ADVANCED FINANCIAL ACCOUNTING & REPORTING

Foreign Exchange Transactions and Translation of Financial Statements

Reviewer: Lyndon P. Regodon, CPA, MIA

1. On November 1, 2008, P company exported goods on account to a Thai corporation for 5,000 Baht. The billing
date is December 1, 2008 and payment is due on January 30, 2009. Exchange rates were as follows:
BID rate OFFER rate
Nov. 01, 2008 P 38 P 36
Dec. 01, 2008 39 38
Dec. 31, 2008 42 40
Jan. 30, 2009 41 39
How much is the forex gain or loss to be recognized on December 31, 2008?_________

The balance of Accounts Receivable on December 31, 2008 is ____________

2. On December 1, 2009, Smile Corp received an order for equipment FOB shipping point from Happy Co. the
order is billed for $86,000, payable on January 31, 2010. The equipment was shipped and invoiced to Happy
Co. on December 12, 2009.
Buying Selling
Dec. 1 51.45 51.60
Dec.12 51.58 51.84
Dec.31 51.72 51.96
Jan.31, 2010 51.68 51.89
On the December 31, 2009 income statement of Smile Corp., how much is the FOREX gain (loss) to be
reported on this transaction?
a. 12,040 b. 14,280 c. (10,320) d. (14,280)

3. JUNIOR purchased inventory costing $14,100 on December 1, 2013 to be paid on March 31, 2014. On the
same date, JUNIOR entered into a forward contract to purchase $14,100 from Citibank for delivery on March
31, 2014. Direct exchange rates for dollars on different dates were as follows:
Spot rates
Bid Offer
December 1, 2013 41.6 41.3
December 31, 2013 42.5 42.5
March 31, 2014 43.4 43.2

Forward rates
Dec. 1 Dec. 31 March 31
30-day futures 42.3 41.8 43.2
60-day futures 41.8 42.2 42.6
90-day futures 40.6 42.5 43.4
120-day futures 42.2 42.8 42.9

What is the reported value of the liability to the vendor at December 31, 2013?________

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ADVANCED FINANCIAL ACCOUNTING & REPORTING
 What was the net impact in JUNIOR Company’s income in 2013 as a result of this hedging activity? _________

How much is the net foreign exchange gain or loss on the 2014 income statement? _________.

4. Manila Company sold merchandise for 325,000 pounds to a customer in London on November 1, 2013.
Collection in British pounds was due on January 30, 2014. On the same date, Manila entered into 90-day
futures contract to sell 325,000 pounds to a bank. Exchange rate for pound on different dates are as follows:

Nov. 1 Dec. 31 Jan. 31

Spot rate P51.3 P52.6 P51.8
30-day futures 52.2 52.4 53.1
60-day futures 51.7 52.1 52.5
90-day futures 50.5 52.5 53.3
How much is the net foreign exchange gain or loss on January 30, 2014?

5. Charles Corporation entered into a forward contract to hedge a sale of inventory in October 26, 2015 to be
collected on January 24, 2015. 72,000 FC (foreign currency) in 90 days. The relevant exchange rates as follows:

Spot rate Forward rate (1/24/10)

October 26, 2015 P 52.73 P 52.78
December 31, 2015 52.82 52.85
January 24, 2016 52.94

What is the net forex gain (loss) from this transaction and hedge that will be reported on Charles 2015 income
statement?

6. On November 1, 2011, Creamline Corp. concluded that the Thailand Baht would weaken during the next six
months because of the coup that transpired recently. In hopes of reporting gain, Creamline entered into a
foreign exchange forward for speculation on November 1, 2011 to sell 1,000,000 baht on April 30, 2012 at a
forward rate.
11/1/2011 12/31/2011 4/30/2012
Spot rate P 1.190 P 1.180 P 1.210
Forward rate 1.198 1.185 1.210

The December 31, 2011 profit and loss statement, foreign exchange gain or loss on forward contract
amounted to:

The forward contract payable on December 31, 20100 is ____________.

7. On Nov. 2, 2012, NICO entered into firm commitment with Japanese firm to acquire an equipment, delivery
and passage of title on March 31, 2013 at a price of 4,375 yen. On the same date, to hedge against
unfavorable changes in exchange rate of the yen. NICO entered into a 150 day forward contract with BPI for
4,375 yen. The relevant exchange rate were as follows:
11/2/12 12/31/12 3/31/13

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ADVANCED FINANCIAL ACCOUNTING & REPORTING
 Spot rate 37 38 35
Forward rate 40 33 35
How much is the amount debited to the equipment account and on what date will it be recorded
a. 200,000 ; 11/2/12 c. 185,000 ; 11/2/12
b. 200,000 ; 2/31/13 d. 175,000 ; 3/31/13

How much is the gain or loss on the hedging instrument on December 31, 2010? _________.

