Deck 8: Foreign Currency Transactions and an Introduction to Hedging

Question 1

Which of the following factors cannot under AASB 121 be considered in selecting an entity's functional currency:

A)the main currency influencing the selling price of its goods and services
B)the main currency influencing its labour and material costs
C)the currency of the main country whose competitive forces and regulation determine the selling price of its goods and services
D)the preferences of the entity's senior management group

Answer 1

D

Question 2

In Australia, the presentation currency adopted must be the Australian currency.

Answer 2

False

Question 3

Under AASB 121 it is possible for an Australian company to have multiple functional currencies, therefore it is possible for the financial report to contain financial statements using different presentation currencies.

Answer 3

False

Question 4

What was the foreign currency exchange difference recognised for Led Ltd on the transaction?

A)$30 000 FC exchange difference revenue
B)$30 000 FC exchange difference expense
C)$60 000 FC exchange difference revenue
D)$60 000 FC exchange difference expense

Question 5

A company can have more than one functional currency.

Question 6

Under AASB 121, foreign currency exchange differences are never recognised for non-monetary items.

Question 7

The calculation of FC exchange differences is much easier if direct exchange rates are used rather than indirect exchange rates.

Question 8

Under AASB 121 a company must initially record all transactions in its functional currency

Question 9

When a non-monetary asset is remeasured to fair value in a foreign currency, it is translated using the reporting date spot rate.

Question 10

What was the foreign currency exchange difference on the transaction recognised by Led in the reporting period ending 30 June 20X1?

A)$30 000 FC exchange difference revenue
B)$30 000 FC exchange difference expense
C)$60 000 FC exchange difference revenue
D)$60 000 FC exchange difference expense

Question 11

A foreign exchange rate quote can best be thought of as:

A)a bank's estimate of value of the foreign currency
B)the price of one currency in terms of another
C)a measure of the difference between the two countries' risk-free interest rates
D)the market's best guess about the future GDP growth rate for the foreign country

Question 12

The holder of a liability denominated in a foreign currency would experience _____ when its functional currency appreciates against that foreign currency:

A)an economic gain
B)an economic loss
C)no change in value for that asset
D)only an accounting loss

Question 13

Alpha Ltd is an Australian company, the currency of its principal economic environment is UK£ and its financial statements are presented in ¥ the functional currency of its parent entity.
When considering foreign currency transactions and the preparation of financial reports of entities that engaged in transactions denominated in foreign currencies, four currency classifications are adopted:
I the presentation currency
II the domestic currency
III the functional currency
IV foreign currencies
For Alpha Ltd, it presentation currency is:

A)A$
B)¥
C)UK£
D)US$

Question 14

What was the foreign currency exchange difference recognised for the reporting period ending 30 June 20X0 by Led Ltd on the transaction?

A)$30 000 FC exchange difference revenue
B)$30 000 FC exchange difference expense
C)$60 000 FC exchange difference revenue
D)$60 000 FC exchange difference expense

Question 15

The holder of an asset denominated in a foreign currency would experience _____ when the functional currency appreciates against that foreign currency:

A)an economic gain
B)an economic loss
C)no change in value for that asset
D)only an accounting loss

Question 16

A direct exchange rate quotation is one expressed in terms of the foreign currency equivalent of one unit of domestic currency.

Question 17

An entity's functional currency is:

A)always the currency of it place of domicile, for an Australian company the A$
B)a foreign currency used as the benchmark in converting other foreign currencies into the currency of the place of domicile
C)the currency in which most of its activities are denominated
D)always its domestic currency

Question 18

Alpha Ltd is an Australian company, the currency of its principal economic environment is UK£ and its financial statements are presented in ¥ the functional currency of its parent entity.
When considering foreign currency transactions and the preparation of financial reports of entities that engaged in transactions denominated in foreign currencies, four currency classifications are adopted:
I the presentation currency
II the domestic currency
III the functional currency
IV foreign currencies
For Alpha Ltd its functional currency is:

