Direct Quotation Indirect Quotation: Foreign Exchange Rate Theory & Computational

FOREIGN EXCHANGE RATE THEORY & COMPUTATIONAL 1. It refers to an obligation to deliver a fixed or determinable number of units of currency. a. Monetary item c. Financial instrument b. Non-monetary item d. Monetary liability 2. For a Philippine entity, which of the following quotations for exchange rates is correct? Direct quotation Indirect quotation

$0.22 Php45: $65 Php40: $1 Php45: $1

a. Php1: b. c. d.

$1 Php65:$ 45 Php1:$ 0.025 Php45:

¥.002:Php40

3. When a foreign currency transaction occurred in one period and settled in another period. a. The exchange differences between the transaction date and the date of settlement is recognized in the period of settlement. b. Exchange difference between the transaction date and the end of reporting period is recognized in the period of transaction. c. Exchange difference between the end of the previous reporting period and the date of settlement is recognized in the period of settlement. d. b and c 4. When a foreign currency transaction occurred and settled in the same period. a. All of the exchange difference is recognized in that period. b. All of the exchange difference is recognized in the next period. c. All of the exchange difference is recognized in the previous period. d. None of these 5. When several exchange rates are available, the rate used is a. The selling rate b. The buying rate c. Either a or b as a matter of accounting policy choice d. That at which the future cash glows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date 6. It is an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity.

a. Foreign operation b. Foreign transaction

c. Foreigner d. Alien operation

7. When translating the financial statements of a foreign operation, which of the following translation procedures is inappropriate a. Assets, liabilities, and equity, including any goodwill and FVAs, are translated at the closing rate. b. Income and expenses are translated at the spot exchange rates. For practical reasons, income and expenses may be translated at the average rate. c. All resulting exchange differences shall be recognized in profit or loss. d. All resulting exchange differences shall be recognized in other comprehensive income. 8. When translating the financial statements of a foreign operation, the resulting exchange differences after translating all assets, liabilities, equity, income and expenses consists of all of the following except a. Translation of opening net assets using opening and closing rates. b. Translation of goodwill using opening and closing rates. c. Translation of profit using average and closing rates. d. Translation of ending net assets using opening and closing rates. 9. The accumulated translation differences from a foreign operation a. Is reclassified within equity when the foreign operation is derecognized. b. Is reclassified to profit or loss when the foreign operation is derecognized. c. Either a or b d. Remains within equity but cannot be reclassifi4ed form one equity account to another equity account 10. When an entity is operating under a hyperinflationary economy, its financial statements a. Are first consolidated in accordance with PFRS 10, then restated in accordance with PAS 29, and finally translated to the presentation currency in accordance with PAS 21. b. Are first translated to the presentation currency in accordance with PAS 21 before they are restated in accordance with PAS 29. c. Are first restated in accordance with PAS 29 before they are translated to the presentation currency in accordance with PAS 21. d. Are first prepared using PAS 1, translated using PAS 21, consolidated using PFRS 10, then restated using PAS 29. 11. After restatement in accordance with PAS 29, the financial statements of an entity operating under a hyperinflationary economy are translated using which of the following procedures? a. All amounts (i.e., assets, liabilities, equity items, income and expenses including comparatives) are translated at the closing rate. b. Comparatives are not restated anymore to the purchasing power current at the end of reporting period, although they are also translated at the closing rate.

c. Non-monetary items are translated at the closing rate while income and expenses are translated at the average rates. d. a and b 12. According to the PFRS for SMEs, it is the currency of the primary economic environment in which the entity operates. a. Presentation currency c. Inflationary currency b. Functionality currency d. Functional currency

