Deck 23: Foreign Currency Transactions and Forward Exchange Contracts

Question 1

Monetary items include the following except for:

A) payables for goods purchased.
B) accounts receivable.
C) financial assets.
D) borrowings.

Answer 1

C

Question 2

Revenues and expenses denominated in a foreign currency, if assumed to be earned or incurred evenly during the financial period, and translated using the:

A) exchange rate at the beginning of the financial period.
B) exchange rate at the end of the financial period.
C) average exchange rate for the financial period.
D) exchange rate at the transaction date.

Answer 2

C

Question 3

Subsequent measurement of items resulting from a foreign currency transaction depend on whether the items are:

A) foreign or local.
B) monetary or non-monetary.
C) classified as current or non-current.
D) initially measured using the correct exchange rate.

Answer 3

B

Question 4

The accounting standard, AASB 121 The Effects of Changes in Foreign Exchange Rates, covers which of the following?

A) Treatment of any exchange differences that arise.
B) Subsequent measurement of assets and liabilities at the end of the reporting period.
C) Initial recognition and measurement of financial statement elements arising from foreign currency transactions.
D) All of these options.

Question 5

The main issue in accounting for foreign currency transactions is:

A) how to treat any foreign exchange differences that arise when assets or liabilities are remeasured at the end of the reporting period using the closing rate.
B) how to translate the financial statements of a foreign operation.
C) how to distinguish between denomination currency or settlement currency.
D) how to record transactions with foreign operations.

Question 6

An exchange difference is 'realised':

A) on initial recognition of a monetary asset.
B) on remeasurement of a monetary liability at the end of the reporting period.
C) when the exchange rate changes between initial recognition and cash settlement.
D) when the exchange rate changes between initial recognition and end of reporting period.

Question 7

The Australian Financial News quoted A$1.00 equals US$1.15/1.18. What does this represent?

A) A bid rate of A$1.15.
B) A bid rate of US$1.18.
C) An offer rate of A$1.18.
D) An offer rate of US$1.18.

Question 8

Outback Limited, an Australian company, purchased machinery from Southern Ranches Limited, a US company, on credit terms for US$600 000. At the transaction date, the exchange rate was US$1 = A$1.20. The journal entry recorded by Outback Limited for this purchase would be:

A) DR Machinery $720 000; CR Payable to Southern Ranches Limited $720 000.
B) DR Machinery $600 000; CR Payable to Southern Ranches Limited $600 000.
C) DR Receivable from Southern Ranches Limited $600 000; CR Cash $600 000
D) DR Machinery $720 000; CR Cash $720 000

Question 9

The Australian financial news quoted US$1.00 equals A$0.8836/0.9105. What does this represent?

A) The direct form of quotation.
B) A bid rate of A$0.9105.
C) An offer rate of A$0.8836.
D) A bid-ask spread of A$0.0269.

Question 10

On 25 June, Wattle Ltd acquires equipment on credit terms from a New Zealand supplier, Timaru Ltd, for NZ$240 000. The exchange rate at 25 June was NZ$1.00 = A$095. On 30 June the exchange rate is NZ$1.00 = A$0.90. Wattle Ltd pays Timaru Ltd in full on 7 July when the exchange rate is NZ$1.00 = A$0.92. The journal entry recorded by Wattle Ltd to remeasure the foreign currency monetary unit at settlement date of 7 July is:

A) DR Payable to Timaru Ltd A$5488; Foreign Exchange Gain A$5488
B) DR Foreign Exchange Loss A$3600; Payable to Timaru Ltd A$3600
C) DR Foreign Exchange Loss A$3600; Payable to Timaru Ltd A$3600.
D) DR Payable to Timaru Ltd A$5488; Foreign Exchange Gain A$5488.