A)A$
B)¥
C)UK£
D)US$

Question 19

Zeppelin Ltd ordered a batch of computers from the USA on 11 November 20X4 for a total price of US$800 000. Zeppelin Ltd’s reporting date is 31 December and its functional currency is A$. The computers were delivered on 23 December 20X4 and payment was made on 15 January 20X5. The risks and benefits of the ownership transfer to the purchaser on delivery. The computers formed part of Zeppelin’s inventory and was still on hand on 31 December 20X4.
$$\begin{array}{l}\text { The following exchange rates applied: }\\\begin{array} { l l l l } 11 \text { November 20X4 } & \text { US } \$ 1.00 & = \mathrm { A } \$ 1.25 \\23 \text { December 20X4 } & \text { US } \$ 1.00 & = \mathrm { A } \$ 1.30 \\31 \text { December 20X4 } & \text { US } \$ 1.00 & = \mathrm { A } \$ 1.35 \\\text { 15 January 20X5 } & \text { US } \$ 1.00 & = \mathrm { A } \$ 1.20\end{array}\end{array}$$

-At what amount would be purchase of the inventory be recognised?

A)$615,385
B)$1,040,000
C)$1,000,000
D)$1,080,000

Question 20

Alpha Ltd is an Australian company, the currency of its principal economic environment is UK£ and its financial statements are presented in ¥ the functional currency of its parent entity.
When considering foreign currency transactions and the preparation of financial reports of entities that engaged in transactions denominated in foreign currencies, four currency classifications are adopted:
I the presentation currency
II the domestic currency
III the functional currency
IV foreign currencies
For Alpha Ltd the following currencies are foreign currency

A)A$, ¥, and US$ only
B)UK£ only
C)US$ only
D)UK£, ¥, and US$ only

Question 21

Comprehensive Minerals NL borrowed US$35 000 000 from a syndicate of European bankers. The agreement was finalized on 1 June 20X5, the money was received on 1 July 20X5, and interest at 4% per half year is payable on 31 December and 30 June of each year. The company’s functional currency is the A$.
The following exchange rates applied.
$\begin{array} { l l l l } \text { 1 June 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.33 \\\text { 1 July 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.38 \\\text { 31 December 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.15 \\\text { 30 June 20X6 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.25 \\\text { 31 December 20X6 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.35 \\\text { 30 June 20X7 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.20\end{array}$


-For the reporting period ending 30 June 20X7 the net amount recognised in the profit or loss statement in respect of the loan will be:

A)A$1 820 000 expense
B)A$3 570 000 expense
C)A$5 320 000 expense
D)A$2 730 000 revenue

Question 22

Zeppelin Ltd ordered a batch of computers from the USA on 11 November 20X4 for a total price of US$800 000. Zeppelin Ltd’s reporting date is 31 December and its functional currency is A$. The computers were delivered on 23 December 20X4 and payment was made on 15 January 20X5. The risks and benefits of the ownership transfer to the purchaser on delivery. The computers formed part of Zeppelin’s inventory and was still on hand on 31 December 20X4.
$$\begin{array}{l}\text { The following exchange rates applied: }\\\begin{array} { l l l l } 11 \text { November 20X4 } & \text { US } \$ 1.00 & = \mathrm { A } \$ 1.25 \\23 \text { December 20X4 } & \text { US } \$ 1.00 & = \mathrm { A } \$ 1.30 \\31 \text { December 20X4 } & \text { US } \$ 1.00 & = \mathrm { A } \$ 1.35 \\\text { 15 January 20X5 } & \text { US } \$ 1.00 & = \mathrm { A } \$ 1.20\end{array}\end{array}$$

-How many A$ will be paid for the computers and what FC exchange difference will be included in Zeppelin's 20X5 financial report in relation to the purchase?

