FOREIGN CURRENCY TRANSACTIONS

1. On November 15, 20x4, CC Inc., a Philippine company, ordered merchandise

FOB shipping point from a German company for 200,000 foreign currency
units (FCU). The merchandise was shipped and invoice on December 10,
20x4. CC paid the invoice on January 10, 20x5. The spot rates for FCU on the
respective dates were:
November 15, 20x4 P .4955
December 10, 20x4 .4875
December 31, 20x4 .4675
January 10, 20x5 .4475

In CC’s December 31, 20x4, income statement, the foreign exchange gain is:

2. On July 1, 20x4, BY Company borrowed 1,680,000 local currency units (LCU)

from a foreign lender evidenced by an interest-bearing note due on July 1,
20x5, which is denominated in the currency of the lender. The Philippine peso
equivalent of the note principal was as follows:
Date Amount
7/1/x4 (date borrowed) P210,000
12/31/x4 (BY’s year-end) 240,000
7/1/x5 (date repaid) 280,000
In its income statement for 20x5, what amount should BY include as a foreign
exchange gain or loss on the note principal?

3. Greco, Inc. a Philippine corporation, bought machine parts from Franco

Company of Germany on March 1, 20x4, for 70,000 foreign currency units
(FCUs), when the spot rate for FCU was P0.5395. Greco’s year-end was March
31, 20x4, when the spot rate for FCU was P0.5445. Greco bought 70,000 FCUs
and paid the invoice on April 20, 20x4, when the spot rate was P0.5495. How
much should be shown in Greco’s income statements as foreign exchange
(transaction) gain or loss for the years ended March 31, 20x4 and 20x5?

4. Cassowary Corporation’s balance sheet at December 31, 20x3 included a

P20,400 account receivable from foreign customer. The account receivable
was denominated as 30,000 foreign currency units (FCUs). What entry did
Cassowary make on January 16, 20x3 when the account receivable was
collected and the exchange rate for 1 FCU was P.67?
a. Cash 20,100

Accounts Receivable 20,100

b. Cash 20,100

Exchange Loss 300

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 Accounts Receivable 20,400

c. Cash 20,400

Accounts Receivable 20,400

d. Cash 20,700

Accounts Receivable 20,400

Exchange Gain 300

5. Kettle Company purchased equipment for 375,000 FCUs (foreign currency

units) from a supplier in a foreign country on July 3, 20x4. Payment in FCU is due
on Sept. 3, 20x4. The exchange rates to purchase one FCU is as follows:
July 3 August 31, (year end) September 3
Spot-rate 1.58 1.55 1.54
30-day rate 1.57 1.53 --
60-day rate 1.56 1.49 --
On its August 31, 20x4, income statement, what amount should Kettle report
as a foreign exchange transaction gain:

6. On March 1, 20x4, Wilson Corporation sold goods for a peso equivalent of

P31,000 to a foreign supplier. The transaction is denominated in foreign
currency (FC). The payment is received on May 10. The exchange rates were:
March 1: 1 FC = P.31
May 10: 1 FC = P.34
What entry is required to revalue foreign currency payable to peso equivalent
value on May 10?
a. Account Receivable . . . . . . . . . . . . . . . . . . . . . . . . 93
Foreign Currency Transaction Gain . . . . . . . . . . 93
b. Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Foreign Currency Transaction Gain . . . . . . . . . . 3,000
c. Foreign Currency Transaction Loss . . . . . . . . . . . . . . 3,000
Accounts Receivable . . . . . . . . . . . . . . . . . . . . 3,000
d. Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Foreign Currency Transaction Gain . . . . . . . . . . 93
7. On 12/12/x6, a domestic exporter sold inventory to a foreign company for
100,000 FCUs (foreign currency units). On that date, the direct spot rate was
P.20. At 12/31/x6, the direct spot rate was P.24. On l/22/x7, when the direct
spot rate was P.21, the domestic exporter received full payment of 100,000
FCUs. In the importer’s 20x6 financial statements, what should be reported as
an FX gain or loss?

8. On 9/30/x6, a domestic importer acquired inventory from an Italian firm for

100,000 FCUs (foreign currency units). On that date, the direct spot rate was
P.90. At l2/31/x6, the direct spot rate was P.85. On l/7/x7, when the direct
spot rate was P.93, the domestic importer made full payment of 100,000

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 FCUs. In the importer’s 20x6 financial statements, what should be reported as
an FX gain or loss?

9. Greco, Inc. a Philippine corporation, bought machine parts from Franco

Company of foreign country on March 1, 20x4, for 70,000 foreign currencies
(FCs), when the spot rate for FC was P0.5395. Greco’s year-end was March 31,
20x4, when the spot rate for marks FCs P0.5445. Greco bought 70,000 FCs and
paid the invoice on April 20, 20x4, when the spot rate was P0.5495. How much
should be shown in Greco’s income statements as foreign exchange
(transaction) gain or loss for the years ended March 31, 20x4 and 20x5?
20x4 20x5 20x4 20x5
a. P-0- P-0- c. P350 loss P-0-
b. P-0- P350 loss d. P350 loss P350 loss
Use the following information for questions 10 to 12.
RD Corporation purchases memory on March 15 from a Taiwanese company for
6,500,000 FCUs (Foreign Currency Units). Payment for the inventory occurs on
May 15. The exchange rate is 1 FCU = P.029 on March 15 and 1 FCU = P.025 on
May 15.
10. What is the amount recorded on RD’s financial records for the inventory on
March 15?
11. What is the amount on Exchange Gain or Loss recorded on RD’s financial
records on May 15?
12. What is the credit to cash when RD pays for the inventory on May 15?

Use the following information for questions 13 to 15.

Wizard Corporation sells inventory on June 20 to a German company for 86,000
FCUs (Foreign Currency Units). Payment occurs on August 10. The exchange
rate on June 20 is 1 FCU = P1.016 and 1 FCU = P1.022 on August 10.
13. What is the amount recorded on Wizard’s financial records for the sale on
June 20?
14. What is the amount on Exchange Gain or Loss recorded on Wizard’s financial
records on August 10?
15. What is the debit to cash when Wizard collects the Accounts Receivable on
August 10?

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 HEDGING TRANSACTIONS
1. On August 1, 20x4, a Philippine firm purchased a machine costing
200,000,000 foreign currency units (FCU) from a foreign firm to be paid for on
October 1, 20x4. Also on August 1, 20x4, the Philippine firm entered into a
contract to purchase 200,000,000 FCU to be delivered on October 1, 20x4, at
a forward rate of 1 FCU = P0.00783. The exchange rates were as follows:
Spot
August 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FCU = P0.00781
August 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FCU = P0.00777
October 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 FCU = P0.00779
Which of the following statements is incorrect concerning the accounting
treatment of these transactions?
a. The machine's final recorded value was P1,558,000.
b. The beginning balance in the accounts payable was P1,562,000.
c. An exchange gain on the accounts payable of P4,000 was recognized
on October 1, 20x4.
d. The value of the accounts payable just before payment, on October 1,
20x4, was P1,558,000.
Use the following information for questions 2 and 3:
Spartan Company purchased interior decoration material from foreign supplier
for 100,000 foreign currencies (FC) on September 5, 20x4, with payment due on
December 2, 20x4. Additionally, on September 5, Spartan acquired a 90-day
forward contract to purchase 100,000 FC of 1 = P.1850. The forward contract
was acquired to manage the exposed net liability position in FC, but it was not
designated as a hedge. The spot rates were:
September 5, 20x4 . . . . . . . . . . . . . . FC1 = P0.1835
December 2, 20x4 . . . . . . . . . . . . . . FC1 = P0.1865
2. In the entry made on December 2nd to revalue foreign currency receivable
to current equivalent peso value,
a. Accounts Payable will be debited for P18,350.
b. Foreign Currency Units will be debited for P18,500.
c. Foreign Currency Transaction Gain will be credited for P150.
d. Other Comprehensive Income will be credited for P300.
3. Based on the preceding information, what is the entry required to settle
foreign currency payable on December 2?
4. On January 15, a Philippine company purchases merchandise from a foreign
supplier for 1,000,000 foreign currency (FC) , when the spot rate is P0.15/1 FC
On the same date, it enters a forward contract for delivery of FC 1,000,000 on
March 15, at a price of P0.148/FC. On March 15, when the spot and forward
rate for March 15 delivery are P0.156/FC, the company closes the forward

