ExpertMedium2 marksMultiple Choice
ACCA · Question 07 · The Effects of Changes in Foreign Exchange Rates
Section A
EuroTrade, whose functional currency is the Euro (€), purchased inventory from a US supplier on 15 November 20X5 for $100,000 USD when the exchange rate was €1 = $1.10. The invoice remains unpaid at 31 December 20X5, when the exchange rate is €1 = $1.15. The inventory is still in stock and its net realizable value exceeds its cost. What is the total impact on EuroTrade's profit or loss for the year ended 31 December 20X5 regarding this transaction?
Section A
EuroTrade, whose functional currency is the Euro (€), purchased inventory from a US supplier on 15 November 20X5 for $100,000 USD when the exchange rate was €1 = $1.10. The invoice remains unpaid at 31 December 20X5, when the exchange rate is €1 = $1.15. The inventory is still in stock and its net realizable value exceeds its cost. What is the total impact on EuroTrade's profit or loss for the year ended 31 December 20X5 regarding this transaction?
Answer options:
A.
A foreign exchange loss of €3,953
B.
A foreign exchange gain of €3,953
C.
Nil, as the inventory is unsold
D.
A foreign exchange gain of €5,000
How to approach this question
Separate the transaction into a non-monetary asset (inventory) and a monetary liability (payable). Retranslate only the monetary liability at year-end.
Full Answer
B.A foreign exchange gain of €3,953✓ Correct
Under IAS 21, inventory is a non-monetary item measured at historical cost, so it remains at €90,909 ($100,000 / 1.10). The trade payable is a monetary item and must be retranslated at the closing rate: $100,000 / 1.15 = €86,956. The decrease in the liability of €3,953 (€90,909 - €86,956) is recognized as a foreign exchange gain in profit or loss.
Common mistakes
Retranslating the inventory as well as the payable, which would incorrectly result in a net zero impact on P&L.
Practice the full ACCA FR — Financial Reporting Practice Exam 2
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