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ACCA Applied Skills · Financial Reporting · Foreign currency transactions

Delta Co, whose functional currency is the dollar ($), buys machinery from a foreign supplier on 1 March for 360,000 euros (EUR) on 60 days' credit. The spot rate on 1 March is $1 = EUR 1.20 and the average rate for March is $1 = EUR 1.25. The machinery is delivered and control passes on 1 March. At what amount should the machinery initially be recognised in Delta Co's financial statements under IAS 21?

The machinery is recognised at $300,000. IAS 21 requires initial recognition at the spot rate on the transaction date, so EUR 360,000 divided by 1.20 gives $300,000. The average rate is not appropriate here, and the amount is not retranslated later because machinery is a non-monetary item at historical cost.

  1. A$288,000
  2. B$300,000Correct
  3. C$432,000
  4. D$450,000

Explanation

IAS 21 requires a foreign currency transaction to be recorded on initial recognition at the spot rate on the transaction date. EUR 360,000 / 1.20 = $300,000. Using the average rate gives EUR 360,000 / 1.25 = $288,000, which is wrong because an average rate is only allowed as an approximation when rates fluctuate little. Multiplying instead of dividing gives $432,000.

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