Company Accounting 11th Edition Leo

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 Testbank
to accompany

Company accounting
11th edition

by
Leo et al.

© John Wiley & Sons Australia, Ltd 2018

 Chapter 8: Translation of financial statements into a presentation currency

Chapter 8: Translation of financial statements into a presentation currency

Multiple-choice questions

1. Which of the following statements is incorrect?

a. The relevant accounting standard applied in translating financial statements into

another currency is AASB 121/IAS 21 The Effects of Changes in Foreign Exchange
Rates.
b. The financial statements of an entity may be recorded in a foreign currency and
translated into Australian dollars for the purpose of combining those statements with
the financial statements of a related Australian company.
*c. Not many companies in Australia have operations in both Australia and overseas
locations.
d. The financial statements of an Australian company may be prepared in Australian
dollars and translated into a foreign currency for presentation purposes.

Correct answer: c
Learning objective 8.1

2. The currency of the country in which the foreign operation is based is referred to as the:

*a. local currency.

b. presentation currency.
c. operational currency.
d. functional currency.

Correct answer: a
Learning objective 8.2

3. The presentation currency is:

a. the currency of the primary economic environment in which the foreign entity
operates.
b. a currency other than the entity’s functional currency .
c. the currency of the country in which the foreign operation is based.
*d. the currency in which the financial statements are presented by the reporting entity.

Correct answer: d
Learning objective 8.2

© John Wiley & Sons Australia, Ltd 2018 8.1

Testbank to accompany: Company accounting 11e by Leo et al.

4. According to AASB 121/IAS 21 The Effects of Changes in Foreign Exchange Rates, the
key economic factor to consider in determining an entity’s functional currency is:

a. which economic environment has the higher exchange rate.

b. in which economic environment does the company incur the highest proportion of its
production costs.
*c. which economic environment an entity primarily generates and spends cash.
d. none of the above.

Correct answer: c
Learning objective 8.2

5. Indicators pointing towards the reporting entity’s currency as the functional currency
include that which of the following?

a. There are active local markets, although there may be significant amounts of exports.
*b. Sales are mostly in the country of the reporting entity.
c. Prices are not primarily responsive in the short term to exchange rate changes.
d. Production costs and operating expenses are determined primarily by local
conditions.

Correct answer: b
Learning Objective 8.2

6. Which of the following is an additional question to be asked in determining whether a

foreign entity’s functional currency is the same as that of the reporting entity?

a. Are the transactions with the reporting entity a high or low proportion of the foreign
operation’s activities?
b. Are the foreign operation’s activities carried out as an extension of the reporting
entity, rather than being carried out with a significant degree of autonomy?
c. Do the cash flows from the foreign operation’s activities directly affect the reporting
entity’s cash flows?
*d. All of the above.

Correct answer: d
Learning objective 8.2

© John Wiley & Sons Australia, Ltd 2018 8.2

 Chapter 8: Translation of financial statements into a presentation currency

7. Where profits generated by the foreign operation are retained in the foreign entity and used
for its expansion:

a. the foreign operation’s currency is likely to be the presentation currency.

*b. the foreign operation’s currency is likely to be the functional currency.
c. the reporting entity’s currency is likely to be the functional currency.
d. the reporting entity’s currency is likely to be the presentation currency.

Correct answer: b
Learning objective 8.2

8. The method used to translate financial statements prepared in the functional currency into
the presentation currency is known as the:

a. temporal method.
b. functional method.
*c. current rate method.
d. presentation method.

Correct answer: c
Learning objective 8.3

9. Assets and liabilities to be received or paid in a fixed or determinable number of units of

money are referred to as:

*a. monetary items.

b. fixed items.
c. non-monetary items.
d. fixed units.

Correct answer: a
Learning objective 8.4

10. When translating into the functional currency, foreign currency denominated non-monetary
assets measured at historical cost must be translated using the:

a. spot rate at end of reporting period.

b. average rate for the reporting period.
*c. exchange rate when the historical cost was determined.
d. exchange rate when the historical cost was revalued to fair value.

Correct answer: c
Learning objective 8.4

© John Wiley & Sons Australia, Ltd 2018 8.3

Testbank to accompany: Company accounting 11e by Leo et al.

11. Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing) on 1 July 20X0. The balance
sheet of Sing Sing as at 30 June 20X1 was as follows.

Balance Sheet as at 30 June 20X1

S$ S$
Machinery- carrying value 300 000 Share capital 400 000
Investment property 400 000 General Reserve 200 000
Receivables 500 000 Retained earnings 1 000 000
Cash 600 000 Accounts payable 170 000
Income tax payable 30 000
1 800 000 1 800 000

• Relevant exchange rates are as follows.

A$ S$
1 July 20X0 1.00 = 1.15
30 June 20X1 1.00 = 1.25
Average 20X0-X1 1.00 = 1.22

If the local currency of Sing Sing is Singapore dollars and the functional currency is Australian
dollars, the total assets of S$1 800,000 would translate into Australian dollars as:

a. $1 565 217.
*b. $1 488 696.
c. $1 440 000.
d. $1 475 410.

Correct answer: b
Learning objective 8.4

12. According to the temporal method, monetary assets are translated at the:

a. average exchange rate for the reporting period.

*b. current rate existing at the end of the reporting period.
c. exchange rate at the date the monetary assets were first recognised.
d. exchange rate existing at the start of the reporting period.

Correct answer: b
Learning objective 8.4

© John Wiley & Sons Australia, Ltd 2018 8.4

 Chapter 8: Translation of financial statements into a presentation currency

13. Post-acquisition date retained earnings that are denominated in a foreign currency are:

a. translated into the functional currency using the rate current at the latest end of
reporting period.
b. translated into the functional currency using the average rate since acquisition date.
c. translated into the functional currency using the rates at the end of each year since
acquisition date.
*d. balances carried forward from translation of previous statement of comprehensive
income and do not need to be translated.

Correct answer: d
Learning objective 8.4

14. When translating into the functional currency, monetary liabilities are translated using the:

a. exchange rate current at the date the item was first recorded.
b. exchange rate prevailing at the end of the last reporting period.
c. average exchange rate for the reporting period.
*d. current exchange rate at the end of the reporting period.

Correct answer: d
Learning objective 8.4

15. When translating foreign currency denominated financial statements into the functional
currency, the exchange differences are recognised:

*a. in profit or loss in the period in which they arise.

b. directly in the retained earnings account.
c. as a deferred asset or liability and amortised over a period of 10 years.
d. as a separate component of equity.

Correct answer: a
Learning objective 8.4

© John Wiley & Sons Australia, Ltd 2018 8.5

Testbank to accompany: Company accounting 11e by Leo et al.

16. If foreign currency denominated non-monetary assets are measured using the fair value
method, they must be translated into the functional currency using the:

*a. exchange rate at the date when the assets were revalued.
b. exchange rate current at the end of the reporting period.
c. average exchange rate for the financial year.
d. exchange rate at the original purchase date of the asset.

Correct answer: a
Learning objective 8.4

17. Which exchange rate should be used when translating revenue and expense items in the
statement of profit or loss and other comprehensive income into the functional currency?

a. Current as at the end of the financial year.

b. Calculated as the average between the rates at the start and end of the year.
*c. Current at the dates the applicable transaction occurred.
d. None of the above.

Correct answer: c
Learning objective 8.4

18. By applying the definition provided in AASB 121/IAS 21 The Effects of Changes in
Foreign Exchange Rates, which of the following items will be regarded as a monetary
item?

a. Motor vehicles
b. Inventory
c. Machinery
*d. Cash

Correct answer: d
Learning objective 8.4

© John Wiley & Sons Australia, Ltd 2018 8.6

 Chapter 8: Translation of financial statements into a presentation currency

19. The general rule for translating liabilities denominated in a foreign currency into the
functional currency is to:

a. translate all liabilities using the current rate existing at the end of the reporting
period.
b. first classify the liabilities into current or non-current.
*c. first classify the liabilities as monetary or non-monetary.
d. translate all liabilities using the rate applicable when the original transaction was
recorded.

Correct answer: c
Learning objective 8.4

20. The exchange rate at a point of time for immediate delivery of the currency in an exchange
is known as the:

*a. spot rate.

b. point rate.
c. immediate rate.
d. temporal rate.

