 5 September through to 5 November in accordance with AASB 121 (rounded to the nearest whole $A)?

The following data is provided for the fair value of a share portfolio, and the fair value of a forward contract taken out on 1 July 2007 to 'hedge' movements in the fair value of the shares. Assume the hedge was highly effective at inception of the hedge. Which of the following statements is true?

The Big Mac index is:

On 1 July 2005 Jarrets Ltd borrows £500,000 from a British bank at an interest rate of 8 per cent, repayable in pounds sterling (£) and with interest due on 30 June each year. The term of the loan is 3 years. On the same date Fitners Ltd borrows $A1 million from an Australian bank at an interest rate of 10 per cent. The term of the loan is 3 years. Jarrets and Fitners decide to swap their interest and principal obligations on 1 July 2005. Exchange rate information is as follows: Both Jarrets and Fitners are Australian companies. What are the journal entries to record the swap for the period ended 30 June 2006 in Jarrets Ltd's books (rounded to the nearest whole $A)?

Hedges cannot be designated and/or documented on a retrospective basis:

AASB 121 defines an exchange rate as a ratio for the exchange of two currencies at a particular time:

The functional currency of an entity is the currency of the prime economic environment in which the entity operates:

There are two broad categories of foreign currency issues that arise in financial reporting. They are:

In terms of retrospectively assessing hedge effectiveness, which of the following situations does not meet the criteria for effectiveness?

The three principal types of hedges referred to in AASB 139 are: