Question 1

Which of the following best describes the requirements under Australian Accounting Standard AASB 139?

Accepted Answer

A)  All financial instruments are accounted for using hedge accounting 
B)  Hedging arrangements must meet certain requirements before hedge accounting can be applied 
C)  Financial instruments must meet certain requirements before hedge accounting can be applied 
D)  All hedging arrangements are accounted for using the general principles of accounting for financial instruments 
A)  All financial instruments are accounted for using hedge accounting 
B)  Hedging arrangements must meet certain requirements before hedge accounting can be applied 
C)  Financial instruments must meet certain requirements before hedge accounting can be applied 
D)  All hedging arrangements are accounted for using the general principles of accounting for financial instruments B

Question 2

Respectively,a company's domestic currency,functional currency and presentation currency are:
i.the currency in which the financial statements must be presented
ii.the currency in which an entity is required to measure its financial performance and position
iii.the currency of the country of incorporation
iv.the currency of the country in which the majority of shareholders are located

Accepted Answer

A)  i, ii, iv 
B)  iii, iv, i 
C)  iii, ii, i 
D)  iv, iii, ii 
A)  i, ii, iv 
B)  iii, iv, i 
C)  iii, ii, i 
D)  iv, iii, ii C

Question 3

A way in which a foreign currency transaction can be hedged is:

Accepted Answer

A)  Buy (or sell) foreign currency at the date of the initial transaction 
B)  Enter into a forward rate agreement to fix the cost of the currency at a fixed date in the future 
C)  Enter into a transaction which neutralises the risk (e.g., have accounts receivable and accounts payable in the same currency with the same payment dates) 
D)  All of the above 
A)  Buy (or sell) foreign currency at the date of the initial transaction 
B)  Enter into a forward rate agreement to fix the cost of the currency at a fixed date in the future 
C)  Enter into a transaction which neutralises the risk (e.g., have accounts receivable and accounts payable in the same currency with the same payment dates) 
D)  All of the above D

Question 4

Exchange rates between the Australian dollar and the US dollar are determined by:

Accepted Answer

A)  jointly by the Reserve Bank of Australia and the US Federal Reserve Board 
B)  the Reserve Bank of Australia 
C)  the Australian Department of Treasury 
D)  the supply of and demand for the two currencies 
A)  jointly by the Reserve Bank of Australia and the US Federal Reserve Board 
B)  the Reserve Bank of Australia 
C)  the Australian Department of Treasury 
D)  the supply of and demand for the two currencies

Question 5

A transaction that is denominated on or requires settlement in a foreign currency is:

Accepted Answer

A)  a forward agreement 
B)  a foreign currency transaction 
C)  a spot rate 
D)  a hedging instrument 
A)  a forward agreement 
B)  a foreign currency transaction 
C)  a spot rate 
D)  a hedging instrument

Question 6

There are four methods suggested for translating foreign currency financial statements.Identify these four methods and explain the translation methods used under each.

Accepted Answer

The answer of There are four methods suggested for translating...

Question 7

When translating the assets and liabilities from functional currency to presentation currency,AASB 121 requires that:

Accepted Answer

A)  the exchange rates at the dates of transaction are used 
B)  the exchange rate as at the end of the reporting period is used 
C)  an average exchange rate for the year of reporting be used 
D)  either a or c can be used 
A)  the exchange rates at the dates of transaction are used 
B)  the exchange rate as at the end of the reporting period is used 
C)  an average exchange rate for the year of reporting be used 
D)  either a or c can be used

Question 8

AASB 121 requires that non-monetary items are measured,subsequent to their initial recognition,at:

Accepted Answer

A)  the exchange rate at the date of transaction 
B)  the exchange rate at the date of that the fair value was determined 
C)  an average exchange rate at the end of the reporting period 
D)  both A and B can apply 
A)  the exchange rate at the date of transaction 
B)  the exchange rate at the date of that the fair value was determined 
C)  an average exchange rate at the end of the reporting period 
D)  both A and B can apply

Question 9

An Australian company purchases goods worth Baht 60 000 from a company in Thailand,and the goods are invoiced in Australian dollars.At the date of purchase,the exchange rate is $AU 1.00 = Baht 30.At the date the goods are paid for,the exchange rate is $AU 1.00 = Baht 25.The Australian company should make the following entries to record the purchase of the goods and the payment made:

