Deck 19: Translation of the Financial Statements of Foreign Entities

Question 1

The following information relates to question
Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing) on 1 July 20X0. The statement of financial position of Sing Sing on that date was as follows:
$\text { Statement of Financial Position as at } 1 \text { July } 20 \times 0$
$\begin{array}{lrlr}&S\$&&S\$\\\text { Machinery at cost } & 280,000 & \text { Share capital } & 200,000 \\\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \\\text { Receivables } & 50,000 & \text { Retained earnings } & 300,000\\\text { Cash }&70,000\\&600,000&&600,000\end{array}$ The statement of financial position of Sing Sing as at 30 June 20X1was as follows:
Statement of Financial Position as at 30 June 20X1
$\begin{array}{lrlr}&S\$&&S\$\\\text { Machinery- carrying value } & 150,000 & \text { Share capital } & 200,000 \\\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \\\text { Trade receivables } & 250,000 & \text { Retained earnings } & 500,000 \\\text { Cash } & 300,000 & \text { Trade payables } & 85,000 \\& & \text { Income tax payable } & 15,000\\&900,000&&900,000\end{array}$
Relevant exchange rates are as follows:
$\begin{array}{llll}&A\$&&S\$\\1 \text { July } 20 \times 0 & 1.00 & = & 1.25 \\30 \text { June } 20 \times 1 & 1.00 & = & 1.28 \\\text { Average } 20 \times 0-\times 1 & 1.00 & = & 1.18\end{array}$

-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

Answer 1

$709 688

Question 2

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.

Answer 2

A

Question 3

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.

Answer 3

D

Question 4

The following information relates to question
Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing) on 1 July 20X0. The statement of financial position of Sing Sing on that date was as follows:
$\text { Statement of Financial Position as at } 1 \text { July } 20 \times 0$
$\begin{array}{lrlr}&S\$&&S\$\\\text { Machinery at cost } & 280,000 & \text { Share capital } & 200,000 \\\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \\\text { Receivables } & 50,000 & \text { Retained earnings } & 300,000\\\text { Cash }&70,000\\&600,000&&600,000\end{array}$ The statement of financial position of Sing Sing as at 30 June 20X1was as follows:
Statement of Financial Position as at 30 June 20X1
$\begin{array}{lrlr}&S\$&&S\$\\\text { Machinery- carrying value } & 150,000 & \text { Share capital } & 200,000 \\\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \\\text { Trade receivables } & 250,000 & \text { Retained earnings } & 500,000 \\\text { Cash } & 300,000 & \text { Trade payables } & 85,000 \\& & \text { Income tax payable } & 15,000\\&900,000&&900,000\end{array}$
Relevant exchange rates are as follows:
$\begin{array}{llll}&A\$&&S\$\\1 \text { July } 20 \times 0 & 1.00 & = & 1.25 \\30 \text { June } 20 \times 1 & 1.00 & = & 1.28 \\\text { Average } 20 \times 0-\times 1 & 1.00 & = & 1.18\end{array}$

-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 5

In order for the financial statements of a foreign operation to be included in the consolidated financial statements of the parent it is necessary to translate the foreign operation's financial statements into:

A) the presentation currency of the reporting entity;
B) the functional currency of the foreign operation;
C) the local currency of the foreign operation;
D) the domestic currency of the foreign operation;

Question 6

When an entity has an investment in a foreign domiciled entity it is necessary to translate the financial statements of the foreign operation to the currency used by the investor:

A) regardless of the ownership interest in the entity
B) only where the entity is a wholly owned subsidiary
C) where the investor has control over the foreign entity
D) where the investment is material to the investor

Question 7

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 8

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 9

Where a change in the functional currency occurs, the translation procedures as outlined in IAS 21 The Effects of Changes in Foreign Exchange Rules, apply:

A) prospectively, from the date of the change;
B) prospectively, from the next reporting date;
C) retrospectively and must be adjusted in the opening balance of retained earnings;
D) retrospectively and must be adjusted directly into the current period profit or loss.

Question 10

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 11

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 12

The following information relates to questions
On 1 January 20X3, Claudia Ltd, an Australian company, acquired 80% of the shares of Saskia Ltd, a New Zealand company, for A$2 498 000. At that date the share capital of Saskia was NZ$2 million and the retained earnings were NZ$1 440 000.

All the assets and liabilities of Saskia were recorded at fair value except for land, for which the fair value was NZ$200 000 higher than the carrying amount and equipment, for which the fair value was NZ$80 000 higher than the carrying amount. The undervalued equipment had a further 4-year life. The tax rate in New Zealand is 25%.

