Deck 24: Accounting for Foreign Currency Transactions

Question 1

A foreign currency transaction shall be recorded on initial recognition in the:

A)presentation currency.
B)local currency.
C)foreign currency.
D)functional currency.

Answer 1

D

Question 2

Inventory is an example of a monetary item.

Answer 2

False

Question 3

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

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

Answer 3

C

Question 4

IAS 21 requires foreign currency transactions to be 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.

Question 5

IAS 21 defines an exchange rate as a ratio for the exchange of two currencies at a particular time.

Question 6

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

Question 7

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.

Question 8

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 IAS 23.

Question 9

The effect of a fall in the exchange rate for British pounds relative to other major world currencies would include:

A)People buying goods overseas with British pounds would find the goods relatively cheaper than before.
B)The cost of importing goods from overseas would increase.
C)The cost of offshore debt would increase.
D)The cost of importing goods from overseas would increase and the cost of offshore debt would increase.

Question 10

If the foreign currency exchange rate between Germany and the US was €1.00 = $0.55 on 1 October 2014 and moved to be €1.00 = $0.60 one month later,the euro has decreased relative to the foreign currency.

Question 11

The exchange rate for a currency depends on many factors including:

A)the price of McDonald's hamburgers in each country.
B)the rate at which the currency is pegged at relative to the other currency of interest.
C)the price of options on futures of the foreign currency.
D)the demand for and supply of the currency in the market.

Question 12

A hedge is defined by IAS 39 as an action taken,whether by entering into a foreign currency contract or otherwise,with the objective of maximising the possible positive effects of movements in exchange rates.

Question 13

There are two broad categories of foreign currency issues that arise in financial reporting.They are:

A)reporting purchase price parity and reporting foreign interest rate adjustments.
B)accounting for foreign currency debt and offshore financing.
C)accounting for foreign currency transactions and translating the accounts of foreign subsidiaries.
D)accounting for foreign currencies using the forex buy rate and the forex sell rate.

Question 14

The essential feature of a non-monetary item is the absence of a right to receive (or an obligation to deliver)a fixed or determinable number of units of currency.

Question 15

In selecting the appropriate foreign currency exchange rates to apply in translating foreign currency transactions,the accountant exercises an important element of judgment about whether the rates are overvaluing or undervaluing the reporting currency.

Question 16

It seems pointless to distinguish between different types of hedges,as the accounting treatment is the same for all hedging,that is,all changes in fair values of hedging instruments are recognised in profit or loss.

Question 17

The purpose of 'hedge accounting' is to recognise the offsetting effects on profit or loss of changes in the nominal values of the financial instrument and the hedging instrument.

Question 18

An example of a foreign currency swap is when a loan denominated in one currency is swapped for a loan denominated in another currency.

Question 19

If an organisation enters a foreign currency swap it will effectively insulate itself against the effects of changes in the spot rates.

Question 20

To classify an arrangement as a hedge,and therefore to apply 'hedge accounting',IAS 32 requires a set of strict conditions be met.

Question 21

IAS 21 requires that the initial recognition of a foreign currency transaction be:

A)in the amount of the foreign currency.
B)at the closing rate at balance date.
C)at the rate the currency is expected to be exchanged at on the settlement date for the monetary asset or liability based on the current market price of futures contracts for the relevant foreign currency.
D)at the spot rate at the date of the transaction.

Question 22

The functional currency of an entity:

A)never changes once determined.
B)must be assessed and changed annually.
C)can change if there is a change in underlying transactions, events and conditions which determine the functional currency.
D)can change as a consequence of the foreign currency transactions that are undertaken by the parent entity.

Question 23

Apart from some limited exceptions,IAS 21 requires that exchange differences on monetary items shall be:

A)deferred and recognised when the associated asset or liability is realised or settled.
B)treated as a reserve or provision against the associated monetary item.
C)not recognised in the accounts until the monetary asset is received or monetary liability settled.
D)recognised as income or an expense in the reporting period in which the exchange rates change.

