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CHAPTER 11

INTERNATIONAL ACCOUNTING STANDARDS; ACCOUNTING


FOR FOREIGN CURRENCY TRANSACTIONS

The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 11–1 Caribbean Company (25 minutes, medium)


Journal entries for 60-day forward contract under two different assumptions as to purpose of
contract.
Pr. 11–2 U.S. Company and Spheric Company (30 minutes, medium)
Two unrelated parts: Journal entries for purchase of merchandise from a foreign supplier and
sale of the merchandise to a foreign customer; journal entries for forward contract not
designated as a hedge.
Pr. 11–3 Zonal Corporation and Iberia Company (30 minutes, medium)
Two unrelated parts: Journal entries for sale of merchandise to a foreign customer; entries for
promissory note received for sale to foreign customer.
Pr. 11–4 Imex Company (30 minutes, medium)
Journal entries for imports and exports and related translation of foreign currencies.
Computation of foreign currency transaction gains and losses from settlement of foreign trade
transactions and from end-of-period adjustments of trade accounts payable to foreign
suppliers.
Pr. 11–5 Impo Company (30 minutes, medium)
Journal entries for acquisition of machine from foreign supplier, loan from foreign bank to pay
for machine, and depreciation of machine.
Pr. 11–6 Allison Company (30 minutes, medium)
Adjusting entries to correct accounting for two types of forward contracts.

ANSWERS TO REVIEW QUESTIONS


1. The U.S. term for jointly controlled entity is influenced investee.
2. International Financial Reporting Standard 3 requires purchase accounting for all business
combinations and periodic testing of goodwill for impairment.
3. In IAS 27, “Consolidated Financial Statements . . . ,” the IAS adopted neither the parent company
concept nor the economic unit concept of consolidated financial statements.
4. a. Exchange rate is an amount of U.S. dollars required to acquire one unit of a foreign currency
on a specific date.
b. Forward rate is an exchange rate applicable to foreign currency transactions that are to be
consummated in the future.
c. Selling spot rate is the exchange rate at which a foreign currency trader will sell a foreign
currency “on the spot.”
d. Spot rate is the exchange rate applicable to current exchanges of money.

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Solutions Manual, Chapter 11 97
5. The U.S. enterprise would have to exchange $215 (¥50,000 x $0.0043 selling spot rate = $215) for
a ¥50,000 draft to settle the trade account payable to the Japanese supplier.
6. A multinational enterprise is a business enterprise that carries on operations in more than one
nation, through a network of branches, divisions, and subsidiaries.
7. The U.S. enterprise would credit $9,600 (P80,000 x $0.12 selling rate = $9,600) to the Trade
Accounts Payable ledger account for a P80,000 purchase from the Philippine exporter.
8. The position of the Financial Accounting Standards Board on the recording of foreign currency
transaction gains and losses is that they should be recognized when the exchange rate changes, in
order to record the gains or losses in the period of the eventthe exchange rate changerather
than on the date the account balance is settled.
9. Proponents of the one-transaction perspective maintain that foreign currency transaction gains or
losses resulting from foreign currency exchange rate fluctuations should be applied to adjust the
cost of merchandise acquired or sold in a foreign trade transaction. In their view, the foreign trade
transaction and the acquisition of foreign currency as a result of the transaction are a single
economic event.
10. Arguments advanced in support of the two-transaction perspective for foreign currency
transaction gains and losses are as follows:
(1) A foreign trade transaction is composed of two separate transactions: One is the purchase or
sale of the merchandise; the other is the acquisition or disposal of the foreign currency paid or
acquired in settlement of the purchase or sale.
(2) Assumption of the risk of a foreign currency transaction gain or loss, rather than hedging the
risk, is a financing-type activity, not a merchandising decision.
11. A forward contract is an agreement to exchange currencies of different countries on a specified
future date at the forward rate in effect when the contract was made.
12. A U.S. multinational enterprise may hedge against the risk of fluctuations in exchange rates for
foreign currencies by acquiring forward contracts for the foreign currencies at the forward rates for
delivery on specified future dates.
13. Market risk is the risk of a decline in value or an increase in onerousness of a financial instrument
resulting from future changes in market prices.

