Question 1

Aussie Ltd has an investment in Yankee Inc. The shares in Yankee were acquired on 15 August 20X4. Yankee uses the revaluation model to account for land & buildings. A building which was acquired by Yankee on 1 April 20X2 was revalued on 15 March 20X9. The exchange rate used to translate the building into the presentation currency at 30 June 20X9 is the rate that applied on:
A) 1 April 20X2
B) 15 August 20X4
C) 15 March 20X9
D) 30 June 20X9

Accepted Answer

D

Question 2

Under AASB 121 The Effects of Changes in Foreign Exchange Rates, an entity must disclose which of the following items in particular?
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.

Accepted Answer

According to AASB 121, the entity needs to disclose the amount of exchange differences included in profit or loss of the period, whether a change in the functional currency has occurred, and the reason for using a presentation currency that is different from the functional currency. The amount of exchange difference included directly in share capital is not specifically required to be disclosed under AASB 121.

Question 3

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.

Accepted Answer

Monetary items are fixed units of currency that are held or assets and liabilities expected to be received or paid in fixed numbers of currency units. Plant and equipment (A) are tangible assets, while intangible items including goodwill (C) are not necessarily monetary in nature. Contingent items (D) are not fixed units of currency and therefore not considered monetary items.

Question 4

According to AASB 121 The Effects of Changes in Foreign Exchange Rates, the currency in which an entity primarily generates and expends cash is considered to be the:
A) economic currency;
B) domestic currency;
C) presentation currency;
D) functional currency.

Accepted Answer

According to AASB 121, the functional currency is the currency of the primary economic environment in which the entity operates. In this case, since Sing Sing operates mainly in Australia, its functional currency is Australian dollars.

Answer: B
 The carrying amount of Sing Sing at the date of acquisition in the consolidated financial statements of Aussie Ltd should be translated into Aussie Ltd's reporting currency (which is Australian dollars) using the exchange rate at the date of acquisition. Aussie Ltd should then translate the carrying amount of Sing Sing's net assets at the end of each reporting period into its own reporting currency, using the exchange rate at that reporting period end.

Question 5

The following information relates to questions
Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing) on 1 July 20X0. The balance sheet of Sing Sing on that date was as follows:
$\text { Balance sheet at } 1 \text { July } 20X0$
$\begin{array}{lrll}
&S\$&&S\$\
\text { Machinery at cost } & 280,000 & \text { Share capital } & 200,000 \
\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \
\text { Receivables } & 50,000 & \text { Retained earnings } & 300,000\
\text { Cash }&70,000&&600,000\&600,000
\end{array}$
The balance sheet of Sing Sing as at is as follows:
Balance Sheet as at 30 June 20X1
$\begin{array}{lllr}&S\$&&S\$\
\text { Machinery- carrying value } & 150,000 & \text { Share capital } & 200,000 \
\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \
\text { Receivables } & 250,000 & \text { Retained earnings } & 500,000 \
\text { Cash } & 300,000 & \text { Accounts payable } & 85,000 \
& & \text { Income tax payable } & 15,000 \
&900,000 & &900,000
\end{array}$
Relevant exchange rates are as follows:
$\begin{array}{lll}&A\$&S\$\
\text { 1 July 20X0 } & 1.00= & 1.25 \
\text { 30 June 20X1 } & 1.00= & 1.28 \
\text { Average 20X0-X1 } & 1.00= & 1.18
\end{array}$
-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

Accepted Answer

The answer of The following information relates to questions
Aussie Ltd...

Question 6

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.

Accepted Answer

Exchange differences arising from the translation of foreign currency denominated financial statements into the functional currency are recognised as an item of gain or loss in the statement of profit or loss and other comprehensive income. This reflects the impact these exchange differences have on the financial performance of the company over the reporting period.

Question 7

The following information relates to questions
Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing) on 1 July 20X0. The balance sheet of Sing Sing on that date was as follows:
$\text { Balance sheet at } 1 \text { July } 20X0$
$\begin{array}{lrll}
&S\$&&S\$\
\text { Machinery at cost } & 280,000 & \text { Share capital } & 200,000 \
\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \
\text { Receivables } & 50,000 & \text { Retained earnings } & 300,000\
\text { Cash }&70,000&&600,000\&600,000
\end{array}$
The balance sheet of Sing Sing as at is as follows:
Balance Sheet as at 30 June 20X1
$\begin{array}{lllr}&S\$&&S\$\
\text { Machinery- carrying value } & 150,000 & \text { Share capital } & 200,000 \
\text { Investment property } & 200,000 & \text { General Reserve } & 100,000 \
\text { Receivables } & 250,000 & \text { Retained earnings } & 500,000 \
\text { Cash } & 300,000 & \text { Accounts payable } & 85,000 \
& & \text { Income tax payable } & 15,000 \
&900,000 & &900,000
\end{array}$
Relevant exchange rates are as follows:
$\begin{array}{lll}&A\$&S\$\
\text { 1 July 20X0 } & 1.00= & 1.25 \
\text { 30 June 20X1 } & 1.00= & 1.28 \
\text { Average 20X0-X1 } & 1.00= & 1.18
\end{array}$
-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

Accepted Answer

The answer of The following information relates to questions
Aussie Ltd...

