FOREIGN CURRENCY TRANSACTIONS MR. ALBERT D.

CRUZ, CPA, CMA

TRANSLATION OF FINANCIAL STATEMENTS

PROBLEM 1
UMASA Trading sells goods to ABC Co. from Bangkok for 1,000,000 Baht. The exchange rate
at this time was P0.9875/baht. ABC paid 31 days later when the prevailing exchange rate was
P1: Baht1.
1. By reason of exchange fluctuation, how much was the foreign exchange gain
or loss if the agreed currency is Thailand baht?
a. P 12,500 loss
b. P 12,500 gain
c. P 12,658 loss
d. P 12,658 gain

PROBLEM 2
YINYAN Company purchased merchandise for 300,000 pounds from a vendor in London on
November 30, 2015. Payment in pounds was due on January 31, 2016. The exchange rates for
pounds were as follows:
November 30, 2015 December 31, 2015
Spot rate £ 1.65 £ 1.62
30 – day rate 1.64 1.59
60 – day rate 1.63 1.56
2. In its December 31, 2015 statement of comprehensive income, what is the
amount to be reported by the company as foreign exchange difference?
a. P 9,000 gain
b. P 3,367 loss
c. P 3,367 gain
d. P 9,000 loss

PROBLEM 3
NOMORECHANCE Holdings, Inc. is the parent company of a group of companies but has its
own operations. It bought fixed asset for $36,000 on November 1, 2015 when the exchange
rate was P44.00 to $1.00. At December 31, 2015, the supplier of fixed assets has not been paid
and the exchange rate at that time was P46.00 = $1.00. The company has not taken out a
forward exchange contract for this payment to hedge against adverse exchange rate
movements.
3. On the statement of financial position of NOMORECHANCE Holdings, Inc.,
what will be the year – end value for accounts payable to the creditor?
a. P 1,584,000
b. P 1,656,000
c. P 1,854,000
d. P 1,566,000

PROBLEM 4
ALABANG Trading buys goods from Kowloon Inc. of Hong kong payable in Hongkong dollars
at a credit term of 60 days. On June 30, 2015, the statement of financial position of Alabang
Trading reflects a payable to Kowloon Inc. representing purchase of goods worth HK$ 250,000
when Hong Kong dollar is going at HK$ 1.00 = PhP 1.00.
4. What will be ALABANG Trading’s foreign exchange gain or loss on June 30,
2015, if the prevailing exchange rate was HK$ 0.975 = PhP 1.00?
a. P 6,250 loss
b. P 6,250 gain
c. P 6,410.25 loss
d. P 6,410.25 gain
 MR. ALBERT D. CRUZ, CPA, CMA

PROBLEM 5
MANDALUYONG Company buys goods from Tokyo Company of Japan worth 2,500,000 yen.
The prevailing exchange rate is P 0.1302136 / yen. MANDALUYONG Company settles the
account 60 days later when the exchange rate is going at P0.118376 / yen.
5. What is the foreign exchange gain or loss of MANDALUYONG?
a. P 29,594 gain
b. P 29,594 loss
c. P 1,920,000 loss
d. P 1,920,000 gain

6. What is the foreign exchange gain or loss of Tokyo?

a. P 29,594 gain
b. P 29,594 loss
c. P 0
d. Yen 2,500,000

PROBLEM 6
On November 15, 2015, PASAY Company a Philippine trader ordered merchandise FOB Shipping
Point from a foreign company for 200,000 local currency units, the currency of the foreign
company. The merchandise was shipped and invoiced to Pasay Company on December 10,
2015. The merchandise was received on December 15, 2015. Pasay Company paid the invoice
on January 10, 2016. The spot rates for each local currency unit on the respective dates are as
follows:
November 15, 2015 P 4.955
December 10, 2015 P 4.675
December 15, 2015 P 4.785
December 31, 2015 P 4.875
January 10, 2016 P 4.475

7. In Pasay Company’ December 31, 2015 Income Statement, what is the

foreign exchange gain or loss?
a. P 40,000 gain
b. P 40,000 loss
c. P 18,000 loss
d. P 16,000 gain

PROBLEM 7
The following data is available with regard to QC Company’s sale of 10,000 foreign currency
units under a forward contract dated November 1, 2015, for delivery on January 31, 2016:
November 1, 2015 December 31, 2015
Spot rate P 8.00 P 8.30
30 day future rate 7.80 8.20
60 day future rate 7.70 8.15
90 day future rate 7.90 8.10
QC Company entered into the forward contract in order to speculate the foreign currency
fluctuations.
8. In QC Company’s income statement for the year ended December 31, 2015,
what amount of gain or loss should be reported from this forward contract?
a. P 1,000 loss
b. P 1,000 gain
c. P 3,000 loss
d. P 3,000 gain

