Exam 25: The Effects of Changes in Foreign Exchange Rates

Sam Cooke Entity (SCE) presses vinyl LP's, EP's, and singles for contracted recording studios and is a foreign subsidiary. SCE contracted with Beach Boys Studio (BBS) on February 14 to deliver 50,000 vinyl singles of the song "Twistin' the Night Away. On April 11, SCE shipped the singles under terms of FOB shipping point. Two days later on April 13, SCE invoiced BBS under terms of 5/10 n/30. Ten days later on April 23, SCE received payment from BBS and credited BBS's account for the 5 percent discount. SCE's year end is June 30. Which date should SCE use to apply an exchange rate to this transaction?

Assia Entity (AE), an Moroccan exporter, with the Moroccan Dirhams (MAD) as both its functional and presentation currency, sells inventory with a carrying amount of MAD 250,000 to a Bruneian importer, Darma Entity (DE) on credit denominated in Bruneian dollar BND 40,000 on December 1, 20X1 to be settled on February 1, 20X2. The spot exchange rate on the transaction date is BND1 = MAD7. -What is the journal entry on the settlement day, February 1, assuming the spot exchange rate is BND1 = MAD6.5?

An entity can choose to present its financial statements in any currency.

Explain the difference between the terms, "function currency" and "presentation currency."

Which conversion rate should be used to translate foreign currency monetary balances at the end of a fiscal period?

If British Entity (AE) enters into a transaction with Portuguese Entity (PE) that is denominated in PE's currency, how is the transaction reflected in the accounting records of AE?

When translating foreign currency items into the functional currency, monetary items are translated at the

An entity can have several different functional currencies.

An entity is required to measure foreign currency transactions and events (i.e., assets, liabilities and operations) in its functional currency.

Assia Entity (AE), an Moroccan exporter, with the Moroccan Dirhams (MAD) as both its functional and presentation currency, sells inventory with a carrying amount of MAD 250,000 to a Bruneian importer, Darma Entity (DE) on credit denominated in Bruneian dollar BND 40,000 on December 1, 20X1 to be settled on February 1, 20X2. The spot exchange rate on the transaction date is BND1 = MAD7. -How should AE account for the sale on December 1, 20X7?

Parsons Produce uses the Euro as its functional currency. In attempt to appeal to British investors, Parsons uses the British pound as its presentation currency. Parsons Produce is allowed to report this way under IAS 21 even though the British Pound isn't its functional currency.

If a foreign operation is not autonomous and it has a high proportion of transactions with the reporting entity, the operation doesn't need to have the same functional currency as the reporting entity.

Explain the difference between the terms, "exchange rate" and "exchange difference."

An entity can choose its functional currency.

O'Hare Entity, located in Northern Ireland, uses the British pound as its functional and presentation currency. O'Hare has investments in Midway Entity which uses the Yen as its functional and presentation currency. These investments are categorized as available for sale. Exchange gains or losses related to these investments are recognized in OCI.

On July 1, 20X7, Kim Entity (KE), a Korean importer, with the South Korean Won as its functional and presentation currency, buys inventory from a Brazilian exporter, Waldir Entity (WE), on credit at a price of 40,000 Brazilian real to be paid on August 15. The spot exchange rate is BRL1= KRW300 at the transaction date. -What is the journal entry on the settlement day, August 15, assuming the spot exchange rate is BRL1= KRW310?

Turnkey Entity disposed of its wholly-owned foreign subsidiary, Threshold Entity. Turnkey had a total credit balance of $50 million in OCI with $12 million relating to foreign exchange differences between Turnkey and Threshold. Which of the following statements most closely reflects the ultimate consequences of the disposal?

Which of the following is not considered in determining an entity's functional currency?

Somnolentus Entity is a French food manufacturer. Recently, Ustal Entity, a Russian retailer purchased 20,000 chocolate bars on credit from Somnolentus at a price of €10,000. Ustal paid Somnolentus 30 days later. The spot exchange rate between the euro (used by somnolentus) and the ruble (used by Ustal) at the date of purchase is €1 to RUB10. Thirty days later, on the day that Ustal paid Somnolentus, the spot exchange rate was €1 to RUB5. What are the journal entries for the date of purchase and the date of payment for Ustal?

The closing rate is the spot exchange rate at the end of the reporting period.