Question 24

On 1 July 2015 Jarrets Plc borrows £500 000 from a British bank at an interest rate of 8 per cent,repayable in pounds sterling (£)and with interest due on 30 June each year.The term of the loan is 3 years.On the same date Fitners Plc borrows €1 million from a European bank at an interest rate of 10 per cent.The term of the loan is 3 years.Jarrets and Fitners decide to swap their interest and principal obligations on 1 July 2015.Exchange rate information is as follows:
1 July 2015 €1.00 = £0.50
30 June 2016 €1.00 = £0.55
Both Jarrets and Fitners are Dutch companies.What are the journal entries to record the swap for the period ended 30 June 2016 in Fitners Plc's books (rounded to the nearest whole euro)?

A) $1 \text { July } 2015$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash } & 1000000 & \\\hline \mathrm{Cr} & \text { Foreign loan } & & 1000000 \\\hline\\\hline \mathrm{Dr} & \text { Foreign currency receivable } & 1000000 & \\\hline \mathrm{Cr} & \text { Australian loan } & & 1000000\\\hline\end{array}$

$30 \text { June } 2016$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Foreign loan } & 90909 & \\\hline \mathrm{Cr} & \text { Foreign exchange gain } & & 90909 \\\hline & & & \\\hline \mathrm{Dr} & \text { Foreign exchange loss } & 90909 & \\\hline \mathrm{Cr} & \text { Foreign currency receivable } & & 90909 \\\hline\\\hline \mathrm{Dr} & \text { Interest expense } & 72727 & \\\hline \mathrm{Cr} & \text { Cash } & & 72727 \\\hline & & \\\hline \mathrm{Dr} & \text { Interest expense } & 27273 & \\\hline \mathrm{Cr} & \text { Cash } & & 27273 \\\hline\end{array}$
B) $1 \text { July } 2015$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash } & 1000000 & \\\hline \mathrm{Cr} & \text { Loan } & & 1000000 \\\hline & & \\\hline \mathrm{Dr} & \text { Loan receivable } & 1000000 & \\\hline \mathrm{Cr} & \text { Foreign currency payable } & & 1000000 \\\hline\end{array}$

$30 \text { June } 2016$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Foreign currency payable } & 90909 & \\\hline \mathrm{Cr} & \text { Foreign exchange gain } & & 90909\\\hline\\\hline \mathrm{Dr} & \text { Interest expense } & 100000 & \\\hline \mathrm{Cr} & \text { Cash } & & 100000 \\\hline\\\hline \mathrm{Dr} & \text { Cash } & 27273 & \\\hline \mathrm{Cr} & \text { Interest expense } & & 27273 \\\hline\end{array}$
C) $1 \text { July } 2015$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash } & 1000000 & \\\hline \mathrm{Cr} & \text { Loan } & & 1000000 \\\hline & & \\\hline \mathrm{Dr} & \text { Loan receivable } & 250000 & \\\hline \mathrm{Cr} & \text { Foreign currency payable } & & 250000 \\\hline\end{array}$

$30 \text { June } 2016$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Foreign exchange loss } & 25000 & \\\hline \mathrm{Cr} & \text { Foreign currency payable } & & 25000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cash } & 27273 & \\\hline \mathrm{Cr} & \text { Interest expense } & & 27273 \\\hline\end{array}$
D) $1 \text { Julv } 2015$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash } & 1000000 & \\\hline \mathrm{Cr} & \text { Loan } & & 1000000 \\\hline& & \\\hline \mathrm{Dr} & \text { Loan receivable } & 1000000 & \\\hline \mathrm{Cr} & \text { Foreign currency payable } & & 1000000 \\\hline\end{array}$

$30 \text { June } 2016$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Foreign currency payable } & 90909 & \\\hline \mathrm{Cr} & \text { Foreign exchange gain } & & 90909 \\\hline & & & \\\hline \mathrm{Dr} & \text { Foreign exchange loss } & & 90909 \\\hline \mathrm{Cr} & \text { Loan receivable } & & \\\hline & & 100000 & \\\hline \mathrm{Dr} & \text { Interest expense } & & 100000 \\\hline \mathrm{Cr} & \text { Cash } & & \\\hline & & 27273 & \\\hline \mathrm{Dr} & \text { Cash } & & 27273 \\\hline \mathrm{Cr} & \text { Interest expense } & & \\\hline\end{array}$

Question 25

IAS 21 requires that foreign currency monetary items outstanding at reporting date must be:

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.

Question 26

The three principal types of hedges referred to in IAS 39 are:

A)fair-value hedges; market value hedges, cash-flow hedges.
B)fair-value hedges; natural hedges, cash-flow hedges.
C)fair-value hedges; hedges of net investments in a foreign operation, cash-flow hedges.
D)hedges of net investments in a foreign operation; market value hedges, cash-flow hedges.

Question 27

For a cash flow hedge relating to the purchase of a particular asset,foreign exchange gains and losses made on the hedging instrument:

A)are all passed to profit or loss.
B)are passed to equity accounts up to the time of the underlying transaction, at which time they are then included as part of the cost of the asset.After this date, they are passed directly to profit or loss.
C)are all passed to the cost of the asset.
D)are passed to equity accounts up to the time of the expiration of the hedging instrument, at which time they are then included as part of the cost of the asset.
E)are passed directly to profit or loss up to the time of the underlying transaction.After this date, they are passed to equity accounts, up to the time of the expiration of the hedging instrument, at which time they are then included as part of the cost of the asset.

Question 28

Examples of monetary items that may be denominated in foreign currencies include:

A)accounts payable and receivable, inventory, bank overdrafts.
B)interest receivable and payable, loans, accounts payable.
C)inventory, interest receivable, supplies, accounts payable.
D)prepayments, loans, accounts payable, debentures payable.

Question 29

On 1 May 2014 Moorooba Exporters Plc,an English company,sells inventory to a customer in Singapore.The inventory is sold for $S300 000 and payment is not due until 30 July 2014.The reporting date for Moorooba Exporters Plc is 30 June.The exchange rate information is:
1 May 2014 £1 = $S0.95
30 June 2014 £1 = $S0.95
30 July 2014 £1 = $S0.95
Moorooba Exporters uses a perpetual inventory system.What journal entries are required in Moorooba Exporters Plc's books to record the transaction,adjustments at the end of the period and settlement in accordance with IAS 21 (rounded to the nearest whole pound)?
What is the realised gain/loss on the monetary item?

A) $1 \text { May } 2014$
$\begin{array}{|l|l|r|l|}\hline\mathrm{Dr} & \text { Accounts receivable } & 330000 & \\\hline \mathrm{Cr} & \text { Inventory } & & 330000\\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Accounts receivable } & 375000 & \\\hline \mathrm{Cr} & \text { Inventory } & & 375000 \\\hline\end{array}$

$30 \text { July } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 285000 & \\\hline \mathrm{Cr} & \text { Accounts receivable } & & 285000 \\\hline\end{array}$ Realised loss £45 000
B) $1 \text { May } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Accounts receivable } & 333333 & \\\hline \mathrm{Cr} & \text { Inventory } & & 333333 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Foreign currency loss } & 66667 & \\\hline \mathrm{Cr} & \text { Accounts receivable } & & 66667 \\\hline\end{array}$

$30 \text { July } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Accounts receivable } & 114286 & \\\hline \mathrm{Cr} & \text { Foreign currency gain } & & 114286 \\\hline \\\hline \mathrm{Dr} & \text { Cash } & 285714 & \\\hline \mathrm{Cr} & \text { Accounts receivable } & & 285714 \\\hline\end{array}$ Realised loss £66 667
C) $1 \text { May } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Accounts receivable } & 272727 & \\\hline \mathrm{Cr} & \text { Inventory } & & 272727 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Foreign currency loss } & 32727 & \\\hline \mathrm{Cr} & \text { Accounts receivable } & & 32727 \\\hline\end{array}$

$30 \text { July } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Accounts receivable } & 75789 & \\\hline \mathrm{Cr} & \text { Foreign currency gain } & & 75789 \\\hline \\\hline \mathrm{Dr} & \text { Cash } & 315789 & \\\hline \mathrm{Cr} & \text { Accounts receivable } & & 315789 \\\hline\end{array}$ Realised gain £43 062
D) $1 \text { May } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Sales } & 330000 & \\\hline \mathrm{Cr} & \text { Accounts receivable } & & 330000 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Accounts receivable } & 90000 & \\\hline \mathrm{Cr} & \text { Foreian currency loss } & & 90000 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Foreign currency gain } & 75789 & \\\hline \mathrm{Cr} & \text { Accounts receivable } & 75789 \\\hline \\\hline \mathrm{Dr} & \text { Accounts receivable } & 315789 & \\\hline \mathrm{Cr} & \text { Cash } & & 315789 \\\hline\end{array}$ Realised gain £90 000

Question 30

The spot rate is defined in IAS 21 as:

A)the rate at which the currency to be exchanged is currently selling against a bundle of currencies of major trading partners.
B)the exchange rate for immediate delivery of currencies to be exchanged.
C)one identified exchange rate for the relevant currencies from the period on or around the date of the transaction.
D)the current exchange rate as implied by forward-exchange contracts in place at the time of the transaction.

