ExpertEasy2 marksMultiple Choice
ACCA · Question 29 · Foreign Currency Transactions
SECTION B - CASE 3: FinServe Solutions
FinServe Solutions Co is a fintech payment processor. The year-end is 31 March 20X7.
On 1 February 20X7, FinServe purchased new servers from a US supplier for $100,000. The invoice is payable on 30 April 20X7. FinServe's functional currency is the €.
Exchange rates (€1 = $X):
1 February 20X7: $1.25
31 March 20X7: $1.20
At what amount should the servers (Property, Plant and Equipment) be initially recognized on 1 February 20X7?
SECTION B - CASE 3: FinServe Solutions
FinServe Solutions Co is a fintech payment processor. The year-end is 31 March 20X7.
On 1 February 20X7, FinServe purchased new servers from a US supplier for $100,000. The invoice is payable on 30 April 20X7. FinServe's functional currency is the €.
Exchange rates (€1 = $X):
1 February 20X7: $1.25
31 March 20X7: $1.20
At what amount should the servers (Property, Plant and Equipment) be initially recognized on 1 February 20X7?
Answer options:
A.
€83,333
B.
€80,000
C.
€125,000
D.
€100,000
How to approach this question
Apply the spot exchange rate on the date of the transaction to translate the foreign currency amount into the functional currency.
Full Answer
B.€80,000✓ Correct
Under IAS 21, a foreign currency transaction is recorded initially at the spot exchange rate at the date of the transaction. The transaction date is 1 February 20X7. $100,000 / 1.25 = €80,000. This establishes the historical cost of the servers.
Common mistakes
Using the year-end exchange rate for initial recognition, or multiplying instead of dividing.
Practice the full ACCA FR — Financial Reporting Practice Exam 1
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