OREIGN CURRENCY TRANSACTIONS AND TRANSLATIONS

DEFINITIONS OF TERMS

Conversion. The exchange of one currency for another.

Current exchange rate. The rate at which one unit of a currency can be exchanged for (converted into) another
currency. For purposes of translation of financial statements, the current exchange rate is the rate at the end of the
period covered by the financial statements or at the dates of recognition in those statements with respect to
revenues, expenses, gains, and losses.
Discount or premium on a forward contract. The foreign currency amount of the contract multiplied by the
difference between the contracted forward rate and the spot rate at the date of inception of the contract.
Foreign currency. A currency other than the functional currency of the reporting entity being referred to (for
example, the Philippine peso could be a foreign currency for a foreign entity).
Foreign currency statements. Financial statements that employ as the unit of measure a functional currency that is
not the reporting currency of the enterprise.
Foreign currency transactions. Transactions whose terms are denominated in a currency other than the reporting
entity’s functional currency. Foreign currency transactions arise when an enterprise (1) buys or sells goods or
services on credit whose prices are denominated in foreign currency, (2) borrows or lends funds and the amounts
payable or receivable
are denominated in foreign currency, (3) is a party to an unperformed forward exchange contract, or (4) for other
reasons, acquires or disposes of assets or incurs or settles liabilities denominated in foreign currency.
Foreign currency translation. The process of expressing in the enterprise’s reporting currency amounts that are
denominated or measured in a different currency.
Forward exchange contract. An agreement to exchange at a specified future date currencies of different countries
at a specified rate (forward rate).
Functional currency. The currency of the primary economic environment in which the entity operates; normally, the
currency of the environment in which the entity primarily generates and expends cash.
Local currency. The currency of a particular country being referred to.
Monetary items. Cash, claims to receive a fixed amount of cash, and obligations to pay a fixed amount of cash.
Non-monetary items. All statement of financial position items other than cash, claims to cash, and cash obligations.
Presentation currency- Paragraph 8 defines this as the currency in which the financial statements of the entity are
presented.
Remeasurement. If an entity’s accounting records are not maintained in its functional currency, remeasurement is
the process necessary to convert those records into the functional currency, with the objective of reflecting the same
results as if the records had been maintained in the functional currency. Monetary balances are translated by using
the current exchange rate, and non-monetary balances are translated by using historical exchange rates. In the event
that remeasurement into the functional currency is required, it must be done prior to translation into the reporting
currency.
Reporting currency. The currency used by the entity to prepare its financial statements.
Reporting enterprise. An entity or group of entities whose financial statements are being referred to. For the
purposes of this discussion, those financial statements reflect (1) the financial statements of one or more foreign
operations by combination, consolidation, or equity method accounting; (2) foreign currency transactions; or (3) both.
Spot rate. The exchange rate for immediate delivery of currencies exchanged.
Transaction date. The date on which a transaction (for example, a sale or purchase of merchandise or services) is
recognized in accounting records in conformity with generally accepted accounting principles. A long-term
commitment may have more than one transaction date (for example, the due date of each progress payment under a
construction contract is an anticipated transaction date).
Transaction gain or loss. Transaction gains or losses result from a change in exchange rates between the
functional currency and the currency in which a foreign currency transaction is denominated. They represent an
increase or decrease in (1) the actual functional currency cash flows realized upon settlement of foreign currency
transactions and (2) the expected functional currency cash flows on unsettled foreign currency transactions.
Translation adjustments. Translation adjustments result from the process of translating financial statements from
the entity’s functional currency into the reporting currency.

Rules for translating FOREIGN CURRENCY TRANSACTIONS (FCT) into the entity’s FUNCTIONAL
CURRENCY:
a. A FCT shall be recorded, on initial recognition the functional currency, by applying to the foreign currency amount the
spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

b. At each balance sheet date the foreign currency monetary item shall be adjusted to comform with the closing rate
(the spot rate at the balance sheet date), which same adjustment is recognized as foreign exchange gain or foreign
exchange loss, as the case maybe, and the carried to current income determination even though such gain or loss is
unrealized.
c. At the date of settlement, any difference between the book carrying value of the foreign currency monetary item
(established at the most recent balance sheet date) and the functional currency amount is recognized either as a
foreign exchange gain or loss, as the case maybe, and carried to current income determination. The functional
currency amount is calculated by applying to the foreign currency amount the spot exchange rate between the
functional currency at the date of the settlement.

Rules for translating LOCAL CURRENCY FS into FUNCTIONAL CURRENCY FS:

a. Monetary assets and monetary liabilities are translated at the current rate existing at the balance sheet.
b. Non-monetary assets and non-monetary liabilities are translated using the exchange rate at the date of the
transaction if carried at the historical cost or the exchange rate at the date of revaluation if carried at the fair value.
c. Stockholders equity items are translated using historical rates (i.e. the exchange rates at the original transaction
dates), except retained earnings which is translated by the components. The only time retained earnings maybe
translated by the use of a single exchange rate is at the date of acquisition, using the exchange rate at the date.
d. Revenues and the expenses are translated using the spot exchange rates at the transaction dates, for practical
purposes, a weighted average current rate is used instead, except for the following:
1. Depreciation expense and amortization expense will be translated using the historical rate of the fixes asset, and
2. Cost of sales will be translated by components.
e. This translation process is referred to as Monetary-Non-Monetary method. Any exchange difference that results from
its application is carried to the income statement either as foreign exchange gain or loss.

Rules for translating FUNCTIONAL CURRENCY FS into the selected PRESENTATION CURRENCY FS.

a. Assets and liabilities are translated at the exchange rate existing at the balance sheet date.
b. Stockholders’ equity items are translated using historical rates (i.e. the exchange rates at the original transaction
dates), except retained earnings which is translated by the components. Retained Earnings may be translated by
applying a single rate at the date of acquisition only, using the spot exchange rate at that date.
c. Revenues and expenses are translated using the spot exchange rates at the date of the transaction. For practical
purposes, a weighted average for the current period is used instead.
d. This translation process is referred to as Current Rate Method and any exchange difference resulting from its
application is called translation adjustment cumulatively (CTA) shown as a component of stockholders’ equity.

Hedging Foreign Currency transactions.

