Deck 10: Translation of the Financial Statements of Foreign Entities

Question 1

Aussie Ltd has an investment in Yankee Inc. The shares in Yankee were acquired on 15 August 20X4. Yankee uses the revaluation model to account for land & buildings. A building which was acquired by Yankee on 1 April 20X2 was revalued on 15 March 20X9. The exchange rate used to translate the building into the presentation currency at 30 June 20X9 is the rate that applied on:

A) 1 April 20X2
B) 15 August 20X4
C) 15 March 20X9
D) 30 June 20X9

Answer 1

D

Question 2

Under AASB 121 The Effects of Changes in Foreign Exchange Rates, an entity must disclose which of the following items in particular?
I) The amount of exchange differences included in profit or loss of the period.
II) The amount of the exchange difference included directly in share capital during the period.
III) Whether a change in the functional currency has occurred.
IV) The reason for using a presentation currency that is different from the functional currency.

A) I, II, III and IV;
B) II and III only;
C) I, III and IV only;
D) I and IV only.

Answer 2

C

Question 3

Monetary items are best described as:

A) plant and equipment;
B) units of currency held and assets and liabilities to be received or paid in fixed numbers of currency units;
C) all intangible items including goodwill;
D) all items that are contingent in nature.

Answer 3

B

Question 4

According to AASB 121 The Effects of Changes in Foreign Exchange Rates, the currency in which an entity primarily generates and expends cash is considered to be the:

A) economic currency;
B) domestic currency;
C) presentation currency;
D) functional currency.

Question 5

The following information relates to questions
Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing) on 1 July 20X0. The balance sheet of Sing Sing on that date was as follows:
$\text { Balance sheet at } 1 \text { July } 20X0$
$\begin{array}{lrll}&S\$&&S\$\\\text { Machinery at cost } & 280,000 & \text { Share capital } & 200,000 \\\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \\\text { Receivables } & 50,000 & \text { Retained earnings } & 300,000\\\text { Cash }&70,000&&600,000\\&600,000\end{array}$
The balance sheet of Sing Sing as at is as follows:
Balance Sheet as at 30 June 20X1
$\begin{array}{lllr}&S\$&&S\$\\\text { Machinery- carrying value } & 150,000 & \text { Share capital } & 200,000 \\\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \\\text { Receivables } & 250,000 & \text { Retained earnings } & 500,000 \\\text { Cash } & 300,000 & \text { Accounts payable } & 85,000 \\& & \text { Income tax payable } & 15,000 \\&900,000 & &900,000\end{array}$
Relevant exchange rates are as follows:
$\begin{array}{lll}&A\$&S\$\\\text { 1 July 20X0 } & 1.00= & 1.25 \\\text { 30 June 20X1 } & 1.00= & 1.28 \\\text { Average 20X0-X1 } & 1.00= & 1.18\end{array}$

-If the functional currency of Sing Sing is Singapore dollars and the presentation currency is Australian dollars the total assets of S$900 000 would translate into Australian dollars as:

A) $703 125
B) $709 688
C) $1 141 500
D) $1 152 000

Question 6

When translating foreign currency denominated financial statements into the functional currency, the exchange differences are recognised:

A) as an item of gain or loss in the statement of profit or loss and other comprehensive income;
B) directly in the retained earnings account;
C) as a deferred asset or liability;
D) as a separate component of equity.

Question 7

The following information relates to questions
Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing) on 1 July 20X0. The balance sheet of Sing Sing on that date was as follows:
$\text { Balance sheet at } 1 \text { July } 20X0$
$\begin{array}{lrll}&S\$&&S\$\\\text { Machinery at cost } & 280,000 & \text { Share capital } & 200,000 \\\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \\\text { Receivables } & 50,000 & \text { Retained earnings } & 300,000\\\text { Cash }&70,000&&600,000\\&600,000\end{array}$
The balance sheet of Sing Sing as at is as follows:
Balance Sheet as at 30 June 20X1
$\begin{array}{lllr}&S\$&&S\$\\\text { Machinery- carrying value } & 150,000 & \text { Share capital } & 200,000 \\\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \\\text { Receivables } & 250,000 & \text { Retained earnings } & 500,000 \\\text { Cash } & 300,000 & \text { Accounts payable } & 85,000 \\& & \text { Income tax payable } & 15,000 \\&900,000 & &900,000\end{array}$
Relevant exchange rates are as follows:
$\begin{array}{lll}&A\$&S\$\\\text { 1 July 20X0 } & 1.00= & 1.25 \\\text { 30 June 20X1 } & 1.00= & 1.28 \\\text { Average 20X0-X1 } & 1.00= & 1.18\end{array}$

