Question 1

Which of the following is not considered in determining an entity's functional currency?
A) Sales prices
B) Indirect material costs
C) The competition's sales prices
D) Management salary costs
E) Interdepartmental transaction prices

Accepted Answer

E

Question 2

Sam Cooke Entity (SCE) presses vinyl LP's, EP's, and singles for contracted recording studios and is a foreign subsidiary. SCE contracted with Beach Boys Studio (BBS) on February 14 to deliver 50,000 vinyl singles of the song "Twistin' the Night Away. On April 11, SCE shipped the singles under terms of FOB shipping point. Two days later on April 13, SCE invoiced BBS under terms of 5/10 n/30. Ten days later on April 23, SCE received payment from BBS and credited BBS's account for the 5 percent discount. SCE's year end is June 30. Which date should SCE use to apply an exchange rate to this transaction?
A) February 14
B) April 11
C) April 13
D) April 23
E) June 30

Accepted Answer

The exchange rate should be applied on April 11, the date of shipment, as the terms are FOB shipping point, meaning the risk and rewards of ownership transfer to the buyer at the point of shipment.

Question 3

Turnkey Entity disposed of its wholly-owned foreign subsidiary, Threshold Entity. Turnkey had a total credit balance of $50 million in OCI with $12 million relating to foreign exchange differences between Turnkey and Threshold. Which of the following statements most closely reflects the ultimate consequences of the disposal?
A) Retained earnings for Turnkey increases by $12 million
B) Net income for Turnkey decreases by $12 million
C) Income from continuing operations increases by $12 million
D) More than one of the above
E) None of the above

Accepted Answer

The $12 million in foreign exchange differences will be reclassified from OCI to retained earnings upon disposal of the foreign subsidiary.

Question 4

When translating foreign currency items into the functional currency, monetary items are translated at the
A) the weighted average exchange rate for the reporting period.
B) spot exchange rate at the end of the reporting period (closing rate).
C) the historical rate at which monetary items were acquired.
D) the rate that reflects the economic reason for acquiring monetary items.

Accepted Answer

Monetary items are translated at the spot exchange rate at the end of the reporting period (closing rate) because their value is fixed in terms of the amount of currency required to settle the item, and the closing rate provides the most current value.

Question 5

What is the correct order in the steps for translating foreign currency financial statements?
1) Translate all foreign currency items from the entity's functional currency into the presentation currency, if different.
2) Translate all foreign currency items into the entity's functional currency.
3) Report the effects of such translation in accordance with IAS 21.
4) Determine the entity's functional currency.
A) 1, 2, 3, 4
B) 4, 2, 1, 3
C) 2, 4, 1, 3
D) 3, 1, 2, 3

Accepted Answer

The correct order starts with determining the entity's functional currency, then translating all foreign currency items into this functional currency, followed by translating these items into the presentation currency if it's different, and finally reporting the effects of such translation in accordance with IAS 21.

Question 6

Delfi Entity (DE), with the functional and presentation currency of the US dollar, established a Canadian subsidiary, Northern Entity (NE), an assembly plant located on the Canadian side of Niagara Falls. Other than paying its employees for labor in the Canadian dollars (local currency), all of NE's transactions are with the parent. NE is financed mainly by the parent. DE provides the subsidiary with any necessary parts and equipment. What is NE's functional currency?
A) the Canadian dollar
B) the US dollar
C) NE can choose any currency it wants
D) more information is needed to determine NE's functional currency

Accepted Answer

The functional currency of Northern Entity (NE) is the US dollar. This is because, despite paying its employees in Canadian dollars, all of NE's transactions are with its parent company, Delfi Entity (DE), which operates in US dollars. Furthermore, NE is primarily financed by DE, which also provides it with necessary parts and equipment. Therefore, the majority of NE's business operations are conducted in US dollars, making it the functional currency.

Question 7

Which conversion rate should be used to translate foreign currency monetary balances at the end of a fiscal period?
A) Foreign currency exchange rates at the end of the fiscal period.
B) Weighted-average foreign currency exchange rates for the fiscal period.
C) Beginning and end of the fiscal period average foreign currency exchange rates.
D) No adjustment is necessary as the transactions have already been reflected in the financial statements.

Accepted Answer

The answer of Which conversion rate should be used to...

Question 8

If British Entity (AE) enters into a transaction with Portuguese Entity (PE) that is denominated in PE's currency, how is the transaction reflected in the accounting records of AE?
A) Converted to the currency of AE at the date of purchase.
B) Recorded in the currency of PE with no translation.
C) Converted to the currency of AE at year-end at the then year-end exchange rates.
D) Converted to the currency of PE based on the average foreign exchange rate for the month prior to the purchase.

