Foreign Currency Accounting Chapter 28 8th Edition Test Bank

Chapter 28 Testbank

1. Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-01 Understand why it is necessary to translate transactions that are denominated in foreign currencies.
Section: Foreign currency transactions
Topic: Foreign currency transactions

2. Inventory is an example of a monetary item.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-02 Understand that all transactions denominated in overseas currencies must initially be translated at the exchange rate in place as at the date of the transaction (the transaction date's spot rate) using the entity's 'functional currency'.
Section: Foreign currency transactions
Topic: Foreign currency transactions

3. Management may exercise its judgement to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-01 Understand why it is necessary to translate transactions that are denominated in foreign currencies.
Learning Objective: 28-02 Understand that all transactions denominated in overseas currencies must initially be translated at the exchange rate in place as at the date of the transaction (the transaction date's spot rate) using the entity's 'functional currency'.
Section: Foreign currency transactions
Topic: Foreign currency transactions

4. An entity may change its functional currency when there is a change in the underlying transactions, events and conditions.

5. The essential feature of a non-monetary item is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency.

6. AASB 121 requires foreign currency transactions to be recorded, on initial recognition in the presentation currency, by applying to the foreign currency amount the spot exchange rate between the presentation currency and the foreign currency at the date of the transaction.

7. The functional currency of an entity is the currency of the prime economic environment in which the entity operates.

8. Issues in relation to foreign currency arise when a reporting entity based in Australia has transactions with an overseas entity and the transaction is denominated in Australian currency.

9. The purpose of 'hedge accounting' is to recognise the offsetting effects on profit or loss of changes in the nominal values of the financial instrument and the hedging instrument.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 28-07 Understand the nature of, and the reason for entering, a hedging transaction.
Section: Hedging transactions
Topic: Hedging transactions

10. AASB 121 defines an exchange rate as a ratio for the exchange of two currencies at a particular time.

11. In selecting the appropriate foreign currency exchange rates to apply in translating foreign currency transactions, the accountant exercises an important element of judgement about whether the rates are overvaluing or undervaluing the reporting currency.

12. If the foreign currency exchange rate between Australia and the US was A$1.00 = US$0.55 on 1 October 2014 and moved to be A$1.00 = US$0.60 one month later, the Australian dollar has decreased relative to the foreign currency.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 28-02 Understand that all transactions denominated in overseas currencies must initially be translated at the exchange rate in place as at the date of the transaction (the transaction date's spot rate) using the entity's 'functional currency'.
Section: Foreign currency transactions
Topic: Foreign currency transactions

13. AASB 121 requires foreign currency monetary items that are expected to be settled in the short term to be translated at the spot rate at reporting date, but does not require this treatment for long-term monetary items denominated in foreign currencies.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-05 Know how to account for foreign exchange gains or losses on monetary items and receivables and payables.
Section: Translation of other monetary assets such as cash deposits
Topic: Translation of other monetary assets such as cash deposits

14. According to AASB 123 a qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-06 Understand what a qualifying asset is and be able to provide the appropriate accounting entries relating to a qualifying asset.
Section: Qualifying assets
Topic: Qualifying asset

15. Exchange gains or losses on a qualifying asset that arise before it ceases to be a qualifying asset are to be deferred and amortised over the life of the asset according to AASB 123.

16. A hedge is defined by AASB 139 as an action taken, whether by entering into a foreign currency contract or otherwise, with the objective of maximising the possible positive effects of movements in exchange rates.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-07 Understand the nature of, and the reason for entering, a hedging transaction.
Section: Hedging transactions
Topic: Hedging transactions

17. To classify an arrangement as a hedge, and therefore to apply 'hedge accounting', AASB 132 requires a set of strict conditions be met.

18. It seems pointless to distinguish between different types of hedges, as the accounting treatment is the same for all hedging, that is, all changes in fair values of hedging instruments are recognised in profit or loss.