13. In preparing consolidated financial statements of a primarily generates and expends cash. a. In which the subsidiary maintains its accounting records. b. Of the country in which the subsidiary is located. c. Of the country in which the parent is located. d. Of the environment in which the subsidiary primarily generates and expends cash. 14. On December 20,20x1, Juan Co. acquired inventory form Joe Co., an unrelated foreign entity. Payment is due on January 4, 20x2. Juan Co. uses a calendar year period. If Juan Co. appropriately did not recognize any foreign exchange gain or loss in its 20x1 profit or loss, what could have been the most likely reason? a. The change in exchange rates as of the end of the reporting period is deferred and is recognized only in 20x2. b. The change in exchange rates is recognized in other comprehensive income. c. Juan is a wholly owned subsidiary of Joe. d. The transaction is denominated in Juan’s functional currency. Use the following information for the next two questions: On December 19, 20x1 Juana Co., a domestic corporation, purchased a machine from Jane Co., a foreign entity. The transaction is denominated in foreign currency units (FCU). Juana received the machine, and settled the related payable, on January 28, 20x2. The exchange rates were 1 local currency unit (LCU) to 5 FCUs, 7 FCUs, and 6 FCUs on December 19, 20x1, December 31, 20x1 and January 28,20x2, respectively. Juana Co. uses a calendar year period. 15. How should Juana Co. account for the fluctuation in exchange rates in 20x1? a. Juana Co. should recognize a foreign exchange gain in its 20x1 profit or loss b. Juana Co. should recognize a foreign exchange loss in 20x1 profit or loss c. Juana Co. should recognize a foreign exchange loss in its 20x1 other comprehensive income d. Juana Co. should defer any gain or loss on the fluctuation in exchange rates in 20x1 and recognized it only in 20x2 when the transaction is settled. 16. How should Juana Co. account for the fluctuation in exchange rates in 20x2? a. Juana Co. should recognize a foreign exchange gain in its 20x1 profit or loss

b. Juana Co. should recognize a foreign exchange loss in 20x1 profit or loss c. Juana Co. should recognize a foreign exchange loss in its 20x1 other comprehensive income d. Juana Co. should not recognize any foreign exchange gain or loss 17. When translating foreign currency denominated items into functional currency at the reporting date, which of the following items is measured using historical exchange rates? a. Inventories measured at cost b. Equity securities measured at fair value c. Bonds payable d. Accrued liabilities 18. A foreign subsidiary’s functional currency is its local currency, which has not experienced significant inflation. A weighted average exchange rate is allowed to be used in translating which of the following items? Wages expenses Sales to customers a. Yes No b. Yes Yes c. No Yes d. No No

Use the following information for the next six questions: Goo Co. sold inventory to a foreign entity for 100,000 FCUs (foreign currency units). Relevant information follows: Date December 1, 20x1 December 22, 20x1 December 31, 20x1 January 8, 20x2

Particular Receipt of order Date of shipment End of reporting period Settlement date

Exchange rates (1 FCU to LCUs) 13.70 LCUs 13.75 13.80 13.50

19. How much total sale revenue from the transaction is included in Goo’s 20x1 statement of profit or loss? a. 1,370,000 b. 1,375,000 c. 1,380,000 d. 1,350,000 100,000 x 13.80 = 1,380,000 C.

20. How much total sale revenue from the transaction is included in Goo’s 20x2 statement of profit or loss? a. 1,375,000 b. 1,380,000 c. 1,350,000 d. 0 100,000 x 13.50 = 1,350,000 C. 21. How much is foreign exchange gain (loss) is recognized in Goo’s 20x1 statement f profit or loss? a. 5,000 b. 10,000 c. (5,000) d. (10,000) Dec 1 20x1 100,000 x 13.70 = 1,370,000 Dec 31 20x1 100,000 x 13.80 = 1,380,000 (10,000) D. 22. How much accounts receivable from the transaction is included in Goo’s 20x1 statement of financial position? a. 1,370,000 b. 1,375,000 c. 1,380,000 d. 1,350,000 100,000 x 13.70 = 1,370,000 A. 23. How much is foreign exchange gain (loss) is recognized in Goo’s 20x2 statement f profit or loss? a. 10,000 b. 30,000 c. (10,000) d. (30,000) 1,370,000 – 1,380,000 = (10,000) C. 24. How much is the total foreign exchange gain (loss) from the transaction? a. 20,000 b. 25,000 c. (20,000) d. (25,000) (10,000) + (10,000) = 20,000 A.