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98 Modern Advanced Accounting, 10/e
SOLUTIONS TO EXERCISES
Ex. 11–1 1. b 7. d
2. b ($1.00 ÷ $1.55 = £0.65) 8. a
3. a ($1.00 ÷ 1.9672 = £0.5083) 9. c
4. a 10. c
5. a (LCU100,000 x $0.15 = $15,000)
6. c
Ex. 11–2 Journal entries for L.A. Company:
2005
June 26 Inventories (£10,000 x $1.67) 16,700
Trade Accounts Payable 16,700
30 Foreign Currency Transaction Losses [£10,000 x ($1.68 –
$1.67)] 100
Trade Accounts Payable 100
July 26 Trade Accounts Payable 16,800
Cash (£10,000 x $1.66) 16,600
Foreign Currency Transaction Gains 200
Ex. 11–3 Journal entries for Walker, Inc.:
2005
Sept. 1 Machinery (C100,000 x $1.070) 107,000
Trade Accounts Payable 107,000
To record acquisition of machine from Pfau Company for
C100,000, translated at selling spot rate.

Oct. 25 Trade Accounts Payable 107,000


Cash (C100,000 x $1.065) 106,500
Foreign Currency Transaction Gains 500
To record payment of C100,000 to Pfau Company and
recognition of transaction gain.
Ex. 11–4 Journal entries for U.S. Company:
2005
Nov. 18 Trade Accounts Receivable (C1,500 x $1.055) 1,583
Sales 1,583
18 Cost of Goods Sold 1,000
Inventories 1,000
30 Trade Accounts Receivable (C1,500 x ($1.060 – $1.055)] 8
Foreign Currency Transaction Gains 8
Dec. 18 Cash (C1,500 x $1.050) 1,575
Foreign Currency Transaction Losses 16
Trade Accounts Receivable ($1,583 + $8) 1,591

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Solutions Manual, Chapter 11 99
Ex. 11–5 Journal entries for Lincoln Company:
2005
Mar. 25 Trade Accounts Receivable (Kr2,000,000 x $0.19) 380,000
Sales 380,000
25 Cost of Goods Sold 260,000
Inventories 260,000
31 Trade Accounts Receivable [Kr2,000,000 x ($0.20 – $0.19)] 20,000
Foreign Currency Transaction Gains 20,000
Apr. 24 Cash (Kr2,000,000 x $0.18) 360,000
Foreign Currency Transaction Losses 40,000
Trade Accounts Receivable ($380,000 + $20,000) 400,000
Ex. 11–6 Journal entries for Yankee Company:
2005
Mar. 1 Notes receivable (LCU600,000 x $0.30) 180,000
Sales 180,000
To record sale of merchandise for 60-day, 18%
promissory note.
Apr. 30 Cash (LCU618,000 x $0.33) 203,940
Notes Receivable 180,000
60
Interest Revenue ($180,000 x 0.18 x 360 ) 5,400
Foreign Currency Transaction Gains
[LCU618,000 x ($0.33 – $0.30)] 18,540
To record payment of note receivable and recognition of
interest revenue and transaction gain.
Ex. 11–7 Correcting entry for Transglobal Company, Nov. 19, 2005:
Foreign Currency Transaction Losses 3,000
Cost of Goods Sold 1,000
Inventories 2,000
To correct accounting for foreign currency transaction loss on
settlement of liability to French supplier.
Ex. 11–8 Journal entries for Kingston Company:
2005
Mar. 31 Investment in Forward Contract 25,000
Forward Contract Payable 25,000
To record forward contract for LCU100,000, at forward
rate of LCU1 = $0.25 (LCU100,000 x $0.25 = $25,000).
Apr. 30 Investment in LCUs (LCU100,000 x $0.22) 22,000
Forward Contract Payable 25,000
Foreign Currency Transaction Losses 3,000
Cash 25,000
Investment in Forward Contract 25,000
To recognize settlement of forward contract, fair value of
investment in LUCs, and transaction loss as follows:
Carrying amount of contract Mar. 31 $25,000
Fair value of contract Apr. 30 (LCU100,000 x $0.22) 22,000
Transaction loss $ 3,000
Ex. 11–9 Journal entries for Concordia Company:
2005
Aug. 6 Inventories (C80,000 x $1.08) 86,400
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100 Modern Advanced Accounting, 10/e
Trade Accounts Payable 86,400
To record purchase on 30-day open account from Belgian
supplier for C80,000, translated at selling spot rate of
C1= $1.08 (C80,000 x $1.08 = $86,400).

6 Investment in Forward Contract 88,000


Forward Contract Payable 88,000
To record forward contract for C80,000 at forward rate
of C1 = $1.10 (C80,000 x $1.10 = $88,000).
Sept. 5 Foreign Currency Transaction Losses 800
Inventories 800
Investment in Forward Contract 800
Foreign Currency Transaction Gains 800
To recognize fair value of forward contract investment,
resultant transaction loss, increase in fair value of
inventories, and resultant transaction gain, as follows:
Forward price of contract:
Aug. 6 $88,000
Sept. 5 (C80,000 x $1.09) 87,200
Transaction loss and gain $ 800
5 Investment in Euros (C80,000 x $1.09) 87,200
Forward Contract Payable 88,000
Investment in Forward Contract ($88,000 – $800) 87,200
Cash 88,000
To record settlement of forward contract and fair value of
investment in euros.
5 Trade Accounts Payable 86,400
Inventories 800
Investment in Euros 87,200
To record payment of Belgian supplier; inventories
acquired now carried at the U.S. dollar amount of the
forward contract ($86,400 + $800 + $800 = $88,000).

CASES
Case 11–1 Arguments in favor of the FASB’s continuing issuance of Statements include the unique
features of many accounting issues in the United States, such as financial instruments
(including derivative instruments) valuation and disclosure, accounting for stock compensation
plans, and accounting for postemployment benefits other than pensions, that necessitate action
by the FASB; and the past slow progress of the IASB, as evidenced by its paucity of output as
compared with that of the FASB. Arguments in favor of the FASB’s serving as a collaborator
in the convergence project with the IASB center on the more efficient use of scarce resources
available to accounting standard setters: Focusing efforts in one international standard-setting
organization, rather than in several national organizations, would assure more rapid
achievement of uniform international accounting standards.
Case 11–2 Supporters of the SEC’s participation in the work of IOSCO argue that enhancing the ability
of multinational enterprises to have their securities traded on international stock exchanges will
facilitate international movements of capital and increase alternative investments available to
the world’s investors. Those who oppose the SEC’s possible acquiescence to the application of
International Accounting Standards in financial reports of foreign enterprises wanting to
have their securities traded in the United States point to the potential danger of erosion of U.S.
accounting standards in areas that appear superior to International Accounting Standards. In
the view of opponents, the sanctioning of alternatives in some International Accounting
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Solutions Manual, Chapter 11 101
Standards will decrease comparability among the financial reports of U.S. enterprises and
foreign enterprises because the trend in U.S. accounting standard setting has been to limit
significantly alternative accounting principles for a specific business transaction or event.
Case 11–3 Students’ solutions to this case should be evaluated on the extent to which they address the
numerous qualitative and quantitative disclosures required for derivative instruments by
paragraphs 44 and 45 of FASB Statement No. 133, “Accounting for Derivative Instruments
and Hedging Activities.” Perhaps selected students might make a Powerpoint-enhanced oral
presentation of their solution.

