p2 - Guerrero Ch10
Foreign Currency Transaction and Translation of Foreign Currency Financial Statements
Problems in these areas are now appearing more often in the CPA examinations. Candidates therefore should be familiar with the standards of financial accounting and recording foreign currency transactions as well as the translation of the financial statements of foreign entity into the presentation currency (Philippine Peso) for purposes of consolidating them in the financial statements of the reporting enterprises. Foreign Currency Transaction These are transactions denominated in foreign currency, the settlement of which is to be made in foreign currency. Foreign currency transactions usually involve purchases (imports) or sales of goods (exports) whose prices are stated in foreign currency. ACCOUNTING FOR IMPORT AND EXPORT TRANSACTIONS An overview of the required accounting procedures for an import or export foreign currency transactions on credit are as follows: 1. On Transaction Date. Record the purchase or sale transactions at the Philippine peso equivalent value using the exchange rate on this date (spot exchange rate). 2. On Statement of Financial Position Date. Adjust the payable or receivable to its Philippine peso equivalent, end-of-period using the closing exchange rate. Recognize any exchange gain or loss for the change in rates between the transaction and statement of financial position dates. 3. On Settlement Date. First adjust the foreign currency payable or receivable for any change in the exchange rate between the statement of financial position date (or transaction date if transaction occurs after the statement of financial position date) and the settlement date, the difference should be recognized as foreign exchange gain or loss. Then record the settlement of the foreign currency payable or receivable. Exchange Rate. This is the rate in which the currencies of two countries are exchange at a particular time. This may be quoted directly or indirectly as follows: Direct exchange rate. This is the number of local currency units (LCU) needed to acquire one foreign currency unit (FCU). From the viewpoint of a Philippine entity the ratio is computed as follows:
Philippine pesos equivalent value 1 FCU Indirect exchange rate. This is the reciprocal of the direct exchange rate. This is computed as follows: 1 FCU Philippine peso equivalent value Foreign Exchange Gain or Loss. Foreign exchange (Forex) gains or loss must be recognized in the statement of comprehensive income of the period in which the exchange rate changes. To determine forex gain or loss, the following guidelines may be used:
Increase in direct exchange rate Decrease in direct exchange rate
(Importer) Payable in Foreign Currency Forex loss Forex gain
(Exporter) Receivable in Foreign Currency Forex gain Forex loss
ACCOUNTING FOR FORWARD EXCHANGE CONTRACTS A forward exchange contract is an agreement to exchange currencies of different countries on a specified future date at the specified rate (the forward rate). Forward rates may be more or less than the spot rate of foreign currency. Forward contracts are recorded at forward rate. These contracts are considered derivative instruments and are entered into for the following purposes: 1. To designate as a fair value hedge (to hedge is to take measures to reduce or eliminate a potential unfavorable outcome of a future event) of: a. An existing foreign currency asset or liability. b. A foreign currency denominated firm commitment. c. A net investment in a foreign operation. 2. To speculate in foreign currency exchange price movement. Foreign Exchange Gain or Loss. In accordance with PAS 39 “Financial Instrument Recognition and Measurement”, forex gain or loss resulting from forward contracts is determined as follows: 1. Speculations
Difference between the forward rate for the term of the contact and the contract rate or rate last used.
2. Hedging for existing foreign currency Changes in forward rate. asset or liability. 3. Hedging of foreign currency Changes in forward rate.
commitment. 4. Hedging in investment in foreign No forex gain or loss. Changes in exchange rate operation. are treated as translation adjustments to be presented in the consolidated statement of financial position under stockholders’ equity. SWAPS A swap is an agreement between two parties to exchange a series of future cash flows. Banks, corporations and other institutions use swaps to manage their interest rate risks, reduce funding costs (fixed or floating), or speculate on interest rate movements. Banks (commercial, investment, and merchant) also act as swap dealers or brokers in their role as financial intermediaries. As a dealer, a bank offers itself as a counterpart to its customers. As a broker, a bank finds counterparts for its customers, in return for a fee: Types of Swap Contracts. There are many types of swap contracts. The common types are the following: Interest rate swaps are over-the-counter (OTC) derivative contracts in which two parties agree to exchange interest cash flows on one or more notional principal amounts at certain times in the future according to an agreed-upon formula. Currency swaps, more commonly known as cross currency interest rate swap, where each party makes interest payment to the other in different currencies. Commodity swaps use prices of commodities such as jet fuel, gold and electricity as the underlying transactions. For example, an airline company agrees to make fixed payments to a swap dealer on regularly scheduled dates and receive payments determined by the prices of jet fuel. OPTIONS An option is a financial contract that provides the holder the right to buy or sell an underlying asset in the future, for a price set today. The price of the option is separate from the price of the underlying asset. An option to but is referred to as a “call”. An option to sell is called a “put”. An underlying asset may be a stock, interest rate, bond, foreign exchange or commodity. Premium – the option price. It is the sum of money that the option buyer pays the option seller to obtain the “right” being sold in the option. This money is paid when the option contract is initiated. An option premium has two parts and intrinsic value and time value. Intrinsic value refers to the amount of value in the option if it were exercised today. Any increase in the intrinsic value
is treated as a gain and any decrease is treated as a loss. Time value is the difference between whatever the intrinsic value is and what the premium is. An increase in the time value is treated also as a gain, while a decrease is treated also as a loss. Strike Price – the fixed price at which the underlying asset can be bought or sold. It is also called the “exercise price” or “striking price”. Expiration date – the date at which the option contract expires. After this date, the option contract ceases to exist, and if the buyer has not exercised the option, the premium is lost to the seller. TRANSLATION OF FOREIGN ENTITY FINANCIAL STATEMENTS If the financial statements of the entity are not in the functional currency of a hyperinflationary economy, then PAS 21 prescribes the following procedures to translate foreign entity’s statement from its functional currency into the presentation currency: Assets and liabilities (including any goodwill arising on the acquisition and any fair value adjustment) are translated at the closing rate at the date of that balance sheet. Income and expense accounts are to be translated at the spot rate at the date of the transactions. (Average rates are allowed if this is a reasonable estimation). Exchange differences are recognized as other comprehensive income. Special rules apply to translate financial statements of an entity whose functional currency is the currency of a hyperinflationary economy. All amounts (i.e., assets, liabilities, equity items, income and expenses, including comparatives) are translated at the closing spot rate at the date of the most recent statement of financial position.
PROBLEMS 1. If P56.5 can be exchanged for 1 US dollar, the direct and indirect exchange rate quotations are:
a. b. c. d.
Direct P56.50 56.5 1.00 1.00
Indirect $1 .018 56.50 .018
2. If one (1) Euro can be exchanged for P69.25 Philippine peso, the indirect exchange rate of Euro per Philippine peso is: a. 0.014 Euro b. 6.925 Euro c. 6.825 Euro d. 6.725 Euro 3. Jeep Corporation imported a machine for US$50,000 United States on January 10, 2013. A corresponding letter of credit (LC) was opened with Metro Bank to cover the importation. Shipment was effected on March 24, 2013 at which time the exporter collected the proceeds of the LC when the exchange rate was P56.45. What is the forex gain or loss to be recognized by Jeep from the fluctuation of the exchange rate: a. P0 b. 22,500 gain c. 22,500 loss d. $25,000 loss 4. Rustan Inc. a Philippine company, bought inventory items from a supplier in Singapore on November 5, 2012 for 50,000 Sing dollar, when the spot rate was P33.60. On December 31, 2012, the spot rate was P33.10. On January 15, 2013 Rustan bought 50,000 Sing dollar at the spot rate of P33.20 and paid the invoice. How much should Rustan report in its statement of comprehensive income for 2012 and 2013 as forex gain or (loss)?
2012 2013 a. P25,000 P(5,000) b. (25,000) 0 c. 0 (25,000) d. 0 0 5. On September 1, 2013 Boysen Corporation received an order for merchandise from a foreign customer for 10,000 local currency units (LCU) when the Philippine peso equivalent was P96,000. Boysen shipped the merchandise on October 15, 2013, and billed the customer for 10,000 LCU when the Phlippine peso equivalent was P100,000. Boysen received the customer’s remittance in full on November 16, 2013, and sold the 10,000 LCU for P105,000. In its statement of comprehensive income for the year ended December 31, 2013, Boysen should report a forex gain of: a. P0 b. 4,000 c. 5,000 d. 9,000 6. On July 1, 2012, Manila Company purchased raw materials from a Japanese supplier for 2,500,000 yen and opens the corresponding letter of credit (LC) with City Bank to cover its importation. The company’s year end is December 31. The spot rate issued by the bank for Japanese yen at various dates is as follows: July 1, 2012 (date of arrival of goods) December 31, 2012 July 1, 2013 (date of settlement)
P0.50 P0.54 P0.52
In its statement of comprehensive income for 2013, what amount should Manila Company include as a foreign exchange gain (loss)? a. P(50,000) b. 150,000 c. (100,000) d. 50,000 7. Cebu Company sold merchandise to a US customer for $10,000. On June 1, 2012 after confirmation of a letter of credit, Cebu Company ships the goods to U.S. when the direct exchange rate is P56.50. On December 31, 2012, the statement of financial position of Cebu Company shows a receivable from US customer in the amount of P574,000. On
January 10, 2013 Cebu Company collected the amount of the LC from the bank, when the exchange rate is P56.80 What adjusting entry was made on December 31,2012? a. Forex loss 9,000 Accounts receivable 9,000 b. Accounts receivable 7,000 Forex gain 7,000 c. Accounts receivable 7,000 Forex gain 7,000 d. Accounts receivable 9,000 Forex gain 9,000 8. The Bacolod Company has a receivable from a customer in Hongkong which is payable in Hongkong dollar. The amount receivable for HK$100,000, has been converted into P750,000 on Bacolod’s December 31,2012 statement of financial position. On January 1,2013, the receivable was collected in full when the exchange tare was HK$1 to P7.70. What journal entry should Bacolod make to record the collection of this receivable on January 15,2013? a. Cash Accounts receivable b. Cash Forex loss Accounts receivable c. Cash Deferred forex loss Accounts receivable d. Cash Accounts receivable Forex gain
770,000 770,000 730,000 20,000 750,000 770,000 15,000 785,000 770,000 750,000 20,000
9. On July 1,2012, Makati Finance, Inc., a Pilipino company lent P200,000 to a US supplier, evidenced by an interest bearing note due on July 1,2013. The note is equivalent to $4,000 on the loan date. The note principal was appropriately included at P210,000 in the receivables section of Makati’s December 31,2012 balance sheet. The note principal was repaid to Makati Finance, Inc. on July 1, 2013, due date when the exchange rate was P56.50 to $1.