Accepted Answer

Transactions in foreign currencies are converted to the reporting entity's functional currency using the exchange rate at the date of the transaction, allowing for consistent financial reporting and comparison.

Question 9

An entity can have several different functional currencies.

Accepted Answer

An entity can have several different functional currencies because different parts of the entity may operate in different currencies. For example, a multinational corporation may have subsidiaries in different countries, each of which uses a different currency. In this case, the entity would need to use multiple functional currencies in order to consolidate its financial statements.

Question 10

Parsons Produce uses the Euro as its functional currency. In attempt to appeal to British investors, Parsons uses the British pound as its presentation currency. Parsons Produce is allowed to report this way under IAS 21 even though the British Pound isn't its functional currency.

Accepted Answer

IAS 21 allows an entity to present its financial statements in any currency (or currencies). If the presentation currency differs from the entity's functional currency, the financial statements are translated into the presentation currency.

Question 11

O'Hare Entity, located in Northern Ireland, uses the British pound as its functional and presentation currency. O'Hare has investments in Midway Entity which uses the Yen as its functional and presentation currency. These investments are categorized as available for sale. Exchange gains or losses related to these investments are recognized in OCI.

Accepted Answer

Exchange gains or losses on available-for-sale financial assets are recognized in Other Comprehensive Income (OCI) until the investment is sold or impaired, at which point the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss. This treatment is consistent with the accounting standards for foreign currency translation related to investments classified as available for sale.

Question 12

Plane & Lathe is a securities broker and investment bank located in Manchester. Plane & Lathe specializes in trading on the London Stock Exchange. Recently, due to economic changes, Plane & Lathe has started trading predominantly on the New York Stock Exchange. Their functional currency changed, as a result, from the British pound to the U.S. dollar. This change is considered a change in accounting policy.

Accepted Answer

This change is considered a change in accounting estimate, not a change in accounting policy. Changing the functional currency is a response to economic realities and does not represent a voluntary change in the principles or methods of accounting.

Question 13

Substantial controversy exists in practice over how translation gains and losses should be reflected in the financial statements.

Accepted Answer

Translation gains and losses arise when financial statements of a foreign operation are translated into the reporting currency of the parent company. The controversy stems from different accounting standards and practices (such as IFRS vs. U.S. GAAP) prescribing different methods for recognizing these gains and losses, either in net income or in other comprehensive income, leading to debates over the most accurate reflection of a company's financial health.

Question 14

If a foreign operation is not autonomous and it has a high proportion of transactions with the reporting entity, the operation doesn't need to have the same functional currency as the reporting entity.

Accepted Answer

The autonomy of a foreign operation and the proportion of transactions with the reporting entity do not determine whether it must have the same functional currency as the reporting entity. The functional currency is determined by the primary economic environment in which the entity operates, not by its relationship with the reporting entity.

Question 15

An entity is required to measure foreign currency transactions and events (i.e., assets, liabilities and operations) in its functional currency.

Accepted Answer

Foreign currency transactions and events must be translated into the entity's functional currency to accurately reflect the financial position and results of operations in the financial statements.

Question 16

An entity can choose its functional currency.

Accepted Answer

The answer of An entity can choose its functional currency....

Question 17

An entity can choose to present its financial statements in any currency.

Accepted Answer

An entity can present its financial statements in any currency, but it must disclose the currency used and the reasons for using a different currency if it is not the functional currency.

Question 18

The closing rate is the spot exchange rate at the end of the reporting period.

Accepted Answer

The closing rate is indeed the spot exchange rate at which a currency can be bought or sold with another currency at the end of the reporting period.

Question 19

Explain the difference between the terms, "exchange rate" and "exchange difference."

Accepted Answer

The answer of Explain the difference between the terms, "exchange...

Question 20

Explain the difference between the terms, "function currency" and "presentation currency."

Accepted Answer

The answer of Explain the difference between the terms, "function...

Quiz 25: The Effects of Changes in Foreign Exchange Rates

Which of the following is not considered in determining an entity's functional currency?

When translating foreign currency items into the functional currency, monetary items are translated at the

Which conversion rate should be used to translate foreign currency monetary balances at the end of a fiscal period?

If British Entity (AE) enters into a transaction with Portuguese Entity (PE) that is denominated in PE's currency, how is the transaction reflected in the accounting records of AE?