Chapter 5 - Foreign Currency

Question 1

What is the difference between the historic rate vs closing rate?

Answer 1

Historic rate (or spot rate) is the rate in placed that the transaction takes place

Closing rate is the rate at reporting date

Question 2

What do we mean by functional currency and why is it important

Answer 2

The currency of the primary economic environment, hence when we make oversees purchases we must always covert into the functional currency

Question 3

UK company buys goods from US supplier on 1 April 20X8. The goods are priced at $54,000. Payment made in two months time on 31 May 20X8.

1 April 20X8 $1.80 : £1
31 May 20X8 $1.75 : £1

Answer 3

Initial transaction - must convert to functional currency (UK £)
$54,000
Thus $1 = £1/1.80 * 54,000 = £30,000

Settled transaction
$1 = £1/1.75 * 54,000 = £30,857

Thus Dr Payables £30,000
Cr Bank Cash £30,857
Cr foreign exchange expense £857

Question 4

If a transaction is still unsettled at reporting date, we translate the value of this at the ?

Answer 4

Closing rate

Thus we would have a payable and expense charge to SPL