In its statement of comprehensive income for the year ended December 31,2013, what amount should Makati finance include as a foreign exchange gain or loss? a. P0 b. P16,000 loss c. P16,000 gain d. P35,000 loss 10. Manila Holdings, Inc., is the parent company of a group of companies who also does its own trading. It bought equipment from a US supplied for $10,000 on November 2, 2013 and opened the corresponding letter of credit (LC) when the exchange rate was P55.00 to $1. On December 31,2013, which is the company’s year end the US supplier has not been paid the exchange t=rate at that time was P57.00 to $1. On the statement of financial position of Manila Holdings, Inc., on December 31,2013, what will be the year end balances of the equipment and the accounts payable accounts. Equipment Accounts Payable a. P570,000 P570,000 b. P570,000 P550,000 c. P550,000 P550,000 d. P550,000 P570,000 11. On September 1,2012, Pasig Company, a Philippine company, sold construction materials to Saudi Arabia for 20,000 Rial. Terms of the sale require payment in Rial on February 1,2013. On September 1, 2012, the spot exchange rate was P15.50 per 1 Rial. At December 31,2012, Pasig’s year end, the spot rate was P14.90, but the rate increased to P15.02 by February 1,2013, when payment was received. How much should Pasig report as foreign exchange gain or loss on its 2013 statement of comprehensive income? a. P0 b. P2,400 gain c. P2,400 loss d. P40,000 gain 12. Lils Hobby Shop buys goods from Waigo Company in Hongkong, payable in Hongkong dollors at a credit term of 60 days. On June 30,2013, the unadjusted balance sheet of Lils reflects a payable to Waigo representing purchase of goods worth HK$10,000 when Hongkong dollar was going at P7.50 for IHD$. What will be Lils forex gain or loss on June 30,2013, if the prevailing exchange rate is quoted at HK$0.12987/P1? a. P2,000 gain b. P2,000 loss
c. P1,000 gain d. P1,000 loss 13. Manila Pit Shop sells goods to Action Hobbies of Hongkong for HK$30,000. The exchange rate at this time is P7.60 for IHK$. Action Hobbies pays 20 days later when the prevailing exchange rate is P7.80 for IHD$. Because of exchange rate fluctuation, how much do Manila Pit Shop and Action Hobbies of Hongkong stand to gain or loss if the transaction is denominated in Hongkong dollar. Manila Pit Shop Action Hobbies a. P6,000 gain P-0b. P6,000 loss P-0c. P -0P6,000 loss d. P -0P6,000 gain 14. On November 15,2012, Hobbies, Inc. of Manila, ordered merchandise FOB shipping point from Nippon Company of Japan for 500,000 yen. The merchandise was shipped and invoiced to Hobbies on December 10,2012. Hobbies paid the invoice on January 10,2013. The exchange rate for yens on the respective date are as follows: November 15,2012 December 10,2012 December 31,2012 January 10,2013
P0.2500 P0.2475 P0.2375 P0.2300
In Hobbies’ December 31,2012 statement of comprehensive income, the forex gain (loss) to be reported is: a. P6,250 b. P(6,250) c. P5,000 d. P(5,000) 15. Pinoy Exports, Inc., sold furnitures to a US customer for 10,000 US dollar. Pertinent exchange rates relating to this transactions are as follws: Conversion Rate (Peso to US$) November 10,2012; Receipt of order November 22,2012; Date of Shipment December 31,2012; Statement of FP date January 5,2013; Settlement date
P56.10 P56.20 P56.50 P56.45
The sale would be appropriately recorded at: a. P562,000 b. P561,000 c. P565,000 d. P564,500 Use the following data in answering Nos. 16 and 17. Makati Corporation imports merchandise from some Japanese companies and exports its own products to other Japanese companies. The unadjusted accounts denominated in Japanese yen at December 31,2012, are as follows: Accounts receivable from the sale of merchandise On December 16 to Narita Company. Billing is for 150,000 Japanese Yen and due January 15,2013
Accounts payable to Akito Company for merchandise Received on December 2 and payable on January 30,2013 Billing is for 275,000 Japanese Yen
Exchange rates on selected dates are as follows: December 31,2012 January 15,2013 January 30,2013
P0.68 P0.675 P0.685
16. What is the net forex gain or loss from the two transactions to be reported in Makati’s statement of comprehensive income for 2012? a. P1,500 loss b. P8,250 gain c. P6,750 gain d. P6,750 loss 17. What is the net forex gain or loss from the settlement of the two transactions to be reported in Makati’s 2013 statement of comprehensive income? a. P2,125 loss b. P2,125 gain c. P2,075 gain d. P2,075 loss Use the following data in answering Nos. 18 and 19.
The accounts of Palawan International, a Philippine company, show P813,000 accounts receivable and P389,000 accounts payable at December 31,2013 before adjusting entries are made. An analysis of the balances reveals the following: Accounts receivable Receivable denominated in Philippine peso Receivable denominated in 200,000 Japanese yen Receivable denominated in 250,000 Thailand baht Total
P285,000 118,000 410,000 P813,000
Accounts payable Payable denominated in Philippine peso Payable denominated in 10,000 Hongkong dollar Payable denominated in 150,000 Thailand baht Total
P 68,500 76,000 244,500 P389,000
Current exchange rates on December 31,2013 are: Japanese yen Thailand baht Hongkong dollars
P0.66 P1.65 P7.00
18. What is the net exchange gain or loss that should be reflected in Palawan’s statement of comprehensive income for 2013 after the year end adjustments? a. P19,000 gain b. P19,500 loss c. P16,500 loss d. P19,500 gain 19. What is the balance of accounts receivable and payable that should be reported in Palawan’s December 31,2013 statement of financial position? Accounts Receivable Accounts Payable a. P829,500 P386,000 b. P386,000 P829,500 c. P813,000 P389,000 d. P389,000 P813,000 Numbers 20 and 21 are based on the following data: On December 12, 2013, Boracay Company entered into two forward exchange contracts, each to purchase 100,000 Hongkong dollars in 90 days. The relevant exchange rates are as follows: Spot Rate December 12, 2013
Forward Rate (for March 12, 2012) P9.00
December 31, 2013
20. Boracay entered into the first forward contract for speculation. At December 31, 2013, what amount of foreign exchange gain (loss) should Boracay in the statement of comprehensive income from this forward contract? a. P0 b. 30,000 c. (30,000) d. 100,000 21. Boracay entered into the second forward contract to hedge a commitment to purchase machinery being manufactured to Boracay’s specification. At December 31, 2013, what amount of net gain or loss on foreign currency transactions should Boracay include in income from this forward contract? a. b. c. d.
P0 30,000 50,000 100,000
Use the following information in answering Nos. 22 and 23. On December 12, 2013, Davao Import, Inc. entered into a forward exchange contract to purchase 100,000 foreign currencies (FC) in 90 days to hedge a purchase of inventory in November, 2013 payable in March 2014. The relevant exchange rates are as follows: Spot Rate November 30, 2013 December 12, 2013 December 31, 2013
P8.70 8.80 9.20
Forward Rate (for March 12, 2014) P8.90 9.00 9.30
22. At December 31, 2013, what amount of foreign exchange gain (loss) from this forward contract should be reported in the statement of comprehensive income of Davao? a. P(30,000) b. 30,000 c. 40,000 d. (40,000) 23. At December 31, 2013, what amount of forex gain (loss) should be reported in the statement of comprehensive income from the adjustment of the accounts payable of 100,000 FC.
a. P50,000 b. (50,000) c. 40,000 d. (40,000) 24. At October 17, 2013, Cebu Company took delivery from a Thailand Company at inventory costing 100,000 Baht. Payment is due on January 15, 2014. On the same date, Cebu entered into a forward contract to buy 100,000 Baht on January 15, 2014. The relevant exchange rates are as follows:
Spot rate Forward rate
10/17/2013 P1.30 1.36
12/31/2013 P1.42 1.43
1/15/2014 P1.40 1.40
What amount of forex gain (loss) from this forward contract should Cebu include in net income for 2013? a. P(7,000) b. 7,000 c. 6,000 d. (6,000) 25. On April 4, 2013, Malate Export, Inc. sold merchandise to Malaysia for 10,000 Ringgit. Payment is due on August 2, 2013. Also on April 4, 2013, Malate entered into a forward exchange contract to sell 10,000 Ringgit on August 2, 2013. Exchange rates for Ringgit are:
Spot rate Forward rate
4/4/2013 P14.80 14.77
6/30/2013 P14.84 14.83
8/2/2013 P14.82 14.82
What amount of forex gain (loss) from this forward contract should be included in Malate’s statement of comprehensive income on June 30, 2013? a. P(6,000) b. 6,000 c. (4,000) d. 4,000 26. Certain accounts of foreign subsidiary in Japan of Manila Corporation at December 31, 2013 have been translated into Philippine pesos as follows: Translated at Current rates Historical rates
Accounts receivable P120,000 P100,000 Prepaid expenses 55,000 50,000 Property and equipment (net) 275,000 285,000 What total amount should be included in Manila’s December 31, 2013 consolidated statement of financial position for the above translated amounts. a. P450,000 b. 425,000 c. 440,000 d. 450,000 27. On January 1, 2012, the Makati Corporation established a branch in Hongkong. On February 15, 2012, the branch purchased inventory for HK$100,000. On December 31, 2013, HK$25,000 of the inventory purchased on February 15, 2013 made up the entire inventory. The exchange rates were as follows: January 1 to June 30, 2013 HK$0.138 = P1 December 31, 2013 HK$0.133 = P1 The December 31, 2013 inventory balance for Makati’s branch should be translated into Philippine pesos in the amount of: a. P181,159.42 b. 187,969.93 c. 3,450.00 d. 3,325.00 28. For 2013 a Korean subsidiary reported the following cost of sales: Beginning inventory (FIFO) 40,000 Won Purchases 300,000 Won Ending Inventory (FIFO) (30,000) Won The exchange rate when the ending inventory items were acquired was P0.0510. the exchange rate for the Korean Won was 0.0490 on January 1 and 0.0540 on December 31. The average rate for the year was 0.0520. What is the cost of sales in Philippine peso that will appear in the translated statement of comprehensive income? a. P16,030 b. 16,120 c. 16,740 d. 15,940 29. The Italy branch of Manila Company reports the following results of its operation for 2013 (in Euro):