Companies with assets or liabilities denominated in foreign currency are exposed to the risk that the exchange
rate might fluctuate, thus causing transaction gains and losses. A company wishing to eliminate this risk could enter a
transaction called a hedge.

Except for speculative hedges, which is a stand –alone contract, hedge agreements have underlying transactions
that justify the creation of the hedge instrument. The underlying transaction is the hedge item, and the hedge
instrument is the mechanism established to minimize adverse effects of changes in exchange rates on the hedged
items.

In foreign currency hedges, there are two types of hedging instruments;

1. Economic hedge instruments- Its main characteristic is that the fair value of the hedge instrument is established at
the inception of the contract by agreement, followed by a full cash settlement upon expiry
2. Derivative hedge instruments- Its main characteristic is that it will have a value of zero at inception of the contract;
cash settlement is restricted to difference over or under the notional amount brought about by changes in the foreign
exchange rate.

The latter type qualifies for use in hedge accounting as described in PAS 39.
 STRAIGHT PROBLEMS

Problem 1 (Importing transaction)

Mindanao Company is a Philippine in the Agusan del Sur area. Its functional currency is the Philippine
peso.

On December 10, 2010, Mindanao purchased equipment from a European Company invoiced at Euro50,000, to be
settled on February 28,2011. The exchange rates between the euro currency and the peso at various dates follow:

December 10,2010 P 60.452

December 31, 2010 (year-end) 60.457
February 28, 2011 60.460

Required:
(a) Prepare all pertinent entries for the above financial information.
(b) At what amounts will the (1) Equipment?P_____
and (2) the Accounts payable?P_____
be shown on the 2010 balance sheets?

Problem 2 (Exporting transaction)

Tagummatic Enterprises, a Philippine exporter sells buntal hats to an Australian importer that will pay AUSTRALIAN
$15,000. Tagummatic does not require immediate payment and allows its foreign buyer 90 days to pay for its
purchases. Tagummatic shipped the goods on December 1, 2010, with payment to be received on March 1, 2011.

The following are the exchange rates between the Australian Dollar and the Philippine peso at pertinent dates:

December 1, 2010 $1: P46.390

December 31, 2010 ( year-end) $1: P46.394
March 1, 2011 $1: P46. 386

Required:
(a) Prepare all pertinent journal entries for the above information in the books of Tagummatic Enterprises.
(b) At what amounts will any foreign exchange gain/ (loss) be shown on the (1) 2010 income, statement
P_______________ and on the (2) 2011 income statement P__________________.?

Problem 3 (Investment in foreign Trading Securities)

Negros Company is a Philippine corporation doing in business in the Bacolod City area. On October 1, 2011 Negros
purchased 1,500 shares of Nigger, Inc. (a listed company in the United States of America) at a price of US $80 per
share. Negros classified the investment as trading securities. The PHL peso/ US dollar exchange rates on October 1,
2011 and December 31,2011 were P46.20 and P46.25, respectively. The price of Nigger, Inc. shares at December
31, 2011 wasUS$100 each.

Required: Prepare all pertinent entries for the above financial information.

Problem 4 (Translation to Presentation Currency)

Pinas Company, a Philippine corporation, forms a wholly-owned subsidiary in Japan (JAPCO) on December 31,
2010. On that date, Pinas invested P300,000 in exchange for all of the subsidiary’s common stock. The exchange
rate on this date P0.60 per Japanese yen, the initial capital investment was Yen500,000, of which Yen150,00 was
immediately invested in inventory and the remainder held in cash. The balance sheet of JAPCO (whose functional
currency is the YEN) when it began operations on January 1, 2011 follows:

Cash Yen 350,000 Common stock Yen 100,000

 Inventory 150,00 APIC 400,000
Total Yen 500,000 Total Yen 500,000

During 2011, JAPCO purchased property and equipment, acquired a patent, and purchased additional inventory,
primarily on account. It generated income after taxes of the Yen 470,000 and declared dividends of Yen 150,000 on
October 1, 2011.

The financial statements of JAPCO for 2011 are as follows:

Income Statements for year ended December 31, 2011

Sales Yen 4,000,000

Cost of goods sold ( 3, 000, 000)
Gross profit 1, 000,000
Depreciation expense ( 100, 000 )
Amortization expense ( 10, 000 )
Other expenses ( 220, 000 )
Income before tax 670,000
Income taxes ( 200, 000 )
Net income Yen 470, 000

Statement of Retained Earnings for year ended December 31, 2011

Retained earnings, 1/1/11 Yen -

Net income for 2011 470,000
Dividends, 10/1/11 (150, 000 )
Retained earnings, 12/31/11 320, 000

Balance Sheet, as of December 31, 2011

Cash Yen 130,000 Accounts

payable Yen 600,000
Accounts receivable 200,000 Long-term-debt 250,000
Inventory 400,000 Common
Stock 100,000
Property and Equipment,
net 900,000 APIC 400,000
Patents, net 40,000 Retained
earnings 320,000

Total Yen 1,670,

000 Total Yen 1,670,000

Statement of Cash Flows for year ended December 31, 2011

Operating activities:
Net income Yen 470,000
Add Depreciation expense 100,000
Amortization expense 10,000
Increase in accounts receivable ( 200, 000)
Increase in inventory (250, 000)
Increase in accounts payable 600,000
Net cash from operations 730,000

Investing activities:
Purchase of property and equipment ( 1, 000, 000)
Acquisition of patent ( 50,000)
 Net cash from investing activities ( 1, 050, 000)

Financing activities:
Proceeds from long-term-debt 250,000
Payment of dividends ( 150,000)
Net cash from financing activities 100,000

Decrease in cash ( 220, 000)

Cash at 1/1/11 350,000
Cash at 12/31/11 130,000

The relevant exchange rates in Philippine pesos are as follows:

January 1, 2011 P 0.60

Average for 2011 0.65
March 15, 2011 (Date when property and equipment
was acquired and long-term-debt was incurred 0.61
April 10, 2011 (Date when patent was acquired) 0.62
October 1, 2011 (Date when dividends were declared) 0.67
December 31, 2011 0.70

Required: Translate the financial statements of JAPCO into the functional and presentation currency of Pinas.

