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ADVANCED ACCOUNTING
Module 7: Foreign Currency Accounting
Practice Set 7.1: Foreign Currency Transactions/Translation
1. Entity A owns majority of the outstanding ordinary shares of Entity B which is operating in
United States of America wherein the functional currency is the USA $. However, the
presentation currency of Entity B is the Philippine Peso because that is the presentation
currency of Entity A. For the year ended December 31, 2020, Entity B presented its
Statement of Financial Position in its functional currency of USA $:

Current Assets $10,000 Current Liabilities $10,000

Noncurrent Assets 40,000 Noncurrent Liabilities 20,000
Ordinary Share Capital 5,000
Preference Share Capital 8,000
Retained Earnings 7,000
Total Assets $50,000 Total Liabilities & Equity $50,000

 The ordinary shares are issued on January 1, 2019 while the preference shares are issued
on July 1, 2019.
 B reported $1,000 net income during 2020 and declared dividends in the amount of $200
on December 1, 2020.
 The translated amount of retained earnings on December 31, 2019 is P300,000.

The following direct exchange rates are provided:

January 1, 2019 P40

July 1, 2019 42
December 31, 2019 43
December 1, 2020 41
December 31, 2020 45
Average Rate 2020 44

a. What is the amount of net assets in US dollars on December 31, 2019? 58,500
b. What amount of translation gain as component of other comprehensive income
should be presented in the statement of comprehensive income for the year ended
December 31, 2020? 67500
c. What is the translated retained earnings balance on December 31, 2020? 47000
d. What is the cumulative translation credit that should be presented in the statement
of financial position on December 31, 2020? 4000

2. GWA Corporation of Makati paid P1,128,750 for a 35% interest in KYJ Company in Taiwan
on January 1, 2022, when KYJ’s net asset totaled 375,000 NT Dollar and the exchange rate
for NT Dollar was P8.60. A summary of changes in KYJ’s net assets during 2022 is as follows:

NT Dollar Exchange Rates

Net assets, January 1 375,000 P8.60
Net income for 2022 75,000 8.55
Dividends paid for 2022 25,000 8.54

GWA Corporation anticipated a strengthening of the Philippine peso against the NT Dollar
during the last half of 2022, and it borrowed 150,000 NT Dollar from a Taiwanese bank for
one year at 10% interest on July 1, 2022 to hedge its net investment in KYJ.

The loan was made when the exchange rate for NT Dollar was P8.55. The loan was
denominated in NT dollar and the current exchange rate at December 31, 2022 was P8.50.

a. What is the Other Comprehensive Income – translation adjustment presented in

equity in 2022 as a result of hedging? Loss of 98658

ADVACC (Acctg 630) – MODULE 7: FOREIGN CURRENCY ACCOUNTING

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3. Honda Phil. is a subsidiary of Honda Japan. The functional currency of Honda Phil. is peso
while the presentation of its parent, Honda Japan, is yen. For the year ended December 31,
2020, Honda Phil. has the following foreign currency denominated assets: Accounts
Receivable of $1,000, and Prepaid Asset of $100. The exchange rate on December 31, 2020
is $1=P40 and P1=¥3

The historical rates are:

Dollar Yen
Accounts Receivable $1=P30 P1=¥2
Prepaid Asset $1=P20 P1=¥4

a. In the separate Statement of Financial Position of Honda Phil. on December 31, 2020,
what is the book value of accounts receivable and prepaid asset, respectively?
b. Using the same data above, what is the book value of accounts receivable and prepaid
asset, respectively, in the Consolidated Statement of Financial Position of Honda
Japan?

Practice Set 7.1: Foreign Currency Hedging

1. On November 1, 2020, an entity acquired on account goods from a foreign supplier at a cost
of $1,000. The accounts payable are paid on January 30, 2021.

On December 1, 2020, an entity sold on account the said goods to a foreign customer at a
selling price of $1,500. The accounts receivable are collected on February 28, 2021.

The entity is operating in Philippine economy wherein the functional currency is the
Philippine Peso.