Accepted Answer

A) 
A)  Dr Inventory$\quad \$ 2000$
$\mathrm { Cr }$ Accounts Payable$\quad \$ 2000$
Dr Accounts Payable $\quad \$ 2000$
Cr Exchange Gain$\quad \$ 400$
Cr Cash at Bank$\quad \$ 1600$ 
B) 
B)  Dr Inventory$\quad \$ 2000$
Cr Accounts Payable$\quad \$ 2000$
Dr Accounts Payable $\quad \$ 2000$
$\mathrm { Cr }$ Cash at Bank$\quad \$ 2000$ 
C) 
C)  Dr Inventory$\quad \$ 2000$
Cr Accounts Payable$\quad \$ 2000$
$\begin{array} { l r } \text { Dr Accounts Payable } & \$ 2000 \ \text { Dr Exchange Loss } & \$ 400 \end{array}$
Cr Cash at Bank$\quad \$ 2400$ 
D) $\begin{array} { c c c } 
\text { 
D)  Dr Inventory } & \$ 2400 & \
\quad \text { Cr Accounts Payable } & & \$ 2400 \
\text { Dr Accounts Payable } & \$ 2400 & \
\quad \text { Cr Cash at Bank } & & \$ 2400
\end{array}$ 
A) 
A)  Dr Inventory$\quad \$ 2000$
$\mathrm { Cr }$ Accounts Payable$\quad \$ 2000$
Dr Accounts Payable $\quad \$ 2000$
Cr Exchange Gain$\quad \$ 400$
Cr Cash at Bank$\quad \$ 1600$ 
B) 
B)  Dr Inventory$\quad \$ 2000$
Cr Accounts Payable$\quad \$ 2000$
Dr Accounts Payable $\quad \$ 2000$
$\mathrm { Cr }$ Cash at Bank$\quad \$ 2000$ 
C) 
C)  Dr Inventory$\quad \$ 2000$
Cr Accounts Payable$\quad \$ 2000$
$\begin{array} { l r } \text { Dr Accounts Payable } & \$ 2000 \ \text { Dr Exchange Loss } & \$ 400 \end{array}$
Cr Cash at Bank$\quad \$ 2400$ 
D) $\begin{array} { c c c } 
\text { 
D)  Dr Inventory } & \$ 2400 & \
\quad \text { Cr Accounts Payable } & & \$ 2400 \
\text { Dr Accounts Payable } & \$ 2400 & \
\quad \text { Cr Cash at Bank } & & \$ 2400
\end{array}$

Question 10

The following comments might be made about Australian businesses involved in gold mining and similar operations (note that Gold is generally traded in US dollars):
i.They do not need to engage in hedging of foreign currency transactions because
Gold prices are always set in US dollars
ii.There is no benefit in engaging in hedging of foreign currency transactions because
They cannot significantly influence the price of their product
iii.Hedging of foreign currency transactions would diminish or remove any uncertainty
About the effects of changes in exchange rates
iv.Hedging of foreign currency transactions could cause them to report lower profits
(or larger losses)than if they did not engage in hedging

Accepted Answer

A)  Both (i) and (iii) are correct 
B)  Both (ii) and (iv) are correct 
C)  Both (i) and (iv) are correct 
D)  Both (iii) and (iv) are correct 
A)  Both (i) and (iii) are correct 
B)  Both (ii) and (iv) are correct 
C)  Both (i) and (iv) are correct 
D)  Both (iii) and (iv) are correct

Question 11

A fair value hedge that meets the requirements under AASB 139 for hedge accounting is accounted for in which of the following ways?

Accepted Answer

A)  Any gain or loss on the hedged item attributable to the hedge risk is recognised in the profit and loss 
B)  Any gain or loss from re-measuring the hedging instrument at fair value or its foreign currency amount is recognised as equity 
C)  When a firm commitment to acquire an asset is entered into and it is a hedged item, the initial carrying amount of the asset should never include the cumulative change in fair value of the commitment previously recognised in the balance sheet 
D)  None of the above describes the correct accounting for a fair value hedge 
A)  Any gain or loss on the hedged item attributable to the hedge risk is recognised in the profit and loss 
B)  Any gain or loss from re-measuring the hedging instrument at fair value or its foreign currency amount is recognised as equity 
C)  When a firm commitment to acquire an asset is entered into and it is a hedged item, the initial carrying amount of the asset should never include the cumulative change in fair value of the commitment previously recognised in the balance sheet 
D)  None of the above describes the correct accounting for a fair value hedge

Question 12

Explain,using simple numerical examples,how (a)a gain and (b)a loss can arise due to changes in currency exchange rates for a business that is (i)selling goods or services to an overseas buyer and (ii)purchasing goods or services from an overseas supplier.Also explain two ways in which a business engaging in international trade can try to protect itself against possible exchange losses.What are the possible disadvantages,if any,in using the methods you suggest?