Sales Cost of sale Purchases Shipments from Manila Inventory, end Gross profit Operating expenses Net income The relevant exchange rates for EUR for 2013 are:
10,000 EUR 1,000 5,000 (800)
5,200 4,800 1,000 3,800 EUR
January 1 P69.20 December 31 69.95 Average rate during the year 69.50 The only shipment from Manila during the year was determined to have a cost to home office of P346,500. The ending inventory was identified to have come from shipments from Manila. What is the translated comprehensive income of the branch in Italy? a. P264,940 b. 264,100 c. 265,810 d. 262,960 30. Pedro Corporation, a Philippine Company starts a subsidiary in New Zealand, the subsidiary had the NZ Dollar as its functional currency. On January 1, 2013, Pedro acquired all of the subsidiary’s common stock for 20,000 NZ Dollar. On April 1, 2013, the subsidiary purchased inventory for 20,000 NZ Dollar, with payment made on May 1, 2013. This inventory is sold on August 1, 2013 for 30,000 NZ Dollar, which is collected on October 1, 2013. Currency exchange rates 1 NZ Dollar for 2013 are as follows: January 1 P15 April 1 17 May 1 18 August 1 19 October 1 20 December 31 21 What Foreign Currency Translation Adjustment will be reported in preparing consolidated financial statements on December 31, 2013? a. P40,000 b. 60,000 c. 140,000
d. 180,000 31. The subsidiary in Japan of Manila Company, a Philippine enterprise has plant assets with a cost of P3,600,000 yen on December 31, 2013. Of this amount, plant assets with a cost of 2,400,000 yen were acquired in 2011 when the exchange rate was 1 yen = P0.625; and plant assets with a cost of 1,200,000 yen were acquired in 2012 when the exchange rate was 1 yen = P0.556. the exchange rate on December 31, 2012 was 1 yen = P0.500, and the weighted average rate for 2013 was 1 yen = P0.521. the Japanese subsidiary depreciates plant assets by the straight line method over a 10 year economic life with no residual value. What is the 2013 depreciation expense for the Japanese subsidiary in Philippine peso for the translated statement of comprehensive income? a. P207,820 b. 187,560 c. 150,000 d. 66,720 32. A wholly-owned foreign subsidiary of a Philippine Company had selected expense accounts stated in local currency unit (LCUs) for the fiscal year ended November 30, 2013 as follows: Bad Debts expense Amortization of patent (patent was acquired on Dec. 1, 2010) Rent expense The exchange rates for LCUs at various dates were as follows: December 1, 2010 November 30, 2013 Average for fiscal year ended November 30, 2013
LCU 60,000 40,000 100,000 P0.25 0.20 0.22
What is the peso amount to be included in the translated statement of comprehensive income of the Philippine Company’s foreign subsidiary for the fiscal year ended November 30, 2013 for the foregoing expense accounts? a. P44,000 b. 40,000 c. 42,000 d. 45,200 33. A wholly-owned subsidiary of Pilipino Inc. has certain expense accounts for the year ended December 31, 2013 stated in local currency units (LCU) as follows:
Depreciation of equipment (related assets were
purchased January 1, 2011) Provision for doubtful accounts Rent
The exchange rates at various dates are as follows:
December 31, 2013 Average for year ended 12/31/2013 January 1, 2011
P40 .44 .50
Assume that charges to the expense accounts occurred approximately evenly during the year. What total peso amount should be included in Pilipino’s 2013 consolidated statement of comprehensive income to reflect these expenses? a. P60,000 b. 68,000 c. 183,200 d. 176,000 34. On December 31, 2013 a foreign subsidiary in Hongkong submitted the following condensed statement of financial position stated in foreign currency:
Total assets Total liabilities Common stock Retained earnings, 12/31
Hongkong Dollar $100,000 20,000 50,000 30,000
The exchange rates are: Current rate Historical rate Weighted average rate
P7.40 7.10 7.00
Assuming that the retained earnings of the subsidiary on December 31, 2013 translated to Philippine Peso is P212,000. What amount of Cumulative Translation Adjustment is to be reported as other comprehensive income on December 31, 2013? a. b. c. d.
P25,000 2,000 20,000 22,000
35. On December 31, 2013 a branch in Singapore submitted the following financial statement stated in Singaporean Dollar: Monetary assets Non-monetary assets Monetary liabilities Common stock Retained earnings, 12/31
Statement of Financial Position
$20,000 15,000 18,000 12,000 5,000
Combined Statement of Comprehensive Income and Retained Earnings Sales Expenses (including Depreciation $1,000) Net income Retained earnings, 1/1 Retained earnings, 12/31 The exchange rates are:
$27,000 25,000 2,000 3,000 $5,000
Current rate P37 Historical rate 34 Weighted average rate 35 Assuming the Retained Earnings on Jan. 1, 2013 of the Singaporean Branch in Philippine Pesos is P128,100. What amount of exchange difference is to be classified as other comprehensive income on December 31, 2013? a. b. c. d.
