1. On November 29, 20x1, ABC Co.

placed a non-cancellable purchase order for the importation of

a machine with a purchase price of €20,000 from a company based in France. The contract term
is FOB shipping point. The machine was shipped on December 1, 20x1 and was received by ABC
on December 15, 20x1. The purchase price was settled on January 3, 20x2.

The following are the exchange rates:

November 29, 20x1………………………………………..₱55:€1
December 1, 20x1………………………………………….₱58:€1
December 15, 20x1………………………………………..₱57:€1
December 31, 20x1………………………………………..₱60:€1
January 3, 20x2…………………………………………….₱61:€1

Requirement: Provide the journal entries.

1. Solution:
Nov. 29,
No entry
20x1
Dec. 1, 20x1 Machine (€20,000 x P58) 1,160,000
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

*Accounts payable – Dec. 15, 20x1 (€20,000 x P57) P1,140,000

Accounts payable – Dec. 1, 20x1 (€20,000 x P58) 1,160,000
Decrease in accounts payable – FOREX gain P 20,000

Dec. 31, Foreign exchange loss* 60,000

20x1 Accounts payable 60,000
to recognize FOREX loss on the exchange difference

* Accounts payable – Dec. 31, 20x1 (€20,000 x P60) P1,200,000

Accounts payable – Dec. 15, 20x1 (€20,000 x P57) 1,140,000
Increase in accounts payable – FOREX loss P 60,000

Total net foreign exchange loss recognized in 20x1 is P40,000 (60,000 loss – 20,000 gain).

Jan. 3, 20x2 Accounts payable 1,200,000

Foreign exchange loss (squeeze) 20,000
Cash in bank (€20,000 x P61) 1,220,000
to record the settlement of the purchase transaction

The foreign exchange loss of P20,000 is recognized in profit or loss in 20x2.

Use the following information for the next three questions:
Entity A has just started its operations on January 1, 20x1. On this date, Entity A’s equity consisted
of ₱2M share capital, which were issued also on this date. Entity A’s functional currency is the
Philippine peso (₱). However, it wishes to present its 20x1 financial statements into Japanese yen (¥).
The following information was gathered on December 31, 20x1, after a year of operations.

Total assets ₱10M

Total liabilities ₱5M

Share capital 2M
Retained earnings 3M
Total liabilities and equity ₱10M

Income ₱7M
Expenses (4M)
Profit ₱3M

Relevant exchange rates:

January 1, 20x1 (historical rate for the share capital) ₱1: ¥2
Average rate ₱1: ¥3
December 31, 20x1 (closing rate) ₱1: ¥4

2. How much is the translated total assets?

a. ¥40M
b. ¥36M
c. ¥20M
d. ¥18M

3. How much is the translated total equity?

a. ¥40M
b. ¥36M
c. ¥20M
d. ¥18M

4. How much is the translated profit or loss?

a. ¥9M
b. ¥7M
c. ¥6M
d. ¥12M
 Translation:

in pesos rates in yens

Total assets ₱10M ¥4 (CR) ¥40M

Total liabilities ₱5M ¥4 (CR) ¥20M

Share capital 2M ¥2 (HR) 4M
Retained earnings 3M (see below) 9M
Exchange differences / Translation Adj. (g/l) - (squeeze) 7M
Total liabilities and equity ₱10M ¥40M

Income ₱7M ¥3 (AR) ¥21M

Expenses (4M) ¥3 (AR) (12M)
Profit ₱3M ¥3 (AR) ¥9M

Translated total assets 40M – translated total liabilities 20M = translated total equity 20M

 Retained earnings is translated as follows:

in pesos rate in yens
Retained earnings, beginning 0 (not applicable) 0 (a)
Profit 3M 3 9M
Retained earnings, end. 3M 9M

Entity A has no beginning retained earnings because it has just started operations during the year. In
(a)

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).

The exchange difference can also be reconciled as follows:

1) Translation of opening net assets

Equity, Jan. 1 - at opening rate (₱2M x ¥2) ¥4M
Equity, Jan. 1 - at closing rate (₱2M x ¥4) 8M
Increase in opening net assets – gain 4M
Cumulative translation gain, Jan. 1 (a) 0
2) Translation of changes in net assets during the period:
Profit or loss:
Profit - at average rate (₱3M x ¥3) 9M
Profit - at closing rate (₱3M x ¥4) 12M
Increase in profit – gain 3M

Exchange difference - gain ¥7M

(a) See explanation on retained earnings above.