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The Effects of Changes in Foreign Exchange Rates: Solutions To Quiz 2
The Effects of Changes in Foreign Exchange Rates: Solutions To Quiz 2
The Effects of Changes in Foreign Exchange Rates: Solutions To Quiz 2
Chapter 10
The Effects of Changes in Foreign Exchange Rates
ANSWERS TO QUIZ 1:
1. D 6. A
2. C 7. C
3. D 8. D
4. A 9. B
5. D 10. C
SOLUTIONS TO QUIZ 2:
1. Solution:
Nov. 29,
No entry
20x1
Dec. 1, Machine (€20,000 x P58) 1,160,000
20x1 Accounts payable 1,160,000
to record the purchase of machine on an FOB shipping point
term
Dec. 15, Accounts payable 20,000
20x1 Foreign exchange gain* 20,000
to recognize FOREX gain on the exchange difference
Total net foreign exchange loss recognized in 20x1 is P40,000 (60,000 loss – 20,000 gain).
Translation:
Translated total assets 40M – translated total liabilities 20M = translated total equity 20M
(a)
Entity A has nobeginning retained earnings because it has just started operations during the year. In the
case of a non-newly formed entity, the amount to be included here would be the translated retained
earnings from the preceding year.
After translating all the amounts, the exchange difference is simply “squeezed” as the balancing
figure between ‘total assets’ and ‘total liabilities and equity.’ This is computed as follows: (¥40M
total assets – ¥20 total liabilities – ¥4M share capital – ¥9 retained earnings) = ¥7 exchange difference –
gain (credit).