Question 1

Which of the following is not an example of a cash flow hedge?

Accepted Answer

A)  a forward contract to buy US$ hedging recognised borrowings in US$. 
B)  a forward contract to sell US$ hedging a highly probable sale of inventory in US$. 
C)  a forward contract to buy US$ hedging future interest payments on variable rate debt in US$. 
D)  a forward contract to buy US$ hedging an unrecognised firm commitment to purchase goods in US$. 
A)  a forward contract to buy US$ hedging recognised borrowings in US$. 
B)  a forward contract to sell US$ hedging a highly probable sale of inventory in US$. 
C)  a forward contract to buy US$ hedging future interest payments on variable rate debt in US$. 
D)  a forward contract to buy US$ hedging an unrecognised firm commitment to purchase goods in US$. A

Question 2

At the end of the reporting period, a foreign currency monetary item is remeasured using:

Accepted Answer

A)  US dollars. 
B)  the closing rate. 
C)  the spot exchange rate. 
D)  the foreign currency monetary value. 
A)  US dollars. 
B)  the closing rate. 
C)  the spot exchange rate. 
D)  the foreign currency monetary value. B

Question 3

The main issue in accounting for foreign currency transactions is:

Accepted Answer

A)  how to treat any foreign exchange differences that arise when assets or liabilities are remeasured at the end of the reporting period using the closing rate. 
B)  how to translate the financial statements of a foreign operation. 
C)  how to distinguish between denomination currency or settlement currency. 
D)  how to record transactions with foreign operations. 
A)  how to treat any foreign exchange differences that arise when assets or liabilities are remeasured at the end of the reporting period using the closing rate. 
B)  how to translate the financial statements of a foreign operation. 
C)  how to distinguish between denomination currency or settlement currency. 
D)  how to record transactions with foreign operations. A

Question 4

Outback Limited, an Australian company, purchased machinery from Southern Ranches Limited, a US company, on credit terms for US$600 000. At the transaction date, the exchange rate was US$1 = A$1.20. The journal entry recorded by Outback Limited for this purchase would be:

Accepted Answer

A)  DR Machinery $720 000; CR Payable to Southern Ranches Limited $720 000. 
B)  DR Machinery $600 000; CR Payable to Southern Ranches Limited $600 000. 
C)  DR Receivable from Southern Ranches Limited $600 000; CR Cash $600 000 
D)  DR Machinery $720 000; CR Cash $720 000 
A)  DR Machinery $720 000; CR Payable to Southern Ranches Limited $720 000. 
B)  DR Machinery $600 000; CR Payable to Southern Ranches Limited $600 000. 
C)  DR Receivable from Southern Ranches Limited $600 000; CR Cash $600 000 
D)  DR Machinery $720 000; CR Cash $720 000

Question 5

Monetary items include the following except for:

Accepted Answer

A)  payables for goods purchased. 
B)  accounts receivable. 
C)  financial assets. 
D)  borrowings. 
A)  payables for goods purchased. 
B)  accounts receivable. 
C)  financial assets. 
D)  borrowings.

Question 6

At the date of the transaction, a foreign currency monetary item is initially recognised and measured using:

Accepted Answer

A)  the spot exchange rate. 
B)  US dollars. 
C)  the closing rate. 
D)  the foreign currency monetary value. 
A)  the spot exchange rate. 
B)  US dollars. 
C)  the closing rate. 
D)  the foreign currency monetary value.

Question 7

The formal documentation of a hedging relationship must include identification of: I. The hedging instriment
II. The hedged iterr
III. The rature of the risk being hedged
IV. How the entity will assesshedge effectiveness

Accepted Answer

A)  I, II, III and IV. 
B)  I, II and III only. 
C)  I, II and IV only. 
D)  II, III and IV only. 
A)  I, II, III and IV. 
B)  I, II and III only. 
C)  I, II and IV only. 
D)  II, III and IV only.

