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Chapter 10

Foreign Currency Transaction


and Translation of Foreign
Currency Financial Statements
Problems in these areas are now appearing more often in the CPA examinations. Candidates
therefore should be familiar with the standards of financial accounting and recording foreign
currency transactions as well as the translation of the financial statements of foreign entity into
the presentation currency (Philippine Peso) for purposes of consolidating them in the financial
statements of the reporting enterprises.

Foreign Currency Transaction


These are transactions denominated in foreign currency, the settlement of which is to be made
in foreign currency. Foreign currency transactions usually involve purchases (imports) or sales
of goods (exports) whose prices are stated in foreign currency.

ACCOUNTING FOR IMPORT AND EXPORT TRANSACTIONS

An overview of the required accounting procedures for an import or export foreign currency
transactions on credit are as follows:

1. On Transaction Date. Record the purchase or sale transactions at the Philippine peso
equivalent value using the exchange rate on this date (spot exchange rate).
2. On Statement of Financial Position Date. Adjust the payable or receivable to its
Philippine peso equivalent, end-of-period using the closing exchange rate. Recognize
any exchange gain or loss for the change in rates between the transaction and
statement of financial position dates.
3. On Settlement Date. First adjust the foreign currency payable or receivable for any
change in the exchange rate between the statement of financial position date (or
transaction date if transaction occurs after the statement of financial position date) and
the settlement date, the difference should be recognized as foreign exchange gain or
loss. Then record the settlement of the foreign currency payable or receivable.

Exchange Rate. This is the rate in which the currencies of two countries are exchange at a
particular time. This may be quoted directly or indirectly as follows:

Direct exchange rate. This is the number of local currency units (LCU) needed to acquire
one foreign currency unit (FCU). From the viewpoint of a Philippine entity the ratio is computed
as follows:
Philippine pesos equivalent value
1 FCU

Indirect exchange rate. This is the reciprocal of the direct exchange rate. This is
computed as follows:

1 FCU
Philippine peso equivalent value

Foreign Exchange Gain or Loss. Foreign exchange (Forex) gains or loss must be recognized in
the statement of comprehensive income of the period in which the exchange rate changes. To
determine forex gain or loss, the following guidelines may be used:

(Importer) (Exporter)
Payable in Receivable in
Foreign Currency Foreign Currency
Increase in direct exchange rate Forex loss Forex gain
Decrease in direct exchange rate Forex gain Forex loss

ACCOUNTING FOR FORWARD EXCHANGE CONTRACTS

A forward exchange contract is an agreement to exchange currencies of different countries on a


specified future date at the specified rate (the forward rate). Forward rates may be more or less
than the spot rate of foreign currency.

Forward contracts are recorded at forward rate. These contracts are considered derivative
instruments and are entered into for the following purposes:
1. To designate as a fair value hedge (to hedge is to take measures to reduce or eliminate a
potential unfavorable outcome of a future event) of:
a. An existing foreign currency asset or liability.
b. A foreign currency denominated firm commitment.
c. A net investment in a foreign operation.
2. To speculate in foreign currency exchange price movement.

Foreign Exchange Gain or Loss. In accordance with PAS 39 Financial Instrument Recognition
and Measurement, forex gain or loss resulting from forward contracts is determined as
follows:

1. Speculations Difference between the forward rate for the term


of the contact and the contract rate or rate last
used.
2. Hedging for existing foreign currency
Changes in forward rate.
asset or liability.
3. Hedging of foreign currency Changes in forward rate.
commitment.
4. Hedging in investment in foreign No forex gain or loss. Changes in exchange rate
operation. are treated as translation adjustments to be
presented in the consolidated statement of
financial position under stockholders equity.

SWAPS
A swap is an agreement between two parties to exchange a series of future cash flows. Banks,
corporations and other institutions use swaps to manage their interest rate risks, reduce
funding costs (fixed or floating), or speculate on interest rate movements. Banks (commercial,
investment, and merchant) also act as swap dealers or brokers in their role as financial
intermediaries. As a dealer, a bank offers itself as a counterpart to its customers. As a broker, a
bank finds counterparts for its customers, in return for a fee:

Types of Swap Contracts. There are many types of swap contracts. The common types are the
following:

Interest rate swaps are over-the-counter (OTC) derivative contracts in which two parties
agree to exchange interest cash flows on one or more notional principal amounts at certain
times in the future according to an agreed-upon formula.

Currency swaps, more commonly known as cross currency interest rate swap, where
each party makes interest payment to the other in different currencies.

Commodity swaps use prices of commodities such as jet fuel, gold and electricity as the
underlying transactions. For example, an airline company agrees to make fixed payments to a
swap dealer on regularly scheduled dates and receive payments determined by the prices of jet
fuel.

OPTIONS

An option is a financial contract that provides the holder the right to buy or sell an underlying
asset in the future, for a price set today. The price of the option is separate from the price of
the underlying asset. An option to but is referred to as a call. An option to sell is called a
put.

An underlying asset may be a stock, interest rate, bond, foreign exchange or commodity.

Premium the option price. It is the sum of 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.

An option premium has two parts and intrinsic value and time value. Intrinsic value refers to
the amount of value in the option if it were exercised today. Any increase in the intrinsic value
is treated as a gain and any decrease is treated as a loss. Time value is the difference between
whatever the intrinsic value is and what the premium is. An increase in the time value is treated
also as a gain, while a decrease is treated also as a loss.