Economic Derivatives: Foreign Currency Hedges

Problem 5- Speculation

Baliwag Corporation, a Filipino company, enters into a forward exchange contract on October 1, 2010 to speculate in
US dollars. The contract is for the sale of $100,000 to the international bank for delivery on March 31, 2011. The
company anticipates the dollar will weaken against the peso.

Relevant exchange rates for the US dollars are as follows:

10/01/10 12/31/10 03/31/11

Spot rate P46.90 P46.00 P45.60
30-day forward 46.80 45.50 46.00
90-day forward 46.60 45.80 45.60
180-day forward 46.30 43.60 45.00

Required: Prepare all required journal entries in the books of Baliwag.

Problem 6- Fair value hedges (Hedge of a foreign currency liability)

Pinoy Company purchased merchandise from a foreign vendor for P100,000 fc. The merchandise is received on
November 2, 2010, payment is due on January 31, 2011. Also on November 2, 2010, Pinoy enters into a 90-day
forward contract for the purchase of P100,000 fc for delivery on January 31, 2011, as a hedge of the foreign currency
transaction. Relevant exchange rates for the foreign currency follow:
11/02/10 12/31/10 01/31/11
Spot-rate P.55 P.56 P.55
30-day forward .56 .58 .57
60-day forward .56 .59 .58
90-day forward .57 .58 .59

Required: Prepare all journal entries for the above information.

Problem 7

Greater NIA Inc., whose functional currency is the Ph Peso, sold merchandise to a foreign buyer for FC 100,000 on
December 1, 2010. Payment is due February 28, 2011. The spot exchange rate on that date was P1.85:FC1.
Predicting the Ph Peso will likely strengthen against the foreign currency by the settlement date, Greater NIA hedge
the exposed FC receivable by entering into a forward contract for the sale of P1.835.

The relevant direct- quote exchange rates between the two currencies at different dates follow:
Spot Forward rates to
Rates Feb. 28, 2011

At December 31, 2010 (Greater

NIA’s year-end) P1.835 P1.825
At February 28, 2011 1.82

Ignore discounting for simplification purposes.

Required: Prepare all journal entries for the above information.

Problem 8- (Hedge of an Identifiable Foreign Currency Commitment)

Assume on November 2, 2010,Pinay Cosmetic Inc. ordered merchandise from a foreign company for delivery to
Pinay on January 31, 2011 at a price of P1,000,000 FC. Also on November 2, 2010 Pinay entered into a forward
contract to purchase 1,000,000 FC for delivery on January 31, 2011. Exchange rates for the foreign currency are:
11/02/10 12/31/10 01/31/11
Spot rate P.75 P.76 P.79
30-day forward .76 .80 .79
90-day forward .78 .79 .80

Required: Prepare all journal entries for the information.

Accounting Derivatives: Foreign Currency Hedges

Problem 9

Pinoy Company purchased merchandise from a foreign vendor for 100,000 FC. The merchandise is received on
November 2, 2010 , payment is due on January 31, 2011. Also, on November 2, 2010, Pinoy enters into a 90-day
forward contract for the purchase of 100,000 FC for delivery on January 31,2011, as a hedge of the foreign currency
transaction. Relevant exchange rates for the foreign currency follow:
11/02/10 12/31/10 01/31/11
Spot rate P.55 P.56 P.55
30-day forward .56 .58 .57
60-day forward .56 .59 .58
90-day forward .57 .58 .59

Required: Prepare all journal entries for the above information.

Problem 10. Speculation/Fair Value Hedge by Futures Contract.

Greater NIA Inc., whose functional is the Ph Peso, sold merchandise to a foreign buyer for FC 100,000 on December
1, 2010. Payment is due February 28, 2011. The spot exchange rate on that date was P1.85:FC1. Predicting the Ph
Peso will likely strengthen against the foreign currency by the settlement date. Greater NIA hedged the exposed FC
receivable by entering into a forward contract for the sale of FC 100,000 for delivery on February 28, 2011, at a
forward rate of P1.835.
The relevant direct-quote exchange rates between the two currencies at the different date follow:
Spot Forward rates to
Rates Feb. 28, 2011
At December 31, 2010
(Greater NIA’s year-end) P1.835 P1.825
At February 28, 2011 1.82
Ignore discounting for simplification purposes

Required: Prepare all journal entries for the above information.

Problem11. Forward Contract as Hedge of an Anticipated Cash Transaction in Foreign Currency.

Entity A has the peso as its functional currency. It expects to purchase a machine for $10,000 on October 31, 20x6.
Accordingly, it is exposed to the risk of increases in the dollar rate. If the dollar rate increases before the purchase
takes place, the entity will have to pay more pesos to obtain the $10,000 that it will have to pay for the machine. To
offset the risk of increases in the dollar rate, the entity enters into a forward contract on April 30, 20x6, to purchase
$10,000 in six months for a fixed amount P500,000. Entity A designates the forward contract as a hedging instrument
in a cash flow hedge of its exposure to increases in the dollar rate.

On July 31 year end, the dollar has appreciated, such that $10,000 for delivery on October 31, 20x6, costs P550,000
on the market. Therefore, the forward contract has increased in fair value by P50,000 (i.e. the difference between the
committed price of P500,000 and the current price of P550,000 ( ignoring for simplicity, the effects of differences in
interest rates between the two currencies). Entity A still to expects to purchase the machine for $10,000, so it
concludes that the hedge is 100 % effective. Because the hedge is fully effective, the entire change in the fair value of
the hedging instrument is recognized directly in equity
On October 31, 20x6, the dollar rate has further increased, such that $10,000 cost P560, 000 in the spot market.
Therefore, the fair value of the forward contract has increased by P60, 000 ( i.e., the difference between the
committed price of P500,000 and the spot price of P560,000. It still expects to purchase the machine for $10,000.

Required: Prepare all the journal entries for the given information.

Problem12. Fair value hedge of expose liability- Call option

On December 1, 2010. Pepper company paid P3, 000 to purchase a 90-day call option for 500,000 Thailand baht.
The option’s purpose is to protect an exposed liability of 500,000 baht relating to a purchase of merchandise received
on December 1, 2010 and to be paid on March 1, 2011. Relevant rates and market values at different dates are as
follows:
12/01/10 12/31/10 03/01/11
Spot rate (market price) P1.20 P 1.28 P1.27
Strike price (exercise price) 1.20 1.20 1.20
Fair value of call option P3,000 P42,000 P35,000

1. The December 31, 2010 accounts payable amounted to

a. P600, 000 c. P635, 000
b. P640, 000 d. P 0

2. The December 31, 2010 Foreign currency contract value-option is

a.P3,000 c.P35,000
b.P42, 000 d. P39,000

3. The December 31, 2010 net foreign exchange gain or (loss) is

a. P 0 c. P (1,000)
b. P1, 000 d. P40 ,000

4. The March 1, 2011 expiration date foreign exchange net gain of (loss) is
a. P 0 c. P (2,000)
b. P2, 000 d. P5,000

5. The March 1, 2011 expiration date, the Foreign currency contract value-Option is
a. P3, 000 c. P39,000
b. P35, 000 d. P42,000

6. Calculate the option’s time value at December 1, 2010

a.P3, 000 c. P40, 000
b.P35, 000 d. P42, 000
7. Calculate the option’s intrinsic value at December 31, 2010
a. P3, 000 c. P40, 000
b. P35, 000 d. P42, 000

8. Calculate the option’s (1) time value and (2) intrinsic value at March 1, 2011.
a. (1) P 3,000 and (2) P 35,000
b. (1) P 4,000 and (2) P39,000
c. (1) P 0 and (2) P35,000
d. (1) P 35,000 and (2) P 0

Problem 13.
On December 1, 2010, Chile Company paid P6, 000 to purchase a 90-day put option for FC 400,000. The
option’s purpose is to hedge an exposed accounts receivable FC 400,000 from a sale of merchandise. The
merchandise is to be shipped on December 1, 2010, payment for which is due on March 1, 2011.
Relevant rates and market values at different dates are as follows:

12/01/10 12/31/10 03/01/11

Spot rate (market price) P1.20 P1.12 P1.13
Strike price (exercise price) 1.20 1. 20 1. 20
Fair value of put Option P6, 000 P36,000 P28,000

Required: Prepare journal entries for the above information.

Foreign Currency Transaction Put Option

12/01/10 12/01/10
SR - P1.20 Put option 6,000
A/R (FC) 480,000 Cash 6,000
Sales 480,000

12/31/10 12/31/10
SR- P1.21 Loss on PO 2,000
Forex loss 32,000 PO 2,000
A/R (F/C) 32,000

Put option 32,000

Gain on PO 32,000

03/01/11 03/01/11
SR- P1.13 Loss on PO (TV) 4,000
Cash 452,000 Loss on PO (IV) 4,000
Forex Gain 4,000 Put option 8,000
A/R (FC) 448,000
Cash 28,000
Put option 28,000

-0-0-0-
Problem 14
On May 1, 2011, Sahara Company entered into a forward contract with a foreign exchange dealer to
purchase FC 1,000,000 for delivery-quoted rates at various dates follow:
Forward Rates to
Spots Rates July 30 2011
May 1, 2011 P1.185 P1.20
May 31, 2011 1.19 1.21
June 30, 2011 1.20 1.205
 July 30, 2011 1.215 1.215
The month-end fair value of the forward contract was calculated using a 5% (per annum) discount rate, as follows:
Date Contracted Current Notional Discount FV Forward
Forward Rate Forward Rate Amount Factor Contract
(a) (b) (c) (d) {(b-a) x c)/d}
May 1, 2011 1.20 1.20 1,000,000 0 0
May 31, 1.20 1.21 1,000,000 1.00835 9,917
2011
June 30, 1.20 1.205 1,000,000 1.004167 4,979
2011
July 30, 1.20 1.215 1,000,000 1.0 15,000
2011
Important notes on the above computations:
1. An inception, the fair value of the forward contract is nil, there being no change between the contracted forward rate
and the forward rate at that point. The subsequent fair value of the forward contract is determined by the change in
forward rate from the inception date to the end of the current period, multiplied by the notional amount, then dividend
by the distant factor.
2. For example, at June 30, 2011, there is one month remaining in the contract. The fair value is P4,479, computed as
follows:
[P1,000,000x(P1.205- P1.20)] / (1+0.05/12)
=P5,000 / 1.004167=P4979
3. The fair value of the forward contract is positive (receivable) because the amount payable by Sahara Company
(P1,2000,000) is less than the amount receivable (P1,215,000) based on the spot rate at maturity were P1.19
instead, the fair value will be negative (payable) because the amount payable by Sahara (P 1,200,000) is more than
the amount receivable (P 1,190.000),- P10,000,i.e
[P1,000,000x (P1.19- P1.20)]=P10,000 / 1.0= P(10,000)
4. The forward rate and the spot rate at maturity date are the same because the time value component of the forward
contract.

MULTIPLE CHOICES

1. Davao Company, a Philippine Corporation, bought inventory from supplier in Japan in November 2, 2010 for 50,000
yen, when the spot rate was P.4245. On December, the spot rate was P.4295. On January 15, 2011, Davao bought
50,000 yen at a spot rate of P.4250 and paid the invoice. How much should Davao report in its income statements
for (1) 2010 and (2) 2011 as a foreign exchange gain or (loss)

a.(1) P250 ; (2) (P225) c. (1) P0; (2) (P225)

b. (1) (P250) (2) P225 d.(1) P0; (2) P220
2. On July 1, 2010, Luzon Corporation borrowed 1,680,000 yen from Japanese Lender evidence by an interest-
bearing note due July 1, 2011. The Philippine Peso equivalent of the note principal was as follows:
July 1, 2010 - Date borrowed P 210, 000
Dec. 31, 2010 - Luzon`s year-end 240,000
July 1, 2011 - Date repaid 280,000
In its income statement for 2011, what amount should Luzon included as a foreign Exchange gain or loss?
a. P70,000 gain c. P40,000 gain
b. P70,000 loss d. P40,000 loss
3. Visayas Corporation, has the following foreign currency transactions during 2011:
1. Merchandise was purchase from a foreign supplier on January 10, 2010, for the Phil-peso equivalent of 600,000.
The invoice was paid on April 21, 2011, at the Philippine peso equivalent of P608, 000.
 2. On September 1, 2011, Visayas borrowed the Philippine peso equivalent of P3,000,000 evidence by a note that
was payable in the lender’s local currency on September 1, 2012. On December 31, 2011, the Philippine peso
equivalent of the principal amount and accrued interest were P3,200,000 and P120,000 respectively. Interest on the
note is 10%.

In Visayas 2011 income statement, what amount should be included as foreign Exchange losses?
a. P40,000 c. P228,000
b. P200,000 d. P300,000
4. On October 1, 2010, Mindanao Corp. acquired goods from USA Company for $10,000 Payable in US dollars on
April 1, 2011. Spot rates on various dates follow:
Transaction date P1 = $0.01
Balance sheet date, 12/31/10 P1 = $0.017
Settlement date P1 = $0.20

As a result of this transaction, Mindanao Corp. has a foreign exchange gain or loss in 2010 and 2011, respectively of
( rounded )
a. P(32,680) and P88,235 c. P(100) and P300
b. P32,680 and P(88,235) d. P(10) and P30

5. On July 1, 2010, Northern Luzon Company lent P308,000 to Us Supplier, evidenced by an interest-bearing note
due on July 1, 2011. The note is equivalent to $8,000 on the loan date. The note principal was appropriately included
at P328, 000 in Northern’s December 31, 2010 balance sheet. The note was repaid to Northern on July 1, 2011. Due
date when the exchange rate was P39 to $1. In its income statement for the year, ended December 31, 2011 what
amount should Northern Luzon Company include transaction gain or loss?

a. P0
b. P26, 000 gain
c. P16,000 gain
d. P16, 000 loss

Translation of Foreign currency Financial Statements.

6. Certain balance sheet accounts of a foreign subsidiary in Japan of Philippine pesos as follows:
Current rate Historical Rate
Accounts receivable P 120,000 P 100,000
Prepaid insurance 55,000 50,000
Copyright 75,000 85,000

What was the total amount included in Tagalog’s December 31, 2011 consolidated balance sheet for the above
accounts?

a. P255,000
b. P235,000
c. P240,000
d. P250,000

7. A wholly owned subsidiary in Hongkong of NCR Corp. has certain expense accounts for the year ended December
31, 2011 stated in Hongkong dollars, as follows:

Depreciation (related assets were purchased on January 1, 2008) 120,000HK$

Provision for doubtful accounts 80,000
Rent 200,000
The functional currency of the Phil. Parent and its Hongkong subsidiary is the Philippine peso.

The exchange rates for HK$ at various fates were as follows:

December 31, 2011 P5.40
Average for the year ended December 31, 2011 5.44
January 1, 2008 5.50

What total peso amount should be included in NCR Corp. 2011 consolidated income statement to reflect these
expenses?
a. P 2,176,000 b. P 2,183,000 c. P 2,180,000 d. P 2,132,000

8. On December 31, 2011 a foreign subsidiary of Philippine Company submitted the following balance in foreign
currency.

FC
Total Assets 100,000
Total Liabilities 20,000
Common Stocks 50,000
Retained Earnings, 12/331/11 30,000

The exchange rates for 1FC are as follows:

Current Rate P 3.40
Historical Rate 3.10
Weighted average rate 3.00

Assuming the retained earnings of the subsidiary on December 31, 2011 translated to Philippine pesos is P92, 000
what amount of cumulative translation adjustment is to be reported in the consolidated balance sheet on December
31, 2011?
a. P 25,000 gain c. P 25,000 loss
b. P 20,000 d. P 22,000 loss

Forward Contracts-Hedging –Economic Foreign Currency Hedge Instruments:

9. Pinas Corporation, a Philippine importer, purchased merchandise from the Star Company of Thailand for 100,000
Baht on March 1, 2011, when the spot rate for a Baht was P1.630. The accounts payable denominated in both as not
due until May 30, 2011 so Pinas immediately entered into a 90-day forward contract to hedge the transaction against
exchange rate changes. The contract was made at forward exchange rate of P1.650. Pinas settled the forward
contract and the account payable on May 30, when the spot rate for Bath was P1.600. On the settlement of the
forward contract on May 30, 2011, Pinas should record o forex gain or (loss) of:
a. P 5,000 b. P (5,000) c. P 2,000 d. P (2,000)

10. Rustan Corporation purchases merchandise from Lacoste Company of Finance for 1,000,000 Franc. The
merchandise was received on December 1, 2010, with payment due in 60 days on January 30, 2011. Also on
December 1, 2010, Rustan enters into a 60-days forward contract with the Bank to purchase the rate for Franc on
selected dates are as follows:
12/1/10 12/31/10 1/30/11
Spot rate P6.01 P6.16 P6.01
30-day futures 6.05 6.07 6.07
60-day futures 6.06 6.08 6.08

What is the net forex gain (loss from this transaction and hedge that will be reported on Rustan’s 2010 income
statement?
a. P(130,000) b. P130, 000 c. P20,000 d. P(140,000)
Terms in this set (50)

What is a subsidiary's functional currency?

A) The currency in which the entity primarily generates and expends cash.
B) Always the currency of the country in which the company has its headquarters.
C) The parent's reporting currency.
D)The currency in which transactions are denominated.
A) The currency in which the entity primarily generates and expends cash.
In comparing the translation and the remeasurement process, which of the following is true?

a)
The reported balance of inventory is normally the same under both methods.
b) The reported balance of sales is normally the same under both methods.
c) The reported balance of equipment is normally the same under both methods.
d) The reported balance of depreciation expense is normally the same under both methods.
b) The reported balance of sales is normally the same under both methods.
Which of the following statements is true for the translation process (as opposed to
remeasurement)?

A translation adjustment is created by the change in the relative value of a subsidiary's net assets
caused by exchange rate fluctuations.

A translation adjustment is created by the change in the relative value of a subsidiary's monetary
assets and monetary liabilities caused by exchange rate fluctuations.

A translation adjustment can affect consolidated net income.

Equipment is translated at the historical exchange rate in effect at the date of its purchase.
A translation adjustment is created by the change in the relative value of a subsidiary's net assets
caused by exchange rate fluctuations.
A subsidiary of Byner Corporation has one asset (inventory) and no liabilities. The functional
currency for this subsidiary is the peso. The inventory was acquired for 100,000 pesos when the
exchange rate was $0.16 = 1 peso. Consolidated statements are to be produced, and the current
exchange rate is $0.19 = 1 peso. Which of the following statements is true for the consolidated
financial statements?

A remeasurement gain must be reported.

A positive translation adjustment must be reported.
A negative translation adjustment must be reported.
A remeasurement loss must be reported.
A positive translation adjustment must be reported.
At what rates should the following balance sheet accounts in foreign statements be translated
(rather than remeasured) into U.S. dollars?

Accumulated
Depreciation—Equipment Equipment
Current Current
Historical Historical
Historical Current
Current Average for year
Current Current

Explanation
All asset accounts are translated at current rates.
Stated at

Current Rates Historical Rates

Accounts receivable, current $ 200,000 $ 220,000
Accounts receivable, long term 100,000 110,000
Prepaid insurance 50,000 55,000
Goodwill 80,000 85,000

$ 430,000 $ 470,000

This subsidiary's functional currency is a foreign currency. What total should Rose's balance
sheet include for the preceding items?

$440,000.
$430,000.
$435,000.
$450,000.
$430,000.

Explanation
Because the foreign currency is the functional currency, a translation is required. All assets
accounts are translated at current rates.
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Newberry, Inc., whose reporting currency is the U.S. dollar ($), has a subsidiary in Argentina,
whose functional currency also is the $. The subsidiary acquires inventory on credit on
November 1, 2014, for 100,000 pesos that is sold on January 17, 2015, for 130,000 pesos. The
subsidiary pays for the inventory on January 31, 2015. Currency exchange rates are as follows:

November 1, 2014 $ 0.16 = 1 peso

December 31, 2014 0.17 = 1
January 17, 2015 0.18 = 1
January 31, 2015 0.19 = 1
A)
What amount does Newberry's consolidated balance sheet report for this inventory at December
31, 2014?

$19,000.
$17,000.
$18,000.
$16,000.

B)
What amount does Newberry's consolidated income statement report for cost of goods sold for
the year ending December 31, 2015?

$18,000.
$19,000.
$17,000.
$16,000.
A) $16,000.

Explanation
The U.S. dollar is the foreign subsidiary's functional currency, so a remeasurement is
appropriate. Inventory is translated at the historical exchange rate [100,000 × $0.16 = $16,000].

B) $16,000.
Explanation
The U.S. dollar is the foreign subsidiary's functional currency, so a remeasurement is
appropriate. Cost of goods sold is translated at the historical rate in effect when the inventory
was acquired [100,000 × $0.16 = $16,000].
Problem 10-14 (LO 10-1)
In the translated financial statements, which method of translation maintains the underlying
valuation methods used in the foreign currency financial statements?

Monetary/nonmonetary method.
Current rate method; income statement translated at average exchange rate for the year.
Temporal method.
Current rate method; income statement translated at exchange rate at the balance sheet date.
Temporal method.

Explanation
By translating items carried at historical cost by the historical exchange rate, the temporal
method maintains the underlying valuation method used by the foreign subsidiary.
In accordance with U.S. generally accepted accounting principles, which translation combination
is appropriate for a foreign operation whose functional currency is the U.S. dollar?
Method Treatment of Translation Adjustment
Current rate Gain or loss in net income
Temporal Other comprehensive income
Current rate Other comprehensive income
Temporal Gain or loss in net income
Temporal Gain or loss in net income

Explanation
When the U.S. dollar is the functional currency, U.S. GAAP requires remeasurement using the
temporal method with remeasurement gains and losses reported in income.
A foreign subsidiary's functional currency is its local currency, which has not experienced
significant inflation. The weighted average exchange rate for the current year is the appropriate
exchange rate for translating

Wages Expense Wages Payable

Yes Yes
Yes No
No Yes
No No
Yes No

Explanation
Wages expense is translated at the average exchange rate; wages payable are translated at the
current exchange rate.
A large private not-for-profit entity's statement of activities should report the net change for net
assets that are

Unrestricted Permanently Restricted

No Yes
Yes No
No No
Yes Yes
Yes Yes
A private not-for-profit entity receives three large cash donations:

One gift of $70,000 is unrestricted.

One gift of $90,000 is restricted to pay the salary of the organization's workers.

One gift of $120,000 is restricted forever with the income to be used to provide food for needy
families.

Which of the following statements is not true?

Temporarily restricted net assets have increased by $90,000.
When the donated money is spent for salaries, unrestricted net assets will increase and decrease
by the same amount.
Permanently restricted net assets have increased by $210,000.
When the donated money is spent for salaries, temporarily restricted net assets will decrease.
Permanently restricted net assets have increased by $210,000.
A private not-for-profit university charges its students tuition of $1 million. However, financial
aid grants total $220,000. In addition, the school receives a $100,000 grant restricted for faculty
salaries. Of this amount, it spent $30,000 appropriately this year. On the statement of activities,
the school reports three categories: (1) revenues and support, (2) net assets reclassified, and (3)
expenses. Which of the following is not true?

In the unrestricted net assets, the revenues and support should total $1 million.
Unrestricted net assets shows the $220,000 as a direct reduction to the tuition revenue balance.
Unrestricted net assets should show an increase of $30,000 for net assets reclassified.
Unrestricted net assets should recognize expenses of $30,000.
In the unrestricted net assets, the revenues and support should total $1 million.
A private not-for-profit entity has the following activities performed by volunteers who work at
no charge. In which case should no contribution be reported?
A carpenter builds a porch on the back of one building so that patients can sit outside.
A computer expert repairs the organization's computer.
An accountant does the organization's financial reporting.
A local librarian comes each day to read to the patients.
A local librarian comes each day to read to the patients.

Explanation:
The work of the librarian does not enhance a nonfinancial asset nor does it require a specialized
skill that would be purchased if not donated.
The financial reporting for private not-for-profit entities primarily focuses on
Inherent differences of various not-for-profit entities that impact reporting presentations.
Standardization of fund information reported.
Basic information for the organization as a whole.
Distinctions between current fund and noncurrent fund presentations.
Basic information for the organization as a whole.

Explanation:
In its original standards for not-for-profit entities, FASB wanted to get away from financial
reporting based on fund accounting. The statements were designed to provide information about
the private not-for-profit entity as a whole.
On December 30, 2015, Leigh Museum, a not-for-profit entity received a $7,000,000 donation of
Day Co. common stock shares with donor-stipulated requirements as follows:

The museum is to sell shares valued at $5,000,000 and use the proceeds to erect a public viewing
building.

The museum is to retain shares valued at $2,000,000 and use the dividends to support current
operations.
As a consequence of its receipt of the Day Co. shares, how much should Leigh report as
temporarily restricted net assets on its 2015 statement of financial position?
$0.
$5,000,000.
$2,000,000.
$7,000,000.
$5,000,000.

Explanation:
The money to be used for the building is temporarily restricted for that purpose whereas the other
$2 million is permanently restricted so that only the subsequent income earned can be used.
A local citizen gives a not-for-profit entity a cash donation that is restricted for research
activities. The money should be recorded in
Unrestricted Net Assets.
Temporarily Restricted Net Assets.
Permanently Restricted Net Assets.
Deferred Revenue.
Temporarily Restricted Net Assets.

Use of the money is limited to the donor's specified purpose.

Theresa Johnson does volunteer work for a local not-for-profit entity as a community service.
She replaces without charge an administrator who would have otherwise been paid $31,000.
Which of the following statements is true?

The charity should make no entry.

The charity should recognize a reduction in expenses of $31,000.
The charity should recognize a restricted gain of $31,000.
The charity should recognize a contribution of $31,000 as an increase in unrestricted net assets as
well as salary expense of $31,000.
The charity should recognize a contribution of $31,000 as an increase in unrestricted net assets as
well as salary expense of $31,000.

This donated service meets the rules for recognition. The expense and the contributed support are
both reported.
Which of these forms must most tax-exempt organizations file annually with the Internal
Revenue Service?
1203.
990.
501(c)(3).
501.
990.

Form 990 is the annual informational form that most tax-exempt organizations are required to
file by the IRS.
Belwood University is a private not-for-profit school that has tax-exempt status. Which of the
following is most likely to be the type of tax-exempt status that Belwood holds?
501(c)(4).
501(c)(3).
501(c)(5).
501(c)(6).
501(c)(3).

Explanation:
As an educational institution, Belwood University will qualify as a 501(c)(3) tax-exempt
organization.
A group of high school seniors performs volunteer services for patients at a nearby nursing
home. The nursing home would not otherwise provide these services, such as wheeling patients
in the park and reading to them. At the minimum wage rate, these services amount to $21,320,
but their actual value is estimated to be $27,400. In the nursing home's statement of activities,
what amount should be reported as public support?
$6,080.
$27,400.
$0.
$21,320.
$0.

Explanation:
These volunteer services, although important, do not meet the criteria for recognition. They do
not require a specialized skill that would be otherwise purchased. They do not enhance a
nonfinancial asset.
A voluntary health and welfare entity receives a gift of new furniture having a fair value of
$2,100. The group then gives the furniture to needy families following a flood. How should the
charity record receipt and distribution of this donation?

Recognize contributed support of $2,100 and community expenditures of $2,100.

Record contributed support of $2,100 and community assistance expense of $2,100.
Recognize revenue of $2,100.
Make no entry.
Record contributed support of $2,100 and community assistance expense of $2,100.
A voluntary health and welfare entity has the following expenditures:

Research to cure disease $ 60,000

Fund-raising costs 70,000
Work to help disabled 40,000
Administrative salaries 90,000

How should the charity report these items?

Program service expenses of $190,000 and supporting service expenses of $70,000.
Program service expenses of $160,000 and supporting service expenses of $100,000.
Program service expenses of $170,000 and supporting service expenses of $90,000.
Program service expenses of $100,000 and supporting service expenses of $160,000.
Program service expenses of $100,000 and supporting service expenses of $160,000.
Assume that the U.S. dollar is the subsidiary's functional currency. What balances does a
consolidated balance sheet report as of December 31, 2015?
a.
Marketable equity securities = $16,000 and Inventory = $16,000.
b.
Marketable equity securities = $17,000 and Inventory = $17,000.
c.
Marketable equity securities = $19,000 and Inventory = $16,000.
d.
Marketable equity securities = $19,000 and Inventory = $19,000.
c.
Marketable equity securities = $19,000 and Inventory = $16,000.

temporal method
inventory (at cost) is remeasured at historical cost .16

marketable equity securities are are current rate at .19

A U.S. company's foreign subsidiary had these amounts in foreign currency units (FCU) in 2015:

The average exchange rate during 2015 was $0.80 = FCU 1. The beginning inventory was
acquired when the exchange rate was $1.00 = FCU 1. Ending inventory was acquired when the
exchange rate was $0.75 = FCU 1. The exchange rate at December 31, 2015, was $0.70 = FCU
1. Assuming that the foreign country is highly inflationary, at what amount should the foreign
subsidiary's cost of goods sold be reflected in the U.S. dollar income statement?
a.
$7,815,000.
b.
$8,040,000.
c.
$8,065,000.
d.
$8,090,000.
c.
$8,065,000.

begining inv. 2000 000x1 =200000

purchases 10300000 x .8=824000
ending inventory (500000)x.75=(375000)
COGS= 10,000,000 8,065,000
Which of the following items is remeasured using historical exchange rates under the temporal
method?
a.
Accumulated depreciation on equipment.
b.
Cost of goods sold.
c.
Marketable equity securities.
d.
Retained earnings.
c.
Marketable equity securities.
Gains from remeasuring a foreign subsidiary's financial statements from the local currency,
which is not the functional currency, into the parent's currency should be reported as a(n)
a.
Deferred foreign exchange gain.
b.
Translation adjustment in Other Comprehensive Income.
c.
Extraordinary item, net of income taxes.
d.
Part of continuing operations.
d.
Part of continuing operations.
Charged students $1.2 million in tuition.
tuition recieveables 120000
tuition revenurs
URNA
b.
Received a donation of investments that had cost the owner $100,000 but was worth $300,000 at
the time of the gift. According to the gift's terms, the university must hold the investments
forever but can spend the dividends for any purpose. Any changes in the value of these securities
must be held forever and cannot be spent.
investments 300000
contributions-PRNA
Received a cash donation of $700,000 that must be used to acquire laboratory equipment.
cash 700,000
contributions-TRNA
+TRNA
Gave scholarships in the amount of $100,000 to students.
scholarships 100,000
tuition recievable
(URNA)
Paid salary expenses of $310,000 in cash
salary expenses 310,000
cash
(URNA)
f.
Learned that a tenured faculty member is contributing his services in teaching for this year and
will not accept his $80,000 salary.
salary expense 80,000
contribution revenue service