Question 8

An exchange difference is 'realised':

Accepted Answer

A)  on initial recognition of a monetary asset. 
B)  on remeasurement of a monetary liability at the end of the reporting period. 
C)  when the exchange rate changes between initial recognition and cash settlement. 
D)  when the exchange rate changes between initial recognition and end of reporting period. 
A)  on initial recognition of a monetary asset. 
B)  on remeasurement of a monetary liability at the end of the reporting period. 
C)  when the exchange rate changes between initial recognition and cash settlement. 
D)  when the exchange rate changes between initial recognition and end of reporting period.

Question 9

AASB 121 requires which of the following to be disclosed in the financial reports?

Accepted Answer

A)  Any change in functional currency and reason for change. 
B)  The net exchange differences recognised in OCI and accumulated in a separate component of equity. 
C)  The amount of exchange differences recognised in the profit or loss for the period other than those that relate to financial instruments measured at fair value through profit or loss. 
D)  All of the above. 
A)  Any change in functional currency and reason for change. 
B)  The net exchange differences recognised in OCI and accumulated in a separate component of equity. 
C)  The amount of exchange differences recognised in the profit or loss for the period other than those that relate to financial instruments measured at fair value through profit or loss. 
D)  All of the above.

Question 10

The Australian Financial News quoted A$1.00 equals US$1.15/1.18. What does this represent?

Accepted Answer

A)  A bid rate of A$1.15. 
B)  A bid rate of US$1.18. 
C)  An offer rate of A$1.18. 
D)  An offer rate of US$1.18. 
A)  A bid rate of A$1.15. 
B)  A bid rate of US$1.18. 
C)  An offer rate of A$1.18. 
D)  An offer rate of US$1.18.

Question 11

A forward contact to buy US$450 000 for a planned purchase transaction of US$600 000 has a hedge ratio of:

Accepted Answer

A)  25%. 
B)  75%. 
C)  15%. 
D)  133%. 
A)  25%. 
B)  75%. 
C)  15%. 
D)  133%.

Question 12

On 28 March 2022, Blue Gum Ltd acquired land in California for a cash consideration of US$400 000. At 30 June 2022 the land is revalued to a fair value of US$500 000. The relevant exchange rates are: 
28 March 2022    US$1.00 = A$1.15
30 June 2022      US$1.00 = A$1.10
On 30 June 2022, Blue Gum Ltd will record a revaluation gain on the land for:

Accepted Answer

A)  A$100 000 
B)  A$160 000 
C)  A$200 000 
D)  A$217 948 
A)  A$100 000 
B)  A$160 000 
C)  A$200 000 
D)  A$217 948

Question 13

On 1 May 2022, Ocean Blue Ltd enters a forward exchange contract to sell US$180 000 in 8 months' time at 31 December 2022. The relevant exchange rates are: $\begin{array}{|l|c|c|}
\hline &\text { Spot Rate } & \begin{array}{c}
\text { Forward Rate (for } \
\text { 31 Dec. 2022) }
\end{array} \\hline 1 \text { May 2022 } & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 1.00
\end{array} & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 1.05
\end{array} \\hline \text { 30 June 2022 - end of reporting period } & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 0.98
\end{array} & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 1.02
\end{array} \\hline \begin{array}{l}
31 \text { December } 2022 \text { - contract settlement } \
\text { date }
\end{array} & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 0.95
\end{array} & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 0.95
\end{array}\
\hline
\end{array}$ The premium (or discount) on the exchange rate at 30 June 2022 is:

Accepted Answer

A)  Premium of $0.02 
B)  Discount of $0.03 
C)  Premium of $0.04 
D)  Discount of $0.05 
A)  Premium of $0.02 
B)  Discount of $0.03 
C)  Premium of $0.04 
D)  Discount of $0.05

Question 14

The following assets can be defined as 'qualifying assets' except for:

Accepted Answer

A)  inventories purchased ready for sale. 
B)  power generation facilities 
C)  investment properties. 
D)  manufacturing plants. 
A)  inventories purchased ready for sale. 
B)  power generation facilities 
C)  investment properties. 
D)  manufacturing plants.

Question 15

On 25 June, Wattle Ltd acquires equipment on credit terms from a New Zealand supplier, Timaru Ltd, for NZ$240 000. The exchange rate at 25 June was NZ$1.00 = A$095. On 30 June the exchange rate is NZ$1.00 = A$0.90. Wattle Ltd pays Timaru Ltd in full on 7 July when the exchange rate is NZ$1.00 = A$0.92. The journal entry recorded by Wattle Ltd for the purchase of the equipment on 25 June is:

Accepted Answer

A)  DR Equipment A$240 000; CR Cash A$240 000 
B)  DR Equipment A$228 000; CR Payable to Timaru Ltd A$228 000 
C)  DR Equipment A$216 000; CR Payable to Timaru Ltd A$216 000 
D)  DR Equipment A$220 800; CR Payable to Timaru Ltd A$220 800 
A)  DR Equipment A$240 000; CR Cash A$240 000 
B)  DR Equipment A$228 000; CR Payable to Timaru Ltd A$228 000 
C)  DR Equipment A$216 000; CR Payable to Timaru Ltd A$216 000 
D)  DR Equipment A$220 800; CR Payable to Timaru Ltd A$220 800

Question 16

Subsequent measurement of items resulting from a foreign currency transaction depend on whether the items are:

Accepted Answer

A)  foreign or local. 
B)  monetary or non-monetary. 
C)  classified as current or non-current. 
D)  initially measured using the correct exchange rate. 
A)  foreign or local. 
B)  monetary or non-monetary. 
C)  classified as current or non-current. 
D)  initially measured using the correct exchange rate.

Question 17

If an Australian company enters a forward exchange contract to buy US$30 000, then which of the following applies?

Accepted Answer

A)  The company's forward contract will act as a hedge against a recognised asset. 
B)  The company's contractual obligation (at the forward rate) and contractual right (at the spot rate) are settled on a net basis. 
C)  The company has a contractual obligation to deliver foreign currency at the settlement date and that obligation is realised at the spot rate. 
D)  The company has a contractual right to receive US$30 000 at the settlement date and that right is an asset fixed in A$ at the forward rate. 
A)  The company's forward contract will act as a hedge against a recognised asset. 
B)  The company's contractual obligation (at the forward rate) and contractual right (at the spot rate) are settled on a net basis. 
C)  The company has a contractual obligation to deliver foreign currency at the settlement date and that obligation is realised at the spot rate. 
D)  The company has a contractual right to receive US$30 000 at the settlement date and that right is an asset fixed in A$ at the forward rate.

Question 18

According to AASB 121, all the following items are 'monetary items' except for:

Accepted Answer

A)  borrowings €60 000. 
B)  trade payable of ₤100 000. 
C)  trade receivable of US$24 000. 
D)  shares held in BHP Ltd listed on the ASX. 
A)  borrowings €60 000. 
B)  trade payable of ₤100 000. 
C)  trade receivable of US$24 000. 
D)  shares held in BHP Ltd listed on the ASX.

Question 19

On 1 May 2022, Ocean Blue Ltd enters a forward exchange contract to sell US$180 000 in 8 months' time at 31 December 2022. The relevant exchange rates are: $\begin{array}{|l|c|c|}
\hline &\text { Spot Rate } & \begin{array}{c}
\text { Forward Rate (for } \
\text { 31 Dec. 2022) }
\end{array} \\hline 1 \text { May 2022 } & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 1.00
\end{array} & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 1.05
\end{array} \\hline \text { 30 June 2022 - end of reporting period } & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 0.98
\end{array} & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 1.02
\end{array} \\hline \begin{array}{l}
31 \text { December } 2022 \text { - contract settlement } \
\text { date }
\end{array} & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 0.95
\end{array} & \begin{array}{l}
\text { US } \$ 1.00= \
\mathrm{A} \$ 0.95
\end{array}\
\hline
\end{array}$ The journal entry required at 30 June 2022 to record any foreign exchange gain or loss on the forward contract is:

Accepted Answer

A)  DR Loss of forward contract A$5400; CR Forward contract A$5400 
B)  DR Loss of forward contract A$5042; CR Forward contract A$5042 
C)  DR Forward contract A$5400; CR Gain on forward contract A$5400 
D)  No entry is required. 
A)  DR Loss of forward contract A$5400; CR Forward contract A$5400 
B)  DR Loss of forward contract A$5042; CR Forward contract A$5042 
C)  DR Forward contract A$5400; CR Gain on forward contract A$5400 
D)  No entry is required.

Question 20

Which of the following is not an example of a fair value hedge?

Accepted Answer

A)  a forward contract to buy US$ hedging a recognised trade payable in US$. 
B)  a forward contract to sell US$ hedging a recognised loan receivable in US$. 
C)  a forward contract to sell US$ hedging a recognised trade receivable in US$. 
D)  a forward contract to buy US$ hedging a highly probable purchase of inventory in US$. 
A)  a forward contract to buy US$ hedging a recognised trade payable in US$. 
B)  a forward contract to sell US$ hedging a recognised loan receivable in US$. 
C)  a forward contract to sell US$ hedging a recognised trade receivable in US$. 
D)  a forward contract to buy US$ hedging a highly probable purchase of inventory in US$.

Exam 23: Foreign Currency Transactions and Forward Exchange Contracts

Which of the following is not an example of a cash flow hedge?

At the end of the reporting period, a foreign currency monetary item is remeasured using:

The main issue in accounting for foreign currency transactions is:

Outback Limited, an Australian company, purchased machinery from Southern Ranches Limited, a US company, on credit terms for US$600 000. At the transaction date, the exchange rate was US$1 = A$1.20. The journal entry recorded by Outback Limited for this purchase would be:

Monetary items include the following except for:

At the date of the transaction, a foreign currency monetary item is initially recognised and measured using:

The formal documentation of a hedging relationship must include identification of: I. The hedging instriment II. The hedged iterr III. The rature of the risk being hedged IV. How the entity will assesshedge effectiveness

An exchange difference is 'realised':

AASB 121 requires which of the following to be disclosed in the financial reports?

The Australian Financial News quoted A$1.00 equals US$1.15/1.18. What does this represent?

A forward contact to buy US$450 000 for a planned purchase transaction of US$600 000 has a hedge ratio of:

The following assets can be defined as 'qualifying assets' except for:

Subsequent measurement of items resulting from a foreign currency transaction depend on whether the items are:

If an Australian company enters a forward exchange contract to buy US$30 000, then which of the following applies?

According to AASB 121, all the following items are 'monetary items' except for:

Which of the following is not an example of a fair value hedge?

Accounting Regulation and the Conceptual Framework

Application of Accounting Theory

Fair Value Measurement

Inventories

Property, Plant and Equipment

Intangible Assets

Impairment of Assets

Provisions, Contingent Liabilities and Contingent Assets

Employee Benefits

Leases

Financial Instruments

Income Taxes

Share Capital and Reserves

Share Based Payment

Revenue

Presentation of Financial Statements

Statement of Cash Flows

Accounting Policies and Other Disclosures

Earnings Per Share

Operating Segments

Related Party Disclosures

Sustainability and Corporate Social Responsibility Recording

Translation of Foreign Currency Financial Statements

Business Combinations

Consolidation: Controlled Entities

Consolidation: Wholly Owned Entities

Consolidation: Intragroup Transactions

Consolidation: Non-Controlling Interest

Consolidation: Other Issues

Associates and Joint Ventures

Joint Arrangements

Insolvency and Liquidation

Accounting for Mineral Resources

Agriculture

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