Question 11

On 25 June, Wattle Ltd acquires equipment on credit terms from a New Zealand supplier, Timaru Ltd, for NZ$240 000. The exchange rate at 25 June was NZ$1.00 = A$095. On 30 June the exchange rate is NZ$1.00 = A$0.90. Wattle Ltd pays Timaru Ltd in full on 7 July when the exchange rate is NZ$1.00 = A$0.92. The journal entry recorded by Wattle Ltd for the purchase of the equipment on 25 June is:

A) DR Equipment A$240 000; CR Cash A$240 000
B) DR Equipment A$228 000; CR Payable to Timaru Ltd A$228 000
C) DR Equipment A$216 000; CR Payable to Timaru Ltd A$216 000
D) DR Equipment A$220 800; CR Payable to Timaru Ltd A$220 800

Question 12

The exchange rate used at the end of the reporting period is:

A) the spot rate.
B) the closing rate.
C) the ending rate.
D) the indirect rate.

Question 13

For a company that has A$ as its functional currency, which of the following is not a foreign currency transaction?

A) goods sold at prices denominated in UK pounds
B) equipment sold at prices denominated in Japanese Yen.
C) inventory sold to a customer in Hong Kong who pays in A$.
D) borrowing funds where amounts are payable in NZ$.

Question 14

FOB is the term of agreement whereby the seller retains ownership while the goods are in transit and the buyer obtains ownership when the goods have been received into its store.

A) origin.
B) destination.
C) foreign country.
D) shipping point.

Question 15

The following assets can be defined as 'qualifying assets' except for:

A) inventories purchased ready for sale.
B) power generation facilities
C) investment properties.
D) manufacturing plants.

Question 16

At the end of the reporting period, a foreign currency monetary item is remeasured using:

A) US dollars.
B) the closing rate.
C) the spot exchange rate.
D) the foreign currency monetary value.

Question 17

At the date of the transaction, a foreign currency monetary item is initially recognised and measured using:

A) the spot exchange rate.
B) US dollars.
C) the closing rate.
D) the foreign currency monetary value.

Question 18

A decrease in the direct rate of US$1 to A$# results in:

A) an exchange loss.
B) a decrease in A$ amount for a payable in US$.
C) an increase in A$ amount for receivable in US$.
D) an increase in US$ amount for a payable in A$.

Question 19

On 25 June, Wattle Ltd acquires equipment on credit terms from a New Zealand supplier, Timaru Ltd, for NZ$240 000. The exchange rate at 25 June was NZ$1.00 = A$095. On 30 June the exchange rate is NZ$1.00 = A$0.90. Wattle Ltd pays Timaru Ltd in full on 7 July when the exchange rate is NZ$1.00 = A$0.92. The journal entry recorded by Wattle Ltd to remeasure the outstanding foreign currency monetary unit at 30 June is:

A) DR Foreign Exchange Loss A$13 235; Payable to Timaru Ltd A$13 235
B) DR Payable to Timaru Ltd A$13 235; Foreign Exchange Gain A$13 235
C) DR Foreign Exchange Loss A$9 000; Payable to Timaru Ltd A$9 000
D) DR Payable to Timaru Ltd A$9 000; Foreign Exchange Gain A$9 000

Question 20

According to AASB 121, all the following items are 'monetary items' except for:

A) borrowings €60 000.
B) trade payable of ₤100 000.
C) trade receivable of US$24 000.
D) shares held in BHP Ltd listed on the ASX.

Question 21

Foreign exchange risk may relate to:

A) recognised assets and liabilities.
B) unrecognised firm commitments.
C) planned foreign currency transactions.
D) all of the above.

Question 22

The degree to which changes in the fair value of a forward contract offset changes in the fair value or cash flows of a hedged item, describes:

A) hedge exposure.
B) transaction exposure.
C) hedge effectiveness.
D) transaction variability.

