University of San Carlos

School of Business and Economics

Department of Accountancy

CEL 2 – Practical Accounting 2 Marvic John M. Leyson

Foreign Exchange Transactions April 1 and 2, 2016
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IAS 21 – The Effects of Changes in Foreign Exchange Rates

Purpose: To set out how to account for transactions in foreign currencies and foreign operations. The
Standard also shows how to translate financial statements into a presentation currency. The key issues are
the exchange rate(s) that should be used and where the effects of changes in exchange rates are reported
in the financial statements.

Definition of Terms:

Functional currency – the currency of the primary economic environment in which the entity operates.

Exchange difference – the difference resulting from translating a given number of units of one currency
into another currency at different exchange rates.

Foreign operation – a subsidiary, associate, joint venture or branch whose activities are based or
conducted in a country or currency other than those of the reporting entity.

Closing rate – the spot exchange rate at the balance sheet date.

Spot rate – the exchange rate for immediate delivery.

Presentation currency – the currency that is used to present the financial statements.

Functional Currency

The functional currency should be determined by looking at several factors. This currency should be the
one in which the entity normally generates and spends cash and in which transactions are normally
denominated. All transactions in currencies other than the functional currency are treated as transactions
in foreign currencies. Five factors can be taken into account in making the decision: the currency

1) That mainly influence the price at which goods and services are sold
2) Of the country whose competitive forces and regulations mainly influence the entity’s pricing
structure
3) That influences the costs of the entity
4) In which funds are generated
5) In which receipts from operating activities are retained

The first three items are generally considered to be the most influential in deciding the functional
currency.

An entity will have to determine the functional currency of a foreign operation, such as a foreign
subsidiary, and whether it is the same currency as that of the reporting entity. Such factors as whether the
foreign entity is an extension of the reporting entity business, what proportion of its transactions are with
the reporting entity, and the nature of cash flows will help determine the functional currency of the
foreign operation.

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The entity’s functional currency reflects the transactions, events and conditions under which the entity
conducts its business. Once decided on, the functional currency does not change unless there is a change
in the underlying nature of the transactions and relevant conditions and events.

If the functional currency is the currency of a hyperinflationary economy, the financial statements should
be restated using IAS 29, Financial Reporting in Hyperinflationary Economies.

When there is a change in the functional currency, it should be applied from the date of change. A change
must be linked to a change in the nature of the underlying transactions. For example, a change in the
major market may lead to a change in the currency that influences sales prices. The change is accounted
for prospectively, not retrospectively.

Recording Foreign Currency Transactions Using the Functional Currency

Foreign currency transactions should be recorded initially at the spot rate of exchange at the date of
transaction. An approximate rate can be used. For example, in general, an average rate for a particular
period can be used, but if exchange rates are fluctuating wildly, an average rate cannot be used.

Subsequently, at each balance sheet date, foreign currency monetary amounts should be reported using
the closing rate. Nonmonetary items measured at historical cost should be reported using the exchange
rate at the date of transaction. Nonmonetary items carried at fair value should be reported at the rate that
existed when the fair values were determined.

It is possible that the carrying value for an item will have been determined by a comparison of two
amounts that have been measured at different dates. For example, the cost of inventory can have been
determined at one date and the net realizable value or recoverable amount at another date. The effect
may be to change the amount of any impairment loss recognized in the functional currency.

Recognition of Exchange Differences

Exchange differences arising on monetary items are reported in profit or loss in the period, with one
exception.

The exception is that exchange differences arising on monetary items that form part of the reporting
entity’s net investment in a foreign operation are recognized in the group financial statements within a
separate component of equity. They are recognized in profit or loss on disposal of the net investment.

The exchange difference arising on monetary items that form part of the reporting entity’s net investment
in a foreign operation is recognized in profit or loss in the entity financial statements.

If a gain or loss on a nonmonetary item is recognized in equity (e.g. property, plant and equipment
revalued under IAS 16), any foreign exchange gain or loss element is also recognized in equity.

Translation to the Presentation Currency from the Functional Currency

An entity can present its financial statements in any currency. If the presentation currency differs from the
functional currency, the financial statements are retranslated into the presentation currency.

If the financial statements of the entity are not in the functional currency of a hyperinflationary economy,
then they are translated into presentation currency in this way:

 Assets and liabilities (including any goodwill arising on the acquisition and any fair value
adjustment) are translated at the closing spot rate at the date of that balance sheet.
 The income statement is to be translated at the spot rate at the date of the transactions. (Average
rates are allowed if there is no great fluctuation in the exchange rates).
 All exchange differences are recognized in a separate component of equity.

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Any exchange difference that relates to the non-controlling interest is recognized in the balance sheet
amount.

Special rules apply for translating into a different presentation currency the results and financial position
of an entity whose functional currency is the currency of a hyperinflationary economy. All amounts are
translated at the closing spot rate. The one exception is that the comparative amounts will be shown as
presented in the previous period.

Translation of a Foreign Operation

When preparing group accounts, it is normal to deal with entities that utilize different currencies. The
financial statements should be translated into the presentation currency.

Any goodwill and fair value adjustments are treated as assets and liabilities of the foreign entity and
therefore are retranslated at each balance sheet date at the closing spot rate.

Exchange differences on intra-group accounts are recognized in profit or loss unless the difference arises
on the retranslation of an entity’s net investment in a foreign operation when it is classified as equity.

Dividends paid in a foreign currency by a subsidiary to its parent company may lead to exchange
differences in the parent’s financial statements and will not be eliminated on consolidation but recognized
in profit or loss.