Strike Price the fixed price at which the underlying asset can be bought or sold. It is also
called the exercise price or striking price.

Expiration date the date at which the option contract expires. After this date, the option
contract ceases to exist, and if the buyer has not exercised the option, the premium is lost to
the seller.

TRANSLATION OF FOREIGN ENTITY FINANCIAL STATEMENTS


If the financial statements of the entity are not in the functional currency of a hyperinflationary
economy, then PAS 21 prescribes the following procedures to translate foreign entitys
statement from its functional currency into the presentation currency:
Assets and liabilities (including any goodwill arising on the acquisition and any fair value
adjustment) are translated at the closing rate at the date of that balance sheet.
Income and expense accounts are to be translated at the spot rate at the date of the
transactions. (Average rates are allowed if this is a reasonable estimation).
Exchange differences are recognized as other comprehensive income.

Special rules apply to translate financial statements of an entity whose functional currency is
the currency of a hyperinflationary economy. All amounts (i.e., assets, liabilities, equity items,
income and expenses, including comparatives) are translated at the closing spot rate at the
date of the most recent statement of financial position.
PROBLEMS
1. If P56.5 can be exchanged for 1 US dollar, the direct and indirect exchange rate
quotations are:

Direct Indirect
a. P56.50 $1
b. 56.5 .018
c. 1.00 56.50
d. 1.00 .018

2. If one (1) Euro can be exchanged for P69.25 Philippine peso, the indirect exchange rate
of Euro per Philippine peso is:

a. 0.014 Euro
b. 6.925 Euro
c. 6.825 Euro
d. 6.725 Euro
3. Jeep Corporation imported a machine for US$50,000 United States on January 10, 2013.
A corresponding letter of credit (LC) was opened with Metro Bank to cover the
importation. Shipment was effected on March 24, 2013 at which time the exporter
collected the proceeds of the LC when the exchange rate was P56.45.

What is the forex gain or loss to be recognized by Jeep from the fluctuation of the
exchange rate:

a. P0
b. 22,500 gain
c. 22,500 loss
d. $25,000 loss
4. Rustan Inc. a Philippine company, bought inventory items from a supplier in Singapore
on November 5, 2012 for 50,000 Sing dollar, when the spot rate was P33.60. On
December 31, 2012, the spot rate was P33.10. On January 15, 2013 Rustan bought
50,000 Sing dollar at the spot rate of P33.20 and paid the invoice.

How much should Rustan report in its statement of comprehensive income for 2012 and
2013 as forex gain or (loss)?
2012 2013
a. P25,000 P(5,000)
b. (25,000) 0
c. 0 (25,000)
d. 0 0
5. On September 1, 2013 Boysen Corporation received an order for merchandise from a
foreign customer for 10,000 local currency units (LCU) when the Philippine peso
equivalent was P96,000. Boysen shipped the merchandise on October 15, 2013, and
billed the customer for 10,000 LCU when the Phlippine peso equivalent was P100,000.
Boysen received the customers remittance in full on November 16, 2013, and sold the
10,000 LCU for P105,000.

In its statement of comprehensive income for the year ended December 31, 2013,
Boysen should report a forex gain of:

a. P0
b. 4,000
c. 5,000
d. 9,000
6. On July 1, 2012, Manila Company purchased raw materials from a Japanese supplier for
2,500,000 yen and opens the corresponding letter of credit (LC) with City Bank to cover
its importation. The companys year end is December 31. The spot rate issued by the
bank for Japanese yen at various dates is as follows:

July 1, 2012 (date of arrival of goods) P0.50


December 31, 2012 P0.54
July 1, 2013 (date of settlement) P0.52

In its statement of comprehensive income for 2013, what amount should Manila
Company include as a foreign exchange gain (loss)?

a. P(50,000)
b. 150,000
c. (100,000)
d. 50,000
7. Cebu Company sold merchandise to a US customer for $10,000. On June 1, 2012 after
confirmation of a letter of credit, Cebu Company ships the goods to U.S. when the direct
exchange rate is P56.50. On December 31, 2012, the statement of financial position of
Cebu Company shows a receivable from US customer in the amount of P574,000. On
January 10, 2013 Cebu Company collected the amount of the LC from the bank, when
the exchange rate is P56.80

What adjusting entry was made on December 31,2012?


a. Forex loss 9,000
Accounts receivable 9,000
b. Accounts receivable 7,000
Forex gain 7,000
c. Accounts receivable 7,000
Forex gain 7,000
d. Accounts receivable 9,000
Forex gain 9,000
8. The Bacolod Company has a receivable from a customer in Hongkong which is payable in
Hongkong dollar. The amount receivable for HK$100,000, has been converted into
P750,000 on Bacolods December 31,2012 statement of financial position. On January
1,2013, the receivable was collected in full when the exchange tare was HK$1 to P7.70.