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PROBLEM 8
CEBU Company entered into a forward contract for speculation. On December 7, 2015, Cebu
entered into a forward contract to purchase 48,000 foreign currencies in 90 days. The relevant
exchange rates are as follows:
Spot rate Forward rate to
3/7/16
December 7, 2015 P 52.59 P 52.65
December 31, 2015 52.63 52.69
March 7, 2016 52.70 ?
9. At December 31, 2015, what amount of foreign exchange gain or loss should
Cebu Company include in its income statement from this contract?
a. P 1,920 loss
b. P 960 gain
c. P 1,920 gain
d. P960 loss

PROBLEM 9
Davao Company sold merchandise for 90,000 rupees to a customer in India on November 2,
2015. Collection in Indian rupees was due on January 31, 2016. On the same date, to hedge
against this foreign currency exposure, Davao Company entered into a future contract to sell
90,000 rupees to a bank for delivery on January 31, 2016. Exchange rates for rupees on
different dates are as follows:

Nov. 2 Dec. 31 Jan. 31

Selling spot rate 81.5 82.0 83.0
Bid spot rate 82.9 80.7 80.1
30 – day futures 82.3 80.4 83.9
60 – day futures 81.8 80.3 82.6
90 – day futures 80.6 81.6 83.4

10. What was the net impact in Davao Company’s income in 2016 as a result of
this hedging activity?
a. P 27,000 loss
b. P 27,000 gain
c. P 36,000 gain
d. P 36,000 loss

PROBLEM 10
Bacolod Company acquired machinery for 150,000 liras from a vendor in Turkey on December 1,
2015. Payment in Turkey lira was due on March 31, 2016. On the same date, to hedge against
foreign currency exposure, Bacolod Company entered into a future contract to purchase
150,000 liras from a bank for delivery on March 31, 2016. Exchange rates for lira on different
dates are as follows:

Dec. 1 Dec. 31 Mar. 31

Selling spot rate 41.4 42.3 43.7
Buying spot rate 42.3 42.2 41.2
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

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 MR. ALBERT D. CRUZ, CPA, CMA

11. What was the net impact in Bacolod Company’ s income statement in 2015 as
a result of this hedging activity?
a. P 75,000 loss
b. P 75,000 gain
c. P 90,000 gain
d. P 90,000 loss

PROBLEM 11
On October 31, 2015, Pyramid Philippines took delivery from a British firm of inventory costing
£725,000. Payment is due on January 31, 2016. At the same time, Pyramid paid P8,250 cash to
acquire a 90 – day call option for £725,000.

Oct. 31, 2015 Dec. 31, 2105 Jan. 31, 2016

Strike price P 3.60 ? ?
Spot rate 3.61 3.62 3.64
Forward rate 3.72 3.77 3.78
Fair value of call option ? P 17,000 ?

Compute for the following:

12. (1) Foreign exchange gain or loss on option contract due to change in time
value on December 31, 2015 if changes in the time value will be excluded
from the assessment of hedge effectiveness, and (2) Foreign exchange gain
or loss due to change in intrinsic value on January 31, 2016 if changes in the
time value will be excluded from the assessment of hedge effectiveness.
a. P 1,500 gain; P 14,500 gain
b. P 5,250 loss; P 7,250 gain
c. P 5,250 loss; P 14,500 gain
d. P 1,500 gain; P 7,250 gain

PROBLEM 12
On May 1, 2015, Palawan Co. anticipated the purchase of 70,000 units of merchandise from a
foreign vendor. The purchase would probably occur on September 25, 2015 and would require a
payment of 1,250,000 foreign currencies. On May 1, 2015, the company purchased a call option
to buy 1,250,000 FC at a strike price of 1 FC = P 0.47. An option premium of P 14,000 was
paid. Changes in the time value of the option will be excluded from the assessment of hedge
effectiveness. For the year 2015, the relevant rates were as follows:

May 1 May 31 June 30 Sept. 25

Spot rate P 0.45 P 0.49 P 0.51 P 0.52
FV of Call option ? P 29,500 P 52,000 ?

13. The foreign exchange gain or loss on option contract in (1) equity and (2)
earnings on June 30:
a. P 50,000; (2,500)
b. (P 50,000); (12,000)
c. P 25,000; 2,500
d. P 25,000; (2,500)

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 MR. ALBERT D. CRUZ, CPA, CMA

PROBLEM 13
On November 1, 2015, Naga Company entered into a firm commitment to acquire machinery.
Delivery and passage of title would be on February 28, 2016 at the price of $12,000
Singaporean dollars. On the same date, to hedge against unfavorable changes in the exchange
rates, Naga entered into a 120 – day forward contract with China bank for $12,000 Singaporean
dollars. Exchange rates were as follows:

Spot rate Forward rate

Nov. 1, 2015 P 36.25 P 34.30
Dec. 31, 2015 37.40 36.70
Feb. 28, 2016 39.50 ?