Disposal of a Foreign Entity

When a foreign operation is disposed of, the cumulative amount of the exchange differences in equity
relating to that foreign operation shall be recognized in profit or loss when the gain or loss on disposal is
recognized.

Hedging

Hedging is a risk management technique that involves using one or more derivatives or other hedging
instruments to offset changes in fair value or cash flows of hedged items. A hedging relationship has
two components:

 Hedged item – an asset, liability, firm commitment, highly probable forecast transaction or net
investment in a foreign operation that exposes the entity to risk of changes in fair value or future
cash flows.

 Hedging instrument – a designated derivative or non-derivative financial asset/liability whose

fair value or cash flows are expected to offset changes in fair value or cash flows of a designated
hedged item.

Three types of hedging relationships:

 Fair value hedge – hedge of the exposure to changes in fair value of a recognized asset or
liability or unrecognized firm commitment that is attributable to a particular risk and that could
affect profit or loss. Changes in FV are reported in profit or loss.

 Cash flow hedge – hedge of the exposure to variability in cash flows that is attributable to
particular risk associated with a recognized asset or liability or a highly probable forecast
transactions and could affect profit or loss. Changes in FV are deferred in OCI.

 Hedge of a net investment in foreign operation – hedge of the exposure to foreign currency
exchange gains or losses of an entity’s net investment in a foreign operation.

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Forward Contract

A forward contract is an agreement to purchase /sell a specified quantity of an underlying asset at a

specified future date, at a price agreed now.

 Future transaction date also called settlement date

 Transaction price is the contracted forward price

 Underlying can be a single financial or non-financial asset or a basket thereof, or can be market
variables

 Forward contracts are OTC instruments, and parties typically deal directly with each other without
the need of an intermediary

 Parties have full discretion on the terms

 Each party bears the risk of loss of non-performance of the other party

 Both parties bear the risk of the liquidity of the contract

 Does not require payment at inception

Foreign currency forward contracts are usually entered into for the following purposes:

 As a fair value hedge – this includes hedges against a change in the fair value of:

 A recognized foreign currency denominated asset or liability

 An unrecognized foreign currency firm commitment

 As a cash flow hedge – this includes hedges against the change in cash flows associated with:

 A forecasted foreign currency transaction

 An unrecognized foreign currency firm commitment

Forward contract used as a fair value hedge:

 FOREX gain/loss = Difference between spot rates

 Gain/loss on forward contract = Difference between original forward rate and forward rate or spot
rate on the year-end or date of settlement respectively

 Take note that the gain/loss on foreign currency usually offsets the FOREX gain/loss. If the
exposed net asset or net liability position is completely hedged, no net FOREX gain or loss is
earned/ incurred.

Forward contract used as a cash flow hedge:

 Usually used for a forecasted transaction, anticipated but not guaranteed.

 Changes in fair value of the hedging instrument is deferred and recognized in OCI. Realized only
if transaction does happen.

 Discounting into present value can also be done, if needed.

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Swaps

A swap is an agreement between two parties to exchange a series of future cash flows, commonly
occurring at regular intervals.

 Are most commonly OTC contracts, as swaps are more likely than other derivatives to be fitted to
a company.

 Swaps are symmetric instruments, and are commonly priced to have zero value at inception, in
which case no cash is exchanged between counterparties.

 Like forwards, the payments can be offset or paid in full.

Forward Contract

Forward contract used for speculation:

 Are valued at forward rates throughout the life of the contract.

 Are also usually fair value hedges.

Options

An option is a contract which gives one party (long) the right to buy or sell to another party (short), at a
specified future date, a specified quantity of a certain underlying asset, for a price agreed upon now.

 Can be exchange traded or over the counter

 Requires upfront payment, called option premium from one party to the other

 May be settled by physical delivery or net settled or not settled at all

Premium – is the option price. This is the sum of the money that the option buyer pays the option seller
to obtain the “right” being sold in the option. This money is paid when the option contract is initiated.

Time value of the option – the difference between the options market price and its intrinsic value.
Changes in the time value of the option are taken to current earnings.

Intrinsic value of the option – the difference between the current market price and the option price of
the hedged item. Also the value of the option if exercised today.

Strike price – the price at which the holder has the option to buy or sell the item.

Option to buy “in the money” – exists when market price is more than the strike price

Option to buy “out of the money” – exists when market price is less than the strike price.

Underlying – the asset, financial instrument or any other basis (e.g. interest rates) to which the option is
linked and from where its value is derived.

Call option – option granting to buy the underlying

Put option – option granting to sell the underlying

Options designated as fair value hedge:

 Gain/Loss on option is immediately recognized in Net Income

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Options designated as cash flow hedge:

 Change in Time Value -> Recognized in Net Income

 Change in Intrinsic Value -> Deferred in Other Comprehensive Income

Hedge of a Net Investment in a Foreign Entity

Forward contracts are used to offset the effects of fluctuations in FOREX rate on their net investments.

FOREX gains/losses arising from these transactions are excluded from the determination of net income.
Adjustments are accumulated in the cumulative Translation Adjustment as OCI.

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ILLUSTRATIVE PROBLEMS

Problem 1 – Exchange Rates

The direct foreign exchange rates in Philippine pesos are:

1 US dollar = P55.8490

1 Japanese yen = P0.4802

Required:

a) What are the indirect exchange rates for the US dollar and Japanese yen?
b) How many dollars must a US firm pay to purchase goods costing P300,000 from a Filipino firm?
c) How many Philippine pesos must be paid for a purchase of costing 6,000,000 Japanese yen?