Question 31

In terms of retrospectively assessing hedge effectiveness,which of the following situations does not meet the criteria for effectiveness?

A)Fair value of shares increased by €12 750; fair value of hedging instrument increased by €11 200
B)Fair value of shares increased by €12 800; fair value of hedging instrument decreased by €10 255
C)Fair value of shares decreased by €12 316; fair value of hedging instrument increased by €15 325
D)Fair value of shares decreased by €11 999; fair value of hedging instrument increased by €13 225

Question 32

On 1 July 2015 Jarrets Plc borrows £500 000 from a British bank at an interest rate of 8 per cent,repayable in pounds sterling (£)and with interest due on 30 June each year.The term of the loan is 3 years.On the same date Fitners Plc borrows €1 million from a European bank at an interest rate of 10 per cent.The term of the loan is 3 years.Jarrets and Fitners decide to swap their interest and principal obligations on 1 July 2015.Exchange rate information is as follows:
1 July 2015 = £0.50
30 June 2016 = £0.55
Both Jarrets and Fitners are Dutch companies.What are the journal entries to record the swap for the period ended 30 June 2016 in Jarrets Plc's books (rounded to the nearest whole euro)?

A) $1 \text { July } 2015$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 250000 & \\\hline \mathrm{Cr} & \text { Foreign loan } & & 250000 \\\hline {\mathrm{Dr}} & & \\\hline \mathrm{Dr} & \text { Foreign currency receivable } & 250000 & \\\hline \mathrm{Cr} & \text { Australian loan } & & 250000 \\\hline\end{array}$

$30 \text { June } 2016$
$\begin{array}{|l|l|r|r|}\hline\mathrm{Dr} & \text { Foreign exchange loss } & 25000 & \\\hline \mathrm{Cr} & \text { Foreign loan } & & 25000 \\\hline & & 25000 & \\\hline \mathrm{Dr} & \text { Foreign currency receivable } & & 25000 \\\hline \mathrm{Cr} & \text { Foreign exchange gain } & & \\\hline & & 22000 & \\\hline \mathrm{Dr} & \text { Interest expense } & & 22000 \\\hline \mathrm{Cr} & \text { Cash } & 3000 & \\\hline & & & 3000 \\\hline \mathrm{Dr} & \text { Interest expense } & & \\\hline \mathrm{Cr} & \text { Cash } & & \\\hline\end{array}$

B) $1 \text { July } 2015$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash } & 1000000 & \\\hline \mathrm{Cr} & \text { Foreign loan } & & 1000000 \\\hline& & \\\hline \mathrm{Dr} & \text { Foreign currency receivable } & 1000000 & \\\hline \mathrm{Cr} & \text { Australian loan } & & 1000000 \\\hline\end{array}$

$30 \text { June } 2016$
$\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & \text { Foreign loan } & 90909 & \\\hline \mathrm{Cr} & \text { Foreign exchange gain } & & 90909 \\\hline & & & \\\hline \mathrm{Dr} & \text { Foreign exchange loss } & 90909 & \\\hline \mathrm{Cr} & \text { Foreign currency receivable } & & 90909 \\\hline & & 80000 & \\\hline \mathrm{Dr} & \text { Interest expense } & & 80000 \\\hline \mathrm{Cr} & \text { Cash } & & \\\hline\end{array}$
C) $1 \text { July } 2015$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash } & 1000000 & \\\hline \mathrm{Cr} & \text { Foreign loan } & & 1000000 \\\hline\\\hline{\mathrm{Dr}} & \text { Foreign currency receivable } & 1000000 \\\hline \mathrm{Cr} & \text { Australian loan } & & \\\hline\end{array}$