How much is the net gain or loss on December 31, 2012? _________.

8. On November 1, 2011, Coco Philippines took delivery from Thailand firm of inventory costing 100,000 baht.
Payment is due on January 30, 2012. Concurrently, Coco Philippines paid P900 cash to acquire a 90-day call
option for 100,000 Thailand baht.
11/1/2011 12/31/2011 1/30/2012
Spot rate P 1.20 P 1.22 P 1.23
Strike price 1.20 1.20 1.20
Fair value of call option P ? P 2,200 P 3,000

Compute the intrinsic and time value on November 1, 2011, December 31, 2011 and January 30, 2012
respectively.

How much is the foreign exchange gain or loss on the option contract due to change in intrinsic value on
December 31, 2011? ___________.

How much is the foreign exchange gain or loss on the option contract due to change in time value on
December 31, 2011? ___________.

How much is the foreign exchange gain or loss on the option contract due to change in effective portion on
2012 income statement? ___________.

How much is the foreign exchange gain or loss on the option contract due to change in ineffective portion on
2012 income statement? ___________.

Under non-split accounting, the forex gain or loss on option contract on December 31, 2011 is _______
How much in the net gain or loss on the hedge item and instrument on December 31, 2011? ________

9. On January 1, 2011, Sheng Inc. paid P16,000 cash to acquire a put foreign exchange option for 1,000,000
Thailand baht, with an expiration date of December 31, 2011. The option hedges 2011’s forecasted exporting
sales of 1,000,000 baht. Sheng’s fiscal year ends June 30. Include the time value element in assessing hedge
effectiveness or nonsplit accounting is used.
1/1/2011 6/30/2011 12/31/2011
Spot rate P 1.205 P 1.183 P 1.171

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ADVANCED FINANCIAL ACCOUNTING & REPORTING
 Strike price 1.19 1.19 1.19
Fair value of put option at 6/30/2011 ? P 18,000 P 19,000

Compute the intrinsic and time value on January 1, 2011, June 30, 2011 and December 31, 2011 respectively.

How much is gain or loss in the June 30, 2011 income statement? _________

How much is gain or loss in the June 30 Other Comprehensive Income? ________

How much is the gain or loss in the December 31, 2011 Statement of Changes in Equity? _________

How much is the gain or loss on December 31, 2011 earnings? __________

10. Suppose SLB Corporation’s subsidiary located on Hongkong started its operation on January 1, 2014 by issuing
100,000 ordinary shares. During the year, the company earned an income of HK$20,000 and declared
HK$ 5,000 dividend on August the same year. Presented below is the company’s balance sheet statement as
of December 31, 2014.

Assets
Cash HK$ 5,000
Accounts receivable 12,000
Inventory 20,000
Plant assets 50,000
Total HK$ 87,000
Liabilities and SHE
Accounts payable 8,000
Notes payable 13,500
Common stock 31,000
APIC 19,500
Retained earnings 15,000
______
Total HK$ 87,000

Exchange rates are as follows:

January 1, 2014 = P30.4
December 31, 2014 = P32.6
August 1, 2014 = P33.5

Required:
a. Compute the amount of cumulative translation adjustment.

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ADVANCED FINANCIAL ACCOUNTING & REPORTING
 Continuing the example, suppose on its second year, the company earned HK$ 30,000 and declared annual
dividend of HK$ 5,000 on September the same year. Illustrated below is the company’s balance sheet as of
December 31, 2015
Assets
Cash HK$ 9,000
Accounts receivable 21,000
Inventory 47,000
Plant assets 45,000
Total HK$ 122,000
Liabilities and SHE
Accounts payable 8,000
Notes payable 23,500
Common stock 31,000
APIC 19,500
Retained earnings 40,000
Total HK$ 122,000

Exchange rates are as follows:

January 1, 2014 = P30.4
December 31, 2014 = P32.6
December 31, 2015 = P34.8
September 1, 2015 = P33.7
Required:
a. Compute the amount of cumulative translation adjustment.
11. A Philippine Company’s foreign subsidiary had the following amounts in dollars ($) in 2013:

Cost of goods sold 6,000,000

Ending inventory 300,000
Beginning inventory 120,000

The average exchange rate during 2013 was $1= P42. The beginning inventory was acquired when the
exchange was $1= P 43. The ending inventory was acquired when the exchange rate was $1 = P41. The
exchange rate on December 31 was $1 = P44. Assuming that the foreign country had a hyperinflationary
economy, at what amount should the foreign subsidiary’s cost of goods sold have been reflected in the 2013
income statement?
a. 252,000,000 c. 258,000,000
b. 246,000,000 d. 264,000,000

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ADVANCED FINANCIAL ACCOUNTING & REPORTING