What journal entry should Bacolod make to record the collection of this receivable on
January 15,2013?

a. Cash 770,000
Accounts receivable 770,000
b. Cash 730,000
Forex loss 20,000
Accounts receivable 750,000
c. Cash 770,000
Deferred forex loss 15,000
Accounts receivable 785,000
d. Cash 770,000
Accounts receivable 750,000
Forex gain 20,000

9. On July 1,2012, Makati Finance, Inc., a Pilipino company lent P200,000 to a US supplier,
evidenced by an interest bearing note due on July 1,2013. The note is equivalent to
$4,000 on the loan date. The note principal was appropriately included at P210,000 in
the receivables section of Makatis December 31,2012 balance sheet. The note principal
was repaid to Makati Finance, Inc. on July 1, 2013, due date when the exchange rate
was P56.50 to $1.
In its statement of comprehensive income for the year ended December 31,2013, what
amount should Makati finance include as a foreign exchange gain or loss?
a. P0
b. P16,000 loss
c. P16,000 gain
d. P35,000 loss
10. Manila Holdings, Inc., is the parent company of a group of companies who also does its
own trading. It bought equipment from a US supplied for $10,000 on November 2, 2013
and opened the corresponding letter of credit (LC) when the exchange rate was P55.00
to $1. On December 31,2013, which is the companys year end the US supplier has not
been paid the exchange t=rate at that time was P57.00 to $1.
On the statement of financial position of Manila Holdings, Inc., on December 31,2013,
what will be the year end balances of the equipment and the accounts payable
accounts.
Equipment Accounts Payable
a. P570,000 P570,000
b. P570,000 P550,000
c. P550,000 P550,000
d. P550,000 P570,000
11. On September 1,2012, Pasig Company, a Philippine company, sold construction
materials to Saudi Arabia for 20,000 Rial. Terms of the sale require payment in Rial on
February 1,2013. On September 1, 2012, the spot exchange rate was P15.50 per 1 Rial.
At December 31,2012, Pasigs year end, the spot rate was P14.90, but the rate increased
to P15.02 by February 1,2013, when payment was received.
How much should Pasig report as foreign exchange gain or loss on its 2013 statement of
comprehensive income?
a. P0
b. P2,400 gain
c. P2,400 loss
d. P40,000 gain
12. Lils Hobby Shop buys goods from Waigo Company in Hongkong, payable in Hongkong
dollors at a credit term of 60 days. On June 30,2013, the unadjusted balance sheet of
Lils reflects a payable to Waigo representing purchase of goods worth HK$10,000 when
Hongkong dollar was going at P7.50 for IHD$.
What will be Lils forex gain or loss on June 30,2013, if the prevailing exchange rate is
quoted at HK$0.12987/P1?
a. P2,000 gain
b. P2,000 loss
c. P1,000 gain
d. P1,000 loss
13. Manila Pit Shop sells goods to Action Hobbies of Hongkong for HK$30,000. The
exchange rate at this time is P7.60 for IHK$. Action Hobbies pays 20 days later when the
prevailing exchange rate is P7.80 for IHD$.
Because of exchange rate fluctuation, how much do Manila Pit Shop and Action Hobbies
of Hongkong stand to gain or loss if the transaction is denominated in Hongkong dollar.
Manila Pit Shop Action Hobbies
a. P6,000 gain P-0-
b. P6,000 loss P-0-
c. P -0- P6,000 loss
d. P -0- P6,000 gain
14. On November 15,2012, Hobbies, Inc. of Manila, ordered merchandise FOB shipping
point from Nippon Company of Japan for 500,000 yen. The merchandise was shipped
and invoiced to Hobbies on December 10,2012. Hobbies paid the invoice on January
10,2013. The exchange rate for yens on the respective date are as follows:

November 15,2012 P0.2500


December 10,2012 P0.2475
December 31,2012 P0.2375
January 10,2013 P0.2300

In Hobbies December 31,2012 statement of comprehensive income, the forex gain


(loss) to be reported is:

a. P6,250
b. P(6,250)
c. P5,000
d. P(5,000)
15. Pinoy Exports, Inc., sold furnitures to a US customer for 10,000 US dollar. Pertinent
exchange rates relating to this transactions are as follws:

Conversion Rate
(Peso to US$)
November 10,2012; Receipt of order P56.10
November 22,2012; Date of Shipment P56.20
December 31,2012; Statement of FP date P56.50
January 5,2013; Settlement date P56.45
The sale would be appropriately recorded at:
a. P562,000
b. P561,000
c. P565,000
d. P564,500

Use the following data in answering Nos. 16 and 17.

Makati Corporation imports merchandise from some Japanese companies and exports its own
products to other Japanese companies. The unadjusted accounts denominated in Japanese yen
at December 31,2012, are as follows:

Accounts receivable from the sale of merchandise


On December 16 to Narita Company. Billing is for
150,000 Japanese Yen and due January 15,2013 P103,500

Accounts payable to Akito Company for merchandise


Received on December 2 and payable on January 30,2013
Billing is for 275,000 Japanese Yen P195,250

Exchange rates on selected dates are as follows:

December 31,2012 P0.68


January 15,2013 P0.675
January 30,2013 P0.685

16. What is the net forex gain or loss from the two transactions to be reported in Makatis
statement of comprehensive income for 2012?
a. P1,500 loss
b. P8,250 gain
c. P6,750 gain
d. P6,750 loss
17. What is the net forex gain or loss from the settlement of the two transactions to be
reported in Makatis 2013 statement of comprehensive income?
a. P2,125 loss
b. P2,125 gain
c. P2,075 gain
d. P2,075 loss

Use the following data in answering Nos. 18 and 19.