AACSB: Analytic
Difficulty: Easy
Learning Objective: 28-07 Understand the nature of, and the reason for entering, a hedging transaction.
Learning Objective: 28-08 Understand the difference between a fair-value hedge and a cash flow hedge, and be able to provide the appropriate accounting entries in respect of both.
Section: Hedging transactions
Topic: Hedging transactions

19. Hedges cannot be designated and/or documented on a retrospective basis.

20. An example of a foreign currency swap is when a loan denominated in one currency is swapped for a loan denominated in another currency.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-09 Understand what a foreign currency swap is and why it might be undertaken, and be able to provide the relevant journal entries to account for a foreign currency swap.
Section: Foreign currency swaps
Topic: Foreign currency swap

21. If an organisation enters a foreign currency swap it will effectively insulate itself against the effects of changes in the spot rates.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-07 Understand the nature of, and the reason for entering, a hedging transaction.
Learning Objective: 28-09 Understand what a foreign currency swap is and why it might be undertaken, and be able to provide the relevant journal entries to account for a foreign currency swap.
Section: Hedging transactions
Topic: Hedging transactions

22. An Australian entity that has cash held in Canadian dollars in the Bank of Canada following some consulting services to a company in Canada would record a gain if the spot fell from A$1 = C$0.80 to A$1 = C$0.75 during the period.

23. Any exchange gains or losses that result from translating both current and non-current payables and receivables at reporting date spot rates must be included in other comprehensive income for the financial period.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 28-05 Know how to account for foreign exchange gains or losses on monetary items and receivables and payables.
Section: Longer-term receivables and payables
Topic: Longer-term receivables and payables

24. An argument by Australian companies against the recognition of a profit or loss on the translation of non-current monetary items is that it is inappropriate due to exchange rates fluctuating long term, as unrealised profit or loss may not subsequently be realised.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-05 Know how to account for foreign exchange gains or losses on monetary items and receivables and payables.
Section: Longer-term receivables and payables
Topic: Longer-term receivables and payables

25. A deposit in foreign currency made by an Australian entity should be translated at the following dates for reporting purposes of the entity:

A. only at the date the deposit is made with the foreign bank.
B. only at reconciliation between the end of the first financial year after making the deposit with the foreign bank and no further subsequent adjustments.
C. at the date of the deposit and then adjusted for a gain or loss based on the initial deposit rate at the beginning of the financial year.
D. at the date of the deposit, and then a gain or loss should be recorded at the end of the financial year.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-05 Know how to account for foreign exchange gains or losses on monetary items and receivables and payables.
Section: Longer-term receivables and payables
Topic: Longer-term receivables and payables

26. While not endorsed by standards setters, which of the following has been argued by Australian companies as an alternative way to account for the translation of long-term monetary assets and liabilities?

A. Record in a deferred account, which would be amortised into operating profit or loss over the term of the long-term monetary asset or liability.
B. Record in other comprehensive income as a foreign currency gain or loss.
C. Record in the statement of profit or loss as a non-recurring item.
D. Record in the statement of changes in equity.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-05 Know how to account for foreign exchange gains or losses on monetary items and receivables and payables.
Section: Longer-term receivables and payables
Topic: Longer-term receivables and payables

27. A foreign currency transaction shall be recorded on initial recognition in the:

A. presentation currency.
B. local currency.
C. foreign currency.
D. functional currency.

28. There are two broad categories of foreign currency issues that arise in financial reporting. They are:

A. reporting purchase price parity and reporting foreign interest rate adjustments.
B. accounting for foreign currency debt and offshore financing.
C. accounting for foreign currency transactions and translating the accounts of foreign subsidiaries.
D. accounting for foreign currencies using the forex buy rate and the forex sell rate.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-01 Understand why it is necessary to translate transactions that are denominated in foreign currencies.
Section: Introduction
Topic: Introduction to accounting for foreign currency transactions

29. The exchange rate for a currency depends on many factors including:

A. the price of McDonald's hamburgers in each country.
B. the rate at which the Australian currency is pegged at relative to the other currency of interest.
C. the price of options on futures of the foreign currency.
D. the demand for and supply of the currency in the market.