Exchange rates are as follows:
$\begin{array}{ll}1 \text { January 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.20 \\31 \text { December 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.40 \\\text { Average for the year } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.30\end{array}$

-The goodwill arising on Claudia's acquisition of Saskia is:

A) NZ$77 600;
B) NZ$88 800;
C) A$93 120;
D) A$422 000.

Question 13

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.

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

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:
$\begin{array}{lll}\text { End of reporting period } & F C 1= & \$ 0.80 \\\text { Average rate for year } & F C 1= & \$ 0.75\end{array}$
The net profit after tax translated into the presentation currency is:

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

Question 16

The following information relates to questions
On 1 January 20X3, Claudia Ltd, an Australian company, acquired 80% of the shares of Saskia Ltd, a New Zealand company, for A$2 498 000. At that date the share capital of Saskia was NZ$2 million and the retained earnings were NZ$1 440 000.

All the assets and liabilities of Saskia were recorded at fair value except for land, for which the fair value was NZ$200 000 higher than the carrying amount and equipment, for which the fair value was NZ$80 000 higher than the carrying amount. The undervalued equipment had a further 4-year life. The tax rate in New Zealand is 25%.

Exchange rates are as follows:
$\begin{array}{ll}1 \text { January 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.20 \\31 \text { December 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.40 \\\text { Average for the year } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.30\end{array}$

-The adjustment to the foreign currency translation reserve on 31 December 20X3 relating to the revaluation of the land if the functional currency of Saskia is New Zealand dollars is:

A) 5 953 debit
B) 5 953 credit
C) 17 857 debit
D) 17 857 credit

Question 17

By applying the definition provided in IAS 21 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 18

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.

Question 19

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 20

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 21

Yandos Limited has made a loan of A$50 000 to a foreign subsidiary in Japan, Yamuchi Limited. The loan was made when the exchange rate was A$4 = Y1. By reporting date, the exchange rate had changed to A$5 = Y1. The Australian parent will need to recognise the following as part of the entry to revalue the loan:

A) DR Loan receivable $62 500;
B) DR Loan receivable $50 000
C) DR Loan receivable $12 500;
D) DR Loan receivable $2500.

Question 22

The following information relates to questions
On 1 January 20X3, Claudia Ltd, an Australian company, acquired 80% of the shares of Saskia Ltd, a New Zealand company, for A$2 498 000. At that date the share capital of Saskia was NZ$2 million and the retained earnings were NZ$1 440 000.

All the assets and liabilities of Saskia were recorded at fair value except for land, for which the fair value was NZ$200 000 higher than the carrying amount and equipment, for which the fair value was NZ$80 000 higher than the carrying amount. The undervalued equipment had a further 4-year life. The tax rate in New Zealand is 25%.

Exchange rates are as follows:
$\begin{array}{ll}1 \text { January 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.20 \\31 \text { December 20X3 } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.40 \\\text { Average for the year } & \mathrm{A} \$ 1.00=\mathrm{NZ} \$ 1.30\end{array}$

-The adjustment to the foreign currency translation reserve on 31 December 20X3 relating to the revaluation of the land if the functional currency of Saskia is Australian dollars dollars is:

A) 5 953 debit
B) 5 953 credit
C) 17 857 debit
D) 17 857 credit

Question 23

A parent entity has recognised an increase of $50 000 in a Loan Receivable from a foreign subsidiary as a result of a change in exchange rates. On consolidation the following adjustment is necessary:

A) $\begin{array} { l c c } \text { DR } & \text { Exchange gain } & \$ 50,000 \\\text { CR } & \text { Foreign currency translation reserve } & \$ 50,000 ;\end{array}$
B) $\begin{array} { l c c c } \text { DR } & \text { Exchange gain } & \$ 50,000 & \\\text { CR } & \text { Loan receivable } & & \$ 50,000 ;\end{array}$
C) $\begin{array} { l c c c } \text { DR } & \text { Loan receivable } & \$ 50,000 & \\\text { CR } & \text { Foreign currency translation reserve } & \$ 50,000 ;\end{array}$
D) $\begin{array} { l c c c } \text { DR } & \text { Foreign currency translation reserve } & \$ 50,000 & \\\text { CR } & \text { Exchange gain } & \$ 50,000 .\end{array}$

Question 24

Under IAS 21 The Effects of Changes in Foreign Exchange Rates, an entity must disclose:
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.