Question 23

On 1 May 2022, Ocean Blue Ltd enters a forward exchange contract to sell US$180 000 in 8 months' time at 31 December 2022. The relevant exchange rates are: $\begin{array}{|l|c|c|}\hline &\text { Spot Rate } & \begin{array}{c}\text { Forward Rate (for } \\\text { 31 Dec. 2022) }\end{array} \\\hline 1 \text { May 2022 } & \begin{array}{l}\text { US } \$ 1.00= \\\mathrm{A} \$ 1.00\end{array} & \begin{array}{l}\text { US } \$ 1.00= \\\mathrm{A} \$ 1.05\end{array} \\\hline \text { 30 June 2022 - end of reporting period } & \begin{array}{l}\text { US } \$ 1.00= \\\mathrm{A} \$ 0.98\end{array} & \begin{array}{l}\text { US } \$ 1.00= \\\mathrm{A} \$ 1.02\end{array} \\\hline \begin{array}{l}31 \text { December } 2022 \text { - contract settlement } \\\text { date }\end{array} & \begin{array}{l}\text { US } \$ 1.00= \\\mathrm{A} \$ 0.95\end{array} & \begin{array}{l}\text { US } \$ 1.00= \\\mathrm{A} \$ 0.95\end{array}\\\hline\end{array}$ The premium (or discount) on the exchange rate at 30 June 2022 is:

A) Premium of $0.02
B) Discount of $0.03
C) Premium of $0.04
D) Discount of $0.05

Question 24

Which of the following is not an example of a cash flow hedge?

A) a forward contract to buy US$ hedging recognised borrowings in US$.
B) a forward contract to sell US$ hedging a highly probable sale of inventory in US$.
C) a forward contract to buy US$ hedging future interest payments on variable rate debt in US$.
D) a forward contract to buy US$ hedging an unrecognised firm commitment to purchase goods in US$.

Question 25

On 1 May 2022, Ocean Blue Ltd enters a forward exchange contract to sell US$180 000 in 8 months' time at 31 December 2022. The relevant exchange rates are: $\begin{array}{|l|c|c|}\hline &\text { Spot Rate } & \begin{array}{c}\text { Forward Rate (for } \\\text { 31 Dec. 2022) }\end{array} \\\hline 1 \text { May 2022 } & \begin{array}{l}\text { US } \$ 1.00= \\\mathrm{A} \$ 1.00\end{array} & \begin{array}{l}\text { US } \$ 1.00= \\\mathrm{A} \$ 1.05\end{array} \\\hline \text { 30 June 2022 - end of reporting period } & \begin{array}{l}\text { US } \$ 1.00= \\\mathrm{A} \$ 0.98\end{array} & \begin{array}{l}\text { US } \$ 1.00= \\\mathrm{A} \$ 1.02\end{array} \\\hline \begin{array}{l}31 \text { December } 2022 \text { - contract settlement } \\\text { date }\end{array} & \begin{array}{l}\text { US } \$ 1.00= \\\mathrm{A} \$ 0.95\end{array} & \begin{array}{l}\text { US } \$ 1.00= \\\mathrm{A} \$ 0.95\end{array}\\\hline\end{array}$ The journal entry required at 30 June 2022 to record any foreign exchange gain or loss on the forward contract is:

A) DR Loss of forward contract A$5400; CR Forward contract A$5400
B) DR Loss of forward contract A$5042; CR Forward contract A$5042
C) DR Forward contract A$5400; CR Gain on forward contract A$5400
D) No entry is required.

Question 26

If an Australian company enters a forward exchange contract to buy US$30 000, then which of the following applies?

A) The company's forward contract will act as a hedge against a recognised asset.
B) The company's contractual obligation (at the forward rate) and contractual right (at the spot rate) are settled on a net basis.
C) The company has a contractual obligation to deliver foreign currency at the settlement date and that obligation is realised at the spot rate.
D) The company has a contractual right to receive US$30 000 at the settlement date and that right is an asset fixed in A$ at the forward rate.