30. The effect of a fall in the exchange rate for Australian dollars relative to other major world currencies would include:

A. people buying goods overseas with Australian dollars would find the goods relatively cheaper than before.
B. the cost of importing goods from overseas would increase.
C. the cost of offshore debt would increase.
D. the cost of importing goods from overseas would increase and the cost of offshore debt would increase.

31. The effect of an increase in the exchange rate for Australian dollars relative to other major world currencies would include:

A. offshore debt would become more expensive.
B. the cost of importing goods from overseas would increase.
C. people buying goods overseas with Australian dollars would find the goods relatively cheaper than before.
D. the cost of Australian exports for overseas buyers would decrease.

32. The Big Mac index is:

A. an indicator of the economic wealth of a country, applied to a capacity to purchase Big Macs with the average wage.
B. a measure of interest rate parity such that the exchange rates between countries can be compared to assess whether or not interest rates are too high or low in a particular country relative to other major currencies in the world.
C. a measure of purchasing power parity applied to a 'real' product that is essentially identical and available around the world.
D. a measure of interest rate parity such that the exchange rates between countries can be compared to assess whether or not interest rates are too high or low in a particular country relative to other major currencies in the world and a measure of purchasing power parity applied to a 'real' product that is essentially identical and available around the world.

33. On 1 September 2015 Antique Furniture Importers acquires furniture from a supplier in Europe. The furniture is shipped f.o.b. from Brussels on 1 September 2015. The cost of the furniture is €500 000. The amount has not been paid at 30 September 2015. Exchange rates are as follows:

What is the amount payable at 1 September and 30 September 2015in Australian dollars (rounded to the nearest whole A$)? Did the Australian dollar strengthen or weaken?

The Australian dollar weakened.

The Australian dollar strengthened.

The Australian dollar weakened.

34. On 1 January 2014 Antique Furniture Importers acquires furniture from a supplier in Europe. The furniture is shipped f.o.b. from Brussels on 1 January 2014. The cost of the furniture is €600 000. The amount has not been paid at 31 January 2014. Exchange rates are as follows:

What is the amount payable at 1 January and 31 January 2014 in Australian dollars (rounded to the nearest whole A$)? Did the Australian dollar strengthen or weaken?

The Australian dollar weakened.

The Australian dollar strengthened.

The Australian dollar weakened.

The Australian dollar strengthened.

35. AASB 121 requires that the initial recognition of a foreign currency transaction be:

A. in the amount of the foreign currency.
B. at the closing rate at balance date.
C. at the rate the currency is expected to be exchanged at on the settlement date for the monetary asset or liability based on the current market price of futures contracts for the relevant foreign currency.
D. at the spot rate at the date of the transaction.

36. The spot rate is defined in AASB 121 as:

A. the rate at which the currency to be exchanged is currently selling against a bundle of currencies of major trading partners.
B. the exchange rate for immediate delivery of currencies to be exchanged.
C. one identified exchange rate for the relevant currencies from the period on or around the date of the transaction.
D. the current exchange rate as implied by forward-exchange contracts in place at the time of the transaction.

37. AASB 121 requires that foreign currency monetary items outstanding at reporting date must be:

A. translated at the spot rate at the transaction date.
B. reported at the forward-exchange rate based on the 90-day bank bill rate at that date.
C. translated at the spot rate at reporting date.
D. translated at the spot rate at settlement date.

38. Examples of monetary items that may be denominated in foreign currencies include:

A. accounts payable and receivable, inventory, bank overdrafts.
B. interest receivable and payable, loans, accounts payable.
C. inventory, interest receivable, supplies, accounts payable.
D. prepayments, loans, accounts payable, debentures payable.

39. Apart from some limited exceptions, AASB 121 requires that exchange differences on monetary items shall be:

A. deferred and recognised when the associated asset or liability is realised or settled.
B. treated as a reserve or provision against the associated monetary item.
C. not recognised in the accounts until the monetary asset is received or monetary liability settled.
D. recognised as income or an expense in the reporting period in which the exchange rates change.