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102 Modern Advanced Accounting, 10/e
25 Minutes, Medium
Caribbean Company Pr. 11–1
Caribbean Company
Journal Entries
a.
20 05
Aug 1 Investment in Forward Contract (£50,000 x $1.95) 9 7 5 0 0
Forward Contract Payable 9 7 5 0 0

31 Foreign Currency Transaction Losses [$97,500 –


(£50,000 x $1.93) – ($1,000 x 0.06 x 30/360)] 9 9 5
Investment in Forward Contract 9 9 5

Sept 30 Investment in Pounds (£50,000 x $1.92) 9 6 0 0 0


Forward Contract Payable 9 7 5 0 0
Foreign Currency Transaction Losses
[($97,500 – $995) – $96,000] 5 0 5
Cash 9 7 5 0 0
Investment in Forward Contract ($97,500 –
$995) 9 6 5 0 5

b.
20 05
Aug 1 Investment in Forward Contract 9 7 5 0 0
Forward Contract Payable 9 7 5 0 0

31 Foreign Currency Transaction Losses 9 9 5


Firm Commitment for Inventories 9 9 5
Investment in Forward Contract 9 9 5
Foreign Currency Transaction Gains 9 9 5

Sept 30 Foreign Currency Transaction Losses 5 0 5


Firm Commitment for Inventories 5 0 5
Investment in Forward Contract 5 0 5
Foreign Currency Transaction Gains 5 0 5

30 Investment in Pounds 9 6 0 0 0
Forward Contract Payable 9 7 5 0 0
Investment in Forward Contract
($97,500 – $995 – $505) 9 6 0 0 0
Cash 9 7 5 0 0

30 Inventories ($96,000 + $995 + $505) 9 7 5 0 0


Investment in Pounds 9 6 0 0 0
Firm Commitment for Inventories
($995 + $505) 1 5 0 0

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Solutions Manual, Chapter 11 103
U.S. Company and Spheric Company Pr. 11–2
a. U.S. Company
Journal Entries

20 05
June 27 Inventories (C100,000 x $1.05) 1 0 5 0 0 0
Trade Accounts Payable 1 0 5 0 0 0

27 Trade Accounts Receivable ($C180,000 x $0.84) 1 5 1 2 0 0


Sales 1 5 1 2 0 0

27 Cost of Goods Sold 1 0 5 0 0 0


Inventories 1 0 5 0 0 0

July 27 Trade Accounts Payable 1 0 5 0 0 0


Foreign Currency Transaction Losses 1 0 0 0
Cash (C100,000 x $1.06) 1 0 6 0 0 0

27 Cash ($C180,000 x $0.85) 1 5 3 0 0 0


Trade Accounts Receivable 1 5 1 2 0 0
Foreign Currency Transaction Gains 1 8 0 0

b. Spheric Company
Journal Entries

20 05
Mar 31 Foreign Currency Transaction Losses [$35,000 –
(S$100,000 x $0.33) – ($2,000 x 0.06 x 30/360)] 1 9 9 0
Investment in Forward Contract 1 9 9 0

Apr 30 Investment in Singapore Dollars (S$100,000 x $0.31) 3 1 0 0 0


Forward Contract Payable 3 5 0 0 0
Forward Currency Transaction Losses
[($35,000 – $1,990) – $31,000] 2 0 1 0
Cash 3 5 0 0 0
Investment in Forward Contract ($35,000 –
$1,990) 3 3 0 1 0

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104 Modern Advanced Accounting, 10/e
30 Minutes, Medium
Zonal Corporation and Iberia Company Pr. 11–3
a. Zonal Corporation
Journal Entries

20 05
Nov 19 Trade Accounts Receivable (£38,000 x $1.45) 5 5 1 0 0
Sales 5 5 1 0 0

19 Cost of Goods Sold 4 0 0 0 0


Inventories 4 0 0 0 0

30 Foreign Currency Transaction Losses[(£38,000 x


($1.45 – $1.44)] 3 8 0
Trade Accounts Receivable 3 8 0

Dec 19 Cash (£38,000 x $1.43) 5 4 3 4 0


Foreign Currency Transaction Losses [£38,000 x
($1.44 – $1.43)] 3 8 0
Trade Accounts Receivable 5 4 7 2 0

b. Iberia Company
Journal Entries

20 05
Jun 30 Notes Receivable (LCU7,500 000 x $0.014) 1 0 5 0 0 0
Sales 1 0 5 0 0 0