Problem 2 – Determining Exchange Differences

Sinulog Jewels, Inc. a Philippine dealer of jewelries has several transactions with foreign entities. Each
transaction is denominated in the local currency unit of the country in which the foreign entity is located.

Required: For each of the following independent cases, determine the balance of the Accounts
Receivable/Accounts Payable or any Foreign Exchange Gain or Loss on December 31, 2011.

Case 1: On November 2, 2011, Sinulog purchased goods from Hong Kong at a price of 40,000 Hong Kong
dollars when the direct exchange rate was 1 Hkg$ = P4.50. The account has not been settled on
December 31, 2011, where the exchange rate has decreased to 1 Hkg$ = P4.00.

Case 2: On November 28, 2011, Sinulog sold goods to a Taiwanese company at a price of 20,000 NT dollar
when the direct exchange rate was 1 NT dollar = P1.80. The account has not been settled as of December
31, 2011, when the exchange rate has increased to 1 NT dollar = P1.90.

Case 3: On December 1, 2011, Sinulog purchased goods from Japan at a price of 60,000 yen when the
direct exchange rate was 1 yen = P.40. The account has not been settled on December 31, 2011, where
the exchange rate has decreased to 1 yen = P.45.

Case 4: On December 15, 2011, Sinulog sold goods to an Indonesian company at a price of 2,500,000
rupiah when the direct exchange rate was 1 rupiah = P.003. The account has not been settled as of
December 31, 2011, when the exchange rate has increased to 1 rupiah = P.0025.

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Problem 3 – Forward Contracts

On December 1, 2011, Pinoy Int’l, Inc. entered into a 120-day forward contract to purchase 100,000 U.S.
dollars. Pinoy Int’l, fiscal year ends on December 31. The direct exchange rates are as follows:
Forward Rate
Date Spot Rate for March 31
December 1, 2011 P40.00 P40.50
December 31, 2011 41.00 41.50
January 30, 2012 40.60 40.30
March 31, 2012 40.10

Required:

1. Assume that the forward contract was to hedge the purchase of furniture for 100,000 U.S. dollars
on December 1, 2011, with payment due on March 31, 2012, how much must be the foreign
currency transaction gain or loss that will appear in the income statement of 2012?
2. Assume that the forward contract was to hedge the agreement made on December 1, 2011, to
purchase furniture on January 30, with payment due on March 31, 2012, how much is the
transaction gain or loss from this forward contract in 2011?
3. Assume that the forward contract was for speculative purposes only, how much is the transaction
gain or loss from this forward contract in 2011?

Problem 4 - Foreign currency translation

Philip Corporation acquired 100% of the common stock of James Corporation, a US Corporation on
January 1, 2017. The following Accounts from James adjusted trial balance in dollars at December 31,
2017 as follows:

Debits:
Cash ……………………………………………………….. $ 10,000
Accounts Receivable ………………………………………… 20,000
Equipment (acquired March 1, 2016), net ……………… 12,000
Cost of sales ……………………………………………………… 4,000
Depreciation expense ………………………………… …… 800
Operating expense ……………………………………….. 2,700
Dividends ………………………………………………………… 500
$ 50,000
Credits:
Accounts payable …………………………………………… $ 8,000
Unearned rent ………………………………………….. 4,000
Capital stock ………………………………………………. 20,000
Retained earnings, January 1 …………………………… 8,000
Sales …………………………………………………………… 10,000
$ 50,000

The relevant exchange rates in Philippines pesos for US dollars are as follows:

$1 = P50 March 1, 2016 (when the common stock was issued and equipment was acquired)
$1 = P 52 average exchange rate for 2017.
$1 = P 53 at the date the dividends were declared.
$1 = P 54 at the date the dividends were paid.
$1 = P 55 at the end of 2017.

The Philippine peso equivalent of retained earnings, January 1 amounted to P392,000. Assume that all
sales, cost of sales and expenses were incurred evenly throughout the year. Assume that the functional
currency is not the currency of a hyperinflationary economy.

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Required: Compute for the following:

1) Net Income for the year:

2) Dividends
3) Retained Earnings, December 31, 2017
4) Total Assets - December 31, 2017
5) Total Liabilities - December 31, 2017
6) Translation reserve/Cumulative translation adjustments
7) Stockholders’ Equity, December 31, 2017

Problem 5 - Investment in foreign entity

Pinoy Corporation acquired 40% of the common stock of Sakura Corporation, a Japanese company, for
P1,600,000 on January 2, 2016, when the stockholders’ equity of Sakura consisted of 5,000,000 yen capital
stock and 2,000,000 yen retained earnings. The spot rate for yen on this date was P0.50. Any cost/book
value difference is patent to be amortized over a 10-year period, and Sakura’s functional currency is the
yen.

Debits Credits
Cash ¥ 1,000,000 Accum. dep’n. – equipment ¥ 2,400,000
Accounts receivable 2,000,000 Accounts payable 3,600,000
Inventories 4,000,000 Capital stock 5,000,000
Equipment 8,000,000 Retained earnings January 1 2,000,000
Cost of sales 4,000,000 Sales 10,000,000
Depreciation expense 800,000
Operating expenses 2,700,000
Dividends 500,000 _____________
¥ 23,000,000 ¥23,000,000

Relevant exchange rates for yen are as follows:

Current exchange rate December 31, 2016 P0.60

Average exchange rate 2016 0.55
Exchange rate applicable to dividends 0.54

Required: Compute the balance of Investment in Sakura Corporation as of December 31, 2016.