The accounts of Palawan International, a Philippine company, show P813,000 accounts
receivable and P389,000 accounts payable at December 31,2013 before adjusting entries are
made. An analysis of the balances reveals the following:

Accounts receivable
Receivable denominated in Philippine peso P285,000
Receivable denominated in 200,000 Japanese yen 118,000
Receivable denominated in 250,000 Thailand baht 410,000
Total P813,000

Accounts payable
Payable denominated in Philippine peso P 68,500
Payable denominated in 10,000 Hongkong dollar 76,000
Payable denominated in 150,000 Thailand baht 244,500
Total P389,000

Current exchange rates on December 31,2013 are:

Japanese yen P0.66


Thailand baht P1.65
Hongkong dollars P7.00

18. What is the net exchange gain or loss that should be reflected in Palawans statement of
comprehensive income for 2013 after the year end adjustments?
a. P19,000 gain
b. P19,500 loss
c. P16,500 loss
d. P19,500 gain
19. What is the balance of accounts receivable and payable that should be reported in
Palawans December 31,2013 statement of financial position?
Accounts Receivable Accounts Payable
a. P829,500 P386,000
b. P386,000 P829,500
c. P813,000 P389,000
d. P389,000 P813,000

Numbers 20 and 21 are based on the following data:

On December 12, 2013, Boracay Company entered into two forward exchange contracts, each
to purchase 100,000 Hongkong dollars in 90 days. The relevant exchange rates are as follows:

Spot Rate Forward Rate


(for March 12, 2012)
December 12, 2013 P8.80 P9.00
December 31, 2013 9.80 9.30

20. Boracay entered into the first forward contract for speculation. At December 31, 2013,
what amount of foreign exchange gain (loss) should Boracay in the statement of
comprehensive income from this forward contract?

a. P0
b. 30,000
c. (30,000)
d. 100,000
21. Boracay entered into the second forward contract to hedge a commitment to purchase
machinery being manufactured to Boracays specification. At December 31, 2013, what
amount of net gain or loss on foreign currency transactions should Boracay include in
income from this forward contract?

a. P0
b. 30,000
c. 50,000
d. 100,000

Use the following information in answering Nos. 22 and 23.

On December 12, 2013, Davao Import, Inc. entered into a forward exchange contract to
purchase 100,000 foreign currencies (FC) in 90 days to hedge a purchase of inventory in
November, 2013 payable in March 2014. The relevant exchange rates are as follows:

Spot Rate Forward Rate


(for March 12, 2014)
November 30, 2013 P8.70 P8.90
December 12, 2013 8.80 9.00
December 31, 2013 9.20 9.30

22. At December 31, 2013, what amount of foreign exchange gain (loss) from this forward
contract should be reported in the statement of comprehensive income of Davao?

a. P(30,000)
b. 30,000
c. 40,000
d. (40,000)
23. At December 31, 2013, what amount of forex gain (loss) should be reported in the
statement of comprehensive income from the adjustment of the accounts payable of
100,000 FC.
a. P50,000
b. (50,000)
c. 40,000
d. (40,000)
24. At October 17, 2013, Cebu Company took delivery from a Thailand Company at
inventory costing 100,000 Baht. Payment is due on January 15, 2014. On the same date,
Cebu entered into a forward contract to buy 100,000 Baht on January 15, 2014. The
relevant exchange rates are as follows:

10/17/2013 12/31/2013 1/15/2014


Spot rate P1.30 P1.42 P1.40
Forward rate 1.36 1.43 1.40

What amount of forex gain (loss) from this forward contract should Cebu include in net
income for 2013?

a. P(7,000)
b. 7,000
c. 6,000
d. (6,000)
25. On April 4, 2013, Malate Export, Inc. sold merchandise to Malaysia for 10,000 Ringgit.
Payment is due on August 2, 2013. Also on April 4, 2013, Malate entered into a forward
exchange contract to sell 10,000 Ringgit on August 2, 2013. Exchange rates for Ringgit
are:

4/4/2013 6/30/2013 8/2/2013


Spot rate P14.80 P14.84 P14.82
Forward rate 14.77 14.83 14.82

What amount of forex gain (loss) from this forward contract should be included in
Malates statement of comprehensive income on June 30, 2013?

a. P(6,000)
b. 6,000
c. (4,000)
d. 4,000
26. Certain accounts of foreign subsidiary in Japan of Manila Corporation at December 31,
2013 have been translated into Philippine pesos as follows:

Translated at
Current rates Historical rates
Accounts receivable P120,000 P100,000
Prepaid expenses 55,000 50,000
Property and equipment (net) 275,000 285,000
What total amount should be included in Manilas December 31, 2013 consolidated
statement of financial position for the above translated amounts.

a. P450,000
b. 425,000
c. 440,000
d. 450,000
27. On January 1, 2012, the Makati Corporation established a branch in Hongkong. On
February 15, 2012, the branch purchased inventory for HK$100,000. On December 31,
2013, HK$25,000 of the inventory purchased on February 15, 2013 made up the entire
inventory. The exchange rates were as follows:

January 1 to June 30, 2013 HK$0.138 = P1


December 31, 2013 HK$0.133 = P1
The December 31, 2013 inventory balance for Makatis branch should be translated into
Philippine pesos in the amount of:

a. P181,159.42
b. 187,969.93
c. 3,450.00
d. 3,325.00
28. For 2013 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 Philippine peso that will appear in the translated statement
of comprehensive income?

a. P16,030
b. 16,120
c. 16,740
d. 15,940
29. The Italy branch of Manila Company reports the following results of its operation for
2013 (in Euro):
Sales 10,000 EUR
Cost of sale
Purchases 1,000
Shipments from Manila 5,000
Inventory, end (800) 5,200
Gross profit 4,800
Operating expenses 1,000
Net income 3,800 EUR
The relevant exchange rates for EUR for 2013 are:

January 1 P69.20
December 31 69.95
Average rate during the year 69.50
The only shipment from Manila during the year was determined to have a cost to home
office of P346,500. The ending inventory was identified to have come from shipments
from Manila.

