ExpertMedium2 marksMultiple Choice
ACCA · Question 12 · IAS 21 The Effects of Changes in Foreign Exchange Rates
Section A
TradeGlobal, whose functional currency is the Dollar ($), purchased goods from a foreign supplier on 1 November 20X5 for 150,000 Euros (€). The invoice remains unpaid at the year-end on 31 December 20X5.
Exchange rates:
1 Nov 20X5: $1 = €1.20
31 Dec 20X5: $1 = €1.25
Average rate for year: $1 = €1.22
What is the exchange difference to be recognized in the Statement of Profit or Loss for the year ended 31 December 20X5?
Section A
TradeGlobal, whose functional currency is the Dollar ($), purchased goods from a foreign supplier on 1 November 20X5 for 150,000 Euros (€). The invoice remains unpaid at the year-end on 31 December 20X5.
Exchange rates:
1 Nov 20X5: $1 = €1.20
31 Dec 20X5: $1 = €1.25
Average rate for year: $1 = €1.22
What is the exchange difference to be recognized in the Statement of Profit or Loss for the year ended 31 December 20X5?
Answer options:
A.
$5,000 loss
B.
$5,000 gain
C.
$2,000 gain
D.
$0, exchange differences are recognized in OCI
How to approach this question
1. Translate the initial transaction at the spot rate on the date of the transaction. 2. Retranslate the outstanding payable at the year-end closing rate. 3. The difference is the exchange gain or loss.
Full Answer
B.$5,000 gain✓ Correct
1. Initial recognition (1 Nov): €150,000 / 1.20 = $125,000 liability.
2. Year-end retranslation (31 Dec): Trade payables are monetary items and must be retranslated at the closing rate. €150,000 / 1.25 = $120,000 liability.
3. The liability has decreased from $125,000 to $120,000. This $5,000 reduction in liability is recognized as a foreign exchange gain in Profit or Loss.
Common mistakes
Dividing instead of multiplying (or vice versa) depending on how the rate is quoted, or confusing a gain with a loss.
Practice the full ACCA FR — Financial Reporting Practice Exam 5
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