Question 1

The Big Mac index is:

Accepted Answer

A)  An indicator of the economic wealth of a country, applied to a capacity to purchase Big Macs with the average wage. 
B)  A measure of interest rate parity such that the exchange rates between countries can be compared to assess whether or not interest rates are too high or low in a particular country relative to other major currencies in the world. 
C)  A measure of purchasing power parity applied to a 'real' product that is essentially identical and available around the world. 
D)  A measure of interest rate parity such that the exchange rates between countries can be compared to assess whether or not interest rates are too high or low in a particular country relative to other major currencies in the world and a measure of purchasing power parity applied to a 'real' product that is essentially identical and available around the world. 
E)  None of the given answers. 
A)  An indicator of the economic wealth of a country, applied to a capacity to purchase Big Macs with the average wage. 
B)  A measure of interest rate parity such that the exchange rates between countries can be compared to assess whether or not interest rates are too high or low in a particular country relative to other major currencies in the world. 
C)  A measure of purchasing power parity applied to a 'real' product that is essentially identical and available around the world. 
D)  A measure of interest rate parity such that the exchange rates between countries can be compared to assess whether or not interest rates are too high or low in a particular country relative to other major currencies in the world and a measure of purchasing power parity applied to a 'real' product that is essentially identical and available around the world. 
E)  None of the given answers.

Question 2

On 1 July 2004 Waugh Ltd enters into an arrangement with a US bank - Big Bank - to borrow US$900,000.The term of the loan is 3 years with interest payable annually in arrears on 30 June at the rate of 10 per cent.The exchange rate information is:   What journal entries are required in Waugh Ltd's books for 1 July 2004 and 30 June 2005 in accordance with AASB 121 (rounded to the nearest whole $A)?

Accepted Answer

A)    
B)    
C)    
D)    
E)  None of the given answers. 
A)    
B)    
C)    
D)    
E)  None of the given answers.

Question 3

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?

Accepted Answer

A)  Long-term foreign currency monetary items are not required to be re-translated at reporting date. The concern raised is that the failure to reflect the impact of changes in the exchange rate on items that are exposed to forex risk does not provide useful information for decision making about the risk exposure of the reporting entity. 
B)  Long-term foreign currency monetary items are required to be re-translated at the spot exchange rate at reporting date and the difference is deferred to be recognised / amortised over the life of the monetary item. The concern that has been raised is that the deferred items are not assets or liabilities in terms of the conceptual framework and are therefore meaningless in the balance sheet and misleading for users of the financial statements. 
C)  Long-term foreign currency monetary items are not required to be re-translated at reporting date, but the exchange rates, maturity dates and applicable forward rates are required note disclosures. The concern raised about this treatment is that the need to reflect the risk exposure in foreign currency denominated monetary items is not addressed through measurement, but only through disclosure, leaving the burden of assessing the impact on the financial position and performance of the entity up to the user. 
D)  Long-term foreign currency monetary items are required to be re-translated at the spot rate at reporting date and any differences treated as gains or losses in the income statement. The concern raised about this treatment is that the amounts of profit and loss recognised in the income statement are actually unrealised and there is considerable doubt about whether or not they would ever be realised as a result of the fluctuating nature of exchange rates. 
E)  None of the given answers. 
A)  Long-term foreign currency monetary items are not required to be re-translated at reporting date. The concern raised is that the failure to reflect the impact of changes in the exchange rate on items that are exposed to forex risk does not provide useful information for decision making about the risk exposure of the reporting entity. 
B)  Long-term foreign currency monetary items are required to be re-translated at the spot exchange rate at reporting date and the difference is deferred to be recognised / amortised over the life of the monetary item. The concern that has been raised is that the deferred items are not assets or liabilities in terms of the conceptual framework and are therefore meaningless in the balance sheet and misleading for users of the financial statements. 
C)  Long-term foreign currency monetary items are not required to be re-translated at reporting date, but the exchange rates, maturity dates and applicable forward rates are required note disclosures. The concern raised about this treatment is that the need to reflect the risk exposure in foreign currency denominated monetary items is not addressed through measurement, but only through disclosure, leaving the burden of assessing the impact on the financial position and performance of the entity up to the user. 
D)  Long-term foreign currency monetary items are required to be re-translated at the spot rate at reporting date and any differences treated as gains or losses in the income statement. The concern raised about this treatment is that the amounts of profit and loss recognised in the income statement are actually unrealised and there is considerable doubt about whether or not they would ever be realised as a result of the fluctuating nature of exchange rates. 
E)  None of the given answers.

Question 4

Sure Ltd purchased goods for £210,000 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 £210,000 on 30 July 2005 is taken out with Aus Bank.Exchange rates are as follows:   What entries are required to record the initial transaction and the forward-exchange contract in accordance with AASB 121 and AASB 139 (rounded to the nearest whole $A)?