$30 \text { June } 2016$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Foreign loan } & 90909 & \\\hline \mathrm{Cr} & \text { Foreign exchange gain } & & 90909 \\\hline & & & \\\hline \mathrm{Dr} & \text { Foreign exchange loss } &90909 & \\\hline \mathrm{Cr} & \text { Foreign currency receivable } & &90909 \\\hline & & & \\\hline \mathrm{Dr} & \text { Interest expense } & 72727& \\\hline \mathrm{Cr} & \text { Cash } & &72727 \\\hline & & \\\hline \mathrm{Dr} & \text { Interest expense } & 272273 & \\\hline \mathrm{Cr} & \text { Cash } & & 27273 \\\hline\end{array}$
D) $1 \text { July } 2015$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 250000 & \\\hline \mathrm{Cr} & \text { Foreign loan } & & 250000 \\\hline & & \\\hline \mathrm{Dr} & \text { Foreign currency receivable } & 250000 & \\\hline \mathrm{Dr} & \text { Loss on foreign currency swap } & 750000 & \\\hline \mathrm{Cr} & \text { Australian loan } & & 1000000 \\\hline\end{array}$

$30 \text { June } 2016$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Foreign exchange loss } & 25000 & \\\hline \mathrm{Cr} & \text { Foreign loan } & & 25000 \\\hline & & 25000 & \\\hline \mathrm{Dr} & \text { Foreign currency receivable } & & 25000 \\\hline \mathrm{Cr} & \text { Foreign exchange gain } & & \\\hline & & 22000 & \\\hline \mathrm{Dr} & \text { Interest expense } & & 22000 \\\hline \mathrm{Cr} & \text { Cash } & & \\\hline & & 3000 & \\\hline \mathrm{Dr} & \text { Interest expense } & & 3000 \\\hline \mathrm{Cr} & \text { Cash } & & 300 \\\hline\end{array}$

Question 33

The hedge effectiveness criteria prescribed in IAS 39 have made which type of financial instrument much less effective as a potential hedging instrument?

A)forward-foreign-exchange contract
B)option
C)futures contract
D)swap

Question 34

The Big Mac index is:

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.

Question 35

An exception to the requirement that foreign currency monetary items should be re-translated at the reporting date is:

A)when the foreign exchange rate is considered to be undervalued.
B)when the foreign currency exchange rate is fixed for a particular transaction according to a contractual arrangement.
C)when exchange rates are expected to move in the opposite direction shortly after reporting date.
D)when the foreign exchange rate is considered to be overvalued.

Question 36

Exchange differences recognised as borrowing costs and included in the cost of an asset,are not recognised:

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)until 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.

Question 37

Which of the following items is not within the scope of IAS 21 The Effects of Changes in Foreign Exchange Rates?

A)foreign currency denominated loans
B)bank deposits in foreign currency
C)investments in foreign operations
D)foreign currency derivatives

Question 38

On 1 July 2013 Kanga Consultants Plc,a Dutch company,completes a contract to provide advice on the installation of a networked computer system to a company in the US.The client pays the fee of US$500 000 into Kanga Consultants' US bank account on that date.The bank pays interest of 8 per cent annually on 30 June.The exchange rate information is:
1 July 2013 €1 = US$0.56
30 June 2014 €1 = US$0.62
What journal entries are required in Kanga Consultants Plc's books for 1 July 2013 and 30 June 2014 in accordance with IAS 21 (rounded to the nearest whole euro)?

A) $1 \text { July } 2013$
$\begin{array}{|l|l|r|r|}\hline \text { Dr } & \text { Inventory } & 280000 & \\\hline \mathrm{Cr} & \text { Accounts payable } & & 280000 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|l|l|r|l|}\hline \mathrm{Dr} & \text { Interest expense } & 18600 & \\\hline \mathrm{Cr} & \text { Accounts payable } & & 18600 \\\hline & & & \\\hline \mathrm{Dr} & \text { Accounts payable } & 30000 & \\\hline \mathrm{Cr} & \text { Foreign currency gain } & & 30000 \\\hline\end{array}$