Question 27

The formal documentation of a hedging relationship must include identification of: I. The hedging instriment
II. The hedged iterr
III. The rature of the risk being hedged
IV. How the entity will assesshedge effectiveness

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

Question 28

Hedge effectiveness is ascertained from:

A) an economic relationship between the hedging instrument and the hedged item.
B) the effect of credit risk does not dominate the economic relationship hedging instrument and the hedged item.
C) the hedge ratio of the hedging relationship reflects actual quantities and is consistent with the purpose of hedge accounting.
D) all of the options are correct.

Question 29

Which of the following is not an example of a fair value hedge?

A) a forward contract to buy US$ hedging a recognised trade payable in US$.
B) a forward contract to sell US$ hedging a recognised loan receivable in US$.
C) a forward contract to sell US$ hedging a recognised trade receivable in US$.
D) a forward contract to buy US$ hedging a highly probable purchase of inventory in US$.

Question 30

A forward contact to buy US$450 000 for a planned purchase transaction of US$600 000 has a hedge ratio of:

A) 25%.
B) 75%.
C) 15%.
D) 133%.

Question 31

The type of hedge which is of the exposure to the variability in cash flows that is attributable to a particular risk that is associated with all, or some component of, a recognised asset or liability is a:

A) fair value hedge
B) cash flow hedge
C) hedge of a net investment in a foreign operation
D) all of the above

Question 32

On 1 July 2022, Jimbour Ltd enters a loan agreement with the Bank of New Zealand to borrow NZ$200 000. The funds are to be used to purchase materials needed for the construction of a manufacturing plant. By 31 December 2022, additional costs of A$75 000 have been paid to complete the manufacturing plant. Interest on the funds borrowed is payable half-yearly in arrears at the fixed interest rate of 5% p.a. Relevant exchange rates are: 1 July 2022 NZ$1.00 = A$0.75
Average July to December 2022 NZ$1.00 = A$0.77
31 December 2022 NZ$1.00 = A$0.85
Average January to June 2023 NZ$1.00 = A$0.80
30 June 2023 NZ$1.00 = A$0.70
The interest expense and any foreign exchange gain or loss on the interest at 31 December 2022 is:

A) Interest expense A$3 850; Foreign exchange gain A$400
B) Interest expense A$3 850; Foreign exchange loss A$400.
C) Interest expense A$6 494; Foreign exchange loss A$611..
D) Interest expense A$6 494; Foreign exchange loss A$611

Question 33

AASB 121 requires which of the following to be disclosed in the financial reports?

A) Any change in functional currency and reason for change.
B) The net exchange differences recognised in OCI and accumulated in a separate component of equity.
C) The amount of exchange differences recognised in the profit or loss for the period other than those that relate to financial instruments measured at fair value through profit or loss.
D) All of the above.

Question 34

On 28 March 2022, Blue Gum Ltd acquired land in California for a cash consideration of US$400 000. At 30 June 2022 the land is revalued to a fair value of US$500 000. The relevant exchange rates are: 28 March 2022 US$1.00 = A$1.15
30 June 2022 US$1.00 = A$1.10
On 30 June 2022, Blue Gum Ltd will record a revaluation gain on the land for:

A) A$100 000
B) A$160 000
C) A$200 000
D) A$217 948

Question 35

On 1 June 2022, Dubbo Ltd acquires inventories for cash of US$400 000. All of the inventories are still on hand at 30 June 2022 and have a net realisable value at that date of US$420 000. Relevant exchange rates are: 1 June 2022 US$1.00 = A$1.30
30 June 2022 US$1.00 = A$1.20
The journal entry recorded by Dubbo Ltd to remeasure the inventories at 30 June 2022 is:

A) DR Inventories write-down expense A$16 000; CR Inventories A$16 000
B) DR Inventories write-down expense A$42 000; CR Inventories A$42 000
C) DR Inventories A$42 000; CR Gain on revaluation (OCI) A$42 000
D) DR Inventories A$16 000; CR Gain on revaluation (OCI) A$16 000