Foreign Currency Transaction & Translation Flashcards by Gabe Celeste

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. Therefore, the weighted average exchange rate for the current year would be an appropriate rate for converting both sales to customers and wages expense. The weighted average exchange rate for the current year is the correct rate to use to convert depreciation expense. Since depreciation expense is incurred throughout the year, the weighted average exchange rate normally is the appropriate basis for conversion.

A U.S. entity purchases goods from a British entity to be settled in pounds sterling. Can be initiated and settled in the same fiscal period. Since the quotes are a number of foreign units per dollar, they are considered indirect quotations. I. The forward contract is not intended to offset an existing risk. Since both indirect quotations decreased, this is the correct response.

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I. The functional currency can be selected at management’s discretion. II. The forward contract used as the hedging instrument must be highly effective in hedging the investment. The contract specifies the subject matter of the exchange.

A foreign exchange gain or loss is recognized for any change in value of a monetary debt denominated in a foreign currency. This is true at balance sheet time as well as when it is realized. Foreign currency exchange gains on accounts receivable are reported in current income as an item of income from continuing operations.

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Translation adjustments result from translating an entity’s financial statements into the reporting currency. Such adjustments, which result when the entity’s functional currency is the foreign currency, should not be included in net income. Instead, such adjustments should be reported as components of “other comprehensive income” and accumulated other comprehensive income in stockholders’ equity.

Therefore, the inventory balance of 240,000 LCU is translated to $40,000 (240,000/6). The hedge of an available-for-sale investment denominated in a foreign currency is a fair value hedge. The risk hedged is the effect of exchange rate changes on the fair value in dollars of the investment. A hedge to offset the risk of exchange rate changes on a planned transaction would be the hedge of a forecasted transaction. A forecasted transaction is a non-firm, but planned or expected transaction that will be denominated in a foreign currency. Per ASC Topic 830, if the functional currency equals the local currency, the current rate method is used.

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The risk being hedged exists prior to an asset or liability being recognized. 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 Foreign Currency Transaction & Translation Flashcards By Gabe Celeste into more dollars. Thus, the number of units per dollar declined. The direct quotation is the rate expressed in US dollars. It means that $.90 can be exchanged for 1 Canadian dollar. The direct quotation is $.90/1.

And, gains on foreign currency transactions should be reported in current income . Component of “other comprehensive income” and stockholders’ equity. Translation gains and losses are reported in other comprehensive income; a translation loss would result in a debit to other comprehensive income. A translation gain would https://quick-bookkeeping.net/ result in a credit to other comprehensive income. The translation loss and the exchange gain are reported separately in other comprehensive income. Either operating transactions (export, import, lending, borrowing, investing, etc.) or forward exchange contract transactions could be foreign currency transactions.