40. An exception to the requirement that foreign currency monetary items should be re-translated at the reporting date is:

A. when the foreign exchange rate is considered to be undervalued.
B. when the foreign currency exchange rate is fixed for a particular transaction according to a contractual arrangement.
C. when exchange rates are expected to move in the opposite direction shortly after reporting date.
D. when the foreign exchange rate is considered to be overvalued.

41. On 1 May 2015 Harriet's Importers Ltd acquires goods from a supplier in Britain. The goods are shipped f.o.b. from England on 1 May 2015. The cost of the goods is £200 000. The amount has not been paid at period end 30 June 2015. Exchange rates are as follows:

Harriet's Importers Ltd uses a perpetual inventory system.

What entries are required at transaction date and reporting date (rounded to the nearest whole A$)?

42. On 1 May 2015 Harry's Plastics Ltd acquires goods from a supplier in the US. The goods are shipped f.o.b. from the United States on 1 May 2015. The cost of the goods is US$1 500 000. The amount has not been paid at period end, 30 June 2015. Exchange rates are as follows:

Harry's Plastics Ltd uses a perpetual inventory system.

What entries are required at transaction date and reporting date (rounded to the nearest whole A$)?

43. What is the required treatment for long-term monetary items denominated in a foreign currency according to AASB 121 and what is a concern that has been raised about the treatment?

A. Long-term foreign currency monetary items are not required to be re-translated at reporting date. The concern raised is that the failure to reflect the effect of changes in the exchange rate on items that are exposed to forex risk does not provide useful information for decision making about the risk exposure of the reporting entity.
B. Long-term foreign currency monetary items are required to be re-translated at the spot exchange rate at reporting date and the difference is deferred to be recognised/amortised over the life of the monetary item. The concern that has been raised is that the deferred items are not assets or liabilities in terms of the conceptual framework and are therefore meaningless in the statement of financial position and misleading for users of the financial statements.
C. Long-term foreign currency monetary items are not required to be re-translated at reporting date, but the exchange rates, maturity dates and applicable forward rates are required note disclosures. The concern raised about this treatment is that the need to reflect the risk exposure in foreign currency denominated monetary items is not addressed through measurement, but only through disclosure, leaving the burden of assessing the impact on the financial position and performance of the entity up to the user.
D. Long-term foreign currency monetary items are required to be re-translated at the spot rate at reporting date and any differences treated as gains or losses in the statement of comprehensive income. The concern raised about this treatment is that the amounts of profit and loss recognised in the statement of comprehensive income are actually unrealised and there is considerable doubt about whether or not they would ever be realised as a result of the fluctuating nature of exchange rates.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 28-05 Know how to account for foreign exchange gains or losses on monetary items and receivables and payables.
Section: Longer-term receivables and payables
Topic: Longer-term receivables and payables

44. On 1 July 2014 Waugh Ltd enters into an arrangement with a US bank—Big Bank—to borrow US$900 000. The term of the loan is 3 years with interest payable annually in arrears on 30 June at the rate of 10 per cent. The exchange rate information is:

What journal entries are required in Waugh Ltd's books for 1 July 2014 and 30 June 2015 in accordance with AASB 121 (rounded to the nearest whole A$)?

45. On 1 July 2016 McGrath Ltd enters into an arrangement with a Hong Kong bank to borrow $HK1 500 000. The term of the loan is 3 years with interest payable annually in arrears on 30 June at the rate of 7 per cent. The exchange rate information is:

What journal entries are required in McGrath Ltd's books for 1 July 2016 and 30 June 2017 and 30 June 2018 in accordance with AASB 121 (rounded to the nearest whole A$)?

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 28-05 Know how to account for foreign exchange gains or losses on monetary items and receivables and payables.
Section: Longer-term receivables and payables
Topic: Longer-term receivables and payables

46. On 1 July 2013 Kanga Consultants Ltd completes a contract to provide advice on the installation of a networked computer system to a company in the US. The client pays the fee of US$500 000 into Kanga Consultants' US bank account on that date. The bank pays interest of 8 per cent annually on 30 June. The exchange rate information is:

What journal entries are required in Kanga Consultants Ltd's books for 1 July 2013 and 30 June 2014 in accordance with AASB 1012 (rounded to the nearest whole A$)?