URNA
g.
Spent $200,000 of the money in (c) on laboratory equipment (no time restriction is assumed on
this equipment).
equipment 200,000
cash

release from restrictions-TRNA 200,000

release from restrictions URNA
h.
Learned that at the end of the year, the investments in (b) are worth $330,000.
investments 30,000
unrealized gain on investment

PRNA
i.
Received dividends of $9,000 cash on the investments in (b).
cash
investment-URNA 9000
j.
Computed depreciation expense for the period of $32,000.
depreciation expense
accumulated depreciation
where do all expenses fall under
URNA
k.
The school's board of trustees decides to set aside $100,000 of previously unrestricted cash for
the future purchase of library books.
cash- restricted internally-library books
cash 100,000
l.
Received an unconditional promise of $10,000, which the school fully expects to collect in three
years although its present value is only $7,000. The school assumes that the money cannot be
used until the school receives it.
pledge receivable
contribution-TRNA
m.
Received an art object as a gift that is worth $70,000 and that qualifies as a work of art. The
school prefers not to record this gift
Collections- sometimes not as assets
NO ENTRY
n.
Paid utilities and other general expenses of $212,000.
Utilties and other general expenses
cash
o.
Received free services from alumni who come to campus each week and put books on the
shelves in the library. Over the course of the year, the school would have paid $103,000 to have
this work done.
no specialized skill NO ENTRY
Which of the following combinations correctly describes the relationship between foreign
currency transactions, exchange rate changes, and foreign exchange gains and losses?
import purchase
foreign currency: depreciates
foreign exchange: gain
2.
In accounting for foreign currency transactions, which of the following approaches is used in the
United States?
a.
One-transaction perspective; accrue foreign exchange gains and losses.
b.
One-transaction perspective; defer foreign exchange gains and losses.
c.
Two-transaction perspective; defer foreign exchange gains and losses.
d.
Two-transaction perspective; accrue foreign exchange gains and losses.
d.
Two-transaction perspective; accrue foreign exchange gains and losses.
3.
On October 1, 2015, Mud Co., a U.S. company, purchased parts from Terra, a Portuguese
company, with payment due on December 1, 2015. If Mud's 2015 operating income included no
foreign exchange gain or loss, the transaction could have
a.
Resulted in an extraordinary gain.
b.
Been denominated in U.S. dollars.
c.
Generated a foreign exchange gain to be reported as a deferred charge on the balance sheet.
d.
Generated a foreign exchange loss to be reported as a separate component of stockholders'
equity.
b.
$10,000.
4.
Post, Inc., had a receivable from a foreign customer that is payable in the customer's local
currency. On December 31, 2015, Post correctly included this receivable for 200,000 local
currency units (LCU) in its balance sheet at $110,000. When Post collected the receivable on
February 15, 2016, the U.S. dollar equivalent was $95,000. In Post's 2016 consolidated income
statement, how much should it report as a foreign exchange loss?
a.
Page 444
$-0-.
b.
$10,000.
c.
$15,000.
d.
$25,000.
C
On July 1, 2015, Houghton Company borrowed 200,000 euros from a foreign lender evidenced
by an interest-bearing note due on July 1, 2016. The note is denominated in euros. The U.S.
dollar equivalent of the note principal is as follows:

In its 2016 income statement, what amount should Houghton include as a foreign exchange gain
or loss on the note?
a.
$35,000 gain.
b.
$35,000 loss.
c.
$10,000 gain.
d.
$10,000 loss.
D
On July 1, 2015, Houghton Company borrowed 200,000 euros from a foreign lender evidenced
by an interest-bearing note due on July 1, 2016. The note is denominated in euros. The U.S.
dollar equivalent of the note principal is as follows:

In its 2016 income statement, what amount should Houghton include as a foreign exchange gain
or loss on the note?
a.
$35,000 gain.
b.
$35,000 loss.
c.
$10,000 gain.
d.
$10,000 loss.
D
New Colony Corporation (a U.S. company) made a sale to a foreign customer on September 15,
2015, for 100,000 foreign currency units (FCU). It received payment on October 15, 2015. The
following exchange rates for 1 FCU apply:

sept 15- .40

sept 30- .42
oct 15- .37

Prepare all journal entries for New Colony in connection with this sale, assuming that the
company closes its books on September 30 to prepare interim financial statements.
accts recievable 40,000
sales

accts recievable
Foreign exchange gain (100,000x (.42-.40))

foreign exchange loss 5000

accts recievable

cash 37000
accts receivable

Terms in this set (8)

Foreign subsidiaries of US parent companies that operate in highly inflationary economies are
required by GAAP to use which method for translation the financial statements:
Temporal Method, with the translation gain or loss to be reported as part of Comprehensive
income
A US company owns a foreign subsidiary. To prepare consolidated financial statements, when
would the parent company convert the foreign subsidiary's accounts into US GAAP?
Prior to the beginning of the translation process
A US company would use the foreign currency as its foreign subsidiary's functional currency if
the foreign subsidiary's
Intra-entity transactions with the parent company are limited.
Which one of the following translation methods has as its basic assumption the premise that a
company's net investment in a foreign operation is exposed to foreign exchange risk?
current rate method
The primary currency of the foreign entity's operating environment is known as the
translation currency
A positive translation adjustment will occur when
a net asset balance sheet exposure exists and the foreign currency appreciates
When the currency exchange rate is used for translation and the foreign currency increases in
value, if the liabilities increase, the company would recognize a
negative translation adjustment
A US company owns an entity located in Denmark that is relatively self contained and integrated
with the local economy. The foreign company uses the krone in its daily operations. The US
company has calculated a $50,000 translation adjustment related to the foreign entity. How the
company report this adjustment in its consolidated financial statements?
The parent would use the current rate method and report the translation adjustment in its other
comprehensive income