Foreign Currency Transactions – Test Bank | 9th

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Chapter 30 Testbank

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

True   False

2. It seems pointless to distinguish between different types of hedges since 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.

True   False

3. 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.

True   False

4. In determining the presentation currency, consideration needs to be given to the currency in which the general purpose financial statements are to be prepared.

True   False

5. Paragraph 9 of AASB 121 provides a number of factors to consider in determining the functional currency.

True   False

6. The awareness of functional currency helps understanding of the risks because it indicates to some extent the degree to which the assets and liabilities of the organisation (particularly the monetary items) might be subject to ongoing fluctuations in value brought about by changing exchange rates.

True   False

7. Different nations' currencies will be subject to different risks in terms of fluctuating exchange rates.

True   False

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

A. presentation currency

B. local currency

C. foreign currency

D. functional currency

9. 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, 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.

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

A. consumers buying goods overseas with Australian dollars would find the goods are cheaper.

B. the cost of importing goods from overseas would decrease.

C. the cost of offshore debt would remain the same.

D. the cost of importing goods from overseas would increase and the cost of offshore debt would increase.

11. 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 and a measure of purchasing power parity applied to a 'real' product that is essentially identical and available around the world.

12. On 1 September 2025, Antique Furniture Importers acquires furniture from a supplier in Europe.

The furniture is shipped f.o.b. from Brussels on 1 September 2025.

The cost of the furniture is €500 000.

The amount has not been paid at 30 September 2025 and exchange rates are as follows:

What is the amount payable at 1 September and 30 September 2025 in Australian dollars? (Rounded to the nearest whole A$.)

Did the Australian dollar strengthen or weaken?

A.

The Australian dollar weakened.

B.

The Australian dollar strengthened.

C.

The Australian dollar strengthened.

D.

The Australian dollar weakened.

13. 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

14. 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 the end of each reporting period, foreign currency monetary items shall be translated using the closing rate.

C. At the end of each 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 the end of each reporting period, non-monetary items that are measured at fair value in a foreign currency shall be translated using closing rate.

15. Agreement under which the obligation relating to a loan denominated in one currency is swapped for a loan denominated in another currency is known as a:

A. foreign currency swap

B. foreign loan swap

C. single currency swap

D. None of the given answers are correct.

16. Typically, in a __________________ a fixed-interest-rate obligation is swapped for a variable-rate obligation.

A. foreign currency swap

B. interest rate swap

C. fixed swap

D. None of the given answers are correct.

17. To the extent that the receivables and payables are for _________ amount and denominated in ____________ currency, the losses on one monetary item (perhaps the foreign currency payable) will be offset by gains on the other monetary item (perhaps the foreign currency receivable).

A. a different; a different

B. the same; the same

C. a different; the same

D. None of the given answers are correct.

18. Swaps occur when borrowers exchange aspects of their respective ______obligations.

A. loan

B. foreign currency

C. earnings

D. None of the given answers are correct.

19. According to AASB 121, at the end of the reporting period, all monetary items must be translated using the reporting date ______ .

A. exchange rates

B. borrowing rates

C. spot rates

D. futures price

20. Across time, the requirement to recognise the gains or losses that result from exchange rate movements as part of profit or loss has been quite unpopular with Australian reporting entities, particularly where it relates to __________ monetary items.

A. non-current

B. current

C. long-term

D. None of the given answers are correct.

21. Companies have argued that the recognition of a profit or loss on the translation of _________________ monetary items at the end of each reporting period is inappropriate, since the exchange rate constantly fluctuates and there is significant doubt about whether the unrealised profit or loss will ever be realised.

A. non-current

B. current

C. long-term

D. None of the given answers are correct.

22. Paragraph 23 of AASB 121 requires that, at the end of each reporting period foreign currency monetary items be translated using the:

A. closing rate

B. near-month futures price

C. spot rate at the beginning of the reporting period

D. None of the given answers are correct.

23. The closing rate is defined in AASB 121 as the spot exchange rate at the _______ of the reporting period.

A. start

B. end

C. middle

D. None of the given answers are correct.

24. The spot rate is defined as the exchange rate for _______________.

A. immediate delivery

B. delayed delivery

C. delivery at any time

D. None of the given answers are correct.

25. An asset that is under construction or otherwise being made ready for future productive use by the company, or by another entity under a contract, and which necessarily takes a substantial period of time to get ready for its intended use or sale, is called a ______ .

A. qualifying asset

B. non-qualifying asset

C. monetary asset

D. None of the given answers are correct.

26. AASB 123 does not provide guidance on what constitutes a 'substantial' period of time, although it is generally accepted that it would be a period _______________________ .

A. less than 12 months

B. less than 6 months

C. greater than 12 months

D. None of the given answers are correct.

27. An entity shall cease capitalising borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are ______. (AASB 123)

A. complete

B. incomplete

C. about to complete

D. None of the given answers are correct.

28. To minimise the risk associated with foreign currency monetary items, an entity can enter into a ______________ .

A. hedge contract

B. new contract

C. speculative contract

D. None of the given answers are correct.

29. What is meant by translation of foreign currency transactions?

______________________________________________________________________________

30. What is meant by a functional currency?

______________________________________________________________________________

31. What is meant by a presentation currency?

______________________________________________________________________________

32. What is a qualifying asset? List some examples.

______________________________________________________________________________

33. Discuss the accounting treatment for borrowing costs, as per AASB 123.

______________________________________________________________________________

34. List some examples of monetary items (e.g. notes receivable).

______________________________________________________________________________

35. Why do we need to understand the meanings of functional currency and 'presentation currency'?

______________________________________________________________________________

36. What is the spot rate?

______________________________________________________________________________

37. What is a hedge contract?

______________________________________________________________________________

38. What is a foreign currency swap?

______________________________________________________________________________

Chapter 30 Testbank