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 28-05 Know how to account for foreign exchange gains or losses on monetary items and receivables and payables.
Section: Translation of other monetary assets such as cash deposits
Topic: Translation of other monetary assets such as cash deposits

47. On 1 May 2014 Moorooba Exporters Ltd sells inventory to a customer in Singapore. The inventory is sold for $S300 000 and payment is not due until 30 July 2014. The reporting date for Moorooba Exporters Ltd is 30 June. The exchange rate information is:

Moorooba Exporters uses a perpetual inventory system. What journal entries are required in Moorooba Exporters Ltd's books to record the transaction, adjustments at the end of the period and settlement in accordance with AASB 121 (rounded to the nearest whole A$)? What is the realised gain/loss on the monetary item?

Realised loss $45 000

Realised loss $66 667

Realised gain $43 062

Realised gain $90 000

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 28-05 Know how to account for foreign exchange gains or losses on monetary items and receivables and payables
Section: Longer-term receivables and payables
Topic: Longer-term receivables and payables

48. On 1 February 2014, Morinda Ltd completes a binding agreement to purchase a hydraulic lift from a manufacturer located in Germany. The cost of the equipment is €150 000. The construction of the lift is completed on 30 May 2014, and it is considered to be a qualifying asset according to AASB 123. The amount owing has not been paid by reporting date 30 June 2014. The following is information about the exchange rates:

What entries are required to record the transaction and subsequent events in accordance with AASB 121 (rounded to the nearest whole A$)?

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 28-06 Understand what a qualifying asset is and be able to provide the appropriate accounting entries relating to a qualifying asset.
Section: Qualifying assets
Topic: Qualifying assets

49. For a cash flow hedge relating to the purchase of a particular asset, foreign exchange gains and losses made on the hedging instrument:

A. are all passed to profit or loss.

B. are passed to equity accounts up to the time of the underlying transaction, at which time they are then included as part of the cost of the asset. After this date, they are passed directly to profit or loss.

C. are all passed to the cost of the asset.

D. are passed to equity accounts up to the time of the expiration of the hedging instrument, at which time they are then included as part of the cost of the asset.

E. are passed directly to profit or loss up to the time of the underlying transaction. After this date, they are passed to equity accounts, up to the time of the expiration of the hedging instrument, at which time they are then included as part of the cost of the asset.

AACSB: Reflective thinking
Learning Objective: 28-07 Understand the nature of, and the reason for entering, a hedging transaction.
Learning Objective: 28-08 Understand the difference between a fair-value hedge and a cash flow hedge, and be able to provide the appropriate accounting entries in respect of both.
Section: Hedging transactions
Topic: Hedging transactions

50. Sure Ltd purchased goods for £210 000 from a British supplier on 1 April 2015. The amount owing on the purchase is payable on 30 July 2015. On 1 May 2015 a forward-exchange contract for the delivery of £210 000 on 30 July 2015 is taken out with Aus Bank. Exchange rates are as follows:

What entries are required to record the initial transaction and the forward-exchange contract in accordance with AASB 121 and AASB 139 (rounded to the nearest whole A$)?

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 28-07 Understand the nature of, and the reason for entering, a hedging transaction.
Learning Objective: 28-08 Understand the difference between a fair-value hedge and a cash flow hedge, and be able to provide the appropriate accounting entries in respect of both.
Section: Hedging transactions
Topic: Hedging transactions

51. Safety Ltd purchased goods for £20 000 from a British supplier on 1 April 2015. The amount owing on the purchase is payable on 30 July 2015. On 1 May 2015 a forward-exchange contract for the delivery of £20 000 on 30 July 2015 is taken out with Aus Bank. Safety Ltd's reporting date is 30 June. Exchange rates are as follows:

What entries are required to report these transactions in accordance with AASB 121 (rounded to the nearest whole A$)?