Accepted Answer

a) A gain can arise due to changes in cu

Question 13

AASB 121 requires the translation of financial statements in which of the following circumstances?
i.if the domestic currency of the foreign operation is not the same as the functional
Currency of its parent
ii.if the functional currency of the foreign operation is not the same as the functional
Currency of its parent
iii.if the functional currency of the economic entity is not its presentation currency
iv.if the presentation currency of the economic entity is not its functional currency

Accepted Answer

A)  i and ii 
B)  ii and iii 
C)  iii and iv 
D)  i and iii 
A)  i and ii 
B)  ii and iii 
C)  iii and iv 
D)  i and iii

Question 14

The main objective of translating the financial statements of foreign operations into Australian dollars is to:

Accepted Answer

A)  compare the performance of the foreign subsidiary's managers with their Australian counterparts 
B)  meet the requirements of tax legislation 
C)  incorporate the results of the foreign operations into the consolidated financial reports 
D)  evaluate the performance of the foreign subsidiary's managers 
A)  compare the performance of the foreign subsidiary's managers with their Australian counterparts 
B)  meet the requirements of tax legislation 
C)  incorporate the results of the foreign operations into the consolidated financial reports 
D)  evaluate the performance of the foreign subsidiary's managers

Question 15

The 'functional currency' of a business is:

Accepted Answer

A)  the currency of the country in which the business is incorporated 
B)  the currency of the primary economic environment in which the company operates 
C)  the currency in which the business presents its financial reports 
D)  the currency of the country in which the majority of the shareholders of the business are located 
A)  the currency of the country in which the business is incorporated 
B)  the currency of the primary economic environment in which the company operates 
C)  the currency in which the business presents its financial reports 
D)  the currency of the country in which the majority of the shareholders of the business are located

Question 16

An Australian company purchases goods worth Baht 60 000 from a company in Thailand,and the goods are invoiced in Thai baht.At the date of purchase,the exchange rate is $AU 1.00 = Baht 30.At the date the goods are paid for,the exchange rate is $AU 1.00 = Baht 25.The Australian company should make the following entries to record the purchase of the goods and the payment made:

Accepted Answer

A) $\begin{array} { c l c } 
\text { 
A)  Dr Inventory } & \$ 2000 & \
\text { Cr Accounts Payable } & & \$ 2000 \
\text { Dr Accounts Payable } & \$ 2000 & \
\text { Cr Cash at Bank } & & \$ 2000
\end{array}$ 
B) $\begin{array} { c r r } 
\text { 
B)  Dr Inventory } & \$ 1800000 & \
\quad \text { Cr Accounts Payable } & \$ 1800000 \
\text { Dr Accounts Payable } & \$ 1800000 \
\quad \text { Cr Exchange Gain } & & \$ 300000 \
\text { Cr Cash at Bank } & & \$ 1500000
\end{array}$ 
C) 
C)  Dr Inventory$\quad \$ 2000$
Cr Accounts Payable$\quad \$ 2000$
Dr Accounts Payable$\quad \$ 2400$
Cr Exchange Gain$\quad \$ 400$
Cr Cash at Bank$\quad \$ 2000$ 
D) $\begin{array} { l r r } 
\text { 
D)  Dr Inventory } & \$ 2000 & \
\quad \text { Cr Accounts Payable } & & \$ 2000 \
\text { Dr Accounts Payable } & \$ 2000 & \
\text { Dr Exchange Loss } & \$ 400 & \
\quad \text { Cr Cash at Bank } & & \$ 2400
\end{array}$ 
A) $\begin{array} { c l c } 
\text { 
A)  Dr Inventory } & \$ 2000 & \
\text { Cr Accounts Payable } & & \$ 2000 \
\text { Dr Accounts Payable } & \$ 2000 & \
\text { Cr Cash at Bank } & & \$ 2000
\end{array}$ 
B) $\begin{array} { c r r } 
\text { 
B)  Dr Inventory } & \$ 1800000 & \
\quad \text { Cr Accounts Payable } & \$ 1800000 \
\text { Dr Accounts Payable } & \$ 1800000 \
\quad \text { Cr Exchange Gain } & & \$ 300000 \
\text { Cr Cash at Bank } & & \$ 1500000
\end{array}$ 
C) 
C)  Dr Inventory$\quad \$ 2000$
Cr Accounts Payable$\quad \$ 2000$
Dr Accounts Payable$\quad \$ 2400$
Cr Exchange Gain$\quad \$ 400$
Cr Cash at Bank$\quad \$ 2000$ 
D) $\begin{array} { l r r } 
\text { 
D)  Dr Inventory } & \$ 2000 & \
\quad \text { Cr Accounts Payable } & & \$ 2000 \
\text { Dr Accounts Payable } & \$ 2000 & \
\text { Dr Exchange Loss } & \$ 400 & \
\quad \text { Cr Cash at Bank } & & \$ 2400
\end{array}$

Question 17

The 'forward' rate of exchange for foreign currencies is:

Accepted Answer

A)  the rate of exchange between the Australian dollar and the US dollar 
B)  the rate applicable to funds to be forwarded to an overseas country 
C)  the rate at which currencies can be exchanged at some future date 
D)  the rate at which currencies can be exchanged immediately 
A)  the rate of exchange between the Australian dollar and the US dollar 
B)  the rate applicable to funds to be forwarded to an overseas country 
C)  the rate at which currencies can be exchanged at some future date 
D)  the rate at which currencies can be exchanged immediately

Question 18

AASB 121 requires an entity to measure its financial performance and financial position in its functional currency.What are the indicators of a functional currency? Is the functional currency the same as the presentation currency? Explain your answers.