B) $1 \text { July } 2013$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 892857 & \\\hline \mathrm{Cr} & \text { Consulting revenue } & & 892857 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 64516 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 64516 \\\hline & & & \\\hline \mathrm{Dr} & \text { Foreign currency loss } & 86405 & \\\hline \mathrm{Cr} & \text { Cash } & & 86405 \\\hline\end{array}$
C) $1 \text { Julv } 2013$
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash } & 1136364 & \\\hline \mathrm{Cr} & \text { Accounts receivable } & & 1136364 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 90909 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 90909 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cash } & 179425 & \\\hline \mathrm{Cr} & \text { Foreign currency gain } & & 179425 \\\hline\end{array}$
D) $\text { 1 July } 2013$
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 892857 & \\\hline \mathrm{Cr} & \text { Consulting revenue } & & 892857 \\\hline\end{array}$

$30 \text { June } 2014$
$\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & \text { Cash } & 71429 & \\\hline \mathrm{Cr} & \text { Interest revenue } & & 71429 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cash } & 806452 & \\\hline \mathrm{Cr} & \text { Consulting revenue } & & 806452 \\\hline\end{array}$

Question 39

Which of the following statements is correct with respect to IAS 21 The Effects of Changes in Foreign Exchange Rates?

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 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.

Question 40

Which of the following is not a condition that must be met,according to IAS 39,before a relationship qualifies for hedge accounting?

A)At the inception of the hedge, there is formal designation and documentation of the hedging relationship.
B)At the inception of the hedge, there is formal designation and documentation of the entity's risk management objective and strategy for undertaking the hedge.
C)The hedge is expected to be highly effective.
D)For fair-value hedges, a forecast transaction that is subject to the hedge must be highly probable.

Question 41

Which of the following items is a commonly used swap?

A)foreign currency swaps
B)options swap
C)investments in foreign operations swaps
D)foreign currency derivatives swaps

Question 42

Which of the following items is not a required condition for applying hedge accounting?

A)The hedge is expected to be highly effective.
B)The forecast transaction does not affect profit or loss.
C)The effectiveness of the hedge can be reliably measured.
D)The hedge is assessed on an ongoing basis.

Question 43

Which of the following items is within the scope of IAS 21 The Effects of Changes in Foreign Exchange Rates?

A)translation of cash flows from foreign operations
B)presentation in a statement of cash flows of the cash flows arising from transactions in a foreign currency
C)hedge accounting for hedging a net investment in a foreign operation
D)presentation of an entity's financial statements in a foreign currency

Question 44

What is a forward rate agreement?
Explain,with an example,how such an agreement can be used as a hedging instrument.

Question 45

How does the accounting treatment for qualifying monetary items differ from other foreign currency monetary items as prescribed under IAS 21 The Effects of Changes in Foreign Exchange Rates?

Question 46

Discuss the situations in which the discontinuation of fair-value hedge accounting is to be done as provided for in IAS 39.

Question 47

Describe,with examples,the reasons why organisations would want to swap a loan denominated in one currency for another.

Question 48

Explain why some opponents of the accounting prescribed in IAS 21 object to the requirement that long-term receivables and payables be translated using the reporting date spot rates.

Question 49

Explain the terms hedging instrument and hedged item,and how hedge accounting brings these two together.

Question 50

The following items are in the financial statements of Pirie Plc as at 30 June 2015. $$\begin{array} { | l | l | } \hline \text { I } & \text { Foreign currency accounts receivable } \\\hline \text { II } & \text { Foreign currency long-term debt } \\\hline \text { III } & \text { Machinery measured in foreign currency-at cost } \\\hline \text { IV } & \text { Inventories measured in foreign currency } \\\hline\end{array}$$ Which of the following combinations identify all items required to be translated at spot rate on 30 June 2015 as prescribed in IAS 21 The Effects of Changes in Foreign Exchange Rates?

A)I and II
B)II and III
C)II and IV
D)III and IV

Question 51

What are presentation and functional currencies?
How do they differ?

Question 52

What is a qualifying asset,and what are the accounting implications in respect to accounting for foreign exchange differences when acquiring such an asset?

Question 53

Discuss the accounting treatment required under IAS 21 The Effects of Changes in Foreign Exchange Rates when a reporting entity has a foreign currency monetary items at the reporting date.

Question 54

Describe,with examples,the two tests of hedge effectiveness.

Question 55

Where the hedge arrangement completely eliminates the consequences of adverse exchange-rate fluctuations,the purchase or sales arrangement is considered to be:

A)partially hedged.
B)positively hedged.
C)perfectly hedged.
D)negatively hedged.