25. Silver Spoon Co. acquired a fixed asset for $36,000 on November 1, 20x1 when the exchange rate was $1.00 = Php23.00. At December 31,20x1 the entity’s year-end, the supplier of the asset has not been paid and the exchange rate at that time was $1.00 = Php25.00. On the December 31, 20x1 statement of financial position, what will be the values for the fixed asset and the creditor who was unpaid? Fixed assets Creditors a. Php900,000 Php900,000 b. Php900,000 Php828,000 c. Php828,000 Php828,000 d. Php828,000 Php900,000 36,000 x 23 = 828,000 D 36,000 x 25 = 900,000 D. 26. Little Boy Blue Co. acquired inventory from a foreign entity on November 28, 20x1 for 10,000 foreign currency units (FCU). Little Boy Blue paid the bill on January 2, 20x2 when the spot rate was Php0.45. The spot rate was Php0.60 on November 28, 20x1 and was Ph0.55 on December 31, 20x1. For the year ended December 31, 20x2. Little Boy Blue should report a foreign exchange gain of a. 0 b. 500 c. 1,000 d. 1,500 10,000 x .55 = 5,500 10,000 x .45 = 4,500 1,000 C. 27. Bull Co. sold goods worth $10,000 to a foreign entity. On June 20x1, Bull Co.’s reporting period cutoff date, the exchange rate was Php26.60. On August 15, 20x1, payment was received through bank transfer whereby Bull Co.’s account was credited Php265,400 before any charges. At the time foreign entity accepted the merchandise, the exchange rate was Php26.75. At what exchange rate is the sale from the transaction would most likely be recognized? a. 26.60 b. 26.54 c. 26.63 d. 26.75 265,400/10,000 = 26.54 B. 28. Glass Co. had the following foreign currency transactions during 20x1:  Merchandise was purchased from a foreign supplier on January 20, 20x1, for the Philippine peso equivalent of Php90,000. The invoice was paid on March 20, 20x1 at the Philippine peso equivalent of Php96,000.  On July 1, 20x1, Glass Co. borrowed the Philippine peso equivalent of Php500,000 evidenced by a note that was payable in the lender’s local currency on July 1, 20x2. On December 31, 20x1,

the Philippine peso equivalents of the principal amount and accrued interest were Php520,000 and Php26,000, respectively. Interest on the note is 10% per annum. In Glass’ 20x1 profit or loss, what amount should be included as foreign exchange loss? a. 0 b. 6,000 c. 21,000 d. 27,000 29. On October 1, 20x1, a local importer contracted to purchase foreign goods requiring payment of 100,000 German marks one month after their receipt at the local importer’s business place. Title to the goods passed on the date of shipment on December 1, 20x1. On December 31, 20x1, the goods were still in transit. The following exchange rates were made available: October 1, 20x1 December 1, 20x1 December 31, 20x1

Php22.00 Php20.00 Php26.00

How should the exchange fluctuation in 20x1 be accounted by this local importer? Transaction gain (loss) Translation adjustment a. (400,000) 0 b. 600,000 200,000 c. (600,000) 200,000 d. (600,000) 0 100,000 x 22.00 = 2,200,000 100,000 x 26.00 = 2,600,000 (400,000) A. 30. On November 30, 20x0, a local entity executed a contract with a foreign entity providing for payment of 10% royalties on sales of the later. Payment is to be made in U.S dollars every January 10 for the previous year’s sales. Sales for the year ended. December 31, 20x1 totaled $50,000 the local entity paid the foreign entity the 20x1 financial statements were issued on February 1, 20x2. The spot rates are as follows: November 30,20x0 Php27.87 January 1, 20x1 Php27.88 December 31, 20x1 Php27.89 January 10, 20x2 Php27.90 How much is the local entity accrue for royalties payable at December 31, 20x1? a. 139,350 b. 139,400 c. 139,450 d. 139,500 50,000 x 10% = 5,000 5,000 x 27.89 = 139, 450 C.

