Question 1

An effective foreign currency hedging transaction will:

Accepted Answer

A)  largely eliminate the risk of loss but allow a gain to be made on a foreign exchange transaction 
B)  require the services of a banker or similar financial intermediary 
C)  largely eliminate both the risk of loss and the possibility of gain on a foreign exchange transaction 
D)  involve both A and C above 
A)  largely eliminate the risk of loss but allow a gain to be made on a foreign exchange transaction 
B)  require the services of a banker or similar financial intermediary 
C)  largely eliminate both the risk of loss and the possibility of gain on a foreign exchange transaction 
D)  involve both A and C above

Question 2

An Australian company sells goods worth $AU 2000 to a US company and the goods are invoiced in US dollars.At the date of sale,the exchange rate is $AU 1.00 = $US 0.78.At the date the goods are paid for,the exchange rate is $AU 1.00 = $US 0.85.The Australian company should make the following entries to record the sale of the goods and the payment received (rounded):

Accepted Answer

A) $\begin{array} { c c r } 
\text { 
A)  Dr Accounts Receivable } & \$ 1560 & \
\text { Cr Sales } & & \$ 1560 \
\text { Dr Cash at Bank } & \$ 1725 & \
\text { Cr Exchange Gain } & & \$ 165 \
\text { Cr Accounts Receivable } & & \$ 1560
\end{array}$ 
B) $\begin{array}{l}
\text { 
B)  Dr Accounts Receivable } \quad \$ 2000\
\begin{array} { l r r } 
\quad \text { Cr Sales } & & \$ 2000 \
\text { Dr Cash at Bank } & \$ 1560 & \
\text { Dr Exchange Loss } & \$ 440 & \
\quad \text { Cr Accounts Receivable } & & \$ 2000
\end{array}
\end{array}$ 
C) $\begin{array} { l l l } 
\text { 
C)  Dr Accounts Receivable } & \$ 2000 & \
\quad \text { Cr Sales } & & \$ 2000 \
\text { Dr Cash at Bank } & \$ 2000 \
\text { Dr account receivable } & \$ 2000 &
\end{array}$ 
D) $\begin{array}{l}
\text { 
D)  Dr Accounts Receivable } \quad \$ 2000\
\begin{array} { l r r } 
\text { Cr Sales } & & \$ 2000 \
\text { Dr Cash at Bank } & \$ 1835 & \
\text { Dr Exchange Loss } & \$ 165 & \
\quad \text { Cr Accounts Receivable } & & \$ 2000
\end{array}
\end{array}$ 
A) $\begin{array} { c c r } 
\text { 
A)  Dr Accounts Receivable } & \$ 1560 & \
\text { Cr Sales } & & \$ 1560 \
\text { Dr Cash at Bank } & \$ 1725 & \
\text { Cr Exchange Gain } & & \$ 165 \
\text { Cr Accounts Receivable } & & \$ 1560
\end{array}$ 
B) $\begin{array}{l}
\text { 
B)  Dr Accounts Receivable } \quad \$ 2000\
\begin{array} { l r r } 
\quad \text { Cr Sales } & & \$ 2000 \
\text { Dr Cash at Bank } & \$ 1560 & \
\text { Dr Exchange Loss } & \$ 440 & \
\quad \text { Cr Accounts Receivable } & & \$ 2000
\end{array}
\end{array}$ 
C) $\begin{array} { l l l } 
\text { 
C)  Dr Accounts Receivable } & \$ 2000 & \
\quad \text { Cr Sales } & & \$ 2000 \
\text { Dr Cash at Bank } & \$ 2000 \
\text { Dr account receivable } & \$ 2000 &
\end{array}$ 
D) $\begin{array}{l}
\text { 
D)  Dr Accounts Receivable } \quad \$ 2000\
\begin{array} { l r r } 
\text { Cr Sales } & & \$ 2000 \
\text { Dr Cash at Bank } & \$ 1835 & \
\text { Dr Exchange Loss } & \$ 165 & \
\quad \text { Cr Accounts Receivable } & & \$ 2000
\end{array}
\end{array}$

Question 3

An Australian company sells goods worth $AU 2000 to a UK company and the goods are invoiced and accepted in Australian dollars.At the date of sale,the exchange rate is $AU 1.00 = £ STG 0.40.At the date the goods are paid for,the exchange rate is $AU 1.00 = £ STG 0.39.The Australian company should make the following entry to record the payment received:

Accepted Answer

A)  Dr Cash at Bank $\quad \$ 2020$
Cr Exchange Gain$\quad \$ 20$
Cr Accounts Receivable$\quad \$ 2000$ 
B)  $\begin{array} { l l l } 
\text { Dr Cash at Bank } & \$ 2000 \
\text { Cr Accounts Receivable }& \$ 2000\
\end{array}$ 
C) $\begin{array} { l r } \text { 
C)  Dr Cash at Bank } & \$ 1980 \ \text { Dr Exchange Loss } & \$ 20\\text {Cr Accounts Receivable}&\$2000 \end{array}$ 
D)  None of the above 
A)  Dr Cash at Bank $\quad \$ 2020$
Cr Exchange Gain$\quad \$ 20$
Cr Accounts Receivable$\quad \$ 2000$ 
B)  $\begin{array} { l l l } 
\text { Dr Cash at Bank } & \$ 2000 \
\text { Cr Accounts Receivable }& \$ 2000\
\end{array}$ 
C) $\begin{array} { l r } \text { 
C)  Dr Cash at Bank } & \$ 1980 \ \text { Dr Exchange Loss } & \$ 20\\text {Cr Accounts Receivable}&\$2000 \end{array}$ 
D)  None of the above

Question 4

Explain,using simple numerical example(s),how hedging a foreign currency transaction can remove uncertainty about the outcome of the transaction.Based on the same example(s),illustrate both how hedging can prevent a business from incurring a loss because of movements in exchange rates and also how it can cause a business to miss out on a potential gain from such movements.

Accepted Answer

Hedging a foreign currency transaction i

An effective foreign currency hedging transaction will:

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

Filters

Exam 27: Foreign Currency Translation

An effective foreign currency hedging transaction will:

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

Filters