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QUIZZER

1. If P26.50 can be exchanged for 1US dollar, the direct and indirect exchange rate quotations are:
A. P26.50 and 1 US dollar, respectively.
B. P26.50 and 0.038 US dollar, respectively
C. P1.00 and 26.50 US dollar, respectively.
D. P1.00 and 0.038 US dollar, respectively.

2. If one Thailand Baht can be exchanged for 90 centavos of Philippine money, what fraction should be
used to compute the indirect quotation of the exchange rate expressed in Thailand Baht?
A. 1.10/1 C. 1/1.10
B. 1/.90 D. .90/1

3. Kulaspiro Company buys goods from Japayuki Company of Japan, worth 2,500,000 yen. The prevailing
exchange rate is P0.118376/Yen. Kulaspiro settles the account 20 days later when the exchange rate is
going at P0.1302136/Yen. To what extent did Kulaspiro and Japayuki gain or lose by reason of the
exchange fluctuation?

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 A. Kulaspiro: 0 Japayuki: Yen 227,273 loss
B. Kulaspiro: P29,594 gain Japayuki: 0
C. Kulaspiro: 0 Japayuki: Yen 227,273 gain
D. Kulaspiro: P29,594 loss Japayuki: 0

4. K Trading buys goods from X Inc., Hongkong, payable in Hongkong dollars at a credit term of 60
days. On June 30, 2015, the unadjusted trial balance of K reflects a payable to X representing purchase
of goods worth HK$250,000 when Hongkong dollars was going at P1/HK$. What will be K exchange
gain or loss on June 30, 2015, if the prevailing exchange rate is HK$ 0.975/P?
A. P25,000 loss C. P6,250 gain
B. P90,909 gain D. P6,410.25 loss

5. D Incorporated, a Pinoy corporation bought machine parts from K Company of U.S. on March 1, 2012
for $30,000 U.S. dollars, when the spot rate for dollars was P40.89. D’s year end was March 31, 2012
when the spot rate for U.S. dollars was P40.84. D bought 30,000 dollars and paid the invoice on April
20, 2012 when the spot rate was P40.94. How much should be shown in D’s income statement as
foreign exchange gain or loss for the years ended March 31, 2012 and 2013?
A. P0; P0 C. P1,500 gain; P3,000 loss
B. P1,500 loss; P3,000 gain D. P0; P1,500 loss

6. On September 22, 2014, Yumi Corporation purchased merchandise from an unaffiliated foreign
company for 10,000 units of the foreign company’s local currency. On that date, the spot rate was
P0.55. Yumi paid the bill in full on March 20, 2015, when the spot rate was P0.65. The spot rate was
P0.70 on December 31, 2014. What amount should Yumi report as a foreign currency transaction loss
in its income statement for the year ended December 31, 2014?
A. P0 C. P500
B. P1,000 D. P1,500

7. On November 15, 2012 Celt Inc. a Pinoy company ordered merchandise FOB shipping point from a
foreign company for 200,000 local currency units, the currency of the foreign company. The
merchandise was shipped and invoiced to Celt on December 10, 2012. Celt paid the invoice on
January 10, 2013. The spot rates for each local currency unit on the respective dates are as follows:

November 15, 2012 P4.955

December 10, 2012 4.875
December 31, 2012 4.675
January 10, 2013 4.475

In Celt’s December 31, 2012 income statement, the foreign exchange gain is:
A. P96,000 C. P80,000
B. P40,000 D. P16,000

8. On June 15, 2015, B Company purchased merchandise worth 100,000 Swiss francs from its Swiss
supplier payable within 30 days under an open account arrangement. B issued a 30-day 6% note
payable in Swill francs. On July 15, 2015, B paid the note in full. The following spot rates (P/SF) are
provided:
Buying Selling
June 15, 2015 P24.03 P24.15
July 15, 2015 24.10 24.22

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 How much did B pay its Swiss supplier on July 15, 2015?
A. P2,415,015 C. P2,434,110
B. P2,422,050 D. P2,427,075

9. Hunt Co. purchased merchandise for 300,000 local currencies from a vendor in foreign country on
November 30, 2015. Payment in local currency was due on January 30, 2016. The exchange rates to
purchase one local currency were as follows:
Nov. 30, 2015 December 31, 2015
Spot rate P1.65 P1.62
30-day rate 1.64 1.59
60-day rate 1.63 1.56

In its December 31, 2015, income statement, what amount should Hunt report as foreign exchange
transaction gain?
A. P12,000 C. P9,000
B. P6,000 D. P0

10. H Trading sells goods to D Co., Bangkok, for Baht 1,000,000. The exchange rate at this time is
P0.9875/Baht. D pays 20 days later when the prevailing exchange is P1: Baht 1. By reason of exchange
fluctuation, how much do H and D stand to gain or lose if the agreed currency of invoice is Thai Baht?
A. H: P12,500 gain D: 0 C. H: 0 D: Baht 12,500 gain
B. H: 0 D: Baht 12,500 loss D. H: P12,500 loss D: 0

11. On October 1, 2014, R International Inc. sold merchandise to a US firm for US$25,000. Terms of sale
require payment in US dollars on March 1, 2015. On October 1, 2014, the spot exchange rate was P27
per US$. On December 31, 2014, R’s year-end spot rate was P26 per US$, but the rate increased to
P29 per US$ by March 1, 2015 when payment was received. How much should R report as foreign
exchange gain or loss in its 2015 income statement?
A. P25,000 loss C. P75,000 gain
B. P0 D. P50,000 gain

12. On September 1, 2015, Bain Corporation received an order for equipment from a foreign customer for
300,000 local currency units (LCU), when the Phil. peso equivalent was P96,000. Bain shipped the
equipment on October 15, 2015 and billed the customer for 300,000 LCU when the Phil. peso
equivalent was P100,000. Bain received the customer’s remittance in full in November 16, 2015 and
sold the 300,000 LCU for P105,000. In its income statement for the year ended December 31, 2015,
Bain should report a foreign exchange gain of:
A. P0 C. P4,000
B. P5,000 D. P9,000

13. The accounts receivable of Bata Corporation, an export company, include the following items
denominated in foreign currency at Dec 31, 2012, before adjusting entries are made as follows:

Foreign Currency Exchange Rate on Balance per Books

Units Transaction Date in Philippine pesos
U.S. dollars 50,000 P40.40 P2,020,000
Thailand bath 200,000 1.08 216,000
Taiwan dollars 100,000 1.29 129,000
Japanese yen 10,000,000 0.3955 3,955,000

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 On December 31, 2012, the current exchange rate for U.S. dollars, Thailand baht, Taiwan dollars, and
Japanese yen were P40.72, P1.07, P1.32, and P0.3677, respectively. Calculate the exchange gain or loss
that should be included in Bata’s 2012 income statement.
A. P261,000 gain C. P261,000 loss
B. P280,000 loss D. P0

14. On September 1, 2015, Sarao Corporation received an order for jeepneys from a British customer for
30,000 pounds, when the peso equivalent was P1,900,000. Sarao shipped the jeepneys on October 15,
2015 and billed the customer for 30,000 pounds when the peso equivalent was P1,961,000. Sarao
received the customer’s remittance in full in November 16, 2015 and sold the 30,000 pounds for
P1,980,000. In its income statement for the year ended December 31, 2015, Sarao should report a
foreign exchange gain of:
A. P0 C. P61,000
B. P19,000 D. P80,000

Questions 15 and 16 are based on the following:

The accounts of Lucas International, a Filipino Corporation, show P8,130,000 accounts receivable and
P3,890,000 accounts payable at December 31, 2011, before adjusting entries are made. An analysis of the
balances reveals the following:

Accounts receivable
Receivable denominated in Phil. pesos P2,850,000
Receivable denominated in 57,000 German marks 1,180,000
Receivable denominated in 61,000 British pounds 4,100,000
Total P8,130,000
Accounts payable
Payable denominated in Phil. pesos P 685,000
Payable denominated in 25,500 Canadian dollars 760,000
Payable denominated in 36,000 British pounds 2,445,000
Total P3,890,000

Current exchange rates for German marks, British pounds, and Canadian dollars at December 31, 2011 are
P20.604; P66.943; and P31.038, respectively.

15. The net exchange gain or loss that should be reflected in Lucas’ income statement for 2011 from
year-end exchange adjustments must be:
A. P88,570 loss C. P88,570 gain
B. P18,466 loss D. P18,466 gain

16. The amounts at which the accounts receivable should be included in Lucas’ December 31, 2011
balance sheet must be:
A. P8,107,951 C. P4,221,534
B. P3,886,417 D. P5,257,951

17. A foreign loan amounting to $1,200,000 was obtained by Camille Co. to finance the acquisition of
certain fixed assets. As at year-end, 50% of the loan remained unpaid, and a 10% year-end
devaluation has taken place. The foreign loan payable is properly stated in the balance sheet at
P17,820,000. What was the exchange rate at the inception of the loan?
A. P29.70 = $1.00 C. P32.67 = $1.00
B. P33.00 = $1.00 D. P27.00 = $1.00

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18. On July 1, 2012 S Company lent P120,000 to a foreign supplier, evidenced by an interest bearing note
due on July 1, 2013. The note is denominated in the currency of the borrower and was equivalent to
840,000 local currency on the loan date. The note principal was appropriately included at P140,000 in
the receivable section of S December 31, 2012 balance sheet. The note principal was repaid to S on
July 1, 2013 due date when the exchange rate was 8 LCU to P1. In its income statement for the year
ended Dec. 31, 2013, what amount should S include as a foreign currency transaction gain or loss?
A. P0 C. P15,000 loss
B. P15,000 gain D. P35,000 loss

19. On July 1, 2014, Clark Company borrowed 1,680,000 local currency units from a foreign lender,
evidenced by an interest-bearing note due on July 1, 2015, which is denominated in the currency of
the lender. The Phil. peso equivalent of the note principal was as follows:

July 1, 2014 (date borrowed) P210,000

December 31, 2014 (Clark’s year-end) 240,000
July 1, 2015 (date paid) 280,000

In its income statement for 2015, what amount should Clark include as a foreign exchange gain or
loss?
A. P70,000 gain C. P70,000 loss
B. P40,000 gain D. P40,000 loss

20. Greta Corporation had the following foreign currency transactions during 2011:
• Merchandise was purchased from a foreign supplier on January 20, 2011, for Phil. Peso equivalent
of P600,000. The invoice was paid on April 20, 2001, at the Phil. Peso equivalent of P680,000.
• On September 1, 2011, Greta borrowed the Phil. Peso equivalent of P3,000,000 evidenced by a
note that was payable in the lender’s local currency on September 1, 2011. On December 31, 2011,
the Phil. Peso equivalents of the principal amount and accrued interest were P3,200,000 and P120,000,
respectively. Interest on the note is 10 percent per annum.

