FAR 55 - Foreign Currency Denominated Transactions Flashcards Preview

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Flashcards in FAR 55 - Foreign Currency Denominated Transactions Deck (26):
1

Shore Co. records its transactions in U.S. dollars. A sale of goods resulted in a receivable denominated in Japanese Yen, and a purchase of goods resulted in a payable denominated in Swiss francs.

Shore recorded a foreign exchange gain on collection of the receivable and an exchange loss on settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar.

Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates?
Yen exchangeable for $1
Francs exchangeable for $1

Decrease, decrease
Since the quotes are a number of foreign units per dollar, they are considered indirect quotations.

When there is a gain on a receivable that is denominated in a foreign currency, it means that the same number of foreign currency units translates into more dollars. Thus, the number of units (yen) per dollar declined.

When there is a loss on a payable, it means that they had to pay more dollars to settle the loan for the fixed amount of francs. Using an indirect quote, this means that the number of francs per dollar declined (it takes more dollars to get the same amount of francs).

Since both indirect quotations decreased, this is the correct response.

2

Which of the following is not associated with the general principles of accounting for foreign currency operating transactions?
A. Transactions will be recorded in terms of the functional currency.
B. Gains and losses result from changes in currency exchange rates.
C. Gains and losses are deferred until transactions are settled.
D. Foreign currencies are converted using the current or spot exchange rate.

C. Gains and losses on foreign currency operating transactions that result from changes in currency exchange rates are not deferred. Such gains and losses must be recognized in current income of the period in which the currency exchange rate changes.

3

If $1.00 will buy 0.76 Euros, then how many dollars will one Euro buy (rounded)?

$1.32 If $1.00 will buy 0.76 Euro, then 0.76E = $1.00, and E = $1.00/0.76, or E = $1.32. So, one Euro will buy $1.32, the correct answer.

4

During 2004, Peg Construction Co. recognized substantial gains from:

An increase in value of a foreign customer's remittance caused by a major foreign currency revaluation.
A court-ordered increase in a completed long-term construction contract's price due to design changes.

Should these gains be included in continuing operations or reported as an extraordinary item in Peg's 2004 income statement?

Both would be included in Continuing operations.
Any company that deals with international customers and suppliers will, in the ordinary course of business, have gains and losses on changes in the relative values of the various currencies. These gains and losses must, therefore, be counted as ordinary income from continuing operations.

The court ordered increase in the construction contract presents a little different problem. Changes in contract price due to design changes is a very ordinary factor in the construction business and definitely ordinary income. However, most of these are not court ordered but handled in the ordinary course of business. A court ordered settlement, if material, may need to be separated out from the normal operations.

Still lawsuits are not unusual in today's business environment so it would still not qualify for extraordinary treatment (both unusual and infrequent). It may be considered as part of 'other revenue and expenses' but this is still part of income from continuing operations making this response correct.

5

Which one of the following is a direct quotation for a U.S. entity when buying Japanese Yen (JPY)?

I. 0.89 JPY per $1.00.
II. $.011 per 1.00 JPY.

II only.
A direct quotation, or direct exchange rate, states the domestic price of one unit of a foreign currency. In this case, each JPY costs $.011, which is a direct quotation.

6

In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary's functional currency is the currency:
A. In which the subsidiary maintains its accounting records.
B. Of the country in which the subsidiary is located.
C. Of the country in which the parent is located.
D. Of the environment in which the subsidiary primarily generates and expends cash.

D. By definition (SFAS #52), an entity's functional currency is the currency of the primary economic environment in which the entity operates. Normally, that is the currency of the environment in which the entity primarily generates and expends cash.

7

Shore Co. records its transactions in U.S. dollars. A sale of goods resulted in a receivable denominated in Japanese Yen, and a purchase of goods resulted in a payable denominated in Swiss francs.

Shore recorded a foreign exchange gain on collection of the receivable and an exchange loss on settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar.

Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates?
Yen exchangeable for $1
Francs exchangeable for $1

Decrease, decrease
Since the quotes are a number of foreign units per dollar, they are considered indirect quotations.

When there is a gain on a receivable that is denominated in a foreign currency, it means that the same number of foreign currency units translates into more dollars. Thus, the number of units (yen) per dollar declined.

When there is a loss on a payable, it means that they had to pay more dollars to settle the loan for the fixed amount of francs. Using an indirect quote, this means that the number of francs per dollar declined (it takes more dollars to get the same amount of francs).

Since both indirect quotations decreased, this is the correct response.

8

On October 1, 2004, Mild Co., a U.S. company, purchased machinery from Grund, a German company, with payment due on April 1, 2005. If Mild's 2004 operating income included no foreign exchange transaction gain or loss, then the transaction could have:
A. Resulted in an extraordinary gain.
B. Been denominated in U.S. dollars.
C. Caused a foreign currency gain to be reported as a contra account against machinery.
D. Caused a foreign currency translation gain to be reported as a separate component of stockholders' equity.

B. If the transaction was denominated in U.S. dollars, there is no foreign exchange gain or loss for Mild. (There would be a gain or loss for Grund.)

9

T/F: A statement expressed in the form of: 1 foreign currency unit = $X, expresses an indirect exchange rate.

False.
This is a direct exchange rate

10

T/F: The carrying value of an outstanding account balance denominated in a foreign currency (e.g. account payable) should be adjusted at year-end using the spot rate at year-end.

True

11

T/F: At the date a foreign currency transaction is initiated, it should be measured and recorded at the dollar value to settle the transaction at that date.

True
Note that there would be no G/L to recognize yet.

12

T/F: A foreign currency exchange gain or loss can not be recognized at the settlement date.