P22,900 10,000 12,000 21,900
Items 36 to 38 are based on the following data: JenJen Company sold computer printer ink cartridges to a Pakistan computer parts store on March 10. The sales price of 100,000 Rupee (R) will be received in 30 days. JenJen anticipates that the exchange rate of the Rupee to Philippine peso will decrease in 30 days. Therefore, JenJen decides to purchase a put option on 100,000 Rupee at a strike price of P.73, paying a premium of P.005 per unit. The following are the relevant data for the term of the option: Spot Rates: March 10 March 31 April 9
P.73 .727 .723
Fair value of the option: March 31 April 9
36. On April 9, what is the entry to record the settlement of the accounts receivable from the Pakistan customer? a. Cash/Foreign currency 72,300 Foreign exchange loss 500 Accounts receivable (R) 72,800 b. Cash/Foreign currency 72,100 Foreign exchange loss 900 Accounts receivable (R) 73,000 c. Cash/Foreign currency 73,000 Foreign exchange gain 900 Accounts receivable (R) 72,100 d. Cash/Foreign currency 73,000 Foreign exchange gain 200 Accounts receivable (R) 72,800 37. What is the entry to record the exercise of the put option on April 9? a. Cash 73,000 Foreign currency 72,300 Put options 700 b. Cash 73,000 Foreign currency 72,500 Put options 500 c. Cash 73,000 Foreign currency 73,000 d. Cash 72,100 Foreign currency 71,500 Put options 500 38. What is the impact on the net income for the first quarter of 2013? a. P72,500 b. 72,300 c. 72,800 d. 72,100 39. On June 1, 2013 Jenna Corporation (a Pilipino Company) sold pool cues to a customer in Thailand for 100,000 Baht when the spot rate is P1.50 per Baht. The pool cues are to be paid on September 1, 2013. On June 1, Jenna Corporation acquires a three-month option to sell 100,000 Baht. The strike price is P1.50 and the premium is P.05 per unit. On September 1, 2013 Jenna receives 100,000 Baht in settlement of the pool cues. The spot rate at that date is P1.43 per Baht.
What is the amount that Jenna would report in income as a result of this transactions? a. P145,000 b. 140,000 c. 143,000 d. 150,000 Items 40 to 42 are based on the following data: On July 1, 2012, Pedro Company purchased 1,000 shares of Jenny Co. common stock at a cost of P150 per share and classified it as an available for sale security. On October 1, Pedro Company purchased an at-the-money put option on Jenny at a premium of P35,000 with a strike price of P250 per share and an expiration date of April 2013. Pedro Company specifies that only the intrinsic value of the option is to be used to measure effectiveness. Thus, the time value decreases of the put will be charged against the income of the period, and not offset against the change in value of the underlying, hedged item. The following shows the fair value of the hedged item and the hedging instrument. Hedged item: Jenny share price Number of shares Hedging instrument Put option (1,000 shares): Intrinsic value Time value Fair value
P0 35,000 P35,000
P30,000 21,500 P51,500
P50,000 5,300 P55,300
P50,000 0 P50,000
40. On December 31, 2013, how much is the value of the put option to be presented on the statement of financial position? a. P51,500 b. 35,000 c. 30,000 d. 25,000 41. What is the cumulative effect on retained earnings of the hedge and sale? a. P65,000 b. 60,000 c. 50,000 d. 55,000 42. What is the entry to record the exercise of the put option on April 17, 2013? a. Cash 250,000 Put option 250,000 b. Cash 250,000
Available-for-sale securities Put option Gain on sale of securities c. Cash Available-for-sale securities Put option Gain on sale of securities d. Cash Available-for-sale securities Put option Gain on sale of securities
100,000 50,000 100,000 50,000 50,000 100,000 100,000 50,000 50,000
1. 2. 3. 4. 5. 6. 7.
B A C A C D D
8. 9. 10. 11. 12. 13. 14.
D C D B B A C
15. 16. 17. 18. 19. 20. 21.
A C A D A B A
ANSWERS 22. 23. 24. 25. 26. 27. 28.
B B B A A B B
29. 30. 31. 32. 33. 34. 35.
B C B A D A A
36. 37. 38. 39. 40. 41. 42.
A A A A A A B
SOLUTIONS AND EXPLANATIONS 1. Direct quotation: P56.50 ÷ 1 or P56.50 Indirect quotation: $1 ÷ P56.50 or $.018 2. 1 / P69.25 = 0.014 3. Exchange rate on March 24, 2013 – Date of purchase Exchange rate on April 1, 2013 – settlement date Increase in exchange rate Accounts payable in foreign currency Forex loss
P56.00 56.45 P .45 $50,000 P22.500
4. The forex gain in 2012 is computed as follows: November 5, 2012 – date of purchase (S$50,000 x P33.60) P1,680,000 December 31, 2012 – balance sheet date (S$50,000 x P33.10) 1,655,000 Decrease (gain) – 2012 P25,000 The forex loss in 2013 is computed as follows: December 31, 2012 P1,655,000 January 15, 2013 – settlement date (S$50,000 x P33.20) 1,660,000 Increase (loss) – 2013 P( 5,000) 5. When the sale is made on October 15, 2013, Boysen debited the accounts receivable and credited sales for P100,000. On November 16, 2013 Boysen received foreign currency worth P105,000. Since the receivable was recorded at P100,000, a P5,000 gain must be recognized. The Philippine peso equivalent when the order was received on September 1, 2013 is not used to compute the gain because no entry is recorded on this date. 6. December 31, 2012 (2,500,000 yen x P0.54) P1,350,000 July 1, 2013 – settlement date (2,500,000 yen x P0.52) 1,300,000 Decrease (gain) P 50,000 7. On June 1, 2013, the date of shipment, a receivable was recorded at P565,000 ($10,000 x P56.50). on December 31, 2013, the balance of the receivable increase to P574,000, therefore adjusting entry (d) is correct. 8. On December 31, 2012 balance sheet the receivable has a balance of P750,000. The collection on January 1, 2013 amounts to P770,000 (100,000 x P7.70), therefore forex gain of P20,000 is to be recognized by recording entry (d).