In Greta’s 2011 income statement, what amount should be included as a foreign exchange loss?
A. P40,000 C. P200,000
B. P220,000 D. P300,000

21. Hizon Holdings, Inc. is the Parent company of a group of companies but also does its own trading. It
bought a fixed asset for $36,000 on November 1, 2012 when the exchange rate was P33.00 = $1.00.
At December 31, 2012, the company’s year-end, the supplier of the fixed asset has not been paid and
the exchange rate at the time was P38.00 = $1.00. The company has not taken out a forward
exchange contract for this payment to hedge against adverse exchange rate movements.

On the balance sheet of Hizon Holdings, Inc., what will be the year-end values for the fixed asset and
the creditor who was unpaid at year-end?
Fixed asset Creditor Fixed asset Creditor
A. P1,368,000 P1,188,000 C. P1,188,000 P1,368,000
B. P1,368,000 P1,368,000 D. P1,188,000 P1,188,000

22. On June 10, 2013, Renan Company enters into a couple of forward contracts, each for US$10,000
deliverable in 60 days. The relevant exchange rates follow:
Spot rate Forward Rate
June 10, 2013 P26.40/US$ P27.00/US$
June 30, 2013 (fiscal year ends) P29.40/US$ P27.90/US$

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 Forward contract 1 will hedge on the inventory purchases made in May 9, 2013 but payable three
months later. Forward contract 2 was entered into because of the perceptible increase in peso-dollar
rate leading to the Atlanta games, albeit none of Renan’s directors or officers are attending. How
much must be the foreign currency gain or (loss) on forward contract 2?
A. (P5,040) C. P12,075
B. (P7,035) D. P9,000

23. Pinoy Importers purchased carved jadeite, the rarer variety of jade, from China for 100,000 yuan on
November 1, 2013. Payment is due on January 30, 2014. On November 1, 2013, the company also
entered into a 90-day forward contract to purchase 100,000 yuan. The rates were as follows:

Date Spot rate Forward rate

November 1, 2013 P5.65 P6.00 (90-day)
December 31, 2013 5.50 5.85 (30-day)
January 30, 2014 5.40

The foreign exchange gain or loss on the forward contract for 2013 must be:
A. P0 C. P15,000
B. P10,000 D. P25,000

24. The following information pertains to F Company’s sale of 10,000 foreign currency units under a
forward contract dated November 1, 2013, for delivery on January 31, 2014:
Nov. 1, 2013 Dec. 31, 2013
Spot rate P8.00 P8.30
30-day future rates 7.90 8.20
90-day future rates 7.80 8.10

F entered into the forward contract in order to speculate in the foreign currency. In F’s income
statement for the year ended December 31, 2013, what amount of loss should be reported from this
forward contract?
A. P4,000 C. P2,000
B. P3,000 D. P0

Questions 25 through 27 are based on the following:

On December 1, 2011, Micro World, Inc. entered into 120-day forward contract to purchase 100,000
dollars. Micro World’s fiscal year ends on December 31. The direct exchange rates were as follows:

Date Spot rate Forward rate for March 31

December 1, 2011 P50.00 P50.90
December 31, 2011 51.00 51.20
January 30, 2012 50.80 50.50
March 31, 2012 50.20

25. Assume that the forward contract was to hedge the purchase of furniture for 100,000 dollars on
December 1, 2011, with payment due on March 31, 2012, how much gain or loss on foreign currency
transaction must appear in the income statement of 2011?
A. P70,000 C. P30,000
B. P0 D. P100,000

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26. Assume that the forward contract was to hedge the agreement made on December 1, 2011, to
purchase furniture with payment due on March 31, 2012, how much gain or loss on foreign currency
transaction must appear in the income statement of 2011?
A. P0 C. P30,000
B. P70,000 D. P100,000

27. Assume that the forward contract was for speculative purposes only, how much gain or loss on
foreign currency transaction must appear in the income statement of 2011?
A. P30,000 C. P0
B. P70,000 D. P100,000

28. HONEY Co. purchased merchandise for 300,000 local currencies from a vendor in foreign country on
November 30, 2015. Payment in local currency was due on January 30, 2016. The exchange rates to
purchase one local currency were as follows:

Nov. 30, 2015 December 31, 2015

Spot rate P1.65 P1.62
30-day rate 1.64 1.59
60-day rate 1.63 1.56

In its December 31, 2015, income statement, what amount should HONEY report as foreign exchange
transaction gain?
A. P12,000 C. P 9,000
B. P 6,000 D. P 0

Use the following information for numbers 29 and 30:

On July 1, 2012, WHY Company purchased 1,000 shares of ME Co. common stock at a cost of P150 per
share and classified it as an available for sale security. On October 1, WHY Company purchased an at-the-
money put option on ME at a premium of P35,000 with a strike price of P250 per share and an expiration
date of April 2013.