A)$960 000; $80 000 FC exchange difference expense
B)$960 000; $80 000 FC exchange difference revenue
C)$960 000; $120 000 FC exchange difference expense
D)$960 000; $120 000 FC exchange difference revenue

Question 23

Zeppelin Ltd ordered a batch of computers from the USA on 11 November 20X4 for a total price of US$800 000. Zeppelin Ltd’s reporting date is 31 December and its functional currency is A$. The computers were delivered on 23 December 20X4 and payment was made on 15 January 20X5. The risks and benefits of the ownership transfer to the purchaser on delivery. The computers formed part of Zeppelin’s inventory and was still on hand on 31 December 20X4.
$$\begin{array}{l}\text { The following exchange rates applied: }\\\begin{array} { l l l l } 11 \text { November 20X4 } & \text { US } \$ 1.00 & = \mathrm { A } \$ 1.25 \\23 \text { December 20X4 } & \text { US } \$ 1.00 & = \mathrm { A } \$ 1.30 \\31 \text { December 20X4 } & \text { US } \$ 1.00 & = \mathrm { A } \$ 1.35 \\\text { 15 January 20X5 } & \text { US } \$ 1.00 & = \mathrm { A } \$ 1.20\end{array}\end{array}$$

-What FC exchange difference, if any, will be included in Zeppelin's profit or loss statement for the year ended 31 December 20X4 and at what amount will the FC account payable be recognised in the balance sheet?

A)FC account payable = 1,080,000; $40,000 FC exchange difference revenue
B)FC account payable = 1,080,000; $80,000 FC exchange difference revenue
C)FC account payable = 1,080,000; $40,000 FC exchange difference expense
D)FC account payable = 1,080,000; $80,000 FC exchange difference expense

Question 24

Sammy Ltd hired a US-based consultant to assist with a major client’s request to improve its internal control system. The consultant’s invoice for US$300,000 was received by Sammy Ltd on 23 June 2000, and paid on 23 July 2000.
Some spot foreign exchanges rates were:
$\begin{array} { l l l l } \text { 23 June 20X0 } & \text { US\$ } 1.00 & = & \text { A\$ } 1.6667 \\\text { 30 June 20X0 } & \text { US\$ } 1.00 & = & \text { A\$ } 1.5385 \\\text { 23 July 20X0 } & \text { US\$ } 1.00 & = & A \$ 1.6128\end{array}$

-Which is the journal entry to record the foreign exchange difference at 30 June 20X0?

A) $\begin{array}{lrc}\text { Accounts } & \text { Debit } \$ & \text { Credit } \$ \\\text { Accounts payable } & 38460 & \\\text { Consultant's fees } & & 38460\end{array}$

B) $\begin{array}{lrc}\text { Accounts payable } &38460 \\\text { Revenue - FC exchange difference } &&& 38460 \\\end{array}$

C) $\begin{array}{lrc}\text { Accounts payable } &&&14999\\\text { Consultant's fees } & 14999\\\end{array}$


D) $\begin{array}{lrc}\text { Accounts payable } &&&14999\\\text { Expense - FC exchange difference} & 14999\\\end{array}$

Question 25

On 10 June 20X0, Jackson Ltd an Australian company, purchased inventory for £100 000 from Pollock Ltd, a Welsh company. Under the contract of sale, property passes when the inventory was delivered to OzWale Air Cargo Ltd, this occurred on 20 June 20X0. The inventory was delivered to Jackson Ltd on 25 June 20X0. Jackson Ltd’s reporting period ends on 30 June and its functional currency is A$. Jackson paid the UK£ amount on 15 July 20X0. Some foreign exchange rates were:
$\begin{array} { l l l } \text { 10 June 20X0 } & \mathrm { UK } £ 1.00 = & \mathrm { A } \$ 2.45 \\\text { 20 June 20X0 } & \mathrm { UK } £ 1.00 = & \mathrm { A } \$ 2.60 \\\text { 25 June 20X0 } & \mathrm { UK } £ 1.00 = & \mathrm { A } \$ 2.65 \\\text { 30 June 20X0 } & \mathrm { UK } £ 1.00 & = \mathrm { A } \$ 2.55 \\\text { 15 July 20X0 } & \mathrm { UK } £ 1.00 & = \mathrm { A } \$ 2.35\end{array}$

