Foreign currency translation and tax implications- Quiz questions

1. The ‘functional currency’ is:
A. The currency in which the financial statements are presented
B. The most important currency in the business of a given company
C. Any currency different from the functional currency
D. All of the above

2. The assets of foreign subsidiaries are translated at…
A. The average exchange rate for the period
B. The exchange rate at the date in which the asset was created
C. The exchange rate at the balance sheet date
D. Any of the above

3. Any exchange differences arising from the translation of the accounts of foreign subsidiaries are recognized in…
A. The income statement
B. Other comprehensive income
C. The entity’s assets
D. The entity’s cash flows

4. A US firm borrowed GBP 5 million on 31 December Year 1, when the exchange rate was £1 = $1.20. The exchange rate on 31 December Year 2 was £1 = $1.15. The US firm uses the USD to present its financial statements.
The loan is reported on the firm’s balance sheet at 31 December Year 2 with the following amount:
A. $4.17 million
B. $4.35 million
C. $6.00 million
D. $5.75 million

5. Using the straight-line method of depreciation under IFRS and doubledeclining depreciation under tax code would most likely result in…
A. A different revenue recognition method
B. Tax manipulation
C. A timing difference
D. A loss

6. In early 2016, Breton Ltd. paid the tax authority $201,600 in cash on the taxable profit it earned in 2015. This amount was recorded in Breton Ltd’s balance sheet at the end of the 2015 fiscal year as…
A. Deferred tax liability
B. Deferred tax asset
C. Tax receivable (asset)
D. Tax payable (liability)

7. A US company has the following earnings in 2019: $30 million: Accrued revenue (in GAAP earnings, not taxed until realized) $80 million: Other revenue (fully taxable) Assume no expenses for simplicity.
Which one of the following statements is correct?
A. Pre-tax profit (reported in the income statement) is $80 million
B. Taxable profit (reported in the tax return) is $110 million
C. No deferred tax income/expense is recognized in 2019
D. No current tax is recognized in 2019
E. None of the above

8. A US company has the following earnings in 2019: $30 million: Accrued revenue (in GAAP earnings, not taxed until realized) $80 million: Other revenue (fully taxable) Assume no expenses for simplicity.
The tax rate on corporate profits is 21%.
Which one of the following statements is correct?
A. Current tax for 2019 is $23.1 million
B. Deferred tax expense for 2019 is $6.3 million
C. Tax expense for 2019 is $29.4 million
D. Deferred tax assets increase by $6.3 million during the year9.

9. A US company has the following earnings in 2019: $30 million: Accrued revenue (in GAAP earnings, not taxed until realized) $80 million: Other revenue (fully taxable)

Assume no expenses for simplicity.
The tax rate on corporate profits is 21%.
The effective tax rate in 2019 is…
A. 28.9%
B. 21.0%
C. 15.3%
D. 5.7%

10. The Income tax expense reported on the income statement is the sum of current tax expense plus…
A. Deferred tax asset
B. Deferred tax liability
C. Penalty for tax evasion
D. Deferred tax expense

11. A company sells a magazine subscription on 31 December 2019. The transaction is accounted by increasing cash and increasing unearned revenue (liability). According to tax rules, revenue from customers is taxed on a cash basis. Which one of the following statements is most likely to be true, in relation to the sale of the subscription?
A. No current tax is due in the year 2019.
B. No timing difference exists in relation to the taxation of the subscription income.
C. The company recognizes a deferred tax expense in 2019.
D. The company recognizes a deferred tax income in 2019.

12. Company ABC plc has been taken to court by a supplier. ABC’s lawyers suggest that the supplier may have a valid claim and therefore it is likely that ABC will have to pay damages and costs to the supplier. As result, ABC’s accountants have recognized the expected payment to the supplier as a provision in ABC’s accounts for 2019 (charging an expense in the P&L and creating a provision on the liability side of the balance sheet). However, such a provision is deductible from taxable profit only when the cash payment is made. ABC expects to pay the supplier at the end of the judicial process, in 2020. Which one of the following statements is most likely to be true, in relation to the provision taken in ABC’s accounts in 2019?
A. No timing difference exists in relation to the taxation of the provision.
B. The provision does not affect ABC’s tax expense for the 2019 fiscal year.
C. The company recognizes a deferred tax asset at the end of the 2019 fiscal year.
D. The company recognizes a deferred tax liability at the end of the 2019 fiscal year.