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 28-07 Understand the nature of, and the reason for entering, a hedging transaction.
Learning Objective: 28-08 Understand the difference between a fair-value hedge and a cash flow hedge, and be able to provide the appropriate accounting entries in respect of both.
Section: Hedging transactions
Topic: Hedging transactions

52. On 5 September 2014 Russell Ltd places an order for €500 000 of inventory from a Swedish supplier. The terms for the purchase of the goods are that they are f.o.b. shipping point and they are to be paid for on 5 November. The financial controller of Russell Ltd enters into a forward-exchange contract on 5 September and designates it as a hedge for the purchase. The forward-exchange contract is for €500 000 to be supplied by the bank on 5 November 2014. The goods are shipped on 5 October 2014 and are paid for on 5 November.

What are the journal entries to record the above transactions from 5 September through to 5 November in accordance with AASB 121 (rounded to the nearest whole A$)?

53. Emu Exports Ltd sold products to a New Zealand company. The sales contract was denominated in $NZ. On 1 October 2015, $NZ500 000 worth of products were sold with the terms f.o.b. shipping point and payment due 30 December 2015. A forward-exchange contract in which the bank agrees to purchase $NZ300 000 from Emu Exports on 30 December 2015 is entered into on 1 November 2015. The forward-exchange rate is A$1 = $NZ1.25. Other exchange rates are as follows:

What are the journal entries to record the above transactions from 1 October through to 30 December 2015 in accordance with AASB 121 (rounded to the nearest whole A$)?

54. On 1 July 2015 Jarrets Ltd borrows £500 000 from a British bank at an interest rate of 8 per cent, repayable in pounds sterling (£) and with interest due on 30 June each year. The term of the loan is 3 years. On the same date Fitners Ltd borrows A$1 million from an Australian bank at an interest rate of 10 per cent. The term of the loan is 3 years. Jarrets and Fitners decide to swap their interest and principal obligations on 1 July 2015. Exchange rate information is as follows:

Both Jarrets and Fitners are Australian companies. What are the journal entries to record the swap for the period ended 30 June 2016 in Jarrets Ltd's books (rounded to the nearest whole A$)?

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 28-09 Understand what a foreign currency swap is and why it might be undertaken, and be able to provide the relevant journal entries to account for a foreign currency swap.
Section: Foreign currency swaps
Topic: Foreign currency swaps

55. On 1 July 2015 Jarrets Ltd borrows £500 000 from a British bank at an interest rate of 8 per cent, repayable in pounds sterling (£) and with interest due on 30 June each year. The term of the loan is 3 years. On the same date Fitners Ltd borrows A$1 million from an Australian bank at an interest rate of 10 per cent. The term of the loan is 3 years. Jarrets and Fitners decide to swap their interest and principal obligations on 1 July 2015. Exchange rate information is as follows:

Both Jarrets and Fitners are Australian companies. What are the journal entries to record the swap for the period ended 30 June 2016 in Fitners Ltd's books (rounded to the nearest whole A$)?

56. The functional currency of an entity:

A. never changes once determined.
B. must be assessed and changed annually.
C. can change if there is a change in underlying transactions, events and conditions which determine the functional currency.
D. can change as a consequence of the foreign currency transactions that are undertaken by the parent entity.

57. Common examples of qualifying assets are assets that result from development and construction activities in:

A. agriculture; power generation facilities; investment property.
B. extractive industries; general insurance; investment property.
C. agriculture; general insurance; investment property.
D. extractive industries; power generation facilities; investment property.

58. AASB 123 Borrowing Costs defines a qualifying asset as an asset that:

A. takes a period of greater than 12 months to get ready for its intended use or sale.
B. takes a substantial period of time to get ready for its intended use or sale.
C. takes a period of greater than 12 months to complete.
D. takes a substantial period of time to complete.

59. Exchange differences recognised as borrowing costs and included in the cost of an asset, are not recognised:

A. until the asset is ready for its intended use or sale, provided the capitalisation of costs does not mean that the cost of the asset exceeds recoverable amount.
B. until such time as they are deemed to be income and expenses by a resolution of the board of management.
C. until such time as income is derived, at which time they are passed directly to profit or loss.
D. until after the asset is ready for its intended use or sale, provided the capitalisation of costs does not mean that the cost of the asset exceeds recoverable amount.

