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When functional currency equals local currency, which of the following is true regarding foreign entity accounting?
It uses the local country's currency
It must conduct banking in a different currency
It cannot apply historical rates
It is generally hyperinflationary
The correct answer is: It uses the local country's currency
When the functional currency equals the local currency, it indicates that the foreign entity primarily operates in the currency of the country where it is located. This situation means that the accounting records of the entity will be maintained in the local currency, effectively reflecting the economic environment and transactions in which the entity participates. Using the local country's currency for accounting aligns with the principles of functional currency as defined by accounting standards such as IFRS and GAAP. This allows for effective measurement and communication of the entity's financial performance and position, as the financial statements will be consistent with the local economic conditions and currency fluctuations. The other options do not accurately reflect the scenario. Conducting banking in a different currency is not a necessity and can vary by entity, while the application of historical rates can still be appropriate in certain contexts—such as when dealing with non-monetary items. The notion that the entity is generally hyperinflationary would only apply under specific economic conditions and is not a general rule when the functional currency aligns with the local currency.