Accepted Answer

A)    
B)    
C)    
D)    
E)  None of the given answers. 
A)    
B)    
C)    
D)    
E)  None of the given answers.

Question 5

AASB 123 Borrowing Costs defines a qualifying asset as an asset that:

Accepted Answer

A)  takes a period of greater than twelve months to get ready for its intended use or sale. 
B)  takes a substantial period of time to get ready for its intended use or sale. 
C)  takes a period of greater than twelve months to complete. 
D)  takes a substantial period of time to complete. 
E)  is specified as "qualifying" under the Corporations Act. 
A)  takes a period of greater than twelve months to get ready for its intended use or sale. 
B)  takes a substantial period of time to get ready for its intended use or sale. 
C)  takes a period of greater than twelve months to complete. 
D)  takes a substantial period of time to complete. 
E)  is specified as "qualifying" under the Corporations Act.

Question 6

Management may exercise its judgement to determine the functional currency that most faithfully represents the economic effects of the underlying transactions,events and conditions.

Accepted Answer

A) True 
 B)False

Question 7

To classify an arrangement as a hedge,and therefore to apply 'hedge accounting',AASB 132 requires a set of strict conditions be met.

Accepted Answer

A) True 
 B)False

Question 8

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?

Accepted Answer

A)  It is not an effective hedge as there was a difference of $10,000,000 between the fair values of the shares and the forward contract at inception. 
B)  It is not an effective hedge as a forward contract cannot be used as a hedging instrument. 
C)  It is an effective hedge as the movement in the fair value of the hedging instrument between 1 July 2007 and 30 June 2010 offset movements in fair value of the shares in the same period, which is within the 80/125 per cent hedge effectiveness range. 
D)  It is an effective hedge as the movements in the fair value of the hedging instrument offset movements in fair value of the shares and stayed within the 80/125 per cent hedge effectiveness range throughout the period to 30 June 2010. 
E)  It is not an effective hedge as the movements in the fair value of the hedging instrument failed to offset movements in the fair value of the shares and stay within the 80/125 per cent hedge effectiveness range throughout the period to 30 June 2010. 
A)  It is not an effective hedge as there was a difference of $10,000,000 between the fair values of the shares and the forward contract at inception. 
B)  It is not an effective hedge as a forward contract cannot be used as a hedging instrument. 
C)  It is an effective hedge as the movement in the fair value of the hedging instrument between 1 July 2007 and 30 June 2010 offset movements in fair value of the shares in the same period, which is within the 80/125 per cent hedge effectiveness range. 
D)  It is an effective hedge as the movements in the fair value of the hedging instrument offset movements in fair value of the shares and stayed within the 80/125 per cent hedge effectiveness range throughout the period to 30 June 2010. 
E)  It is not an effective hedge as the movements in the fair value of the hedging instrument failed to offset movements in the fair value of the shares and stay within the 80/125 per cent hedge effectiveness range throughout the period to 30 June 2010.

Question 9

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

Accepted Answer

A)  Foreign currency transactions are recorded, on initial recognition in the presentation currency, by applying to the foreign currency amount the spot exchange rate between the presentation currency and the foreign currency at the date of the transaction. 
B)  At each end of the reporting period, foreign currency non-monetary items shall be translated using the closing rate. 
C)  At each end of the reporting period non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction. 
D)  At each end of the reporting period, non-monetary items that are measured at fair value in a foreign currency shall be translated using closing rate. 
E)  None of the given answers. 
A)  Foreign currency transactions are recorded, on initial recognition in the presentation currency, by applying to the foreign currency amount the spot exchange rate between the presentation currency and the foreign currency at the date of the transaction. 
B)  At each end of the reporting period, foreign currency non-monetary items shall be translated using the closing rate. 
C)  At each end of the reporting period non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction. 
D)  At each end of the reporting period, non-monetary items that are measured at fair value in a foreign currency shall be translated using closing rate. 
E)  None of the given answers.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Exchange gains or losses on a qualifying asset that arise before it ceases to be a qualifying asset are to be deferred and amortised over the life of the asset according to AASB 123:

Accepted Answer

A) True 
 B)False

Question 12

The effect of an increase in the exchange rate for Australian dollars relative to other major world currencies would include:

Accepted Answer

A)  Offshore debt would become more expensive. 
B)  The cost of importing goods from overseas would increase. 
C)  People buying goods overseas with Australian dollars would find the goods relatively cheaper than before. 
D)  The cost of Australian exports for overseas buyers would decrease. 
E)  All of the given answers. 
A)  Offshore debt would become more expensive. 
B)  The cost of importing goods from overseas would increase. 
C)  People buying goods overseas with Australian dollars would find the goods relatively cheaper than before. 
D)  The cost of Australian exports for overseas buyers would decrease. 
E)  All of the given answers.

