Financial Accounting and Reporting-CPA Practice Exam

In what situation is the monetary item rate on the balance sheet accounted for at the current rate?

1. When the entity reports at historical rates

2. When the functional currency is the local currency

3. When it is a nonmonetary item

4. When it pertains to excessive inflation

The correct answer is: When the functional currency is the local currency

The situation where the monetary item on the balance sheet is accounted for at the current rate occurs when the functional currency of the entity is the local currency. This means that financial statements are prepared using the currency that reflects the economic environment in which the entity primarily operates. In this case, monetary items, such as cash, receivables, and payables, are remeasured or translated at the current exchange rate to accurately represent their value in terms of the local currency. This approach ensures that the reported amounts reflect the effects of changes in currency values, providing a more relevant and timely representation of the entity's financial position, especially in environments where currency values can fluctuate significantly. Other scenarios provided in the options do not align with this principle. For example, historical rates would not consider current currency valuations, nonmonetary items aren't influenced by current exchange rates as they are accounted for at historical costs, and excessive inflation affects how entities account for both monetary and nonmonetary items differently, following specific guidance typically known as hyperinflation accounting, rather than automatically translating at the current rate.