9. The forex gain is computed as follows: Balance sheet date – December 31, 2012 P210,000 Settlement date – July 1, 2013 ($4,000 x P56.50) 226,000 Increase in receivable (gain) P16,000 10. Equipment ($10,000 x P55) P550,000 Accounts payable ($10,000 x P57) P570,000 11. December 31, 2012 – statement of financial position date P14.90 February 1, 2013 – settlement date 15.02 Increase in exchange rate P0.12 Receivable in foreign currency 20,000 Rial Increase in receivable (gain) P2,400 12. Direct exchange rate – June 30, 2013 P7.50 Direct exchange rate – June 30, 2013 (P1/HK$0.12987) 7.70 Increase in exchange rate P0.20 Payable in HK$ 10,000 Increase in payable in foreign currency (loss) P2,000 13. Manila Pit Shop – Philippines Exchange rate – date of sale P7.60 Exchange rate – settlement date 7.80 Increase in exchange rate P0.20 Receivable in HK$ 30,000 Increase in receivable (gain) P6,000 14. Transaction date – date of shipment – 12/10/2012 P0.2475 Statement of financial position date – 12/31/2012 0.2375 Decrease in exchange rate P 0.01 Payable in Yen 500,000 Gain – decrease in payable in FC P 5,000 15. The sale should be recorded on the date of shipment using the exchange rate on that date. Therefore the sale to be recorded is P562,000 ($10,000 x P56.20). 16. 2012: Accounts receivable in Yen: December 16 - transaction date P103,500 December 31, - adjustment (150,000 yen x P0.68) 102,000 Decrease in accounts receivable (loss) P(1,500) Accounts receivable in Yen: December 2 - transaction date P195,250 December 31 - adjustment (275,000 yen x P0.68) 187,000 Decrease in accounts payable (gain) Net forex gain (loss) 17. 2013: Accounts receivable in Yen: December 31 - statement of financial position date P102,000 January 15 - settlement date (150,000 x P0.675) 101,250 Decrease in accounts receivable - loss
Accounts payable in Yen: December 31 - statement of financial position date P187,000 January 30 - settlement date (275,000 yen x P0.685) 188,375 Increase in accounts payable - loss (1,375) Net foreign gain (loss) P(2,125) 18. The answer is computed as follows: Adjusted Unadjusted Forex gain Balances Balances (loss) 12/31/2013 12/31/2013 12/31/2013 Accounts receivable: Philippine peso P285,000 P285,000 P 0 Japanese yen (200,000 yen x P.66) 132,000 118,000 14,000 Thailand Baht (250,000 x P1.65) 412,500 410,000 2,500 Total gain P829,500 P813,000 P16,500 Accounts payable: Philippine peso Hongkong dollar (10,000 x P7.00) Thailand Baht (150,000 x P1.65) Total gain Net forex gain
P68,500 70,000 247,500 P386,000
P68,500 76,000 244,500 P389,000
P 0 6,000 (3,000) P3,000 P19,500
19. 19. The balances of the accounts receivable and payable to be reported in the December 31, 2013 statement of financial position can be taken from the computation in No. 18 as follows: Accounts receivable P829,500 Accounts payable P386,000 20. Foreign transactions involving forward contracts for speculation are recorded in pesos using forward rate. In the statement of financial position date, the forward contract receivable and payable are adjusted to reflect the new forward rate, any resulting gain (loss) is included in the statement of comprehensive income. The computation therefore is as follows: December 12, 2013: forward rate for 90-days P9.00 December 31, 2013: forward rate for the remaining 9.30 Increase in forward rate P0.30 Hongkong dollars 100,000 Forex gain P30,000 21. A foreign currency commitment is a contract or agreement denominated in foreign currency that will result in a foreign currency transaction at a later date. Both the change in the forward contract and the underlying commitment are recorded - in effect, offsetting each other. Any gain or loss on this forward contract is based on the forward
rate. To compute the net gain (loss), candidates should know the entries made for this contract as follows: December 12, 2013: Forward contract receivable (FC) Forward contract payable To record purchase of 100,000 HK$ for Delivery in 90 days at a forward rate of P9.00
December 31, 2013 Forward contract receivable (FC) 30,000 Forex gain 30,000 To record increase in forward rate 100,000 HK$ (P9.30 - P9.00) However this gain is offset by the decrease in the value of the underlying firm commitment as shown below: December 31, 2013 Forex loss 30,000 Change in value of firm commitment To record forex loss (payment in HK dollars more Philippine pesos.) The change in value of purchase commitment is treated as an adjustment to the cost of purchases when goods are received. Based on the above entries, on December 31, 2013, no gain or loss is recognized. 22. December 12, 2013: forward rate for 90 days December 31, 2013: forward rate Increase in forward rate Foreign currency Forex gain
P9.00 9.30 P0.30 100,000 30,000
23. Accounts payable in foreign currency: November 30, 2013: spot rate December 31, 2013: spot rate Increase in spot rate Foreign currency Increase in accounts payable - Forex loss
