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Exam 7: Foreign Currency Transactions and an Introduction to Hedging

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Question 21

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

E) A) and C)
F) A) and D)

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Question 22

Multiple Choice

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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

E) A) and B)
F) C) and D)

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Question 23

True/False

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

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$ $

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

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

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

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 $\quad$ the presentation currency II $\quad$ the domestic currency III $\quad$ the functional currency IV $\quad$ foreign currencies -For Alpha Ltd, it presentation currency is: