Deck 27: Foreign Currency Translation

Question 1

A transaction that is denominated on or requires settlement in a foreign currency is:

A) a forward agreement
B) a foreign currency transaction
C) a spot rate
D) a hedging instrument

Answer 1

B

Question 2

An Australian company purchases goods worth Baht 60 000 from a company in Thailand,and the goods are invoiced in Thai baht.At the date of purchase,the exchange rate is $AU 1.00 = Baht 30.At the date the goods are paid for,the exchange rate is $AU 1.00 = Baht 25.The Australian company should make the following entries to record the purchase of the goods and the payment made:

A) $\begin{array} { c l c } \text { A) Dr Inventory } & \$ 2000 & \\\text { Cr Accounts Payable } & & \$ 2000 \\\text { Dr Accounts Payable } & \$ 2000 & \\\text { Cr Cash at Bank } & & \$ 2000\end{array}$
B) $\begin{array} { c r r } \text { B) Dr Inventory } & \$ 1800000 & \\\quad \text { Cr Accounts Payable } & \$ 1800000 \\\text { Dr Accounts Payable } & \$ 1800000 \\\quad \text { Cr Exchange Gain } & & \$ 300000 \\\text { Cr Cash at Bank } & & \$ 1500000\end{array}$
C)C) Dr Inventory $\quad \$ 2000$
Cr Accounts Payable $\quad \$ 2000$
Dr Accounts Payable $\quad \$ 2400$
Cr Exchange Gain $\quad \$ 400$
Cr Cash at Bank $\quad \$ 2000$
D) $\begin{array} { l r r } \text { D) Dr Inventory } & \$ 2000 & \\\quad \text { Cr Accounts Payable } & & \$ 2000 \\\text { Dr Accounts Payable } & \$ 2000 & \\\text { Dr Exchange Loss } & \$ 400 & \\\quad \text { Cr Cash at Bank } & & \$ 2400\end{array}$

Answer 2

$\begin{array} { l r r } \text { D) Dr Inventory } & \$ 2000 & \\\quad \text { Cr Accounts Payable } & & \$ 2000 \\\text { Dr Accounts Payable } & \$ 2000 & \\\text { Dr Exchange Loss } & \$ 400 & \\\quad \text { Cr Cash at Bank } & & \$ 2400\end{array}$

Question 3

Respectively,a company's domestic currency,functional currency and presentation currency are:
I)the currency in which the financial statements must be presented
Ii)the currency in which an entity is required to measure its financial performance and position
Iii)the currency of the country of incorporation
Iv)the currency of the country in which the majority of shareholders are located

A) i, ii, iv
B) iii, iv, i
C) iii, ii, i
D) iv, iii, ii

Answer 3

C

Question 4

The following comments might be made about Australian businesses involved in gold mining and similar operations (note that Gold is generally traded in US dollars):
I)They do not need to engage in hedging of foreign currency transactions because
Gold prices are always set in US dollars
Ii)There is no benefit in engaging in hedging of foreign currency transactions because
They cannot significantly influence the price of their product
Iii)Hedging of foreign currency transactions would diminish or remove any uncertainty
About the effects of changes in exchange rates
Iv)Hedging of foreign currency transactions could cause them to report lower profits
(or larger losses)than if they did not engage in hedging

A) Both (i) and (iii) are correct
B) Both (ii) and (iv) are correct
C) Both (i) and (iv) are correct
D) Both (iii) and (iv) are correct

Question 5

The 'functional currency' of a business is:

A) the currency of the country in which the business is incorporated
B) the currency of the primary economic environment in which the company operates
C) the currency in which the business presents its financial reports
D) the currency of the country in which the majority of the shareholders of the business are located

Question 6

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):

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 7

When translating the assets and liabilities from functional currency to presentation currency,AASB 121 requires that:

A) the exchange rates at the dates of transaction are used
B) the exchange rate as at the end of the reporting period is used
C) an average exchange rate for the year of reporting be used
D) either a or c can be used

Question 8

Exchange rates between the Australian dollar and the US dollar are determined by:

A) jointly by the Reserve Bank of Australia and the US Federal Reserve Board
B) the Reserve Bank of Australia
C) the Australian Department of Treasury
D) the supply of and demand for the two currencies

Question 9

Which of the following best describes the requirements under Australian Accounting Standard AASB 139?

A) All financial instruments are accounted for using hedge accounting
B) Hedging arrangements must meet certain requirements before hedge accounting can be applied
C) Financial instruments must meet certain requirements before hedge accounting can be applied
D) All hedging arrangements are accounted for using the general principles of accounting for financial instruments

Question 10

A way in which a foreign currency transaction can be hedged is:

A) Buy (or sell) foreign currency at the date of the initial transaction
B) Enter into a forward rate agreement to fix the cost of the currency at a fixed date in the future
C) Enter into a transaction which neutralises the risk (e.g., have accounts receivable and accounts payable in the same currency with the same payment dates)
D) All of the above

Question 11

An effective foreign currency hedging transaction will:

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 12

An Australian company purchases goods worth Baht 60 000 from a company in Thailand,and the goods are invoiced in Australian dollars.At the date of purchase,the exchange rate is $AU 1.00 = Baht 30.At the date the goods are paid for,the exchange rate is $AU 1.00 = Baht 25.The Australian company should make the following entries to record the purchase of the goods and the payment made:

A)A) Dr Inventory $\quad \$ 2000$
$\mathrm { Cr }$ Accounts Payable $\quad \$ 2000$
Dr Accounts Payable $\quad \$ 2000$
Cr Exchange Gain $\quad \$ 400$
Cr Cash at Bank $\quad \$ 1600$
B)B) Dr Inventory $\quad \$ 2000$
Cr Accounts Payable $\quad \$ 2000$
Dr Accounts Payable $\quad \$ 2000$
$\mathrm { Cr }$ Cash at Bank $\quad \$ 2000$
C)C) Dr Inventory $\quad \$ 2000$
Cr Accounts Payable $\quad \$ 2000$
$\begin{array} { l r } \text { Dr Accounts Payable } & \$ 2000 \\ \text { Dr Exchange Loss } & \$ 400 \end{array}$
Cr Cash at Bank $\quad \$ 2400$
D) $\begin{array} { c c c } \text { D) Dr Inventory } & \$ 2400 & \\\quad \text { Cr Accounts Payable } & & \$ 2400 \\\text { Dr Accounts Payable } & \$ 2400 & \\\quad \text { Cr Cash at Bank } & & \$ 2400\end{array}$

Question 13

AASB 121 requires that non-monetary items are measured,subsequent to their initial recognition,at:

A) the exchange rate at the date of transaction
B) the exchange rate at the date of that the fair value was determined
C) an average exchange rate at the end of the reporting period
D) both A and B can apply

Question 14

The 'spot' rate of exchange for foreign currencies is:

A) the rate at which currencies can be exchanged in a particular place (e.g., in Sydney or in New York)
B) the rate of exchange between the Australian dollar and the US dollar
C) the rate at which currencies can be exchanged on the New York foreign exchange market
D) the rate at which currencies can be exchanged immediately

Question 15

The main objective of translating the financial statements of foreign operations into Australian dollars is to:

A) compare the performance of the foreign subsidiary's managers with their Australian counterparts
B) meet the requirements of tax legislation
C) incorporate the results of the foreign operations into the consolidated financial reports
D) evaluate the performance of the foreign subsidiary's managers

Question 16

The 'forward' rate of exchange for foreign currencies is:

A) the rate of exchange between the Australian dollar and the US dollar
B) the rate applicable to funds to be forwarded to an overseas country
C) the rate at which currencies can be exchanged at some future date
D) the rate at which currencies can be exchanged immediately

Question 17

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:

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 18

A fair value hedge that meets the requirements under AASB 139 for hedge accounting is accounted for in which of the following ways?

A) Any gain or loss on the hedged item attributable to the hedge risk is recognised in the profit and loss
B) Any gain or loss from re-measuring the hedging instrument at fair value or its foreign currency amount is recognised as equity
C) When a firm commitment to acquire an asset is entered into and it is a hedged item, the initial carrying amount of the asset should never include the cumulative change in fair value of the commitment previously recognised in the balance sheet
D) None of the above describes the correct accounting for a fair value hedge

Question 19

Maypole Pty Ltd is an Australian company which has a functional currency of Australian dollars.Appleflower Pty Ltd is a US company which is a wholly owned subsidiary of Maypole.Its functional currency is US dollars.To comply with AASB 121,Maypole must translate the financial statements of Appleflower into Australian dollars to report in the consolidated groups financial statements.
Appleflower has land which it acquired on 17 October 20X0 for US$ 500 000.The relevant exchange rates are as follows:
Spot rate at date of acquisition $\quad AUS 1 = US\$ 0.80$
Spot rate at 30 June 20X1 $\quad AUS 1 = US\$ 0.85$
Average rate for the 20X1 financial year $\quad AUS 1 = US\$ 0.82$
The amount which should be recorded in the Maypole consolidated group for the land for the 20X1 financial year (assuming no fair value adjustments have occurred).is:

A) AU$ 425 000
B) AU$ 410 000
C) AU$ 400 000
D) AU$ 500 000

Question 20

AASB 121 requires the translation of financial statements in which of the following circumstances?
I)if the domestic currency of the foreign operation is not the same as the functional
Currency of its parent
Ii)if the functional currency of the foreign operation is not the same as the functional
Currency of its parent
Iii)if the functional currency of the economic entity is not its presentation currency
Iv)if the presentation currency of the economic entity is not its functional currency

A) i and ii
B) ii and iii
C) iii and iv
D) i and iii

Question 21

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.

Question 22

There are four methods suggested for translating foreign currency financial statements.Identify these four methods and explain the translation methods used under each.

Question 23

Explain,using simple numerical examples,how (a)a gain and (b)a loss can arise due to changes in currency exchange rates for a business that is (i)selling goods or services to an overseas buyer and (ii)purchasing goods or services from an overseas supplier.Also explain two ways in which a business engaging in international trade can try to protect itself against possible exchange losses.What are the possible disadvantages,if any,in using the methods you suggest?

Question 24

AASB 121 requires an entity to measure its financial performance and financial position in its functional currency.What are the indicators of a functional currency? Is the functional currency the same as the presentation currency? Explain your answers.