False.
It can be

13

T/F: The dollar value of transactions denominated in a foreign currency is determined using the forward exchange rate.

False.
Using the spot exchange rate.

14

T/F: A spot exchange rate is a current exchange rate.

True

15

T/F: The functional currency of an entity is determined by the primary economic environment of the entity.

True

16

On September 22, 2005, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company's local currency. On that date, the spot rate was $.55. Yumi paid the bill in full on March 20, 2006, when the spot rate was $.65. The spot rate was $.70 on December 31, 2005.

What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, 2005?

$1,500
When a monetary obligation in a foreign currency exists, all gains and losses reflective of changes in exchange rates are recognized in current income.

The loss would be based on the rate at initiation and the rate at year end. (The recovery in the next period would be treated as a gain in that period.) The loss is $1,500 [($.55 - $.70)10,000], making this response correct.

17

Can a gain or loss on a foreign currency import transaction be recognized if the transaction is initiated in one fiscal period and settled:
In the same fiscal period
In a later fiscal period

yes, yes
The effect of exchange rate changes on accounts denominated in a foreign currency should be recognized in the period(s) in which the exchange rate changes. Therefore, if such an account (e.g., account payable) exists in more than one period, the effects of exchange rate changes in either or both periods would result in the recognition of a gain or loss in either or both periods.

18

Which of the following is not associated with accounting for a foreign currency import transaction?
A. Can be initiated and settled in the same fiscal period.
B. Typically involves a domestic entity buying from a foreign entity.
C. A settlement amount greater than the recorded amount results in an exchange gain.
D. Changes in exchange rates create gains and losses.

C. Because an import transaction normally results in a liability to the buyer (importer), a settlement amount (of the liability) greater than the current carrying amount of the liability will result in an exchange loss, not an exchange gain.

19

Which one of the following is most likely a foreign currency import transaction by a U.S. company?
A. Sale of goods to be collected in dollars.
B. Purchase of goods to be paid in dollars.
C. Sale of goods to be collected in a foreign currency.
D. Purchase of goods to be paid in a foreign currency.

D. The purchase of goods by a U.S. entity would most likely reflect an import transaction and, since it is to be settled in a foreign currency, would be a foreign currency import transaction.

20

Which one of the following is most likely a foreign currency import transaction by a U.S. company?
A. Sale of goods to be collected in dollars.
B. Purchase of goods to be paid in dollars.
C. Sale of goods to be collected in a foreign currency.
D. Purchase of goods to be paid in a foreign currency.

D. The purchase of goods by a U.S. entity would most likely reflect an import transaction and, since it is to be settled in a foreign currency, would be a foreign currency import transaction.

21

On November 15, 2005, Celt Inc., a U.S. company, ordered merchandise FOB shipping point from an East German company for 200,000 marks. The merchandise was shipped and invoiced to Celt on December 10, 2005. Celt paid the invoice on January 10, 2006.
The spot rates for marks on the respective dates are as follows:

November 15, 2005 $.4955
December 10, 2005 .4875
December 31, 2005 .4675
January 10, 2006 .4475

In Celt's December 31, 2005, income statement, the foreign exchange gain is:

$4,000
SFAS #52 requires that cash or amounts owed by or to a company that are denominated in a foreign currency be translated at the current rate with a gain or loss being recognized. Recognition is based on the change in the spot rate between the recording of the transaction and the date of the financial statements.

The other critical date is the date at which the transaction became an amount owed by or to the company. This occurs at the transfer of title date of December 10, 2005. Any change before that date is an adjustment in the cost of the merchandise.

This correctly picks up the gain as the change between when the debt was established and the balance sheet date.

22

Which of the following is a foreign currency export transaction for a U.S. entity?
A. Sale of goods to be collected in dollars.
B. Purchase of goods to be paid in dollars.
C. Sale of goods to be collected in a foreign currency.
D. Purchase of goods to be paid in a foreign currency.

C. The sale of goods to be collected in a foreign currency would be a foreign currency export transaction. A foreign currency transaction occurs when a U.S. entity enters into a transaction that is denominated (to be settled) in a foreign currency, not in dollars.

23

On October 1 of the current year, a U.S. company sold merchandise on account to a British company for 2,000 pounds (exchange rate, 1 pound = $1.43). At the company's December 31 fiscal year end, the exchange rate was 1 pound = $1.45. The exchange rate was $1.50 on collection in January of the subsequent year. What amount would the company recognize as a gain (loss) from foreign currency translation when the receivable is collected?

$100 gain
A foreign currency exchange gain will be recognized for the change in exchange rate between December 31 and the January collection date. That gain is computed as $1.45 -> $1.50 = $0.05 x 2,000 pounds = $100 gain.

24

T/F: A gain on an import transaction would occur when the recorded amount is greater than the settlement amount, and a loss on an export transaction would occur when the recorded amount is greater than the settlement amount.

True. An import transaction will result in a payable. A gain on a foreign currency payable would occur when the settlement amount is less than the recorded amount. An export transaction will result in a receivable. A loss on a foreign currency receivable would occur when the recorded amount is greater than the settlement amount.

25

T/F: A gain on an import transaction would occur when the recorded amount is greater than the settlement amount, and a loss on an export transaction would occur when the recorded amount is greater than the settlement amount.

True. An import transaction will result in a payable. A gain on a foreign currency payable would occur when the settlement amount is less than the recorded amount. An export transaction will result in a receivable. A loss on a foreign currency receivable would occur when the recorded amount is greater than the settlement amount.

26

T/F: A foreign currency denominated export transaction could result in an account payable to the exporting entity.

False.
This would result in an account receivable.

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