Foreign Currency Transactions

1. During July 2016, Petron Corporation had the following transactions with foreign business:

Exchange Rate
Date Nature of Transaction Billing Currency (Direct)
Vendor A
7/1/16 Imported merchandise costing 100,000
rupees from Pakistan wholesaler Rupee P .82
7/10/16 Paid 40% of amount owed .83
7/31/16 Paid remaining amount owed .78

Customer A
7/15/11 Sold merchandise for 50,000 pound to
Syrian wholesaler Pound* P .95
7/20/11 Received 20% payment .90
7/30/2011 Received remaining amount owed .91

*Syrian pound

What is the capitalized cost of inventory purchase from the Pakistan wholesaler?

a. P 0 c. P 82,000
b. 78,000 d. 83,000

Solution:
Cost of inventory purchase:
100,000 rupees x P .82 (spot rate on the date of transaction = P 82,000

2. Juan, a Philippine Corporation, bought inventory items from a supplier in Germany on

November 5, 2016 for 100,000 marks, when the spot rate was P 21. At Juan’s December 31,
2016, year end, the spot rate was P 20.5. On January 15, 2017, Juan bought 100,000 marks at
the spot rate of P 20.90 and paid the invoice. How much should Juan report in its income
statement for 2016 and 2017 as foreign exchange transaction gain or (loss)?

2016 2017 2016 2017

a. P 50,000 P 40,000 c. P 0 P 10,000
b. 50,000 (40,000) d. 10,000 0

Solution:

Date of transaction : 11/5/2016............... P 21.0

Balance Sheet date : 12/31/2016............ P 20.5 P .5 gain x 100,000 = P 50,000 gain
Date of settlement: 1/15/2017................. P 20.9 P .4 loss x 100,000 = P 40,000 loss (b)
 3. On September 1, 2016 Pedro & Co., a Philippine Corporation, sold merchandise to a foreign
firm for P 250,000 francs. Terms of the sale require payment in francs on February 1, 2017. On
September 1, 2016, the spot exchange rate was P 6. 27 per franc. At December 31, 2011,
Pedro’s year end, the spot rate was P 6.00, but the rate increased for P 6.30 by February 1,
2017, when payment was received. How much should Pedro report as foreign exchange
transaction gain or (loss) in its income statement?

2016 2017 2016 2017

a. P 67,500 (P 75,000) c. P 0 P 7,500
b. 67,500 ( 75,000) d. 7,500 0

Solution:

Date of transaction : 9/1/2016............... P 6.27

Balance Sheet date : 12/31/2016............ P 6.00 P .27 loss x 250,000 = P 67,500 loss
Date of settlement: 2/1/2017................. P 6.30 P .30 gain x 250,000 = P 75,000 gain (b)

4. On July 1, 2016, Bato Company lent P 120,000 to a foreign supplier, evidenced by an interest
bearing note due on July 1, 2017. The note is denominated in the currency of the borrower and
was equivalent to 840,000 local currency units (LCU) on the loan date. The note principal was
appropriately included at P 140,000 in the receivable section of Bato’s December 31, 2016
balance sheet. The note principal was repaid to Bato on the July 1, 2017 due date when
exchange rate was 8 LCU to P 1. In its income statement for the year ended December 31,
2017, what amount should Bato include as a foreign currency transaction gain or loss?

a. P 0 c. P 15,000 gain
b. 15,000 loss d. 35,000 loss

Solution:

(d)
12/31/2016: Balance sheet date.............................................................................. P 140,000
7/1/2017 : date of settlement: 840,000 LCU x P 1/8 LCU......................................... 105,000
Foreign currency exchange transaction loss............................................................. (d ) P 35,000

5. On September 1, 2016 Rosan Corp, received an order for equipment from a foreign customer
for 300,000 local currency units (LCU) when the Philippine peso equivalent was P 96,000.
Rosan shipped the equipment on October 15, 2016, anfd billed the customer for P 300,000 LCU
when the Philippine peso equivalent was P 100,000. Rosan received the customer’s remittance
in full on November 16, 2016, and sold the 300,000 LCU for P 105,000. In its income statement
for the year ended December 31, 2016, Rosan should report a foreign exchange transaction
gain of:

a. P 0 c. P 5,000
b. 4,000 d. 9,000
Solution:

(c)
When the sale is made on 10/15/2016, Rason would record a receivable and sales at P 100,000 the peso
equivalent on that date.
Accounts Receivable 100,000
Sales 100,000