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 contract and pays for the merchandise. The merchandise has not yet been
sold at March 15. What amount, in pesos, does the company pay for the
merchandise? At what amount, in pesos, does the merchandise appear on
the company’s March 15 balance sheet?
Amount paid Merchandise balance
a. P148,000 P148,000
b. P148,000 P150,000
c. P156,000 P150,000
d. P150,000 P156,000
5. A Philippine company issues a purchase order for merchandise to a foreign
supplier. The agreed upon total price is 1,200,000 foreign currency units
(FCU), and the current spot rate is P1/FC 1. Suppose the company enters a
forward contract when the purchase order is issued, at a rate of P0.95/FC 1,
for delivery when the merchandise is received. If the spot rate rises to P1.05
when the merchandise is received and paid for, at what value will the
merchandise be reported on the company’s books?
a. P1,020,000 c. P1,200,000
b. P1,140,000 d. P1,260,000
Use the following Information for Questions 6 to 9:
Taste Bits Inc. purchased chocolates from foreign supplier for 200,000 foreign
currencies (FC) on December 1, 20x4. Payment is due on January 30, 20x5. On
December 1, 20x4, the company also entered into a 60-day forward contract to
purchase 200,000 FC. The forward contract is not designated as a hedge. The
rates were as follows:
Spot Rate Forward Rate
December 1, 20x4 P0.89 P0.90 (60 days)
December 31, 20x4 0.91 0.93 (30 days)
January 30, 20x5 0.92
6. The entries on December 31, 20x4, include a:
a. Credit to Foreign Currency Payable to Exchange Broker, P4,000.
b. Debit to Foreign Currency Receivable from Exchange Broker,
P6,000.
c. Debit to Foreign Currency Receivable from Exchange Broker,
P186,000.
d. Debit to Foreign Currency Transaction Gain, P4,000.
7. The entries on January 30, 20x5, include a:
a. Debit to Pesos Payable to Exchange Broker, P180,000.
b. Credit to Cash, P184,000.
c. Credit to Premium on Forward Contract, P4,000.
d. Credit to Foreign Currency Receivable from Exchange Broker,
P180,000.

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8. The entries on January 30, 20x5, include a:
a. Credit to Foreign Currency Units, P184,000.
b. Credit to Cash, P180,000.
c. Debit to Foreign Currency Transaction Loss, P4,000.
d. Debit to Pesos Payable to Exchange Broker, P184,000.
9. The entries on January 30, 20x5, include a:
a. Debit to Pesos Payable to Exchange Broker, P184,000.
b. Credit to Foreign Currency Transaction Gain,P4,000.
c. Credit to Foreign Currency Receivable from Exchange Broker,
P180,000.
d. Debit to Foreign Currency Units, P184,000.
10. On September 1, 20x4, Philippine Company entered into a foreign exchange
contract for speculative purposes by purchasing 50,000 foreign currencies
(FCs) for delivery in 60 days. The rates to exchange pesos for FCs follow:
9/1/x4 9/30/x4
Spot rates . . . . . . . . . . . . . . P. 75 P0.70
30- day forward rate . . . . 0.73 0.72
90- day forward rate . . . . 0.74 0.73
In its September 30, 20x4, income statement, what amount should JS report as
foreign exchange loss
Use the following information for questions 11 and 12:
11. On September 1, 20x4, Mudd Plating Company entered into two forward
exchange contracts to purchase 250,000 foreign currencies (FCs) each in 90
days. The relevant exchange rates are as follows:
Spot rate Forward rate For Dec. 1, 20x4
September 1, 20x4 1.46 1.47
September 30, 20x4 (year-end) 1.50 1.48
The first forward contract was to hedge a purchase of inventory on September
1, payable on December 1. On September 30, what amount of foreign
currency transaction loss should Mudd Plating report in income?
12. The second forward contract was strictly for speculation. On September 30,
20x4, what amount of foreign currency transaction gain should Mudd Plating
report in income?
13. On November 1, 20x4, National Company sold inventory to a foreign customer.
The account will be settled on March 1 with the receipt of 200,000 foreign
currency units (FCU). On November 1, National also entered into a forward
contract to hedge the exposed asset. The forward rate is P0.80 per unit of
foreign currency. National has a December 31 fiscal year-end. Spot rates on
relevant dates were:
Date Per unit of Foreign Currency
November 1 P0.83
December 31 0.81