Accepted Answer

The answer of AASB 121 requires an entity to measure...

Question 19

Maypole Pty Ltd is an Australian company which has a functional currency of Australian dollars.Appleflower Pty Ltd is a US company which is a wholly owned subsidiary of Maypole.Its functional currency is US dollars.To comply with AASB 121,Maypole must translate the financial statements of Appleflower into Australian dollars to report in the consolidated groups financial statements.
Appleflower has land which it acquired on 17 October 20X0 for US$ 500 000.The relevant exchange rates are as follows:
Spot rate at date of acquisition$\quad AUS  1 =  US\$ 0.80$
Spot rate at 30 June 20X1$\quad AUS  1 =  US\$ 0.85$
Average rate for the 20X1 financial year$\quad AUS  1 =  US\$ 0.82$
The amount which should be recorded in the Maypole consolidated group for the land for the 20X1 financial year (assuming no fair value adjustments have occurred).is:

Accepted Answer

A)  AU$ 425 000 
B)  AU$ 410 000 
C)  AU$ 400 000 
D)  AU$ 500 000 
A)  AU$ 425 000 
B)  AU$ 410 000 
C)  AU$ 400 000 
D)  AU$ 500 000

Question 20

The 'spot' rate of exchange for foreign currencies is:

Accepted Answer

A)  the rate at which currencies can be exchanged in a particular place (e.g., in Sydney or in New York) 
B)  the rate of exchange between the Australian dollar and the US dollar 
C)  the rate at which currencies can be exchanged on the New York foreign exchange market 
D)  the rate at which currencies can be exchanged immediately 
A)  the rate at which currencies can be exchanged in a particular place (e.g., in Sydney or in New York) 
B)  the rate of exchange between the Australian dollar and the US dollar 
C)  the rate at which currencies can be exchanged on the New York foreign exchange market 
D)  the rate at which currencies can be exchanged immediately

Exam 27: Foreign Currency Translation

Which of the following best describes the requirements under Australian Accounting Standard AASB 139?

A way in which a foreign currency transaction can be hedged is:

Exchange rates between the Australian dollar and the US dollar are determined by:

A transaction that is denominated on or requires settlement in a foreign currency is:

There are four methods suggested for translating foreign currency financial statements.Identify these four methods and explain the translation methods used under each.

When translating the assets and liabilities from functional currency to presentation currency,AASB 121 requires that:

AASB 121 requires that non-monetary items are measured,subsequent to their initial recognition,at:

A fair value hedge that meets the requirements under AASB 139 for hedge accounting is accounted for in which of the following ways?

The main objective of translating the financial statements of foreign operations into Australian dollars is to:

The 'functional currency' of a business is:

The 'forward' rate of exchange for foreign currencies is:

AASB 121 requires an entity to measure its financial performance and financial position in its functional currency.What are the indicators of a functional currency? Is the functional currency the same as the presentation currency? Explain your answers.

The 'spot' rate of exchange for foreign currencies is:

Institutional Arrangements for Setting Accounting Standards in Australia

A Conceptual Framework: Scope, reporting Entity and the Objective of Financial Report

A Conceptual Framework: the Fundamentals of General Purpose Financial Reporting

A Conceptual Framework: Recognition and Measurement of the Elements of Financial Statements

The Choice of Accounting Methods

The Balance Sheet: an Overview

Accounting for Current Assets

Accounting for Property, plant and Equipment

Accounting for Company Income Tax

Accounting for Investments

Accounting for Intangible Assets

Accounting for Leases

Accounting for Employee Benefits

Accounting for Financial Instruments

Equity

The Income Statement

The Cash Flow Statement

Financial Reporting: Segment Reporting, value Added Statements, highlights Statements and Future-Oriented Financial Information

Further Financial Reporting Issues

Accounting for the Extractive Industries

Accounting for Real Estate Development and Construction Contracts

Accounting for Agricultural Activity

Accounting for Superannuation Plans

Accounting for Financial Institutions

Financial Reporting in the Public Sector

International Accounting Standards, harmonisation and Convergence

Accounting for Corporate Social Responsibilities

Ethics in Accounting

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