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ACCA Applied Skills · Financial Reporting · Foreign currency transactions

Parent P, whose functional currency is the dollar, acquired 100% of S, a foreign subsidiary with the rupee as functional currency, on 1 January for 600,000 rupees when S's net assets had a fair value of 500,000 rupees. Goodwill is treated as an asset of the foreign operation. Rates: 1 January 2 rupees to the dollar; 31 December 2.5 rupees to the dollar. No impairment has occurred. What is the goodwill in the consolidated statement of financial position at 31 December?

Goodwill is $40,000. It is 100,000 rupees (600,000 less 500,000) and, being an asset of the foreign operation, is retranslated at the closing rate of 2.5. Using the acquisition rate would give $50,000, which is wrong; the $10,000 difference goes to other comprehensive income.

  1. A$40,000Correct
  2. B$50,000
  3. C$48,000
  4. D$100,000

Explanation

Goodwill is 600,000 − 500,000 = 100,000 rupees. As an asset of the foreign operation it is retranslated at the closing rate: 100,000/2.5 = $40,000. Option B (100,000/2) uses the acquisition rate, so it ignores retranslation. The exchange loss of $10,000 goes to other comprehensive income.

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