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 March 1 0.84
What will be the adjusted balance in the Accounts Receivable account on
December 31, and how much gain or loss was recorded as a result of the
adjustment?
Receivable Balance Gain/Loss Recorded
a. P170,000 P4,000 gain
b. P162,000 P4,000 loss
c. P168,000 P2,000 gain
d. P164,000 P2,000 loss
Use the following information for questions 14 and 15:
On April 1, 20x4, Manatee Company entered into two forward exchange
contracts to purchase 300,000 foreign currencies (FCs) each in 120 days. The
relevant exchange rates are as follows:
Forward Rate
Spot rate For Aug. 1, 20x4
April 1, 20x4 1.16 1.17
April 30, 20x4 (year-end) 1.20 1.18
14. The first forward contract was to hedge a purchase of inventory on April 1,
payable on December 1. On April 30, what amount of foreign currency
transaction loss should Manatee report in income?
15. The second forward contract was strictly for speculation. On April 30, 20x4,
what amount of foreign currency transaction gain should Manatee report in
income.
16. On November 1, 20x4, Cone Company sold inventory to a foreign customer.
The account will be settled on March 1 with the receipt of 250,000 foreign
currency units (FCU). On November 1, Cone also entered into a forward
contract to hedge the exposed asset. The forward rate is P0.90 per unit of
foreign currency. Cone has a December 31 fiscal year-end. Spot rates on
relevant dates were:
Date Per Unit of Foreign Currency
November 1 P0.93
December 31 0.91
March 1 0.94
The entry to record the forward contract is
a. FCU Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
Premium on Forward Contract . . . . . . . . . . . . . . . . . . 7,500
Pesos Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,500
b. Pesos Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,500
Discount on Forward Contract . . . . . . . . . . . . . . 7,500
FCU Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
c. FCU Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,500
Discount on Forward Contract . . . . . . . . . . . . . . 7,500
Pesos Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
d. Pesos receivable from exchange broker. . . . . . . . . . 225,000

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 FCU Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
17. Pile, Inc. purchased merchandise for 500,000 FC from a foreign vendor on
November 30, 20x4. Payment in foreign currency is due January 31, 20x5. On
the same day, Pile signed an agreement with a foreign exchange broker to
buy 500,000 FC on January 31, 20x5. Exchange rates to purchase 1 FC are as
follows:
Nov. 30, 20x4 Dec. 31, 20x4 Jan. 31, 20x5
Spot . . . . . . . . . . . . . . . . . . . . P1.49 P1.45 P1.44
30 day . . . . . . . . . . . . . . . . . . P1.48 P1.43 P1.43
60 day . . . . . . . . . . . . . . . . . . P1.46 P1.41 P1.42
What will be the adjustment to the account payable included in the journal
entry record on November 30, 20x4?
a. P20,000 debit c. P30,000 debit
b. P20,000 credit d. P-0-
18. Larson, Inc. sold merchandise for 600,000 FC to a foreign vendor on
November 30, 20x4. Payment in foreign currency is due January 31, 20x5. On
the same day, Larson signed an agreement with a foreign exchange broker
to sell 600,000 FC on January 31, 20x5. Exchange rates to purchase 1 FC are
as follows:
Nov. 30, 20x4 Dec. 31, 20x4 Jan. 31, 20x5
Spot P1.49 P1.46 P1.43
30 day P1.48 P1.43 P1.44
60 day P1.47 P1.40 P1.42
What will be the amount of the Forward Contract Receivable-Dollars on
November 30, 20x4?

Use the following information for questions 19 and 21:

Car Corp. (a Philippine based company) sold parts to a foreign customer on
December 16, 20x4, with payment of 10 million foreign currencies (FC) to be
received on January 15, 20x5. The following exchange rates applied:

Date Spot Rate Forward Rate to Jan. 15

December 16, 20x4 P 00090 P .00098
December 31, 20x4 .00092 .00093
January 15, 20x5 .00095 .00095
19. Assuming a forward contract was not entered into, what would be the net
impact on Car Corp.'s 20x4 income statement related to this transaction?

20. Assuming a forward contract was entered into, what would be the net
impact on Car Corp's 20x4 income statement related to this transaction?
Assume an annual interest rate of 12% and a fair value hedge. The present
value for one month at 12% is .9901.

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21. Assuming a forward contract was entered into on December 16, what would
be the net impact on Car Corp.'s 20x5 income statement related to this
transaction?
22. On August 31, Ram Corporation, a Philippine company, expects to order
merchandise from a foreign supplier in three months, denominating the
transaction in foreign currency (FC). On August 31, the spot rate is P1.19 per
FC and Quality enters into a three-month forward contract to purchase
600,000 FC at a rate of P1.20. At the end of three months, the spot rate is
P1.21 per FC and Ram orders and receives the merchandise, paying 600,000
FC. What are the effects on net income from these transactions?
a. P6,000 Discount Expense plus a P6,000 negative Adjustment to Net
Income when the merchandise is sold
b. P6,000 Discount Expense plus a P12,000 negative Adjustment to Net
Income when the merchandise is sold
c. P6,000 Premium Expense plus a P6,000 negative Adjustment to Net
Income when the merchandise is sold
d. P12,000 Premium Expense plus a P6,000 positive Adjustment to Net
Income when the merchandise is sold
e. P12,000 Discount Expense plus an P12,000 positive Adjustment to Net
Income when the merchandise is sold