Question 13

According to AASB 123 a qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale:

Accepted Answer

A) True 
 B)False

Question 14

On 1 May 2005 Harriet's Importers Ltd acquires goods from a supplier in Britain.The goods are shipped f.o.b.from England on 1 May 2005.The cost of the goods is £200,000.The amount has not been paid at period end,30 June 2005.Exchange rates are as follows:   Harriet's Importers Ltd uses a perpetual inventory system.
What entries are required at transaction date and reporting date (rounded to the nearest whole $A)?

Accepted Answer

A)    
B)    
C)    
D)    
E)  None of the given answers. 
A)    
B)    
C)    
D)    
E)  None of the given answers.

Question 15

An entity's may change its functional currency when there is a change in the underlying transactions,events and conditions.

Accepted Answer

A) True 
 B)False

Question 16

Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.

Accepted Answer

A) True 
 B)False

Question 17

AASB 121 requires that foreign currency monetary items outstanding at reporting date must be:

Accepted Answer

A)  Translated at the spot rate at the transaction date. 
B)  Reported at the forward-exchange rate based on the 90-day bank bill rate at that date. 
C)  Translated at the spot rate at reporting date. 
D)  Translated at the spot rate at settlement date. 
E)  None of the given answers. 
A)  Translated at the spot rate at the transaction date. 
B)  Reported at the forward-exchange rate based on the 90-day bank bill rate at that date. 
C)  Translated at the spot rate at reporting date. 
D)  Translated at the spot rate at settlement date. 
E)  None of the given answers.

Question 18

Exchange differences recognised as borrowing costs and included in the cost of an asset,are recogniseD.

Accepted Answer

A)  Until the asset is ready for its intended use or sale, provided the capitalisation of costs does not mean that the cost of the asset exceeds recoverable amount. 
B)  Until such time as they are deemed to be income and expenses by a resolution of the Board of Management. 
C)  Until such time as income is derived, at which time they are passed directly to profit or loss. 
D)  Only after the asset is ready for its intended use or sale, provided the capitalisation of costs does not mean that the cost of the asset exceeds recoverable amount. 
E)  At the discretion for the entity's auditors. 
A)  Until the asset is ready for its intended use or sale, provided the capitalisation of costs does not mean that the cost of the asset exceeds recoverable amount. 
B)  Until such time as they are deemed to be income and expenses by a resolution of the Board of Management. 
C)  Until such time as income is derived, at which time they are passed directly to profit or loss. 
D)  Only after the asset is ready for its intended use or sale, provided the capitalisation of costs does not mean that the cost of the asset exceeds recoverable amount. 
E)  At the discretion for the entity's auditors.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A)  Foreign currency denominated loans 
B)  Bank deposits in foreign currency 
C)  Investments in foreign operations 
D)  Foreign currency derivatives 
E)  None of the given answers. 
A)  Foreign currency denominated loans 
B)  Bank deposits in foreign currency 
C)  Investments in foreign operations 
D)  Foreign currency derivatives 
E)  None of the given answers.

Exam 35: Accounting for Foreign Currency Transactions

The Big Mac index is:

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?

AASB 123 Borrowing Costs defines a qualifying asset as an asset that:

Management may exercise its judgement to determine the functional currency that most faithfully represents the economic effects of the underlying transactions,events and conditions.

To classify an arrangement as a hedge,and therefore to apply 'hedge accounting',AASB 132 requires a set of strict conditions be met.

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?

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

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

Exchange gains or losses on a qualifying asset that arise before it ceases to be a qualifying asset are to be deferred and amortised over the life of the asset according to AASB 123:

The effect of an increase in the exchange rate for Australian dollars relative to other major world currencies would include:

According to AASB 123 a qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale:

An entity's may change its functional currency when there is a change in the underlying transactions,events and conditions.

Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.

AASB 121 requires that foreign currency monetary items outstanding at reporting date must be:

Exchange differences recognised as borrowing costs and included in the cost of an asset,are recogniseD.

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

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

An Overview of the Australian External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financ

Theories of Financial Accounting

An Overview of Accounting for Assets

Depreciation of Property, plant and Equipment

Revaluation and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

Accounting for Heritage Assets and Biological Assets

An Overview of Accounting for Liabilities

Accounting for Lease

Set-Off and Extinguishment of Debt

Accounting for Employee Benefits

Share Capital and Reserves

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in E

Accounting for Share-Based Payments

Accounting for Income Taxes

Cash-Flow Statements

Accounting for the Extractive Industries

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After Balance Sheet Date

Segment Reporting

Related-Party Disclosures

Earnings Per Share

Accounting for Group Structures

Further Consolidation Issues I: Accounting for Intragroup Transact

Further Consolidation Issues II: Accounting for Minority Interests

Further Consolidation Issues III: Accounting for Indirect Ownershi

Further Consolidation Issues Iv: Accounting for Changes in the Deg

Accounting for Equity Investments

Accounting for Equity Investments

Translation of the Accounts of Foreign Operations

Accounting for Corporate Social Responsibility

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