WHY Company specifies that only the intrinsic value of the option is to be used to measure effectiveness.
Thus, the time value decreases of the put will be charged against the income of the period, and not offset
against the change in value of the underlying hedge item. The following shows the fair value of the
hedged item and the hedging instrument:

10/1/12 12/31/12 3/3/13 4/17/13

Hedged item:
ME share price P 250 P 220 P 200 P 200
Number of shares 1,000 1,000 1,000 1,000

Hedging instrument
Put option (1,000 shares):
Intrinsic value P 0 P30,000 P50,000 P50,000
Time value 35,000 21,500 5,300 0
Fair value P35,000 P51,500 P55,300 P50,000

29. On December 31, 2012, how much is the value of the put option to be presented on the statement of
financial position?
A. P 25,000 C. P 30,000
B. P 35,000 D. P 51,500

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30. What is the cumulative effect on retained earnings of the hedge and sale?
A. P 50,000 C. P 55,000
B. P 60,000 D. P 65,000

31. On June 30 of the current year, Ester Company entered into a firm commitment to purchase
equipment from Nagasaki Company for 80,000,000 yen on August 31. The exchange rate on June 30
is 100 yen = $1. To reduce the exchange rate risk that could increase the cost of the equipment in US
dollars, the entity paid $12,000 for a call option contract. The contract gave the entity the option to
purchase 80,000,000 yen at an exchange rate of 100 yen = $1 on August 31. On August 31, the
exchange rate is 93 yen = $1. What amount in US dollars did the entity save by purchasing the call
option?
A. $12,000 C. $60,215
B. $48,215 D. $ 0

32. Richeway Corp. had a realized foreign exchange loss of P15,000 for the year ended December 31,
2007 and must also determine whether the following items will require year-end adjustment:
 Richeway had an P8,000 loss resulting from the translation of the accounts of its wholly owned
foreign subsidiary for the year ended December 31, 2007.
 Richeway had an account payable to an unrelated foreign supplier payable in the supplier’s local
currency. The Philippine peso equivalent of the payable was P 64,000 on the October 1, 2007
invoice date, and it was P 60,000 on December 31, 2007. The invoice is payable on January 30,
2008.
In Richeway’s 2007 consolidated income statement, what amount should be included as foreign
exchange loss?
A. P11,000 C. P 15,000
B. P 19,000 D. P 23,000

33. Philline Inc., had a credit translation adjustment of P30,000 for the year ended December 31, 2007.
The functional currency of Philline’s subsidiary is the currency of the country in which it is located.
Additionally, Philline had a receivable from a foreign customer payable in the local currency of the
customer. On December 31, 2006, this receivable for 200,000 local currency units (LCU) was correctly
included in Philline’s balance sheet at P110,000. When the receivable was collected on February 15,
2007, the Philippine peso equivalent was P120,000. In Philline’s 2007 consolidated income statement,
how much should be reported as foreign exchange gain?
A. P0 C. P 10,000
B. P 30,000 D. P 40,000

34. Certain balance sheet accounts of a foreign subsidiary of Lehcar, Inc. at December 31, 2007, have
been translated into Philippine pesos as follows:

Translated at
Current rates Historical rates
Note receivable, long-term P 240,000 P 200,000
Prepaid rent 85,000 80,000
Patent 150,000 170,000
P 475,000 P 450,000

The subsidiary’s functional currency is not the currency of a hyperinflationary economy. What total
amount should be included in Lehcar’s December 31, 2007 consolidated balance sheet for the above
accounts?
A. P 450,000 C. P 455,000
B. P 475,000 D. P 495,000

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35. A foreign subsidiary of Bonanza Corporation has certain balance sheet accounts at December 31,
2007. Information relating to these accounts in Philippine pesos is as follows:

Translated at
Current rates Historical rates
Marketable securities, at cost P 65,000 P 75,000
Inventories, at average cost 500,000 550,000
Patents 80,000 85,000
P 645,000 P 710,000

What total amount should be included in Bonanza’s December 31, 2007, consolidated balance sheet
for the above accounts if the subsidiary’s functional currency is not the currency of a hyperinflationary
economy (Closing Rate Method)?
A. P 710,000 C. P 700,000
B. P 660,000 D. P 645,000

36. Certain balance sheet accounts in a foreign subsidiary of Freebies Company at December 31, 2007,
terms of U.S. Dollars:

Accounts receivable, current $ 10,000

Accounts receivable, long-term 15,000
Prepaid interest 5,000
Building (acquired in 2003) 50,000

The general price index for:

2003 100
January 1, 2007 150
Average price index for 2007 400
December 31, 2007 425

The relevant exchange rates for every 1US dollars were as follows:
2003 P 45
January 1, 2007 52
Average rate for the year 53
December 31, 2007 55

What total should be included in Freebies balance sheet at December 31, 2007 for the above items if
the subsidiary’s functional currency is the currency of a hyperinflationary economy?
A. P 4,160,000 C. P 4,250,000
B. P 4,400,000 D. P 13,337,500

37. A wholly owned subsidiary of Wizzard Inc. has certain expense accounts for the year ended December
31, 2007, stated in local currency units (LCU) as follows:
LCU
Depreciation of equipment (acquired 1/1/2005) 120,000
Provision for doubtful accounts 80,000
Rent 200,000
The exchange rates at various dates are as follows:
Peso equivalent of 1 LCU
December 31, 2007 P .40
Average for year ended 12/31/2007 .44
January 1, 2005 .50

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 The subsidiary’s functional currency is not the currency of the hyperinflationary economy (Net
Investment Method).