What is the translated comprehensive income of the branch in Italy?

a. P264,940
b. 264,100
c. 265,810
d. 262,960
30. Pedro Corporation, a Philippine Company starts a subsidiary in New Zealand, the
subsidiary had the NZ Dollar as its functional currency. On January 1, 2013, Pedro
acquired all of the subsidiarys common stock for 20,000 NZ Dollar. On April 1, 2013, the
subsidiary purchased inventory for 20,000 NZ Dollar, with payment made on May 1,
2013. This inventory is sold on August 1, 2013 for 30,000 NZ Dollar, which is collected on
October 1, 2013. Currency exchange rates 1 NZ Dollar for 2013 are as follows:

January 1 P15
April 1 17
May 1 18
August 1 19
October 1 20
December 31 21
What Foreign Currency Translation Adjustment will be reported in preparing
consolidated financial statements on December 31, 2013?

a. P40,000
b. 60,000
c. 140,000
d. 180,000
31. The subsidiary in Japan of Manila Company, a Philippine enterprise has plant assets with
a cost of P3,600,000 yen on December 31, 2013. Of this amount, plant assets with a cost
of 2,400,000 yen were acquired in 2011 when the exchange rate was 1 yen = P0.625;
and plant assets with a cost of 1,200,000 yen were acquired in 2012 when the exchange
rate was 1 yen = P0.556. the exchange rate on December 31, 2012 was 1 yen = P0.500,
and the weighted average rate for 2013 was 1 yen = P0.521. the Japanese subsidiary
depreciates plant assets by the straight line method over a 10 year economic life with
no residual value.

What is the 2013 depreciation expense for the Japanese subsidiary in Philippine peso for
the translated statement of comprehensive income?

a. P207,820
b. 187,560
c. 150,000
d. 66,720
32. A wholly-owned foreign subsidiary of a Philippine Company had selected expense
accounts stated in local currency unit (LCUs) for the fiscal year ended November 30,
2013 as follows:

Bad Debts expense LCU 60,000


Amortization of patent (patent was acquired on Dec. 1, 2010) 40,000
Rent expense 100,000

The exchange rates for LCUs at various dates were as follows:


December 1, 2010 P0.25
November 30, 2013 0.20
Average for fiscal year ended November 30, 2013 0.22

What is the peso amount to be included in the translated statement of comprehensive


income of the Philippine Companys foreign subsidiary for the fiscal year ended
November 30, 2013 for the foregoing expense accounts?

a. P44,000
b. 40,000
c. 42,000
d. 45,200
33. A wholly-owned subsidiary of Pilipino Inc. has certain expense accounts for the year
ended December 31, 2013 stated in local currency units (LCU) as follows:

LCU
Depreciation of equipment (related assets were 120,000
purchased January 1, 2011)
Provision for doubtful accounts 80,000
Rent 200,000

The exchange rates at various dates are as follows:

December 31, 2013 P40


Average for year ended 12/31/2013 .44
January 1, 2011 .50

Assume that charges to the expense accounts occurred approximately evenly during the
year. What total peso amount should be included in Pilipinos 2013 consolidated
statement of comprehensive income to reflect these expenses?

a. P60,000
b. 68,000
c. 183,200
d. 176,000
34. On December 31, 2013 a foreign subsidiary in Hongkong submitted the following
condensed statement of financial position stated in foreign currency:

Hongkong Dollar
Total assets $100,000
Total liabilities 20,000
Common stock 50,000
Retained earnings, 12/31 30,000

The exchange rates are:

Current rate P7.40


Historical rate 7.10
Weighted average rate 7.00

Assuming that the retained earnings of the subsidiary on December 31, 2013 translated
to Philippine Peso is P212,000. What amount of Cumulative Translation Adjustment is to
be reported as other comprehensive income on December 31, 2013?

a. P25,000
b. 2,000
c. 20,000
d. 22,000
35. On December 31, 2013 a branch in Singapore submitted the following financial
statement stated in Singaporean Dollar:

Statement of Financial Position


Monetary assets $20,000
Non-monetary assets 15,000
Monetary liabilities 18,000
Common stock 12,000
Retained earnings, 12/31 5,000

Combined Statement of Comprehensive Income and Retained Earnings

Sales $27,000
Expenses (including Depreciation $1,000) 25,000
Net income 2,000
Retained earnings, 1/1 3,000
Retained earnings, 12/31 $5,000
The exchange rates are:

Current rate P37


Historical rate 34
Weighted average rate 35
Assuming the Retained Earnings on Jan. 1, 2013 of the Singaporean Branch in Philippine Pesos is
P128,100. What amount of exchange difference is to be classified as other comprehensive
income on December 31, 2013?

a. P22,900
b. 10,000
c. 12,000
d. 21,900

Items 36 to 38 are based on the following data:

JenJen Company sold computer printer ink cartridges to a Pakistan computer parts store on
March 10. The sales price of 100,000 Rupee (R) will be received in 30 days. JenJen anticipates
that the exchange rate of the Rupee to Philippine peso will decrease in 30 days. Therefore,
JenJen decides to purchase a put option on 100,000 Rupee at a strike price of P.73, paying a
premium of P.005 per unit. The following are the relevant data for the term of the option:

Spot Rates:
March 10 P.73
March 31 .727
April 9 .723
Fair value of the option:
March 31 P600
April 9 700

36. On April 9, what is the entry to record the settlement of the accounts receivable from
the Pakistan customer?

a. Cash/Foreign currency 72,300


Foreign exchange loss 500
Accounts receivable (R) 72,800
b. Cash/Foreign currency 72,100
Foreign exchange loss 900
Accounts receivable (R) 73,000
c. Cash/Foreign currency 73,000
Foreign exchange gain 900
Accounts receivable (R) 72,100
d. Cash/Foreign currency 73,000
Foreign exchange gain 200
Accounts receivable (R) 72,800
37. What is the entry to record the exercise of the put option on April 9?
a. Cash 73,000
Foreign currency 72,300
Put options 700
b. Cash 73,000
Foreign currency 72,500
Put options 500
c. Cash 73,000
Foreign currency 73,000
d. Cash 72,100
Foreign currency 71,500
Put options 500
38. What is the impact on the net income for the first quarter of 2013?
a. P72,500
b. 72,300
c. 72,800
d. 72,100
39. On June 1, 2013 Jenna Corporation (a Pilipino Company) sold pool cues to a customer in
Thailand for 100,000 Baht when the spot rate is P1.50 per Baht. The pool cues are to be
paid on September 1, 2013. On June 1, Jenna Corporation acquires a three-month
option to sell 100,000 Baht. The strike price is P1.50 and the premium is P.05 per unit.
On September 1, 2013 Jenna receives 100,000 Baht in settlement of the pool cues. The
spot rate at that date is P1.43 per Baht.
What is the amount that Jenna would report in income as a result of this transactions?
a. P145,000
b. 140,000
c. 143,000
d. 150,000

Items 40 to 42 are based on the following data:

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

Pedro 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, hedged 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:
Jenny share price P250 P220 P200 P200
Number of shares 1,000 1,000 1,000 1,000

Hedging instrument
Put option (1,000 shares):
Intrinsic value P0 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

40. On December 31, 2013, how much is the value of the put option to be presented on the
statement of financial position?
a. P51,500
b. 35,000
c. 30,000
d. 25,000
41. What is the cumulative effect on retained earnings of the hedge and sale?
a. P65,000
b. 60,000
c. 50,000
d. 55,000
42. What is the entry to record the exercise of the put option on April 17, 2013?
a. Cash 250,000
Put option 250,000
b. Cash 250,000
Available-for-sale securities 100,000
Put option 50,000
Gain on sale of securities 100,000
c. Cash 200,000
Available-for-sale securities 50,000
Put option 50,000
Gain on sale of securities 100,000
d. Cash 200,000
Available-for-sale securities 100,000
Put option 50,000
Gain on sale of securities 50,000
ANSWERS
1. B 8. D 15. A 22. B 29. B 36. A
2. A 9. C 16. C 23. B 30. C 37. A
3. C 10. D 17. A 24. B 31. B 38. A
4. A 11. B 18. D 25. A 32. A 39. A
5. C 12. B 19. A 26. A 33. D 40. A
6. D 13. A 20. B 27. B 34. A 41. A
7. D 14. C 21. A 28. B 35. A 42. B

SOLUTIONS AND EXPLANATIONS

1. Direct quotation: P56.50 1 or P56.50


Indirect quotation: $1 P56.50 or $.018
2. 1 / P69.25 = 0.014
3. Exchange rate on March 24, 2013 Date of purchase P56.00
Exchange rate on April 1, 2013 settlement date 56.45
Increase in exchange rate P .45
Accounts payable in foreign currency $50,000
Forex loss P22.500

4. The forex gain in 2012 is computed as follows:


November 5, 2012 date of purchase (S$50,000 x P33.60) P1,680,000
December 31, 2012 balance sheet date (S$50,000 x P33.10) 1,655,000
Decrease (gain) 2012 P25,000
The forex loss in 2013 is computed as follows:
December 31, 2012 P1,655,000
January 15, 2013 settlement date (S$50,000 x P33.20) 1,660,000
Increase (loss) 2013 P( 5,000)
5. When the sale is made on October 15, 2013, Boysen debited the accounts receivable
and credited sales for P100,000. On November 16, 2013 Boysen received foreign
currency worth P105,000. Since the receivable was recorded at P100,000, a P5,000 gain
must be recognized. The Philippine peso equivalent when the order was received on
September 1, 2013 is not used to compute the gain because no entry is recorded on this
date.
6. December 31, 2012 (2,500,000 yen x P0.54) P1,350,000
July 1, 2013 settlement date (2,500,000 yen x P0.52) 1,300,000
Decrease (gain) P 50,000
7. On June 1, 2013, the date of shipment, a receivable was recorded at P565,000 ($10,000
x P56.50). on December 31, 2013, the balance of the receivable increase to P574,000,
therefore adjusting entry (d) is correct.
8. On December 31, 2012 balance sheet the receivable has a balance of P750,000. The
collection on January 1, 2013 amounts to P770,000 (100,000 x P7.70), therefore forex
gain of P20,000 is to be recognized by recording entry (d).
9. The forex gain is computed as follows:

Balance sheet date December 31, 2012 P210,000


Settlement date July 1, 2013 ($4,000 x P56.50) 226,000
Increase in receivable (gain) P16,000
10. Equipment ($10,000 x P55) P550,000
Accounts payable ($10,000 x P57) P570,000
11. December 31, 2012 statement of financial position date P14.90
February 1, 2013 settlement date 15.02
Increase in exchange rate P0.12
Receivable in foreign currency 20,000 Rial
Increase in receivable (gain) P2,400
12. Direct exchange rate June 30, 2013 P7.50
Direct exchange rate June 30, 2013 (P1/HK$0.12987) 7.70
Increase in exchange rate P0.20
Payable in HK$ 10,000
Increase in payable in foreign currency (loss) P2,000
13. Manila Pit Shop Philippines
Exchange rate date of sale P7.60
Exchange rate settlement date 7.80
Increase in exchange rate P0.20
Receivable in HK$ 30,000
Increase in receivable (gain) P6,000
14. Transaction date date of shipment 12/10/2012 P0.2475
Statement of financial position date 12/31/2012 0.2375
Decrease in exchange rate P 0.01
Payable in Yen 500,000
Gain decrease in payable in FC P 5,000
15. The sale should be recorded on the date of shipment using the exchange rate on that
date. Therefore the sale to be recorded is P562,000 ($10,000 x P56.20).
16. 2012: Accounts receivable in Yen:
December 16 - transaction date P103,500
December 31, - adjustment (150,000 yen x P0.68) 102,000
Decrease in accounts receivable (loss) P(1,500)

Accounts receivable in Yen:


December 2 - transaction date P195,250
December 31 - adjustment (275,000 yen x P0.68) 187,000
Decrease in accounts payable (gain) 8,250
Net forex gain (loss) P6,750
17. 2013: Accounts receivable in Yen:
December 31 - statement of financial position date P102,000
January 15 - settlement date (150,000 x P0.675) 101,250
Decrease in accounts receivable - loss P(750)
Accounts payable in Yen:
December 31 - statement of financial position date P187,000
January 30 - settlement date (275,000 yen x P0.685) 188,375
Increase in accounts payable - loss (1,375)
Net foreign gain (loss) P(2,125)
18. The answer is computed as follows:
Adjusted Unadjusted Forex gain
Balances Balances (loss)
12/31/2013 12/31/2013 12/31/2013
Accounts receivable:
Philippine peso P285,000 P285,000 P 0
Japanese yen (200,000 yen x P.66) 132,000 118,000 14,000
Thailand Baht (250,000 x P1.65) 412,500 410,000 2,500
Total gain P829,500 P813,000 P16,500

Accounts payable:
Philippine peso P68,500 P68,500 P 0
Hongkong dollar (10,000 x P7.00) 70,000 76,000 6,000
Thailand Baht (150,000 x P1.65) 247,500 244,500 (3,000)
Total gain P386,000 P389,000 P3,000
Net forex gain P19,500
19.
19. The balances of the accounts receivable and payable to be reported in the December
31, 2013 statement of financial position can be taken from the computation in No. 18 as
follows:

Accounts receivable P829,500


Accounts payable P386,000
20. Foreign transactions involving forward contracts for speculation are recorded in pesos
using forward rate. In the statement of financial position date, the forward contract
receivable and payable are adjusted to reflect the new forward rate, any resulting gain
(loss) is included in the statement of comprehensive income. The computation therefore
is as follows:

December 12, 2013: forward rate for 90-days P9.00


December 31, 2013: forward rate for the remaining 9.30
Increase in forward rate P0.30
Hongkong dollars 100,000
Forex gain P30,000
21. A foreign currency commitment is a contract or agreement denominated in foreign
currency that will result in a foreign currency transaction at a later date. Both the
change in the forward contract and the underlying commitment are recorded - in effect,
offsetting each other. Any gain or loss on this forward contract is based on the forward
rate. To compute the net gain (loss), candidates should know the entries made for this
contract as follows:

December 12, 2013:


Forward contract receivable (FC) 900,000
Forward contract payable 900,000
To record purchase of 100,000 HK$ for
Delivery in 90 days at a forward rate of P9.00

December 31, 2013


Forward contract receivable (FC) 30,000
Forex gain 30,000
To record increase in forward rate
100,000 HK$ (P9.30 - P9.00)
However this gain is offset by the decrease in the value of the underlying firm
commitment as shown below:

December 31, 2013


Forex loss 30,000
Change in value of firm commitment
To record forex loss (payment in HK dollars more Philippine pesos.)

The change in value of purchase commitment is treated as an adjustment to the cost of


purchases when goods are received.

Based on the above entries, on December 31, 2013, no gain or loss is recognized.

22. December 12, 2013: forward rate for 90 days P9.00


December 31, 2013: forward rate 9.30
Increase in forward rate P0.30
Foreign currency 100,000
Forex gain 30,000

23. Accounts payable in foreign currency:


November 30, 2013: spot rate P8.70
December 31, 2013: spot rate 9.20
Increase in spot rate P0.50
Foreign currency 100,000
Increase in accounts payable - Forex loss P50,000

24. Forward contract receivable (FC)


October 17, 2013: spot rate P1.36
December 31, 2013: forward rate 1.43
Increase in forward rate P0.07
Foreign currency 100,000 Baht
Increase in receivable - forex gain P7,000

25. Forward contract payable (FC)


April 4, 2013: spot rate P1.36
June 30, 2013: forward rate 1.43
Increase in forward rate P0.06
Foreign currency 10,000 Ringgit
Increase in receivable - forex gain P6,000
26. Assets are to be translated using the closing rate, therefore the answer is (a), P450,000.
27. Assets are to be translated using the direct closing rate, therefore the answer is
P187,969 (P1/HK0.133) x HK25,000.
28. The cost of sales is translated using the average rate for the period as follows:
Inventory, January 1, 2013 40,000 Won
Purchases 300,000 Won
Goods available for sale 340,000
Inventory, December 31, 2013 30,000 Won
Cost of sales 310,000 Won
Average exchange rate P0.0520
Cost of sales in Philippine Peso P16,120
29. The computation is:

In EUR Exchange Rate In Philippine Peso


Sales 10,000 P69.50 (A) P695,000
Cost of sales (Schedule 1) 5,200 69.50 (A) 361,400
Gross profit 4,800 333,600
Operating expenses 1,000 69.50 (A) 69,500
Total comprehensive Income 3,800 P264,100
Schedule 1:
Purchases 1,000 EUR
Shipments from Manila 5,000
Ending inventory (800)
Cost of sales 5,200 EUR

30. The computation is as follows:


In NZ Dollar Exchange Rate In Philippine
Peso
Net assets, January 1 20,000 P15 P300,000
Increase in net assets:
Net income (30,000 20,000) 10,000 19 190,000
Net assets, December 31 30,000 490,000
Net assets, December 31 at Current rate 30,000 P21 CR 630,000
Translation adjustment P140,000
31. The depreciation expense is based on the acquisition cost of the plant assets computed
as follows:

2009 acquisition (2,400,000 y 10) 240,000


2010 acquisition (1,200,000 y 10) 120,000
Total cost 360,000
Average rate for 2011 P 0.521
2011 depreciation expense P187,560
32. All expenses are translated using the weighted average exchange rate. The computation
therefore is:
Bad debts expense (60,000 x P.22) P13,200
Amortization of patents (40,000 x .22) 8,800
Rent expense (100,000 x .22) 22,000
Total P44,000
33. All expenses are to be translated using the weighted average rate. Therefore the
translated total expense is P176,000.
34. The cumulative translation adjustment is the balancing amount (B/A) in the statement
of financial position translated to Philippine peso. The computation is as follows:

In Hongkong Exchange In Philippine


Dollar Rate Peso
Assets 100,000 P7.40 CR P740,000
Liabilities 20,000 P7.40 CR 148,000
Common stock 50,000 P7.10 HR 355,000
Retained earnings, December 31 30,000 Given 212,000
Total 100,000 P715,000
Cumulated translation adjustment B/A 25,000
Total liabilities and stockholders' equity P740,000

35. First, translate the statement of comprehensive income and retained earnings to
compute the retained earnings on December 31 in Philippine pesos as follows:

Singaporean Exchange In Philippine


Dollar Rate Peso
Sales 27,000 P35 945,000
Operating expenses:
Depreciation 1,000 35 35,000
Other 24,000 35 840,000
Total 25,000 875,000
Net income 2,000 70,000
3,000 given 128,100
Retained earnings, 12/31 5,000 198,100

The exchange difference to be classified as other comprehensive income can now be


computed by translating the statement of financial position as shown below:

Singaporean Exchange In Philippine


Dollar Rate Peso
Assets 35,000 P37 1,295,000
Liabilities 18,000 37 666,000
Common stock 12,000 34 408,000
Retained earnings, December 31 5,000 Per IS and RE 198,100
1,272,100
Translation adjustment OCI 22,900
Total 1,295,000

36. Entry (a) is correct. The forex loss is computed as follows:


Settlement received at spot rate (100,000 rupee x .723) P72,300
Balance of accounts receivable:
Date of sale (100,000 x ,73) P73,000
Adjustment for forex loss, limited to gain
on increase in fair value of option ( 200) 72,800
Forex loss P( 500)

37. Entry (a) is correct. Cash is to be debited at the strike price of P73,000 (100,000 x .73)
and foreign currency is credited at spot rate of P72,300 (100,000 x .723). Put option is
credited at its fair value of P700 on the exercise date.
38. The net impact on income is equal to the net cash inflows (73,000 strike price less P500
option premium).
39. Strike price of P150,000 (100,000 Baht x 1.50) less the premium of 5,000 (100,000 x .05).
40. At fair value on December 31, 2013 P51,500.
41. The cumulative effect on retained earnings of the hedge and sale is a net gain of
P65,000 computed as follows:
Cash received at strike price (1,000 shares x 25) P250,000
Available-for-sale securities (150,000 - 50,000) ( 100,000)
Put option, at fair value ( 50,000)
Gain on sale of securities P100,000
Loss on tome value of the option ( 35,000)
Net gain P65,000
42. Entry (b) is correct as computed in No. 41 above.