60. Which of the following is not a condition that must be met, according to AASB 139, before a relationship qualifies for hedge accounting?

A. At the inception of the hedge, there is formal designation and documentation of the hedging relationship.
B. At the inception of the hedge, there is formal designation and documentation of the entity's risk management objective and strategy for undertaking the hedge.
C. The hedge is expected to be highly effective.
D. For fair-value hedges, a forecast transaction that is subject to the hedge must be highly probable.

61. The three principal types of hedges referred to in AASB 139 are:

A. fair-value hedges; market value hedges, cash-flow hedges.
B. fair-value hedges; natural hedges, cash-flow hedges.
C. fair-value hedges; hedges of net investments in a foreign operation, cash-flow hedges.
D. hedges of net investments in a foreign operation; market value hedges, cash-flow hedges.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-07 Understand the nature of, and the reason for entering, a hedging transaction.
Learning Objective: 28-08 Understand the difference between a fair-value hedge and a cash flow hedge, and be able to provide the appropriate accounting entries in respect of both.
Section: Hedging transactions
Topic: Hedging transactions

62. In terms of retrospectively assessing hedge effectiveness, which of the following situations does not meet the criteria for effectiveness?

A. Fair value of shares increased by $12 750; fair value of hedging instrument increased by $11 200.
B. Fair value of shares increased by $12 800; fair value of hedging instrument decreased by $10 255.
C. Fair value of shares decreased by $12 316; fair value of hedging instrument increased by $15 325.
D. Fair value of shares decreased by $11 999; fair value of hedging instrument increased by $13 225.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 28-07 Understand the nature of, and the reason for entering, a hedging transaction.
Learning Objective: 28-08 Understand the difference between a fair-value hedge and a cash flow hedge, and be able to provide the appropriate accounting entries in respect of both.
Section: Hedging transactions
Topic: Hedging transactions

63. The following data is provided for the fair value of a share portfolio, and the fair value of a forward contract taken out on 1 July 2014 to 'hedge' movements in the fair value of the shares. Assume the hedge was highly effective at inception of the hedge.

Which of the following statements is ?

A. It is not an effective hedge as there was a difference of $10 000 000 between the fair values of the shares and the forward contract at inception.
B. It is not an effective hedge as a forward contract cannot be used as a hedging instrument.
C. It is an effective hedge as the movement in the fair value of the hedging instrument between 1 July 2014 and 30 June 2017offset movements in fair value of the shares in the same period, which is within the 80–125 per cent hedge effectiveness range.
D. It is not an effective hedge as the movements in the fair value of the hedging instrument failed to offset movements in the fair value of the shares and stay within the 80–125 per cent hedge effectiveness range throughout the period to 30 June 2017.

64. The hedge effectiveness criteria prescribed in AASB 139 have made which type of financial instrument much less effective as a potential hedging instrument?

A. Forward-foreign-exchange contract.
B. Option.
C. Futures contract.
D. Swap.

65. Which of the following statements is correct with respect to AASB 121 The Effects of Changes in Foreign Exchange Rates?

A. Foreign currency transactions are recorded, on initial recognition in the presentation currency, by applying to the foreign currency amount the spot exchange rate between the presentation currency and the foreign currency at the date of the transaction.
B. At each end of the reporting period, foreign currency monetary items shall be translated using the closing rate.
C. At each end of the reporting period non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction.
D. At each end of the reporting period, non-monetary items that are measured at fair value in a foreign currency shall be translated using closing rate.

66. Which of the following statements is correct with respect to AASB 121 The Effects of Changes in Foreign Exchange Rates?

A. When there is a change in an entity's functional currency, the entity shall apply the translation procedures applicable to the new functional currency prospectively from the date of the change.
B. When there is a change in an entity's functional currency, the entity shall apply the translation procedures applicable to the new functional currency retrospectively from the date of the change.
C. Exchange differences arising from the translation of long-term monetary items are recognised in profit or loss on settlement.
D. Exchange differences arising from long-term monetary items are deferred and amortised into operating profit or loss over the term of the long-term monetary asset or liability.