The charges to the expense accounts occurred approximately evenly during the year. What total peso
amount should be included in Wizzard’s 2007 consolidated income statement to reflect these
expenses?
A. P 160,000 C. P 168,000
B. P 176,000 D. P 183,200

38. A wholly-owned foreign subsidiary of a Philippine Company had selected expense accounts stated in
local currency units (LGU’s) for the fiscal year ended November 30, 2007 as follows:

Bad Debts expense 60,000 LCU

Amortization of patent 40,000
Rent expense 100,000

The exchange rates for LCU’s at various dates were as follows:

November 30, 2007 0.20
Average for fiscal year ended, November 30, 200 7 0.22
December 31, 2007 0.25

If the subsidiary’s functional currency is not the currency of a hyperinflationary economy (Current Rate
Method), what is the peso amount to be included in the translated income statement of the Philippine
Company’s foreign subsidiary for the fiscal year ended November 30, 2007 for the foregoing expense
accounts, if the changes to expense were occurred evenly were occurred evenly throughout fiscal
year.
A. P 44,000 C. P 40,000
B. P 42,000 D. P45,200

39. A foreign subsidiary of a Philippine Company had selected expense accounts stated in local currency
units (LCU) for the year ended December 31, 2007:

Depreciation expense (related asset acquired

May 15, 2005) ………………………………. 5,000 LCU
Doubtful account expense (related asset recorded
June 1, 2007) ………………………………… 1,000
Salary expense (occurred approximately even
during the year)………………………………. 10,000
Insurance expense (paid November 16, 2007) ………. 2,000
Utilities expense (evenly throughout the year) ……… 6,000

The exchange rates for LCU’s at various dates were as follows:

May 15, 2005 ……………………………………………. P 20.00

June 1, 2007 ……………………………………………… 28.00
November 16, 2007 ……………………………………… 28.50
December 31, 2007………………………………………. 30.00
Average for the year ended ..…………………………… 29.00
Average for the 4th quarter ………………………………. 27.00

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 The subsidiary’s functional currency is the currency of a hyperinflationary economy. What total peso
amount should be included in the December 31, 2007 consolidated income statement to reflect these
expenses?
A. P 720,000 C. P 696,000
B. P 649,000 D. P 648,000

40. Using the same information from number 39, assume that the subsidiary’s functional currency is the
currency of a hyperinflationary economy and expenses were occurred evenly throughout the year.

What total peso amount should be included in the December 31, 2007 consolidated income
statement to reflect these expenses?
A. P 720,000 C. P 696,000
B. P 649,000 D. P 648,000

41. The subsidiary in Japan of Manila Company, a Philippine enterprise has plant assets with a cost of
3,600,000 yen on December 31, 2007. Of this amount, plant assets with a cost of 2,400,000 yen were
acquired in 2005 when the exchange rate was 1 yen = P0.625; and plant assets with a cost of
1,200,000 yen were acquired in 2006 when the exchange rate was 1 yen = P0.556. The exchange rate
on December 31, 2007 was 1 yen = P.0500, and the weighted average rate for 2007 was 1 yen=P0521.
The Japanese subsidiary depreciated plant assets by the straight line method over a 10 years
economic life with no residual value.

If the subsidiary’s functional currency is the currency of a hyperinflationary economy, what is the 2007
depreciation expense for the Japanese subsidiary in Philippine peso, for the translated income
statement?
A. P 216,720 C. P 187,560
B. P 180,000 D. P 66,720

42. On January 1, 2007, Katie Company formed a foreign branch. The branch purchased merchandise at a
cost of 720,000 local currency units (LCU) on February 15, 2007. The purchase price was equivalent to
P180,000 on this date. The branch’s inventory at December 31, 2007 consisted solely of merchandise
purchased on February 15, 2007, and amounted to 240,000 LCU. The exchange rate was 6 LCU to P1
on December 31, 2007 and the average rate of exchange was 5 LCU to P1 for 2007.

In Katie’s December 31, 2007 balance sheet, the branch inventory balance of 240,000 LCU should be
translated into Philippine pesos at (using closing rate method):
A. P 40,000 C. P 48,000
B. P 60,000 D. P 84,000

43. Property was purchased on December 31, 2010 for 20 million baht. The general price index in the
country was 60.1 on that date. On December 31, 2012, the general price index had risen to 240.4. If
the entity operates in a hyperinflationary economy, what would be the carrying amount in the
financial statements of the property after restatement?
A. 20 million baht C. 80 million baht
B. 1,200.2 million baht D. 4.808 million baht

44. PERFECT Corporation, a Philippine company starts a subsidiary in New Zealand, which had the NZ
Dollar as its functional currency. On January 1, 2014, PERFECT acquired all of the subsidiary’s common
stock for 20,000 NZ Dollar. On April 1, 2014, the subsidiary purchased inventory for 20,000 NZ Dollar,
with payment made on May 1, 2014. This inventory is sold on August 1, 2014 for 30,000 NZ Dollar,
which is collected on October 1, 2014. Currency exchange rates 1 NZ Dollar for 2014 as follows:

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 January 1 P 15
April 1 P 17
May 1 P 18
August 1 P 19
October 1 P 20
December 31 p 21

What Foreign Currency Translation Adjustment will be reported in preparing consolidated financial
statements on December 31, 2014?
A. P 140,000 C. P 180,000
B. P 40,000 D. P 60,000

45. For 2014, a Korean subsidiary reported the following cost of sales:

Beginning inventory (FIFO) 40,000 Won

Purchases 300,000 Won
Ending inventory (FIFO) (30,000) Won

The exchange rate when the ending inventory items were acquired was P0.0510. The exchange rate
for the Korean Won was 0.0490 on January 1 and 0.0540 on December 31. The average rate for the
year was 0.0520.

What is the cost of sales in the Philippine peso that will appear in the translated income statement?
A. P 16,030 C. P 16,120
B. P 16,740 D. P 15,940

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