30 Cost of Goods Sold 7 5 0 0 0


Inventories 7 5 0 0 0

Aug 29 Cash (LCU7,650,000 x $0.016) 1 2 2 4 0 0


Notes Receivable 1 0 5 0 0 0
Interest Revenue ($105,000 x 0.12 x 60/360) 2 1 0 0
Foreign Currency Transaction Gains
[LCU7,650,000 x ($0.016 – $0.014)] 1 5 3 0 0

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Solutions Manual, Chapter 11 105
30 Minutes, Medium
Imex Company Pr. 11–4
Imex Company
Journal Entries
a.
20 05
Mar 6 Inventories (B100,000 x $0.007) 7 0 0
Trade Accounts Payable 7 0 0

6 Investment in Forward Contract (B100,000 x $0.008) 8 0 0


Forward Contract Payable 8 0 0

18 Inventories (C75,000 x $1.06) 7 9 5 0 0


Trade Accounts Payable 7 9 5 0 0

25 Trade Accounts Receivable (Sfr50,000 x $0.52) 2 6 0 0 0


Sales 2 6 0 0 0

25 Cost of Goods Sold 1 5 0 0 0


Inventories 1 5 0 0 0

Apr 4 Inventories (C150,000 x $1.07) 1 6 0 5 0 0


Trade Accounts Payable 1 6 0 5 0 0

5 Investment in Bolivars (B100,000 x $0.007) 7 0 0


Forward Contract Payable 8 0 0
Inventories 1 0 0
Cash 8 0 0
Investment in Forward Contract 8 0 0

5 Trade Accounts Payable 7 0 0


Investment in Bolivars 7 0 0

17 Trade Accounts Payable 7 9 5 0 0


Cash (C75,000 x $1.05) 7 8 7 5 0
Foreign Currency Transaction Gains 7 5 0

24 Cash (Sfr50,000 x $0.53) 2 6 5 0 0


Trade Accounts Receivable 2 6 0 0 0
Foreign Currency Transaction Gains 5 0 0

b. 30 Trade Accounts Payable [$160,500 – (C150,000 x


$1.05)] 3 0 0 0
Foreign Currency Transaction Gains 3 0 0 0

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106 Modern Advanced Accounting, 10/e
30 Minutes, Medium
Impo Corporation Pr. 11–5
Impo Company
Journal Entries

20 05
June 30 Machinery and Equipment (¥500,000 x $0.0084) 4 2 0 0
Accounts Payable 4 2 0 0

30 Cash (¥500,000 x $0.0084) 4 2 0 0


Notes Payable 4 2 0 0

30 Accounts Payable 4 2 0 0
Cash 4 2 0 0

July 31 Interest Expense ($4,200 x 0.12 x 30/360) 4 2


Interest Payable 4 2

31 Depreciation Expense ($4,200 x 1/5 x 1/12) 7 0


Accumulated Depreciation of Machinery and
Equipment 7 0

31 Notes Payable [¥500,000 x ($0.0084 – $0.0082)] 1 0 0


Interest Payable [¥5,000 x ($0.0084 – $0.0082)] 1
Foreign Currency Transaction Gains 1 0 1

Aug 29 Notes Payable 4 1 0 0


Interest Payable 4 1
Interest Expense 4 1
Foreign Currency Transaction Losses 1 5 3
Cash (¥510,000 x $0.0085) 4 3 3 5

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Solutions Manual, Chapter 11 107
30 Minutes, Medium
Allison Company Pr. 11–6
Allison Company
Adjusting Entries
Sept. 30, 2005
Travel Expenses (¥100,000 x $0.00786) 7 8 6
Foreign Currency Transaction Losses 1 5
Forward Contracts 8 0 1
To correct accounting for forward contract that
matured Apr. 30, 2005.

Inventories 5 2 0 0 0
Forward Contracts 5 2 0 0 0
To correct accounting for forward contract that
matured Sept. 30, 2005

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108 Modern Advanced Accounting, 10/e