-If the local currency of Sing Sing is Singapore dollars and the functional currency is Australian dollars the total assets of S$900,000 would translate into Australian dollars as:

A) $703 125
B) $709 688
C) $1 141 500
D) $1 152 000

Question 8

Post acquisition date retained earnings that are denominated in a foreign currency are:

A) translated into the functional currency using the rate current at the latest end of reporting period;
B) translated into the functional currency using the average rate since acquisition date;
C) translated into the functional currency using the rates at the end of each year since acquisition date;
D) balances carried forward from translation of previous statement of comprehensive income and do not need to be translated.

Question 9

Mortimer Limited has the following items in its statement of profit or loss and other comprehensive income:
Revenue FC60 000,
Cost of goods sold FC25 000,
Interest expense FC8 000,
Income tax expense FC10 000.
All items arose evenly across the year. The following exchange rates applied:
$\begin{array}{lll}\text { End of reporting period } & \mathrm{FC} 1= & \$ 0.80 \\\text { Average rate for year } & \mathrm{FC} 1= & \$ 0.75\end{array}$
The net profit after tax translated into the presentation currency is:

A) $12 750;
B) $13 600;
C) $21 250;
D) $26 667.

Question 10

By applying the definition provided in AASB 121 The Effects of Changes in Foreign Exchange Rates, the following items will be regarded as a monetary item:

A) property, plant and equipment;
B) land and buildings;
C) inventory;
D) accounts receivable.

Question 11

Indicators pointing towards the local overseas currency as the functional currency include, that the:
I) Parent's cash flows are directly affected on a current basis.
II) Cash flows are primarily in the local currency and do not affect the parent's cash flows.
III) Sales prices are primarily responsive to exchange rate changes in the short-term.
IV) Production costs are determined primarily by local conditions.

A) I and III only;
B) II and IV only;
C) I, III and IV only;
D) I, II and IV only.

Question 12

If foreign currency denominated non-monetary items are measured using the fair value method, they must be translated into the functional currency using the:

A) exchange rate at the date when the value was determined;
B) exchange rate current at end of reporting period;
C) closing exchange rate for the financial year;
D) exchange rate at the transaction date.

Question 13

According to AASB 121 The Effects of Changes in Foreign Exchange Rates, the following statement, 'the currency that affects the economic wealth of the entity', provides a definition of?

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

Question 14

Differences arise in relation to the treatment of which of the following when translating from the local to functional currency as opposed to the functional to presentation currency?

A) accounts receivable
B) cost of goods sold
C) depreciation expense
D) share capital

Question 15

When translating into the functional currency foreign currency denominated non-monetary items measured using historical cost must be translated using the:

A) rate current at end of reporting period;
B) average rate for the reporting period;
C) exchange rate at the date of the transaction;
D) rate prevailing at the end of the last financial year.

Question 16

The general rule for translating liabilities denominated in a foreign currency into the functional currency is to:

A) translate all liabilities using the current rate existing at end of reporting period;
B) first classify the liabilities into current and non-current;
C) first classify the liabilities as monetary or non-monetary;
D) translate all liabilities using the rate current on entering into the transaction.

Question 17

When translating into the functional currency monetary liabilities are translated using the:

A) exchange rate current at the date the item was first recorded;
B) exchange rate prevailing at the end of the last reporting period;
C) closing exchange rate;
D) exchange rate current at end of reporting period.

Question 18

When translating into the presentation currency the translation difference is recognised:

A) in profit or loss
B) as a separate component of equity
C) in retained earnings
D) as an asset or liability, depending on whether it is a debit or credit balance.

Question 19

When translating the revenue and expenses in the statement of profit or loss and other comprehensive income, theoretically each item of revenue and expense should be translated using the spot exchange rate between the:

A) functional currency and the foreign currency on the reporting date;
B) presentation currency and the functional currency on the reporting date;
C) functional currency and the foreign currency on the date the transaction occurred;
D) presentation currency and the local currency on the transaction date.