The following direct exchange rates are provided:

Buying spot rate Selling spot rate

November 1, 2020 P40 P42
December 1, 2020 39 40
December 31, 2020 45 47

a. What is the sales revenue for 2020?

b. What is the carrying amount of accounts receivable on December 31, 2020?
c. What is the carrying amount of accounts payable on December 31, 2020?
d. What is the net foreign currency gain for 2020?

2. Vector Corporation issued a promissory note denominated in foreign currency for the
purchase made from a supplier in England on December 1, for a 60-day, 18% promissory
note for 108,000 pounds, at a selling rate of 1FC to P74.20. On December 31, the selling spot
rate is 1FC to P74.85. On January 30, the selling spot rate is 1FC to P75.75.

a. On the settlement date, how much is the foreign exchange gain/loss?

3. Uragon Company sold warehouse facilities for $8,340,000 to a customer in Oregon, USA on
November 02, 2020. Collection in US dollars was due on January 31, 2021. On the same date,
to hedge this foreign currency exposure, Uragon Company entered into a forward contract
to sell $8,340,000 to Export bank for delivery on January 31, 2021. Indirect exchange rates
on different dates were as follows:

Nov 2 Dec 31 Jan 31

Spot rate 0.02387 0.02457 0.02494
30-day futures 0.02364 0.02475 0.02278
60-day futures 0.02392 0.02481 0.02437
90-day futures 0.02463 0.02403 0.02304

a. How much is the effect on earnings due to hedged item in the 2020 P/L statement?
b. How much is the effect on earnings due to hedged item in the 2021 P/L statement?

ADVACC (Acctg 630) – MODULE 7: FOREIGN CURRENCY ACCOUNTING

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4. Barako Company acquired heavy equipment for $14,100 from a supplier in Detroit, USA on
December 1, 2020. Payment in US dollars was due on March 31, 2021. On the same date, to
hedge this foreign currency exposure, Barako entered into a forward contract to purchase
$14,100 from Citibank for delivery on March 31, 2021. Direct exchange rates for dollars on
different dates were as follows:

Spot Rates
Bid Offer
December 1, 2020 41.6 41.4
December 31, 2020 42.5 42.3
March 31, 2021 43.4 43.7

Forward Rates
Dec 1 Dec 31 Mar 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

a. What is the reported value of the liability to the vendor at December 31, 2020?
b. What is the net impact in Barako Company’s income in 2020 as a result of this
hedging activity?

5. On November 2, 2020, P Corp entered into a firm commitment with Japanese firm to acquire
equipment, delivery and passage of title on march 31, 2021, at a price of 4,375 yen. On the
same date, to hedge against unfavorable changes in the exchange rate of the yen, P Corp.
entered into a 150-day forward contract with BPI for 4,375 yen. The relevant exchange
rates were as follows:

11/02/2020 12/31/2020 03/31/2021

Spot Rate P37 P38 P35
Forward Rate P40 P33 P35

a. What is the foreign currency gain/loss due to the change in the fair value of the
underlying purchase commitment on December 31, 2020?
b. What is the amount debited to the equipment account?

6. On November 1, 2020, 7D Co. entered into a firm commitment with Toki-Toki Japanese
Company for the export of dried mangoes with a contract price of 10,000 Yen. The goods
will be delivered by 7D Co. on January 31, 2021. On the same day, in order to protect itself
from the risk of changes in fair value of the firm commitment due to changes in underlying
foreign currency, 7D Co. entered into a forward contract with BDO for the sale of 10,000 Yen
at the forward rate on November 1, 2020. IAS 29 provides that hedge of the foreign
currency risk of a firm commitment may be accounted for as either fair value hedge or cash
flow hedge. 7D Co. elected to account for the hedge of the firm commitment using fair value
hedge. The following direct exchange rates are provided:

November 1, 2020 December 31, 2020 January 30,2021

Buying spot rate P10 P13 P12
Selling spot rate P13 P15 P16
Forward buying 90-days P11 P14 P15
Forward selling 90-days P13 P16 P17
Forward buying 60-days P14 P17 P16
Forward selling 60-days P15 P18 P14
Forward buying 30-days P11 P15 P12
Forward selling 30-days P13 P11 P14

a. What is the foreign currency gain (loss) due to hedged item for the year ended
December 31, 2020?
b. What is the foreign currency gain (loss) due to hedging instrument for the year ended
December 31, 2021?

