FOREIGN
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
Forward Rate
|
Current
Forward Rate
|
Notional
Amount
|
Discount
Factor
|
FV
Forward Contract
|
|
|
(a)
|
(b)
|
(c)
|
(d)
|
{(b-a)
x c)/d}
|
|
May 1, 2011
|
1.20
|
1.20
|
1,000,000
|
0
|
0
|
|
May 31, 2011
|
1.20
|
1.21
|
1,000,000
|
1.00835
|
9,917
|
|
June 30, 2011
|
1.20
|
1.205
|
1,000,000
|
1.004167
|
4,979
|
|
July 30, 2011
|
1.20
|
1.215
|
1,000,000
|
1.0
|
15,000
|
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 )
- P(32,680) and P88,235 c. P(100) and P300
- 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)
Where can I find the answer here?
ReplyDeleteExcellent post with important information.
ReplyDeleteCurrency Exchanger
Mindanao Company is a Philippine in the Agusan del Sur area. Its functional currency is the Philippine peso.
ReplyDeleteOn 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?