Use the following information for the next nine questions: ABC Co. owns 80% of the ordinary shares of a foreign subsidiary, XYZ, Inc. a company based in Korea. XYZ, Inc.’s functional currency is won. The subsidiary was acquired at the start of the reporting period for 6,000,000 wons, when the subsidiary’s retained earnings were. XYZ, Inc.’s functional currency is won. The subsidiary was acquired at the start of the reporting period for 6,000,000 wons, when the subsidiary’s retained earnings were 3,200,000 wons. At the date of the acquisition the fair value of the net assets of the subsidiary were 5,600,000 wons. This included a fair value adjustment in respect of land. ABC Co. elected to measure non-controlling interest at the NCI’s proportionate share of the fair value of the subsidiary’s net assets. The group determined at year-end that goodwill is not impaired. There were no changes in the share capital of the subsidiary during the year. The relevant exchange rates are as follows: Date exchange rates Jan. 1, 20x1……………………………………………………..Php003: KRW 1 Average of the year………………………………………..Php0.04: KRW 1 Dec. 31, 20x1………………………………………………….Php0.05: KRW 1 A summary of the individual financial statements of the entities at the end of reporting period are shown below: Statements of financial position As at December 31, 20x1 ASSETS Investment subsidiary Other assets TOTAL ASSETS LIABILITIES AND EQUITY Liabilities Share capital Retained earnings Total equity TOTAL LIABILITIES AND EQUITY

ABC Co. (Pesos) 180,000 8,000,000 8,180,000

XYZ, Inc. (wons)

1,600,000 4,000,000 2,580,000 6,580,000 8,180,000

240,000 800,000 4,160,000 4,960,000 5,200,000

ABC Co. (pesos) 3,600,000 (2,160,000) 1,440,000

XYZ, Inc. (wons) 2,400,000 (1,440,000) 960,0000

5,200,000 5,200,000

Statements of profit or loss For the year ended December 31, 20x1

Revenues Expenses Profit for the year

31. How much is the goodwill as of December 31, 20x1?

a. 45,600

b. 76,000

c. 66,500

d. 64,500

32. How much is the non-controlling interest in the net assets of the subsidiary (NCI) as of December 31, 20x1? a. 39,360 b.56,600 c.54,360 d.65,600 33. How much is the consolidated retained earnings as of December 31, 20x1? a. 2,618,400 b.2,702,400 c.2,672,340 d.2,610,720 34. How much is the total translation gain (loss) to be recognized in other comprehensive income in 20x1? a. 152,000 b. 121,600 c.161,600 d.136,600 35. How much is the consolidated profit in 20x1? a. 1,478,400 b. 1,488,000 c.1,596,400

d.1,696,000

36. How much is the consolidated total comprehensive income in 20x1? a.1,640,000 b.1,630,400 c.1,718,000 d.1,832,000 37. How much is the comprehensive income attributable to owners of the parent? a.1,592,320 b.1,606,080 c.1,598,400 d.1,638,080 38. How much is the consolidated total assets as of December 31, 20x1? a. 8,416,000 b. 9,680,000 c. 8,340,000 d.9,860,000 39. How much is the equity attributable to owners of the parent as of December 31, 20x1? a. 6,676,320 b. 6,828,320 c.6,738,400 d.6,804,000

STRAIGHT PROBLEMS PROBLEM 1 Barefoot Co. purchased inventory from Nakasakasaka Co., a foreign supplier, on November 15, 20x1 for ¥100,000, when the spot rate was Php0.4295. On December 31, 20x1, the spot rate was Php0.4245. Barefoot Co. settled the account on January 15, 20x2 when the spot rate was Php0.4345. Requirement: Provide the journal entries in 20x1 and 20x2. PROBLEM 2 On November 1, 20x1, Pain Co. receive a sale order for equipment from Gain Co., a foreign entity, for 300,000 foreign currency units (FCU) when the local currency unit (LCU) equivalent was 96,000 LCUs. Pain shipped the equipment on December 1, 20x1, and billed the customer for 300,000 FCUs when the local unit equivalent was 100,000 LCUs. On December 31, 20x1, the local currency unit equivalent of the 300,000 FCUs was 103,000 LCUs. Pain received the payment on January 6, 20x2 when the local currency unit equivalent of the 300,000FCUs was 105,000 LCUs. Requirement: Provide the journal entries in 20x1 and 20x2. PROBLEM 3 Mee Co. acquired inventory from a foreign entity for 100,000 FCUs (foreign currency units). The term is FOB Shipping Point. Relevant information follows: Date Dec. 1, 20x1 Dec. 22, 20x1 Dec. 31, 20x1 Jan. 8, 20x2

Particulars Place of order Date of shipment End of reporting period Settlement date

Exchange rates (1 FCU to LCUs) 13.70 LCUs 13.75 13.80 13.50

Requirements: a. How much accounts payable is initially recognized form the transaction? b. How much is the foreign exchange gain (loss) is recognized in Mee’s 20x1 statement of profit or loss? c. How much inventory from the transaction is included in Mee’s 20x1 statement of financial position? d. How much accounts payable from the transaction is included in Mee’s 20x1 statement of financial position? e. How much is the foreign exchange gain (loss) is recognized in Mee’s 20x2 statement of profit or loss? f. How much is the total foreign exchange gain (loss) recognized from the transaction?