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 28-02 Understand that all transactions denominated in overseas currencies must initially be translated at the exchange rate in place as at the date of the transaction (the transaction date's spot rate) using the entity's 'functional currency'.
Section: Foreign currency transactions
Topic: Foreign currency transactions

67. Which of the following items is not within the scope of AASB 121 The Effects of Changes in Foreign Exchange Rates?

A. Foreign currency denominated loans.
B. Bank deposits in foreign currency.
C. Investments in foreign operations.
D. Foreign currency derivatives.

68. Which of the following items is within the scope of AASB 121 The Effects of Changes in Foreign Exchange Rates?

A. Translation of cash flows from foreign operations.
B. Presentation in a statement of cash flows of the cash flows arising from transactions in a foreign currency.
C. Hedge accounting for hedging a net investment in a foreign operation.
D. Presentation of an entity's financial statements in a foreign currency.

69. The following items are in the financial statements of Pirie Ltd as at 30 June 2015.

Which of the following combinations identify all items required to be translated at spot rate on 30 June 2015 as prescribed in AASB 121 The Effects of Changes in Foreign Exchange Rates?

A. I and II
B. II and III
C. II and IV
D. III and IV

70. Where the hedge arrangement completely eliminates the consequences of adverse exchange-rate fluctuations, the purchase or sales arrangement is considered to be:

A. partially hedged.
B. positively hedged.
C. perfectly hedged.
D. negatively hedged.

71. Which of the following items is not a required condition for applying hedge accounting?

A. The hedge is expected to be highly effective.
B. The forecast transaction does not affect profit or loss.
C. The effectiveness of the hedge can be reliably measured.
D. The hedge is assessed on an ongoing basis.

72. Which of the following items is a commonly used swap?

A. Foreign currency swaps.
B. Options swap.
C. Investments in foreign operations swaps.
D. Foreign currency derivatives swaps.

Chapter 28 Testbank Summary

Category	# of Questions
AACSB: Analytic	2
AACSB: Reflective thinking	70
Difficulty: Easy	42
Difficulty: Hard	12
Difficulty: Medium	17
Learning Objective: 28-01 Understand why it is necessary to translate transactions that are denominated in foreign currencies.	5
Learning Objective: 28-02 Understand that all transactions denominated in overseas currencies must initially be translated at the exchange rate in place as at the date of the transaction (the transaction date's spot rate) using the entity's 'functional currency'.	28
Learning Objective: 28-05 Know how to account for foreign exchange gains or losses on monetary items and receivables and payables.	13
Learning Objective: 28-06 Understand what a qualifying asset is and be able to provide the appropriate accounting entries relating to a qualifying asset.	6
Learning Objective: 28-07 Understand the nature of, and the reason for entering, a hedging transaction.	18
Learning Objective: 28-08 Understand the difference between a fair-value hedge and a cash flow hedge, and be able to provide the appropriate accounting entries in respect of both.	11
Learning Objective: 28-09 Understand what a foreign currency swap is and why it might be undertaken, and be able to provide the relevant journal entries to account for a foreign currency swap.	5
Section: Foreign currency swaps	4
Section: Foreign currency transactions	30
Section: Hedging transactions	18
Section: Longer-term receivables and payables	10
Section: Qualifying assets	6
Section: Translation of other monetary assets such as cash deposits	3
Section: Introduction	1
Topic: Foreign currency swap	1
Topic: Foreign currency swaps	3
Topic: Foreign currency transactions	30
Topic: Hedging transactions	18
Topic: Introduction to accounting for foreign currency transactions	1
Topic: Longer-term receivables and payables	10
Topic: Qualifying asset	1
Topic: Qualifying assets	5
Topic: Translation of other monetary assets such as cash deposits	3

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Aug 21, 2025

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Chapter 28 Foreign Currency Accounting

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