Reference no: EM13490013

(a)Describe the concepts of functional and presentational currencies in the context of accounting for overseas operations.

(b)Broome Ltd established an overseas subsidiary on 1/7/2011 with FC100 000 capital. Cash of FC100 000 was the only asset on 1/7/2011. In the year ended 30/6/2012, profit ofFC45 000 was made and the statement of financial position showed thefollowing:

Machinery FC100 000
Inventory20 000
Receivables16 000
Cash9 000
Total assets145 000
Capital100 000
Retained earnings 45 000
145 000

On 1/7/2011, the exchange rate was A$1 = 2FC; on 30/6/2012 the rate was A$1 = 2.5FC; the average rate for 2011/2012 was A$1 = 2.25FC. The functional currency is the foreign currency.

Translate the profit of FC45 000 and the statement of financial position into Australian dollars. Explain the nature of the balancing item foreign exchange gain.