Question 1

Monetary items include the following except for:
A) payables for goods purchased.
B) accounts receivable.
C) financial assets.
D) borrowings.

Accepted Answer

Monetary items refer to those assets and liabilities that are held in the form of cash or can be converted into cash easily. Financial assets like stocks, bonds and investments are not necessarily held in the form of cash and hence are not considered as monetary items. Therefore, option C is the best choice as it represents an exception to the given list of monetary items.

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.

Accepted Answer

The average exchange rate for the financial period is the best choice as it provides a more accurate representation of the true amount of revenues and expenses earned or incurred during that period. Using the exchange rate at the beginning or end of the period may not fully capture the fluctuations in the exchange rate throughout the period. Using the exchange rate at the transaction date may not be practical for companies with many transactions or those with lengthy periods between the transaction date and financial reporting period.

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.

Accepted Answer

Subsequent measurement of items resulting from a foreign currency transaction depends on whether they are monetary or non-monetary. Monetary items are those that involve a fixed or determinable amount of currency, such as accounts receivable or payable, cash, or short-term investments. Non-monetary items, on the other hand, are those that do not involve a fixed or determinable amount of currency, such as inventory, property, or equipment. The measurement of monetary items is typically based on the exchange rate in effect at the balance sheet date, while the measurement of non-monetary items is typically based on historical cost.

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.

Accepted Answer

AASB 121 covers all of the options listed, including the treatment of exchange differences, subsequent measurement of assets and liabilities, and initial recognition and measurement of financial statement elements arising from foreign currency transactions.

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.

Accepted Answer

The main issue in accounting for foreign currency transactions is 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. This is because foreign currency transactions involve exchange rate fluctuations, which can create gains or losses that need to be accounted for in the financial statements.

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.

Accepted Answer

Exchange differences are considered 'realised' when there is a change in exchange rates between the initial recognition of a monetary asset or liability and its settlement in cash, which results in an actual gain or loss being recognized in the financial statements.

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.

Accepted Answer

The quote A$1.00 equals US$1.15/1.18 represents a bid rate of US$1.15 and 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

Accepted Answer

The correct journal entry for Outback Limited, an Australian company, to record the purchase of machinery on credit from Southern Ranches Limited, a US company, is to debit Machinery for A$720,000 and credit Payable to Southern Ranches Limited for A$720,000. This is because the transaction amount of US$600,000 is converted to Australian dollars at the exchange rate of US$1 = A$1.20, resulting in A$720,000 (600,000 * 1.20).

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.

Accepted Answer

The answer of The Australian financial news quoted US$1.00 equals...

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.

Accepted Answer

To determine the foreign exchange gain or loss, we need to compare the amount payable on the settlement date with the amount recorded on the acquisition date.

Amount payable on settlement date (7 July): NZ$240,000 x A$0.92/NZ$1 = A$220,800

Amount recorded on acquisition date (25 June): NZ$240,000 x A$0.95/NZ$1 = A$228,000

Therefore, there is a foreign exchange loss of A$7,200 (A$228,000 - A$220,800).

The journal entry to record the payment on 7 July would be:

DR Payable to Timaru Ltd A$240,000 
DR Foreign Exchange Loss A$7,200 
CR Bank A$247,200

Therefore, the correct answer is C: DR Foreign Exchange Loss A$3600; Payable to Timaru Ltd A$3600.

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

Accepted Answer

The correct journal entry for the purchase of the equipment on 25 June, when the exchange rate was NZ$1.00 = A$0.95, is to debit Equipment for A$228,000 (NZ$240,000 * 0.95) and credit Payable to Timaru Ltd for A$228,000.

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.

Accepted Answer

The closing rate is the exchange rate used at the end of the reporting period, which reflects the value of the foreign currency at that point in time. The spot rate and ending rate may also be used, but they may not accurately reflect the currency value at the end of the reporting period. The indirect rate is not relevant in this context.

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$.
D) borrowing funds where amounts are payable in NZ$.

Accepted Answer

Since A$ is the functional currency of the company, any transaction involving A$ is not considered a foreign currency transaction. Therefore, option C (selling inventory to a customer in Hong Kong who pays in A$) is not a foreign currency transaction. Options A, B, and D involve currency other than the functional currency of the company and are considered foreign currency transactions.

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.

Accepted Answer

FOB destination means ownership of the goods transfers from the seller to the buyer when the goods reach the buyer's specified destination.

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.

Accepted Answer

Inventories purchased ready for sale are not qualifying assets because they are not used in the production of income.

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.

Accepted Answer

According to International Financial Reporting Standards (IFRS), at the end of the reporting period, foreign currency monetary items should be remeasured using the closing rate, which is the exchange rate at the end of the reporting period. This ensures that the monetary item is translated into the reporting currency at its current value. Therefore, the correct choice is option B.

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.

Accepted Answer

At the date of the transaction, a foreign currency monetary item is initially recognised and measured using the spot exchange rate, which is the exchange rate at that specific moment in time.

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$.

Accepted Answer

A decrease in the direct rate of US$1 to A$1 means that more A$ are needed to purchase one US$. Therefore, a payable in US$ would require a larger amount of A$ to pay off the debt, resulting in a decrease in A$ amount for that payable.

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

Accepted Answer

The answer of On 25 June, Wattle Ltd acquires equipment...

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.

Accepted Answer

Shares held in BHP Ltd listed on the ASX are not considered monetary items under AASB 121 as they represent ownership in a company rather than a fixed monetary value. The other options are considered monetary items as they represent fixed amounts of currency owed or owned by the company.

Quiz 23: Foreign Currency Transactions and Forward Exchange Contracts

Monetary items include the following except for:

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

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

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

The main issue in accounting for foreign currency transactions is:

An exchange difference is 'realised':

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

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:

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

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

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

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.

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

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

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

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

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