Answer to Question #186057 in Finance for Mohammad

Question

Question 1 (34 marks) 

A- Assume that a French corporation exports electronic equipment to USA in a transaction denominated in dollar. Is this transaction a foreign currency transaction? Is it a foreign transaction? Explain the difference between these two concepts and their application here.                 (5 marks)

B- The unrealized gains and losses from intercompany transactions involving plant assets might be eventually realized. Does it make any difference if these assets are depreciable or non-depreciable? Explain.          (5 marks)

Answer 1

a)

A foreign currency transaction is a business transaction denominated in a currency other than a firm's functional or home currency. If for instance, a German company exports electronic equipment to USA in a transaction denominated by the dollar, which is not its functional currency, then this transaction is termed as a foreign currency transaction.

Therefore, this case represents a foreign transaction.

b)

The key objective of inter company transactions involving plant asset is to save the company from the depreciation in the particular year. Unrealized gains and losses of inter company transactions of the assets which can be depreciated are realized when assets are disposed to some outside parties or held within the entity. In this, the entity recognizes unrealized losses or gains on selling price and cost of consolidated entity.

Unrealized gains and losses from inter-company sales of depreciable assets gets realized via use if the assets are held within the consolidated entity and through sale if the assets are sold to outside parties. The process of recognizing previously unrealized gains and losses through use is a piecemeal recognition over the remaining useful life of the depreciable asset.