ACCA FR · Chapter 11

Foreign currency transactions MCQs with Answers

5 multiple-choice questions on Foreign currency transactions for ACCA FR Financial Reporting. Try each one before revealing the answer and explanation.

1. Question 1

   Under IAS 21, what is an entity's functional currency?

   • A) The currency in which the financial statements are presented
   • B) The currency of the country in which the entity is legally incorporated
   • C) The currency in which the entity's shares are listed
   • D) The currency of the primary economic environment in which the entity operates
   Show answer & explanation

   Answer: D) The currency of the primary economic environment in which the entity operates

   The functional currency is the currency of the primary economic environment in which the entity operates. It is usually the currency that mainly influences sales prices, labour and material costs. The presentation currency is the currency in which the financial statements are presented, and it can be different.

2. Question 2

   On 1 October Merlin Co, whose functional currency is the dollar ($), bought inventory on credit for 120,000 dinars (D) when the exchange rate was D4 = $1. At its 31 December year end the invoice was still unpaid, the inventory was unsold and the rate was D5 = $1. What exchange difference arises, and at what amount is the inventory carried?

   • A) Exchange loss $6,000; inventory $30,000
   • B) Exchange gain $6,000; inventory $24,000
   • C) No exchange difference; inventory $30,000
   • D) Exchange gain $6,000; inventory $30,000
   Show answer & explanation

   Answer: D) Exchange gain $6,000; inventory $30,000

   The purchase is recorded at the spot rate: D120,000 / 4 = $30,000. The payable is a monetary item, so it is retranslated at the closing rate: D120,000 / 5 = $24,000. The liability has fallen by $6,000, which is an exchange gain in profit or loss. Inventory is non-monetary and stays at its historical rate amount of $30,000 (subject to the NRV test).

3. Question 3

   Under IAS 21, which of the following is a NON-MONETARY item that is NOT retranslated at the closing rate when it is measured at historical cost?

   • A) A trade receivable denominated in a foreign currency
   • B) A bank loan denominated in a foreign currency
   • C) Cash held in a foreign currency bank account
   • D) A prepayment made in a foreign currency for goods to be received next year
   Show answer & explanation

   Answer: D) A prepayment made in a foreign currency for goods to be received next year

   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. They are retranslated at the closing rate. A prepayment for goods will be settled by receiving goods, not cash, so it is non-monetary and stays at the historical rate.

4. Question 4

   On 1 November Peregrine Co (functional currency $) sold goods on credit for €200,000, when the rate was €1.25 = $1. On 1 December it received €100,000 when the rate was €1.3 = $1. The rest was still outstanding at 31 December, when the rate was €1.2 = $1. What is the net exchange difference in profit or loss for the year? (Round to the nearest dollar.)

   • A) Net loss of $3,077
   • B) Net gain of $256
   • C) Net gain of $3,333
   • D) Net gain of $6,410
   Show answer & explanation

   Answer: B) Net gain of $256

   The sale and receivable are recorded at $160,000 (€200,000 / 1.25). Settled part: €100,000 was carried at $80,000 and received as $76,923, a loss of $3,077. Outstanding part, a monetary item retranslated at the closing rate: €100,000 / 1.2 = $83,333 against $80,000, a gain of $3,333. Net = $3,333 - $3,077 = gain of $256.

5. Question 5

   On 1 January Hobby Co (functional currency $) bought a machine for 600,000 kroner when the exchange rate was 6 kroner = $1, and paid for it immediately. The machine is depreciated over 10 years on a straight-line basis. At 31 December the rate was 5 kroner = $1. What is the machine's carrying amount at 31 December?

   • A) $108,000
   • B) $90,000
   • C) $120,000
   • D) $100,000
   Show answer & explanation

   Answer: B) $90,000

   Property, plant and equipment is non-monetary. Under the cost model it is recorded at the spot rate on the transaction date and not retranslated: 600,000 / 6 = $100,000. Depreciation = $100,000 / 10 = $10,000. Carrying amount = $100,000 - $10,000 = $90,000. The closing rate is irrelevant because the cash was paid on the purchase date.