14. How much is the foreign exchange gain or loss recognized by Naga Company
on the firm commitment on December 31, 2015?
a. P 13,800 gain
b. P 28,800 loss
c. P 13,800 loss
d. P 28,800 gain

15. At what amount will the equipment be presented in the statement of financial
position as at December 31, 2016?
a. 411,600
b. 474,000
c. 435,000
d. 440,400

PROBLEM 14
On December 1, 2015, Caloocan Corporation acquired 6,900 shares of Eastwood Company at a
cost of P 42 per share. Caloocan classifies them as available – for – sale securities. On this
same date, Caloocan decides to hedge against a possible decline in the value of the securities
by purchasing, at a cost of P 17,850, an at–the–money put option to sell the 6,900 shares. The
option expires on April 1, 2016. The fair values of the investment and the options follow:

12/1/15 12/31/15 4/1/16

Eastwood shares P 42 P 39.75 P 35.25
Put option – FV ? P 23,100 P 46,575

16. The gain or loss on option contract due to change in time value on December
31, 2015 if split accounting is used in the assessment of hedge effectiveness
should be?
a. P 15,525 gain
b. P 10,275 gain
c. P 10,275 loss
d. P 15,525 loss

17. The 2016 net gain on loss on the hedging activity amounted to:
a. P 7,575 loss
b. P 23,475 gain
c. P 7,575 gain
d. P 23,475 loss

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PROBLEM 15
On August 1, EWF Company forecasted the purchase of 50,000 units of inventory from Thailand
Company. The purchase would probably occur on November 3 and require the payment of
2,340,000 baht. It is anticipated that the inventory could be further processed and delivered to
customers by early December. On August 1, the company purchased a call option to buy
2,340,000 baht at a strike price of 1FC=P1.95. An option premium of P8,850 was paid.
Spot rates and option values are as follows;
Aug 1 Aug 31 Sept 30 Nov 3
Spot rate P1.93 P1.952 P1.963 P1.97
Fair value of call option P? P15,690 P34,410 P?

On November 3, EWF Company purchased 50,000 units of inventory at a cost of 2,376,000

baht. The option was settled/sold on November 3 at its fair value. After incurring further
processing costs of P180,000, the inventory was sold for P9,400,000 on December 7.

18. How much would be the effect of the above transactions in EWF’s Profit or
Loss Statement at year end?
A. 4,539,280
B. 4,586,080
C. 4,577,230
D. 4,530,430

PROBLEM 16
CC Corporation owns a subsidiary in Japan whose financial statements are in Japanese Yen.
Dec. 31, 2014 Dec. 31, 2015
ASSETS
Cash and cash equivalents ¥ 30,000 ¥ 25,000
Receivables 122,500 147,500
Inventory 160,000 170,000
Property, plant and equipment, net 255,000 230,000
TOTAL ASSETS ¥ 567,500 ¥ 572,500

LIABILITIES AND EQUITY

Accounts payable ¥ 55,000 ¥ 75,000
Long – term debt 322,500 285,000
Common stock 115,000 115,000
Retained earnings 75,000 97,5000
TOTAL LIABILITIES AND EQUITY ¥ 567,500 ¥ 572,500

Relevant exchange rates were as follows:

January 1, 2014 ¥ 1 = P 45
December 31, 2014 ¥ 1 = P 42.50
December 31, 2015 ¥ 1 = P 47.50
Average 2014 ¥ 1 = 43.75
September 12, 2014 ¥ 1 = P 40

CC formed the subsidiary on January 1, 2014. Income of the subsidiary was earned evenly
throughout the years and the subsidiary declared dividends worth ¥ 15,000 on September 12,
2014 and none were declared during 2015.
19. How much is the cumulative translation adjustment in 2015?
a. P 625,000
b. P 568,750
c. P 1,006,250
d. P 875,000

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PROBLEM 17
On January 1, 2015 FAREWELL CORPORATION organized GOODLUCK Company as
subsidiary in Australia with an initial investment cost $ 157,500. GOODLUCK Company’s
December 31, 2015, trial balance in Australian dollars is as follows:
Debit Credit
Cash and cash equivalents $ 18,375
Trade receivables, net 52,500
Due from Farewell 13,125
Inventory 65,625
Machinery and equipment 262,500
Accumulated depreciation $ 26,250
Accounts payable 31,500
Mortgage bonds payable 131,250
Ordinary shares 157,500
Sales 393,750
Cost of goods sold 183,750
Selling expenses 78,750
Depreciation expense 26,250
Dividends declared 39,375
TOTAL $ 740,250 $ 740,250
Additional information:
a. Purchases of merchandise are made evenly throughout the year. Items in the ending
inventory were purchased July 1.
b. Machinery and equipment are depreciated by the straight line method with a 10-year life
and no residual value. A full year’s depreciation is taken in the year of acquisition. The
equipment was acquired on April 1.
c. The dividends were declared and paid on October 1.
d. The exchange rates were as follows:
January 1 P 35.50 October 1 P 35.40
April 1 35.25 December 31 35.00
July 1 35.60 Average 2015 35.30

20. How much is the cumulative translation adjustment in 2015?

a. P 94,500 loss
b. P 94,500 gain
c. P 114,187.50 loss
d. P 114,187.50 gain

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