Exam 7: Accounting for Foreign Currency

Non-monetary items are translated using the exchange rate at the balance sheet date. Any resulting foreign exchange gain or loss is recorded in other comprehensive income.

On November 2, 2013, Glasser Company purchased a machine for 100,000 Swiss francs (CHF)with payment requirement on March 30, 2014. To eliminate the risk of foreign exchange losses on this payable, Glasser entered into a forward exchange contract on November 3, 2013 to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30, 2014. The spot rate was CHF1 = $1.95 on November 2, 2013 and CHF1 = $1.97 on December 1, 2013. What is the amount of the premium or discount on the forward exchange contract?

On November 2, 2013, Choi Company purchased equipment for 100,000 Swiss francs (CHF)with payment requirement on March 30, 2014. To eliminate the risk of foreign exchange losses on this payable, Choi entered into a forward exchange contract on November 3, 2013 to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30, 2014. The spot rate was CHF1 = $1.95 on November 2, 2013 and CHF1 = $1.97 on December 1, 2013. How should the premium or discount on the forward exchange contract be accounted for if it is deemed to be a cash flow hedge?

Which of the following items is a non-monetary item?

Assets and liabilities (including comparatives)are translated at the spot rate at the date of the statement of financial position.

Once an entity's functional currency is identified, all transactions denominated in another currency are considered to be foreign currency transactions. What are some examples of foreign currency transactions?

Exchange gains and losses on accounts receivable/payable that are denominated in a foreign currency are deferred and reported upon settlement.

Which of the following typically cannot be a hedged item?

When a commercial transaction is denominated in another currency, foreign exchange gains and losses are realized.

On December 1, 2013, Rollings Ltd. sold goods to Federer Ltd., a company located in Switzerland for 500,000 Swiss francs (CHF). At the date of sale, the spot rate was CHF1 = $1.0329. On the same date, Rollings acquired a 90-day forward contract at a rate of CHF1 = $1.0315. On March 1, 2014, Rollings receives full payment from Federer and delivered the Swiss francs in execution of the forward contract. The spot rate at March 1, 2014 was CHF1 = $1.0287. What amount should Rollings record for the sale?

Once a company's functional currency is identified, all transactions denominated in another currency are considered to be foreign currency transactions.

What is the exchange rate in effect at the date of the transaction called?

Which of the following statements regarding functional currency is FALSE?

A transaction gain or loss at the settlement date is:

Companies may operate in Canada, meaning that their offices are located in Canada, and their customers are Canadian. However, sometimes companies may decide they are willing to accept payment in a currency other than Canadian dollars. Which of the following statements is FALSE?

Which of the following list would not be effective as a hedge for a Canadian company with a large number of transactions in Denmark?

Which of the following is NOT one of the conditions that must be met to qualify for hedge accounting?

Which of the following statements regarding the translation of the financial statements into a presentation currency is FALSE?

In order to identify the foreign exchange component of a transaction, a company must establish the currency in which its books and records should be maintained.

A transaction loss would result from