Correct answer: a
Learning objective 8.4

21. If a reporting entity establishes a foreign operation, the equity used to form the foreign
operation is the:

*a. pre-acquisition equity.

b. foreign equity.
c. reporting equity.
d. post-acquisition equity.

Correct answer: a
Learning objective 8.4

© John Wiley & Sons Australia, Ltd 2018 8.7

Testbank to accompany: Company accounting 11e by Leo et al.

22. When translating into the presentation currency, all assets and liabilities are translated
using the:

a. average exchange rate for the financial period.

b. exchange rate applicable when the original transaction was recorded.
*c. exchange rate current at the date of the statement of financial position.
d. exchange rate as at the start of the reporting period.

Correct answer: c
Learning objective 8.5

23. Dividends declared are translated into the presentation currency at the:

a. average exchange rate for the reporting period.

*b. rates current when the dividends are declared.
c. rates current when the dividends are paid to the shareholders.
d. rates current when the shareholders approve the dividend at the company’s annual
general meeting.

Correct answer: b
Learning objective 8.5

24. Gairdner Limited has the following items in its statement of profit or loss and other
comprehensive income for the year ended 30 June 20X4:
Revenue FC120 000,
Cost of goods sold FC50 000,
Other expenses FC16 000,
Income tax expense FC20 000.
All items were earned and incurred evenly across the year. The following exchange rates
applied:
End of reporting period FC1 = $1.45
Average rate for year FC1 = $1.40
The net profit after tax translated into the presentation currency is:

*a. $47 600.

b. $24 286.
c. $23 448.
d. $49 300.

Correct answer: a
Learning objective 8.5

© John Wiley & Sons Australia, Ltd 2018 8.8

 Chapter 8: Translation of financial statements into a presentation currency

25. When translating from the functional currency into the presentation currency, exchange
differences arise because of which of the following?

a. Opening net assets are translated at a closing rate different from the previous closing
rate
b. Income and expense items are translated at rates different from the closing rate used
for all assets and liabilities
*c. Both a and b
d. None of the above

Correct answer: c
Learning objective 8.5

26. Exchange differences arising when translating from the functional currency into the
presentation currency are recognised in other comprehensive income and:

a. recorded as a deferred asset and amortised over the expected useful life.
b. recognised in profit or loss.
*c. accumulated in equity using a ‘foreign currency translation reserve’.
d. accumulated in equity using retained earnings.

Correct answer: c
Learning objective 8.5

27. Translating from the functional currency to the presentation currency involves which of the
following procedures?

a. Recognise exchange differences in other comprehensive income.

b. Translate the income and expenses at the exchange rates at the dates of the
transactions.
c. Translate the assets and liabilities at the closing rate at the date of the statement of
financial position.
*d. All of the above.

Correct answer: d
Learning objective 8.5

© John Wiley & Sons Australia, Ltd 2018 8.9

Testbank to accompany: Company accounting 11e by Leo et al.

28. Which of the following statements is incorrect?

a. Movements in the foreign currency translation reserve must be disclosed.

b. Exchanges differences included in profit or loss must be disclosed.
*c. There is no need to disclose if the presentation currency is different from the
functional currency.
d. AASB 121/IAS 21 The Effects of Changes in Foreign Exchange Rates requires
disclosures about the translation of financial statements into other currencies.

Correct answer: c
Learning objective 8.6

29. Which of the following must be disclosed when the presentation currency of the parent
entity is different from the functional currency?

a. The reason for using a different presentation currency

b. The fact they are different
c. The functional currency
*d. All of the above

Correct answer: d
Learning objective 8.6

30. Under AASB 121/IAS 21 The Effects of Changes in Foreign Exchange Rates, an entity
must disclose which of the following items in particular?
I. The amount of exchange differences included in profit or loss of the period.
II. The amount of the exchange difference included directly in share capital during the
period.
III. Whether a change in the functional currency has occurred.
IV. The reason for using a presentation currency that is different from the functional
currency.

a. I, II, III and IV

b. II and III only
*c. I, III and IV only
d. I and IV only

Correct answer: c
Learning objective 8.6

© John Wiley & Sons Australia, Ltd 2018 8.10