On 11/16/2016, Rosan receives foreign currency worth P 105,000. Since the receivable was recorded at
P 100,000, a P 5,000 gain must be recorded.
Foreign currency 105,000
Accounts Receivable 100,000
Foreign exchange gain 5,000

The peso equivalent when the order was received on 9/1/2016 (P 96,000) is not used to compute the gain
because no entry is recorded on this date. The receipt and acceptance of a purchase order from a
customer is an executor commitment which is not generally recorded.
Foreign Currency Financial Statement Translation

1. On January 1, 2016, Kiner Company formed a foreign branch. The branch purchased
merchandise at a cost of 720,000 local currency units (LCU) on February 5, 2016. The purchase
price was equivalent to P 180,000 on this date. The branch’s inventory at December 31, 2016
consisted solely of merchandised purchase on February 15, 2016 and amounted to 240,000
LCU. The exchange rate was 6 LCU to P 1 on December 31, 2016, and the average rate of
exchange was 5 LCU to P 1 for 2016. In Kiner’s December 31, 2016 balance sheet, the branch
inventory balance of 240,000 LCU should be translated into Philippine pesos at (using closing
rate method).

a. P 40,000 c. P 60,000
b. 48,000 d. 84,000

Solution:

P 40,000 (P240,000 / 6) . Assets should be translated using closing rate if closing rate method is used .

2. The Pinoy Company acquired a foreign subsidiary (Taiwan) on August 15, 2016. Goodwill
arising on the acquisition was NT Dollar (Taiwanese currency) 175,000. Consolidated financial
statements are prepared at the year end of December 31, 2016 requiring the translation of all
foreign operations results into the presentation currency of peso.

The following rates of exchange have been identified:

Rate at August 15, 2016 Nt Dollar 1.321 : 1
Rate at December 31, 2016 Nt Dollar 1.298 : 1
Average rate for the year ended December 31, 2016 Nt Dollar 1.302 : P 1
Average rate for the period fro August 15 to December 31, 2016 Nt Dollar 1.292 :
P 1.
According to PAS 21 ( the effects of changes on foreign exchange rates), at what
amount should the goodwill be measured in the consolidated statement of financial position?

a. P 134,409 c. P 134,823
b. 135,449 d. 312,449

Solution:

(c)
Goodwill arising from acquisition................................. Nt dollar 175,000
Divided by: Closing/Current rate (Nt dollar : peso)...... Nt dollar 1,298
Goodwill in the consolidated balance sheet................ P 134,823

3. A subsidiary of Salisbury, Inc. located in a foreign country whose functional currency is the
foreign currency (which is not the currency of a hyperinflationary economy). The subsidiary
acquires inventory on credit on November 1, 2016, for 100,000 foreign currencies (FC) that is
sold on January 17, 2017 for P 130,000 foreign currencies (FC). The subsidiary pays fot the
inventory on January 31, 2017. Currency exchange rates for 1 foreign currency (FC) are as
follows:

November 1. 2016................... P 0.16 = 1 FC

December 31, 2016................. 0.17 = 1
January 17, 2017.................... 0.18 = 1
January 31, 2017.................... 0.19 = 1
Average for 2017..................... 0.20 = 1

What amount does Salisbury’s consolidated balance sheet report for this inventory at December
31, 2016?
a. P 16,000 c. P 18,000
b. 17,000 d. 19,000

Solution:

The foreign currency is the functional currency, so a translation method or closing rate
method is appropriate. All assets (including inventory) are translated at the current exchange rate
( 100,000 x P .17)

4. Using the same information in No. 3, what amount does Salisbury’s consolidated income
statement report for cost of goods sold for the year ending December 31, 2017 assuming the
following current rates for 1 foreign currency (FC):

November 1. 2016................... P 0.16 = 1 FC

December 31, 2016................. 0.17 = 1
January 1, 2017.................... 0.18 = 1
January 31, 2017.................... 0.19 = 1
Average for 2016..................... 0.20 = 1

a. P 16,000 c. P 19,000
b. 17,000 d. 20,000

Solution:

The foreign currency is the functional currency, so a translation method or closing rate
method is appropriate. Cost of goods sold is translated at the average rate for 2017 (historical rate,i.e.
rate on January 17 impracticable to use since it is not given). The cost of goods sold amounted for
P 20,000 (100,000 x P .20)

5. Westmore, Ltd. is a Thailand subsidiary of a Philippine Company. Westmore’s functional

currency is baht. The following exchange rates were in effect during 2016:

January 1.................................................... P 1 = .625 baht

June 30....................................................... P 1 = .610 baht
 December 31.............................................. P 1 = .620 baht
Weighted average rate for the year............ P 1 = .630 baht

Westmore reported sales of Baht 1,500,000 during 2016. What amount (rounded) would have
been included for this subsidiary in calculating consolidated sales?

a. P 2,380,952 c. P 2,429,150
b. P 2,400,000 d. P 2,419,355

Solution:

The foreign currency is the local currency (LCU), so a translation method or closing rate
method is appropriate. Sales are translated at the average rate (historical rate i.e. rate on January 17
impracticable to use since it is not given). The sales amounted to P 2,380,952 ( 1,500,000 baht / .630
baht)
 Installment Sales

1. Conrado Motons sells locally manufactured jeepneys on the installment basis. The
information presented below relates to operations during the past three years;

2016 2015 2014

Cost of instalment P 8,765,625 P 7,700,000 P 4,950,000
sales
Dec. 31 balance:
Inst. R’ble, 2016 9,728, 125
Inst. R’ble, 2015 3,025,000 8,387,500
Inst. R’ble, 2014 1,512,500 4,812,500
Gross Profit Rate 32 % 30 % 28 %

Conrado Motors uses the instalment method of accounting, what would the company report as
total realized gross profit for the year 2016?

a. P 1, 012,000 c. P 3,733, 750

b. 3,044,250 d. 6,993,250

Solution:

2014 2015 2016 Total

Inst. Accounts Receivable,
1/1/2016 (inst. sales)........ P 1,512,500 P 8,387,500 P 12,890,625*
Less: Inst. Accounts
Receivable 12/31/2016........ 0 3,025,000 9,728,125
Collections in 2016.............. P 1,512,500 P 5362,500 P 3,162,500
Multiplied by: gross profit rate 28% 30% 32%
Total realized gross profit... P 432,500 P 1, 608,750 P 1,012000 P 3,044,250 (b)
*P 8,765,625/ (100%-32%)

2. The various documents and records which were recovered immediately after a fire gutted its
premises, EMC Marketing Co. Gathered the following information ( the company uses the
instalment method of accounting):

2014 2015 2016

Instalment sales P 500,000 P 800,000 P (?)
Cost of inst. sales (?) 600,000 (?)
Gross profit on inst. (?) (?) 282,000
sales
Collection on:
2014 sales 50,000 250,000 100,000
2015 sales - 200,000 500,000
2016 sales - - 400,000
Realized gross profit 11,000 (?) 241,000
on inst sales
Based on the information given above, the cost of installement sales for the year 2016 was:

a. P 900,000 c. P 932,000
b. 918,000 d. 940,000

Solution:

(b)
Realized Gross Profit in 2016....................................................................................... P 241,000
Less: Realized gross profit in 2016 for 2014 sales:
P 100,000 x 22%*.......................................................................................... 22,000
Realized Gross Profit in 2016 for 2015 sales:
P 500,000 x 25%**...................................................................................... 125,000
Realized Gross Profit in 2016 for 2016 sales............................................................... P 94,000
Gross Profit for 2016: (alternative formula)
Realized Gross Profit/collections: P94,000/ P 400,000..................................... 23.5%

Therefore, the cost of instalment sales would be:

Installment sales – 2016:
Gross profit/gross profit rate : P 282,000/ 23.5%............................................ P 1,200,000
Less: Gross profit......................................................................................... 282,000
Cost of Installment sales....................................................................................... P 918,000

*alternative formula to compute gross profit rate:

Realized Gross profit/collections
For 2014 sales: P11,000/ P50,000.......................................................................... 22%

**2015 sales: 100% - (P 600,000 / P800,000)........................................................... 25%

3. Cente, Inc. appropriately uses the installement method of accounting to recognize income in
its financial statements. Some pertinent data relating to this method of accounting include:

2014 2015 2016

Installment sales..................... P 300,000 P 375,000 P 360,000
Cost of inst. Sales................... 225,000 285,000 252,000
Gross profit............................. P 75,000 P 90,000 P 108,000

Rate of gross profit on

inst. Sales......................... 25 % 24 % 30 %

2014 2015 2016

Balance of deferred gross
profit at year end :
From 2014 sales P 52,500 P 15,000 P -
From 2015 sales 54,000 9,000
From 2016 sales 72,000
Total....................................... P 52,000 P 69,000 P 81,000
What amount of installment accounts receivable should be presented in Cente’s December 31,
2016 balance sheet?

