Finance Assignment: Tutorial 6 - Foreign Exchange and Taxation

This document provides solutions to a finance tutorial focusing on foreign exchange and taxation. The assignment covers key concepts such as functional currency, exchange rates, and deferred tax. The answers address questions related to the translation of foreign subsidiary financial statements, the recognition of exchange differences, and the calculation of tax payable and deferred tax liabilities. The solutions also include explanations and references to relevant accounting standards, providing a comprehensive understanding of the topics covered. The tutorial explores the impact of exchange rate fluctuations on financial statements and the accounting treatment of timing differences in taxation. The answers demonstrate the application of accounting principles to real-world scenarios, helping students grasp the intricacies of foreign exchange and taxation in financial reporting.

Answer 1) B. The most important currency in the business of a given company
Explanation: A functional refers to the currency in which the business’s income and
expenses are generated. Hence, when it comes to a foreign subsidiary company, the same
conducts and presents their business operations in the functional currency in their respective
state currency.
Answer 2) C. The exchange rate at the balance sheet date
Explanation: The translation of the foreign subsidiary financial statements are done into the
parent’s presentation currency at the yearend rates. The said transition is on the year end rates
to avoid the numerous rates on different items of assets and liabilities.
Answer 3) B. Other comprehensive income
Explanation: As per FRS 102, all the exchange differences shall be recognised in other
comprehensive income, Croner1.
Answer 4) D. $5.75 million
Explanation: The closing rate would be used for the said presentation. As stated above, the
transition rate used in the year end rate for the reporting in the balance sheet.
Answer 5) C. A timing difference
Explanation: The timing difference would arise on different value of the same asset in the
organisation’s books and for the purposes of the tax computations.
Answer 6) D. Tax payable (liability)
Explanation: The tax payable liability recorded in the books of an enterprise on year end is
paid in cash to the regulators next year.
Explanation: The tax on the taxable profits of an enterprise is stated as Tax payable.
Answer 7) E. None of the above
Explanation: The total profit of the entity is $ 110 million. However, out of which $ 80
million is taxable in the current year. $ 30 million is deferred tax income for the current year.
The current tax would be payable by the entity on $ 80 million, with deferred tax liability
creation on $ 30 million.
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Answer 8) B. Deferred tax expense for 2019 is $6.3 million
Explanation: $30 million is the timing difference and tax thereon would be paid later
because the same would not be taxable until realized as per taxation rules.
Answer 9) B. 21.0%
Explanation: Total tax is the summation of the current tax and the deferred tax liability.
Accordingly, $ (23.1 million/110 million) = $ 21 million
Answer 10) B. Deferred tax liability
Explanation: The total income tax expense recorded in the income statement is the sum of
the current tax liability and the deferred tax liability, or in the case of the deferred tax asset,
the deferred tax asset is deducted from the current tax expense.
Answer 11) D. The company recognizes a deferred tax income in 2019
Explanation: The Company would pay income tax on the said income later on.
Answer 12) C. The company recognizes a deferred tax asset at the end of the 2019 fiscal
year.
Explanation: The said provision would be deducted from the taxable profits in the year 2020
and company would save tax thereon in future.

Bibliography
Croner-i Limited. https://library.croneri.co.uk/cch_uk/dgaap/b30-4-2 (accessed Oct 8, 2019).