ExpertMedium2 marksMultiple Choice
ACCA · Question 30 · Foreign Currency Transactions
SECTION B - CASE 3: FinServe Solutions
FinServe Solutions Co is a fintech payment processor. The year-end is 31 March 20X7.
Following on from the previous question, FinServe's functional currency is the Euro (€). It purchased servers for $100,000 USD on 1 February 20X7. The invoice is unpaid at 31 March 20X7.
Exchange rates (€1 = $X):
1 February 20X7: $1.25
31 March 20X7: $1.20
What is the exchange gain or loss to be recognized in the statement of profit or loss for the year ended 31 March 20X7?
SECTION B - CASE 3: FinServe Solutions
FinServe Solutions Co is a fintech payment processor. The year-end is 31 March 20X7.
Following on from the previous question, FinServe's functional currency is the Euro (€). It purchased servers for $100,000 USD on 1 February 20X7. The invoice is unpaid at 31 March 20X7.
Exchange rates (€1 = $X):
1 February 20X7: $1.25
31 March 20X7: $1.20
What is the exchange gain or loss to be recognized in the statement of profit or loss for the year ended 31 March 20X7?
Answer options:
A.
€3,333 gain
B.
€3,333 loss
C.
€5,000 loss
D.
No gain or loss is recognized until the invoice is paid.
How to approach this question
1. Calculate the liability at the transaction date. 2. Calculate the liability at the year-end date using the closing rate. 3. Compare the two. If the liability increased, it's a loss. If it decreased, it's a gain.
Full Answer
B.€3,333 loss✓ Correct
Trade payables are monetary items and must be retranslated at the closing rate at the reporting date. Initial liability (1 Feb) = €80,000. Retranslated liability (31 Mar) = $100,000 / 1.20 = €83,333. The liability has increased by €3,333. An increase in a liability is an expense (exchange loss) recognized in profit or loss.
Common mistakes
Confusing a gain with a loss (thinking a lower exchange rate number is better, without realizing it means the Euro buys fewer Dollars).
Practice the full ACCA FR — Financial Reporting Practice Exam 1
32 questions · hints · full answers · grading
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