Question 8

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.

Accepted Answer

The answer of Post acquisition date retained earnings that are...

Question 9

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:
$\begin{array}{lll}
\text { End of reporting period } & \mathrm{FC} 1= & \$ 0.80 \
\text { Average rate for year } & \mathrm{FC} 1= & \$ 0.75
\end{array}$
The net profit after tax translated into the presentation currency is:
A) $12 750;
B) $13 600;
C) $21 250;
D) $26 667.

Accepted Answer

The answer of Mortimer Limited has the following items in...

Question 10

By applying the definition provided in AASB 121 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.

Accepted Answer

Accounts receivable are considered monetary items since they represent a right to receive a fixed or determinable amount of money in the future. The other items listed (property, plant and equipment, land and buildings, and inventory) are non-monetary items since they do not represent a fixed or determinable amount of money.

Question 11

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.

Accepted Answer

Indicators that the local overseas currency is the functional currency include that cash flows are primarily in the local currency and do not affect the parent's cash flows (II) and that production costs are determined primarily by local conditions (IV). These factors suggest the subsidiary operates independently of the parent company's currency environment.

Question 12

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.

Accepted Answer

If foreign currency denominated non-monetary items are measured using the fair value method, they must be translated into the functional currency using the exchange rate at the date when the value was determined.

Question 13

According to AASB 121 The Effects of Changes in Foreign Exchange Rates, the following statement, 'the currency that affects the economic wealth of the entity', provides a definition of?
A) functional currency;
B) local currency;
C) presentation currency;
D) foreign currency.

Accepted Answer

The statement "the currency that affects the economic wealth of the entity" defines the functional currency. The functional currency is the currency of the primary economic environment in which the entity operates and generates cash flows.

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

Accepted Answer

Depreciation expense is recorded in the functional currency using the exchange rate at the date of the transaction. However, when translating from the functional currency to the presentation currency, the historical exchange rate for the date of acquisition of the asset is used. Differences in treatment may arise due to changes in exchange rates between the date of acquisition and the date of translation. Accounts receivable, cost of goods sold, and share capital are translated at the exchange rate at the date of the transaction in both instances.

Question 15

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.

Accepted Answer

Non-monetary items measured using historical cost are typically fixed assets or inventory. These items are not expected to be converted into cash or cash equivalents in the future, and therefore, any changes in their fair value due to exchange rate fluctuations are not recognized in the financial statements. As a result, they are translated using the exchange rate at the date of the transaction, which represents the historical cost of the item in the functional currency. This ensures that the carrying amount of the non-monetary item remains consistent over time, regardless of changes in the exchange rate.

Question 16

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.

Accepted Answer

The general rule for translating liabilities denominated in a foreign currency into the functional currency is to first classify the liabilities as monetary or non-monetary. Monetary liabilities are translated using the current rate existing at the end of the reporting period, while non-monetary liabilities are translated using the historical rate at the time of the transaction. Therefore, choice C is the best option as it takes into account the classification of the liabilities.

Question 17

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.

Accepted Answer

The answer of When translating into the functional currency monetary...

Question 18

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.

Accepted Answer

The translation difference is recognised as a separate component of equity in the statement of financial position when translating into the presentation currency. This is in line with the requirements of IAS 21 The Effects of Changes in Foreign Exchange Rates.

Question 19

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.

Accepted Answer

Theoretically, each item of revenue and expense should be translated using the spot exchange rate between the functional currency and the foreign currency on the date the transaction occurred. This approach reflects the value of the transactions at the time they were made.

Quiz 10: Translation of the Financial Statements of Foreign Entities

Monetary items are best described as:

According to AASB 121 The Effects of Changes in Foreign Exchange Rates, the currency in which an entity primarily generates and expends cash is considered to be the:

When translating foreign currency denominated financial statements into the functional currency, the exchange differences are recognised:

Post acquisition date retained earnings that are denominated in a foreign currency are:

By applying the definition provided in AASB 121 The Effects of Changes in Foreign Exchange Rates, the following items will be regarded as a monetary item:

If foreign currency denominated non-monetary items are measured using the fair value method, they must be translated into the functional currency using the:

According to AASB 121 The Effects of Changes in Foreign Exchange Rates, the following statement, 'the currency that affects the economic wealth of the entity', provides a definition of?

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?

When translating into the functional currency foreign currency denominated non-monetary items measured using historical cost must be translated using the:

The general rule for translating liabilities denominated in a foreign currency into the functional currency is to:

When translating into the functional currency monetary liabilities are translated using the:

When translating into the presentation currency the translation difference is recognised:

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: