ACC316

2ND SEM SY 2020-2021

REVIEW QUESTIONS
(Chapter 17)

1. What is a foreign currency transaction?

Foreign currency transaction is a transaction that is denominated in or requires

settlement in a foreign currency including transactions arising when an entity:
a. Buys or sells or services whose price is denominated in a foreign currency
b. Bowwows or lends funds when the amounts payable or receivable are
denominated in a foreign currency
c. Otherwise acquires or disposes of assets or incurs or settles liabilities,
denominated in a foreign currency
For example, the company could export goods to consumers in another country,
resulting  rise to revenue and accounts receivable in a foreign currency, or it could buy
imported goods from vendors in another country, resulting in rise to expenses
and accounts payable in a foreign currency. When an entity directly enters into such
transactions, it is exposed to the cash flow effects of changes in value of the foreign
currency. An entity must convert foreign currency items into its functional currency in
order to recognize those items in its accounting records. Once recognized, exchange
differences will arise when changes in exchange rates affect the carrying amounts.

2. How is a for foreign currency transaction recorded on transaction date, intervening

balance sheet date and settlement date?

Accounting for Foreign currency transaction is recorded at initial recognition in the

reporting currency, by applying to the foreign currency amount the exchange rate
between the reporting currency and the foreign currency on the date of the transaction.
And also known as spot exchange rate where it is the functional currency and the
foreign currency at the date of the transaction.

Type of Account Exchange rate to be use in translation

Monetary Items
Non- monetary items carried at historical
cost
Non- monetary items carried at fair value
Translated using the closing rate or the
spot exchange rate at the end of the
reporting period.
Translated using the exchange rate at the
date of the transaction or the historical
exchange rate.
Translated using the exchange rates at the
date when the fair value was measured.
ACC316
2ND SEM SY 2020-2021

Monetary items are defined as units of currency held and assets and liabilities to be received or
paid in a fixed or determinable number of units of currency. Most common examples of
monetary items include trade receivables and payables or loans. While 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. Examples of non-monetary items include goodwill, PP&E, intangible assets
and inventories.