ADVACC (Acctg 630) – MODULE 7: FOREIGN CURRENCY ACCOUNTING

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7. On October 1, 2020, the company took delivery from a Bahrain firm of inventory costing
850,000 dinar. Payment is due on January 30, 2021. Concurrently the company paid
P11,700 at-the-money call option for 850,000 Bahrain dinar. The strike price is P9.40.

Market Price Fair Value of the call option

October 1, 2020 9.400 11,700
December 31, 2020 9.423 23,200
January 30, 2021 9.435 29,750

a. If changes in the time value will be excluded from the assessment of hedge
effectiveness, what is the forex gain (loss) on the hedging instrument due to change in
the ineffective portion on December 31, 2020?
b. If the changes in the time value will be included in the assessment of hedge
effectiveness, what is the forex gain (loss) in the hedging instrument in 2021?
c. If split accounting is used in the assessment of hedge effectiveness, what is the forex
gain (loss) on the option contract due to change in intrinsic value on December 31,
2021?

8. On October 1, 2020, 5J sold on account an inventory to a US-based company at a price of

$5,000 collectible on January 30, 2021. On November 1, 2020, 5J purchased on account an
inventory to a US-based company at a price of $8,000 payable on March 2, 2021.

On October 1, 2020, in order to hedge the foreign currency risk related to its foreign
currency denominated accounts receivable, 5J acquired a 120-day put option from RCBC to
sell $5,000 at a strike price of P40 by paying option premium of P500. On November 1,
2020, in order to hedge the foreign currency risk related to its foreign currency
denominated accounts payable, 5J acquired a 120-day call option from RCBC to buy $8,000
at an option premium of P600.
The following additional data are provided:

10/1/2020 11/1/2020 12/31/2020 1/30/2021 3/2/2021

Buying spot rate P40 P38 P36 P37 P39
Selling spot rate P39 P41 P44 P41 P42
FV of put option ? ? P23,000 ? ?
FV of call option ? ? P25,000 ? ?

a. What is the net foreign currency gain or loss as a result of hedging activity to be
reported by 5J Inc. for the year end December 31, 2020?
b. What is the net foreign currency gain or loss as a result of hedging activity to be
reported by 5J Inc. for the year ended December 31, 2021?

9. On September 1, 2020, 2B Co. anticipated the purchase of merchandise from a foreign

vendor at a price of $1,000. The purchase would probably occur on January 30, 2021. On
October 1, 2020, 2B Co. forecasted the sale of merchandise to a foreign customer at a price
of $3,000. The sale would probably occur on March 31, 2021.

On September 1, 2020, 2B Co. purchased a 150-day call option to buy $1,000 at an option
price of P20 by paying option premium of P200. On October 1, 2020, 2B Co. purchased a
180-day put option to sell $3,000 at a strike price of P24 by paying option premium of P300.
The company prepares calendar year financial statements.

The forecasted purchase and sales transaction occurred on the date anticipated. For the
year ended December 31, 2021, all foreign currency receivables are collected but only 80%
of purchased inventories from the foreign vendor were sold to third person.
The following additional data are provided:

9/1/2020 10/1/2020 12/31/2020 1/30/2021 3/31/2021

Buying spot rate P23 P24 P21 P22.50 P22
Selling spot rate P20 P21 P24 P23 P21
FV of put option ? ? P10,000 ? ?
FV of call option ? ? P4,500 ? ?

ADVACC (Acctg 630) – MODULE 7: FOREIGN CURRENCY ACCOUNTING

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a. What is the net foreign currency gain or loss in Other Comprehensive Income of
Statement of Comprehensive Income for the year ended December 31, 2020?
b. What is the net foreign currency gain or loss in Other Comprehensive Income of
Statement of Comprehensive Income for the year ended December 31, 2021?
c. What is the net cumulative Other Comprehensive Income in December 31, 2021?

ADVACC (Acctg 630) – MODULE 7: FOREIGN CURRENCY ACCOUNTING

Ateneo de Zamboanga University – School of Management and Accountancy