-What FC exchange difference amounts will be included in Jackson's profit or loss statement if property passed on delivery in Australia?
$\quad$$\quad$$\quad$ 20X0 $\quad$$\quad$$\quad$ 20X1
$\quad$$\quad$$\quad$ $ $\quad$$\quad$$\quad$$\quad$$\quad$ $

A)10,000 revenue $\quad$ 20,000 revenue
B)10,000 expense $\quad$ 30,000 revenue
C)15,000 revenue $\quad$ 25,000 revenue
D)15,000 revenue $\quad$ 25,000 expense

Question 26

Comprehensive Minerals NL borrowed US$35 000 000 from a syndicate of European bankers. The agreement was finalized on 1 June 20X5, the money was received on 1 July 20X5, and interest at 4% per half year is payable on 31 December and 30 June of each year. The company’s functional currency is the A$.
The following exchange rates applied.
$\begin{array} { l l l l } \text { 1 June 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.33 \\\text { 1 July 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.38 \\\text { 31 December 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.15 \\\text { 30 June 20X6 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.25 \\\text { 31 December 20X6 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.35 \\\text { 30 June 20X7 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.20\end{array}$


-In the company's financial statements for the reporting period ending 30 June 20X6 the following items will appear:

A)interest expense A$3 500 000; foreign currency denominated loan A$43 750 000
B)interest expense A$3 360 000; foreign currency denominated loan A$43 750 000
C)interest revenue A$3 500 000; foreign currency denominated loan A$43 750 000
D)interest expense A$3 864 000; foreign currency denominated loan A$43 750 000

Question 27

On 10 June 20X0, Jackson Ltd an Australian company, purchased inventory for £100 000 from Pollock Ltd, a Welsh company. Under the contract of sale, property passes when the inventory was delivered to OzWale Air Cargo Ltd, this occurred on 20 June 20X0. The inventory was delivered to Jackson Ltd on 25 June 20X0. Jackson Ltd’s reporting period ends on 30 June and its functional currency is A$. Jackson paid the UK£ amount on 15 July 20X0. Some foreign exchange rates were:
$\begin{array} { l l l } \text { 10 June 20X0 } & \mathrm { UK } £ 1.00 = & \mathrm { A } \$ 2.45 \\\text { 20 June 20X0 } & \mathrm { UK } £ 1.00 = & \mathrm { A } \$ 2.60 \\\text { 25 June 20X0 } & \mathrm { UK } £ 1.00 = & \mathrm { A } \$ 2.65 \\\text { 30 June 20X0 } & \mathrm { UK } £ 1.00 & = \mathrm { A } \$ 2.55 \\\text { 15 July 20X0 } & \mathrm { UK } £ 1.00 & = \mathrm { A } \$ 2.35\end{array}$

-What FC exchange difference amounts will be included in Jackson's profit or loss statement?
$\quad$$\quad$$\quad$ 20X0 $\quad$$\quad$$\quad$ 20X1
$\quad$$\quad$$\quad$$\quad$ $ $\quad$$\quad$$\quad$$\quad$ $

A)10,000 expense $\quad$ 10,000 revenue
B)10,000 expense $\quad$ 20,000 expense
C)10,000 revenue $\quad$ 20,000 revenue
D)5,000 revenue $\quad$ 20,000 revenue

Question 28

Sammy Ltd hired a US-based consultant to assist with a major client’s request to improve its internal control system. The consultant’s invoice for US$300,000 was received by Sammy Ltd on 23 June 2000, and paid on 23 July 2000.
Some spot foreign exchanges rates were:
$\begin{array} { l l l l } \text { 23 June 20X0 } & \text { US\$ } 1.00 & = & \text { A\$ } 1.6667 \\\text { 30 June 20X0 } & \text { US\$ } 1.00 & = & \text { A\$ } 1.5385 \\\text { 23 July 20X0 } & \text { US\$ } 1.00 & = & A \$ 1.6128\end{array}$

-What is the difference between the expense for consultant's fees in the profit or loss statement and the amount of A$ cash paid for this consultant?

A)10,517
B)22,290
C)38,460
D)16,170