Question 1

Emu Exports Ltd sold products to a New Zealand company.The sales contract was denominated in $NZ.On 1 October 2015,$NZ500 000 worth of products were sold with the terms f.o.b.shipping point and payment due 30 December 2015.A forward-exchange contract in which the bank agrees to purchase $NZ300 000 from Emu Exports on 30 December 2015 is entered into on 1 November 2015.The forward-exchange rate is A$1 = $NZ1.25.Other exchange rates are as follows: $$\begin{array} { | l | l | } 
\hline 1 \text { October } 2015 & \text { A\$1.00 } = \text {\$NZ1.12 } \
\hline 1 \text { November } 2015 & \text { A\$1.00 } = \text { \$NZ1.20 } \
\hline 30 \text { December } 2015 & \text { A\$1.00 } = \text { \$NZ1.30 } \
\hline
\end{array}$$ What are the journal entries to record the above transactions from 1 October through to 30 December 2015 in accordance with AASB 121 (rounded to the nearest whole A$)?

Accepted Answer

A) 
 
B) 
 
C) 
 
D)

Question 2

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

Accepted Answer

The answer of Describe,with examples,the reasons why organisations would want...

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

On 1 July 2016 McGrath Ltd enters into an arrangement with a Hong Kong bank to borrow $HK1 500 000.The term of the loan is 3 years with interest payable annually in arrears on 30 June at the rate of 7 per cent.The exchange rate information is: $$\begin{array} { | l | l | } 
\hline \text { 1 July } 2016 & \text { A\$1 } = \text { \$HK4.25 } \
\hline 30 \text { June } 2017 & \text { A\$1 } = \text { \$HK3.50 } \
\hline 30 \text { June } 2018 & \text { A\$1 } = \text { \$HK4.50 } \
\hline
\end{array}$$ What journal entries are required in McGrath Ltd's books for 1 July 2016 and 30 June 2017 and 30 June 2018 in accordance with AASB 121 (rounded to the nearest whole A$)?

Accepted Answer

A) 
 
B) 
 
C) 
 
D)

Question 5

The spot rate is defined in AASB 121 as:

Accepted Answer

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 6

Inventory is an example of a monetary item.

Accepted Answer

A) True 
 B)False

Question 7

Safety Ltd purchased goods for £20 000 from a British supplier on 1 April 2015.The amount owing on the purchase is payable on 30 July 2015.On 1 May 2015 a forward-exchange contract for the delivery of £20 000 on 30 July 2015 is taken out with Aus Bank.Safety Ltd's reporting date is 30 June.Exchange rates are as follows:  What entries are required to report these transactions in accordance with AASB 121 (rounded to the nearest whole A$)?

Accepted Answer

A) 
 
B) 
 
C) 
 
D)

Question 8

On 1 May 2015 Harry's Plastics Ltd acquires goods from a supplier in the US.The goods are shipped f.o.b.from the United States on 1 May 2015.The cost of the goods is US$1 500 000.The amount has not been paid at period end,30 June 2015.Exchange rates are as follows: $$\begin{array} { | l | l | } 
\hline 1 \text { May } 2015 & \text { A\$1.00 } = \text { US\$0.59 } \
\hline 30 \text { June } 2015 & \text { A\$1.00 = US\$0.52 } \
\hline
\end{array}$$ Harry's Plastics Ltd uses a perpetual inventory system.
What entries are required at transaction date and reporting date (rounded to the nearest whole A$)?

Accepted Answer

A) 
 
B) 
 
C) 
 
D)

Question 9

According to AASB 123 a qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

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Question 11

What is the required treatment for long-term monetary items denominated in a foreign currency according to AASB 121 and what is a concern that has been raised about the treatment?

Accepted Answer

A)  Long-term foreign currency monetary items are not required to be re-translated at reporting date. The concern raised is that the failure to reflect the affect of changes in the exchange rate on items that are exposed to forex risk does not provide useful information for decision making about the risk exposure of the reporting entity. 
B)  Long-term foreign currency monetary items are required to be re-translated at the spot exchange rate at reporting date and the difference is deferred to be recognised/amortised over the life of the monetary item. The concern that has been raised is that the deferred items are not assets or liabilities in terms of the conceptual framework and are therefore meaningless in the statement of financial position and misleading for users of the financial statements. 
C)  Long-term foreign currency monetary items are not required to be re-translated at reporting date, but the exchange rates, maturity dates and applicable forward rates are required note disclosures. The concern raised about this treatment is that the need to reflect the risk exposure in foreign currency denominated monetary items is not addressed through measurement, but only through disclosure, leaving the burden of assessing the impact on the financial position and performance of the entity up to the user. 
D)  Long-term foreign currency monetary items are required to be re-translated at the spot rate at reporting date and any differences treated as gains or losses in the statement of comprehensive income. The concern raised about this treatment is that the amounts of profit and loss recognised in the statement of comprehensive income are actually unrealised and there is considerable doubt about whether or not they would ever be realised as a result of the fluctuating nature of exchange rates.

Question 12

Discuss the accounting treatment required under AASB 121 The Effects of Changes in Foreign Exchange Rates when a reporting entity has a foreign currency monetary items at the reporting date.

Accepted Answer

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Question 13

Which of the following statements is correct with respect to AASB 121 The Effects of Changes in Foreign Exchange Rates?

Accepted Answer

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 14

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

Accepted Answer

The answer of What is a forward rate agreement?
 Explain,with...

Question 15

AASB 121 requires that foreign currency monetary items outstanding at reporting date must be:

Accepted Answer

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 16

A hedge is defined by AASB 139 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.

Accepted Answer

A) True 
 B)False

Question 17

Discuss the situations in which the discontinuation of fair-value hedge accounting is to be done as provided for in AASB 139.

Accepted Answer

The answer of Discuss the situations in which the discontinuation...

Question 18

The following items are in the financial statements of Pirie Ltd 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 AASB 121 The Effects of Changes in Foreign Exchange Rates?

Accepted Answer

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

Exam 32: Accounting for Foreign Currency Transactions

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

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

The spot rate is defined in AASB 121 as:

Inventory is an example of a monetary item.

According to AASB 123 a qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.

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

What is the required treatment for long-term monetary items denominated in a foreign currency according to AASB 121 and what is a concern that has been raised about the treatment?

Discuss the accounting treatment required under AASB 121 The Effects of Changes in Foreign Exchange Rates when a reporting entity has a foreign currency monetary items at the reporting date.

Which of the following statements is correct with respect to AASB 121 The Effects of Changes in Foreign Exchange Rates?

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

AASB 121 requires that foreign currency monetary items outstanding at reporting date must be:

A hedge is defined by AASB 139 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.

Discuss the situations in which the discontinuation of fair-value hedge accounting is to be done as provided for in AASB 139.