a. P 270,000 c. P 279,000
b. 277,500 d. 300,000

Solution:

(b)
Installment accounts receivable, December 31, 2016:
Deferred gross profit, December 31, 2016/ gross profit rate
2014 sales P 0
2015 sales: P 9,000 / 24% 37,500
2016 sales: P 72,000 / 30% 240,000
Installment accounts receivable, December 31, 2016 (b )P 277,500

4. Gloria Corporation started operations on January 1, 2015 selling home appliances and
furniture sets both for cash and on istallment basis. Data on the instalment sales operations of
the company gathered for the years ending December 31, 2015 and 2016 as follows:

2015 2016
Installment sales..................... P 400,000 P 500,000
Cost of inst. Sales................... 240,000 350,000
Cash collected on inst. sales
2015 installment contracts 210,000 150,000
2016 installment contracts - 300,000

Additional information:
On January 5,2017 on instalment sale in 2015 was defaulted and the merchandise with an
appraised value of P 5,000 was repossessed. Related instalment receivable balance on
January 5,2017 was P 8,000.

(1) The balance of Deferred Gross Profit on December 31, 2016, and (2) the gain or (loss) on
repossession in 2017
a. (1) P 130,000; (2) P 200 c. (1) P 76,000; (2) P 1,800
b. (1) 76,000; (2) 200 d. (1) P 130,000; (2) (200)
Solution:

(b)
(1) Deferred Gross Profit, 12/31/2016: 2015 sales 2016 sales Total
Installment sales...................................... P 400,000 P 500,000
Less: Collections in 2015......................... 210,000
Collections in 2016....................... 150,000 300,000
Installments AR,
December 31, 2016...................... P 40,000 P 200,000
Multiplied by: Gross profit rate................. 40% 30%
Deferred Gross Profit,
December 31, 2016...................... P 16,000 P 60,000 P 76,000 (b)

Gross Profit Rates: 2015 2016

Installment Sales.......................... P 400,000 P 500,000
Less; Cost of Installment sales..... 240,000 350,000
Gross profit................................... P 160,000 P 150,000
Gross profit rates.......................... 40% 30%

(2) Gain (loss) on repossession

Appraised value of repossessed merchandise....... P 5,000
Less: Unrecovered cost:
Installment accounts receivable – 2015,
Unpaid balance........................................... 8,000
Less; Deferred gross profit
( P 8,000 x 40%).......................................... 3,200 4,800
Gain on repossession............................................. (b) 200

5. The Jaja Sales Co. which began the appliances business on January 1, 2014 reports gross
profit on the instalment basis. The following information relative to the instalment sales are
available:

2014 2015 2016

Installment sales..................... P 360,000 P 375,000 P 450,000
Cost of inst. Sales................... 270,000 271,875 324,000
Gross profit............................. P 90,000 P 103,125 P 126,000

Collections:
2014 inst. contracts P 67,500 P 112,500 P 108,750
2015 inst. contracts 71,250 120,000
2016 inst. contracts 93,750

Defaults:
Unpaid balance of 2014 P 18,750 P 22,500
Installment contracts
Value assigned to 9,750 9,000
repossessed
merchandise..................
Unpaid balance of 2015 24,000
installment contracts
 Value assigned to 13,500
repossessed
merchandise..................

(1) The realized gross profit on instalment sales during 2016, and (2) the loss on repossession
during the year 2016:

a. (1) P 86,437.50; (2) P 12,225 c. (1) P 86,437.50; (2) P 11,775

b. (1) 90,300.00; (2) 11,775 d. (1) 88,687.50; (2) 34,275

Solution:

(c)
(1) Realized Gross Profit in 2016:
2014 sales: P 108,750 x (90,000 / 360,000)*............................................... P 27,187.50
2015 sales: P 120,000 x (103,125 / 375,000)**............................................. 33,000.00
2016 sales: P 93,750 x (126,000 / 450,000).................................................. 26,250.00
(c) P 86,437,50

(2) Loss on repossession in 2016:

2014 sales 2015 sales Total
Value of repossessed merchandise............ P 9,000 P 13,500
Less: unrecovered cost:
Unpaid balance................................ P 22,500
Less: Deferred gross profit:
2014: P 22,500 x 25%* 5,625
2015: P 24,000 x 27.25%** 6,600
P 16,875 P 17,400
Gain (loss) on repossession P (7,875) P (3,900) (c) P (11,775)