Cebu Roosevelt Memorial Colleges, Inc.

1st Semester, AY 2020-2021

Semi-Final Exam: Business Combinations

THEORY
1. The exchange difference arising after the translation is treated as:
a. Forex gain or loss c. An asset
b. Foreign currency translation adjustment d. A liability

2. The exchange rate for converting foreign entity’s retained earnings into Philippine pesos is:
a. Historical rate b. Spot rate c. Current rate d. Average rate

3. For each items listed below, state whether they increase or decrease the balance in cumulative
translation adjustments, assuming a credit balance at the beginning of the year, when the
foreign currency weakened relative to the Philippine peso during the year.
Comprehensive income Dividends declared
a. Increase Decrease
b. Decrease Decrease
c. Decrease Increase
d. Increase Increase

4. An entity started trading in country A, whose currency was the peso. After several years the
entity expanded and exported its product to country B, whose currency was the euro. The
business was conducted through a subsidiary in country B. The subsidiary is essentially an
extension of the entity’s own business, and the directors of the two entities are common. The
functional currency of the subsidiary is:
a. The peso c. The peso or the euro
b. The euro d. Difficult to determine

5. Which of the considerations would not be relevant in determining the entity’s functional
currency?
a. The currency that influence the costs of the entity
b. The currency in which fund is generated
c. The currency in which receipt from operating activities are retained
d. The currency that is the most internationally acceptable for trading

6. What exchange rates should be used to translate the items below, assuming the foreign
subsidiary is a country which has not experienced hyperinflation over three years?
Equipment Depreciation Inventories
a. Current rate Average rate Current rate
b. Historical rate Historical rate Current rate
c. Current rate Historical rate Current rate
d. Historical rate Average rate Average rate
 7. What exchange rate is used to translate assets and liabilities of a foreign entity?
a. Closing rate c. Average rate
b. Historical rate d. None of the above

8. Foreign currency translation adjustments arising from translation of the statements of a foreign
entity are currently reported in:
a. Stockholders’ equity of the foreign subsidiary
b. Revenue and expense of the foreign subsidiary
c. Consolidated income statement
d. Paid in capital of the parent company

9. For each items listed below, state whether they increase or decrease the balance in cumulative
translation adjustments (assuming a credit balance at the beginning of the year) when the
foreign currency strengthened relative to the Philippine peso during the year.
Net income Dividends declared
a. Decrease Increase
b. Increase Decrease
c. Decrease Decrease
d. Increase Increase

10. What exchange rates should be used to translate the items below, assuming the foreign
subsidiary is in a country which has not experienced hyperinflation over three years?
Common stock Premium on Bonds Payable Sales
a. Current rate Historical rate Average rate
b. Historical rate Current rate Average rate
c. Historical rate Historical rate Current rate
d. Current rate Current rate Current rate

PROBLEMS
1. In October 2015, Zebra Corporation obtained a loan amounting to US$120,000 for the purchase
of machinery and equipment. By the end of the year, one-half of the loan was still unpaid and a
ten percent “devaluation” has taken place. If the foreign loan payable account is correctly
reported in the balance sheet at ₱1,848,000, the rate of exchange at the time the loan was
obtained must have been
a. US$1.00 = ₱27.00 c. US$ = ₱29.00
b. US$ = ₱28.00 d. US$ = ₱30.00

2. HJC Co. sells goods to a customer in Bangkok for 500,000 bahts on May 31, 2020 when the
exchange rate was ₱0.9875/Baht. The customer paid the account in full a week later when the
exchange rate was ₱1/Baht. By reason of the exchange rate fluctuation, HJC Co. should
recognize:
a. A loss of ₱6,250 if billing is in pesos
b. A gain of ₱6,250 if billing is in pesos
 c. A loss of ₱6,250 if billing is in bahts
d. A gain of ₱6,250 if billing is in bahts

3. KYT Native Products received the following income statement from its Los Angeles, USA branch
for the five month ended May 31, 2020:
$120,00
Sales 0
Cost of goods sold
Jan. 1 inventory $15,000
Shipments from home
office 75,000
(10,000
May 31 inventory ) (80,000)
Gross profit on sales $40,000
Expenses (22,000)
Net income $18,000
Exchange rates, expressed in pesos per dollar, were ₱24.00 on Jan. 1 and ₱27.50 on May 31,
while the average for the period was ₱26.00. On the home office books, shipments to branch
were recorded as ₱1,975,000. The reported branch net income to be recognized by the home
office would be
a. ₱432,000 b. ₱468,000 c. ₱488,000 d. ₱495,000

4. Airblade Trading sells goods to Monster Co. in Bangkok at 1,000,000 bahts. The exchange rate at
this time is ₱0.9875/Baht. Twenty days later, Monster Co. pays its account when the exchange
rate is ₱1.00/Baht. By reason of exchange rate fluctuation, how much do Airblade and Monster
Co. stand to gain or lose if the agreed currency for the invoice is in Thai Baht?
A B C D
Airblade ₱12,500 gain ₱12,500 loss No gain/loss No gain/loss
Monster Co. No gain/loss No gain/loss B12,500 loss B12,500 gain
5. Burgsman Co. buys goods from Ducati Co. of Hongkong payable in Hongkong dollars on a 60-day
credit term. Burgsman Co.’s balance sheet as of June 30, 2020, reflected a payable to Ducati Co.
for merchandise valued at HK$250,000 that were purchased at the going rate of ₱4.00/HK$.
What exchange gain or loss should Burgsman Co. recognize assuming that the prevailing
exchange rate on June 30, 2020 is HK$0.275/₱?
a. ₱6,250 gain b. ₱25,000 loss c. ₱27,500 gain d. ₱90,909
gain

6. Kultura, Inc. buys merchandise from Hokkaido Trading in Japan valued at ¥2,500,000. The
prevailing exchange rate is ₱0.118376/¥. Twenty days later, Kultura, Inc. settles the account
when the exchange rate is ₱0.1302136/¥. To what extent did Kultura, Inc. and Hokkaido Trading
gain, or lose, by reason of the exchange rate fluctuation?
A B C D
Kultura, Inc. No gain/loss No gain/loss ₱29,594 gain ₱29,594 loss
Hokkaido Trading ¥227,273 gain ¥227,273 loss No gain/loss No gain/loss
7. On December 1,2020, Abra Corp. received an order for equipment FOB Shipping Point from
Benetton Co. The order is billed for $258,000 payable on January 31, 2021. The equipment
was shipped and invoiced to Benetton on December 12, 2020.
Buying Selling
December 1 51.45 51.60
December 12 51.58 51.84
December 31 51.72 51.96
January 31, 2021 51.68 51.89
On the December 31, 2020 income statement of Abra Corp., how much is the forex gain (loss) to
be reported on this transaction?
a. ₱36,120 b. ₱42,840 c. (₱30,960) d. (₱42,840)

8. Metro Company acquired the Gaisano Company, a foreign subsidiary, on September 10,
2020. The fair value of the assets of Gaisano was the same as their carrying amount except
for land where the fair value was $50,000 greater than carrying amount. This fair value
adjustment has not been recognized in the separate financial statements of Gaisano
Company. Consolidated financial statements are prepared at year-end December 31, 2020
requiring translation of all foreign operations’ results into the presentation currency of pesos.
The following rates of exchange have been identified:
September 10, 2020 $1.62 : ₱1
December 31, 2020 $1.56 : ₱1
Average rate for the year ended December 31, 2020 $1.60 : ₱1
Average rate for the period from Sept. 10 to Dec. 31, 2020 $1.58 : ₱1
What fair value adjustment is required to the carrying amount of land in the consolidated
statement of financial position?
a. ₱30,864 b. ₱32,051 c. ₱31.250 d. ₱31,646

9. For the current year a Sri Lankan subsidiary reported a beginning FIFO inventory of 40,000
Rupee, purchases of 300,000 Rupee, and an ending FIFO inventory of 30,000 Rupee. The
exchange rate for the Sri Lankan Rupee was .5325 on January 1, and .5854 on December
31. The average rate for the year was .5745. What is the cost of goods sold in Philippine
peso?
a. ₱176,088 b. ₱178,095 c. ₱178,000 d. ₱181,474

10. Chan Company has a branch in Singapore. On December 31, 2020, the Singapore branch
reported the following expenses stated in Singapore dollar:
Bad debts expense S$6,000
Amortization of patent (patent was acquired on 1/1/16) 4,000
Rent expense 10,000
The exchange rates for Singapore dollars at various dates were as follows:
January 1, 2016 ₱20.00
December 31, 2020 26.35
Average rate for year ended Dec. 31, 2020 28.20
What is the Philippine peso amount to be included in the translated statement of CI of the
Singapore branch for the year ended December 31, 2020 for the foregoing expense?
a. ₱527,000 b. ₱564,000 c. ₱531,200 d. ₱400,000