P8.70 9.20 P0.50 100,000 P50,000
24. Forward contract receivable (FC) October 17, 2013: spot rate December 31, 2013: forward rate Increase in forward rate
P1.36 1.43 P0.07
Foreign currency Increase in receivable - forex gain
100,000 Baht P7,000
25. Forward contract payable (FC) April 4, 2013: spot rate P1.36 June 30, 2013: forward rate 1.43 Increase in forward rate P0.06 Foreign currency 10,000 Ringgit Increase in receivable - forex gain P6,000 26. Assets are to be translated using the closing rate, therefore the answer is (a), P450,000. 27. Assets are to be translated using the direct closing rate, therefore the answer is P187,969 (P1/HK0.133) x HK25,000. 28. The cost of sales is translated using the average rate for the period as follows: Inventory, January 1, 2013 40,000 Won Purchases 300,000 Won Goods available for sale 340,000 Inventory, December 31, 2013 30,000 Won Cost of sales 310,000 Won Average exchange rate P0.0520 Cost of sales in Philippine Peso P16,120 29. The computation is: In EUR Exchange Rate Sales 10,000 P69.50 (A) Cost of sales (Schedule 1) 5,200 69.50 (A) Gross profit 4,800 Operating expenses 1,000 69.50 (A) Total comprehensive Income 3,800 Schedule 1: Purchases 1,000 EUR Shipments from Manila 5,000 Ending inventory (800) Cost of sales 5,200 EUR
In Philippine Peso P695,000 361,400 333,600 69,500 P264,100
30. The computation is as follows: In NZ Dollar Exchange Rate Net assets, January 1 Increase in net assets: Net income (30,000 — 20,000)
In Philippine Peso P300,000 190,000
Net assets, December 31 30,000 490,000 Net assets, December 31 at Current rate 30,000 P21 CR 630,000 Translation adjustment P140,000 31. The depreciation expense is based on the acquisition cost of the plant assets computed as follows: 2009 acquisition (2,400,000 y 10) 240,000 2010 acquisition (1,200,000 y 10) 120,000 Total cost 360,000 Average rate for 2011 P 0.521 2011 depreciation expense P187,560 32. All expenses are translated using the weighted average exchange rate. The computation therefore is: Bad debts expense (60,000 x P.22) P13,200 Amortization of patents (40,000 x .22) 8,800 Rent expense (100,000 x .22) 22,000 Total P44,000 33. All expenses are to be translated using the weighted average rate. Therefore the translated total expense is P176,000. 34. The cumulative translation adjustment is the balancing amount (B/A) in the statement of financial position translated to Philippine peso. The computation is as follows:
Assets Liabilities Common stock Retained earnings, December 31 Total Cumulated translation adjustment Total liabilities and stockholders' equity
In Hongkong Dollar 100,000 20,000 50,000 30,000 100,000
Exchange Rate P7.40 CR P7.40 CR P7.10 HR Given B/A
In Philippine Peso P740,000 148,000 355,000 212,000 P715,000 25,000 P740,000
35. First, translate the statement of comprehensive income and retained earnings to compute the retained earnings on December 31 in Philippine pesos as follows:
Sales Operating expenses: Depreciation Other Total Net income
Singaporean Dollar 27,000
Exchange Rate P35
In Philippine Peso 945,000
1,000 24,000 25,000 2,000
35,000 840,000 875,000 70,000
Retained earnings, 12/31
The exchange difference to be classified as other comprehensive income can now be computed by translating the statement of financial position as shown below:
Assets Liabilities Common stock Retained earnings, December 31 Translation adjustment OCI Total
Singaporean Dollar 35,000 18,000 12,000 5,000
Exchange In Philippine Rate Peso P37 1,295,000 37 666,000 34 408,000 Per IS and RE 198,100 1,272,100 22,900 1,295,000
36. Entry (a) is correct. The forex loss is computed as follows: Settlement received at spot rate (100,000 rupee x .723) Balance of accounts receivable: Date of sale (100,000 x ,73) P73,000 Adjustment for forex loss, limited to gain on increase in fair value of option ( 200) Forex loss
72,800 P( 500)
37. Entry (a) is correct. Cash is to be debited at the strike price of P73,000 (100,000 x .73) and foreign currency is credited at spot rate of P72,300 (100,000 x .723). Put option is credited at its fair value of P700 on the exercise date. 38. The net impact on income is equal to the net cash inflows (73,000 strike price less P500 option premium). 39. Strike price of P150,000 (100,000 Baht x 1.50) less the premium of 5,000 (100,000 x .05). 40. At fair value on December 31, 2013 P51,500. 41. The cumulative effect on retained earnings of the hedge and sale is a net gain of P65,000 computed as follows: Cash received at strike price (1,000 shares x 25) P250,000 Available-for-sale securities (150,000 - 50,000) ( 100,000) Put option, at fair value ( 50,000) Gain on sale of securities P100,000 Loss on tome value of the option ( 35,000) Net gain P65,000 42. Entry (b) is correct as computed in No. 41 above.