Deck 25: The Effects of Changes in Foreign Exchange Rates

Question 1

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

A) Sales prices
B) Indirect material costs
C) The competition's sales prices
D) Management salary costs
E) Interdepartmental transaction prices

Answer 1

Interdepartmental transaction prices

Question 2

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?

A) February 14
B) April 11
C) April 13
D) April 23
E) June 30

Answer 2

April 11

Question 3

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?

A) Retained earnings for Turnkey increases by $12 million
B) Net income for Turnkey decreases by $12 million
C) Income from continuing operations increases by $12 million
D) More than one of the above
E) None of the above

Answer 3

Retained earnings for Turnkey increases by $12 million

Question 4

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

A) the weighted average exchange rate for the reporting period.
B) spot exchange rate at the end of the reporting period (closing rate).
C) the historical rate at which monetary items were acquired.
D) the rate that reflects the economic reason for acquiring monetary items.

Question 5

What is the correct order in the steps for translating foreign currency financial statements?
1) Translate all foreign currency items from the entity's functional currency into the presentation currency, if different.
2) Translate all foreign currency items into the entity's functional currency.
3) Report the effects of such translation in accordance with IAS 21.
4) Determine the entity's functional currency.

A) 1, 2, 3, 4
B) 4, 2, 1, 3
C) 2, 4, 1, 3
D) 3, 1, 2, 3

Question 6

Delfi Entity (DE), with the functional and presentation currency of the US dollar, established a Canadian subsidiary, Northern Entity (NE), an assembly plant located on the Canadian side of Niagara Falls. Other than paying its employees for labor in the Canadian dollars (local currency), all of NE's transactions are with the parent. NE is financed mainly by the parent. DE provides the subsidiary with any necessary parts and equipment. What is NE's functional currency?

A) the Canadian dollar
B) the US dollar
C) NE can choose any currency it wants
D) more information is needed to determine NE's functional currency

Question 7

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

A) Foreign currency exchange rates at the end of the fiscal period.
B) Weighted-average foreign currency exchange rates for the fiscal period.
C) Beginning and end of the fiscal period average foreign currency exchange rates.
D) No adjustment is necessary as the transactions have already been reflected in the financial statements.

Question 8

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?

A) Converted to the currency of AE at the date of purchase.
B) Recorded in the currency of PE with no translation.
C) Converted to the currency of AE at year-end at the then year-end exchange rates.
D) Converted to the currency of PE based on the average foreign exchange rate for the month prior to the purchase.

Question 9

An entity can have several different functional currencies.

Question 10

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.

Question 11

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.

Question 12

Plane & Lathe is a securities broker and investment bank located in Manchester. Plane & Lathe specializes in trading on the London Stock Exchange. Recently, due to economic changes, Plane & Lathe has started trading predominantly on the New York Stock Exchange. Their functional currency changed, as a result, from the British pound to the U.S. dollar. This change is considered a change in accounting policy.

Question 13

Substantial controversy exists in practice over how translation gains and losses should be reflected in the financial statements.

Question 14

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.

Question 15

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

Question 16

An entity can choose its functional currency.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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?

Question 22

List the primary indicators that priority is given to in determining an entity's functional currency,

Question 23

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.

-How will KE account for the purchase on July 1?

Question 24

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?

Question 25

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?

Question 26

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?