PROBLEM 4 On January 1, 20x1, Pool Co. acquired 70% interest in Swim Co., a U.S. company, for $10,000. Swim’s functional currency is the U.S. dollar. On acquisition date, Swim’s net identifiable assets had a carrying

amount of $9,000, equal to fair value. NCI is measured using the proportionate share method. The relevant exchange rates are as follows: Date Exchange rates Jan 1, 20x1..............................................Php43.00: $1 Average for the year...............................Php44.00:$1 Dec 31, 20x1...........................................Php45.00:$1 A summary of the individual financial statements of the entities at the end of reporting period are shown below: Statements of financial position As at December 31, 20x1

ASSETS Investment in subsidiary Other assets TOTAL ASSETS

Pool Co. (pesos) 430,000 10,000,000 10,430,000

Swim Co. (dollars) 32,000 32,000

LIABILITIES AND EQUITY Liabilities Share capital Retained earnings Total equity TOTAL LIABILITIES AND EQUITY

2,000,000 3,000,000 5,430,000 8,430,000 10,430,000

17,000 8,000 7,000 15,000 32,000

Pool Co. (pesos) 1,200,000 (500,000) 700,000

Swim Co. (dollars) 14,000 (8,000) 6,000

Statements of profit or loss For the year ended December 31, 20x1

Revenues Expenses Profit for the year

There were no changes in the subsidiary’s share capital during the year. Requirement: Prepare the consolidated financial statements. PROBLEM 5 On November 15, 20x1, Lemon Co. ordered merchandise on an FOB shipping point term, from a foreign entity for 200,000 marks. The merchandise was shipped and invoiced to Lemon on December 10, 20x1. Lemon paid the invoice on January 10, 20x2. The spot rates are as follows:

Nov. 15, 20x1 December 10, 20x1 December 31, 20x1 January 10, 20x2

Php22.4955 Php22.4875 Php22.4675 Php22.4475

Requirement: Provide the journal entries in 20x1 and 20x2. PROBLEM 6 On September 1, 20x1, Creed Co. sold merchandise to a foreign entity for 250,000 francs. Terms of the sale require payment in francs on February 1, 20x2. On September 1, 20x1, the spot exchange rate was Php1.20 per franc. At December 31, 20x1, the spot rate was Php1.19, but the rate increased to Php1.22 by February 1, 20x2, when payment was received. Requirement: Provide the journal entries in 20x1 and 20x2. PROBLEM 7 On January 1, 20x1, Barefooted Co. acquired 90% interest in Nakasakasaka Co., a Japanese company, for ¥100,000. Nakasakasaka’s functional currency is the yen. On acquisition date, Swim’s net identifiable assets had a carrying amount of ¥90,000, equal to fair value. NCI is measured using the proportionate share method. The relevant exchange rates are as follows: Date exchange rates Jan. 1, 20x1………………………………………….Php0.50 : ¥1 Average for the year……………………………Php0.52 : ¥1 Dec 31, 20x1……………………………………….Php0.54 : ¥1 A summary of the individual financial statements of the entities at the end of reporting period are shown below: Statement of financial position As at December 31, 20x1

ASSETS Investment in subsidiary Other assets TOTAL ASSETS

Barefooted (pesos) 50,000 1,500,000 1,550,000

Nakasakasaka (yens)

LIABILITIES AND EQUITY Liabilities Share capital Retained earnings Total equity TOTAL LIABILITIES AND EQUITY

250,000 800,000 500,000 1,300,000 1,550,000

20,000 80,000 40,000 120,000 140,000

140,000 140,000

Statements of profit or loss For the year ended December 31, 20x1

Revenues Expenses Profit for the year

Barefooted (pesos) 1,200,000 (500,000) 700,000

Nakasakasaka (yen) 150,000 (120,000) 30,000

There were no changes in the subsidiary’s share capital during the year. Requirement: Prepare the consolidated financial statements.