Accounting

 for  Foreign  Currency  Translation,  Conversion  and  Financial  Reporting  for  Foreign  Economies  
 
1.   On  September  1,  2016,  McQueen  Incorporated  entered  into  non-­‐‑cancellable  sales  order  with  a  Japanese  firm  to  
purchase  a  new  machine.    The  contract  price  was  100,000  yen.    The  machine  was  delivered  on  December  23,  2016.    
The  invoice  was  dated  November  13,  2016,  the  shipping  date  (FOB  shipping  point).    The  vendor  was  paid  on  January  
2,  2017.    The  buying  and  selling  spot  exchange  rates  are  as  follows:  
Sept.  3,  2016   Nov.  13,  2016   Dec.  23,  2016   Dec.  31,  2016   Jan.  7,  2017  
Buying  rate   ₱0.18   ₱0.20   ₱0.21   ₱0.22   ₱0.21  
Selling  rate   ₱0.20   ₱0.21   ₱0.22   ₱0.23   ₱0.24  
 
Prepare  the  journal  entries  for  the  above  transactions  and  determine  the  following:  
a.   What  is  the  amount  Capitalizable  to  the  equipment?  
b.   What  is  the  reportable  foreign  exchange  gain  or  loss  amount  in  McQueen’s  2017  income  statement?  
c.   What  is  the  reported  value  of  the  payable  to  the  vendor  at  December  31,  2016?  
 
2.   On  September  of  the  current  year,  Wang  Corporation  had  the  following  transactions  with  foreign  entities:  
Date   Nature  of  transaction   Billing  currency   Exchange  rate  
Vendor  Alexander   FC  1   (Direct)  
1-­‐‑Sep   Imported  merchandise  costing  FC100,000  
from  a  foreign  wholesaler     ₱0.82  
15-­‐‑Sep   Paid  40%  of  the  amount  owed     ₱0.83  
30-­‐‑Sep   Paid  the  remaining  amount  owed     ₱0.78  
 
Customer  Balenciaga   FC  2    
18-­‐‑Sep   Sold  merchandise  for  FC50,000  to  a  foreign  
wholesaler     ₱0.95  
22-­‐‑Sep   Received  20%  payment     ₱0.90  
29-­‐‑Sep   Received  the  remaining  amount  owed   ₱0.91  
 
Prepare  the  journal  entries  for  the  above  transactions.  
 
3.   Bottega  Co.,  a  Philippine  Corporation,  bought  inventory  items  from  Veneta  Co.,  a  supplier  in  Germany  on  November  9,  
2017  for  100,000  marks,  when  the  spot  rate  was  P21.    At  Bottega’s  December  31,  2017  year-­‐‑end,  the  spot  rate  was  
P20.50.    On  January  31,  2018,  Bottega  bought  100,000  marks  at  the  spot  rate  of  P20.90  and  paid  the  invoice.  
Determine  the  forex  gain/loss  on  December  31,  2017.  
 
4.   On  October  5,  2016,  Burberry  Co.,  sold  merchandise  to  a  foreign  firm  for  250,000  francs.    Terms  of  the  sale  require  
payment  in  francs  on  March  1,  2017.    On  October  5,  2016,  the  spot  rate  was  P6.27  per  franc.    At  December  31,  2016,  
the  spot  rate  was  P6.00  and  increased  to  P6.30  by  March  1,  when  payment  was  received.  
How  much  should  Burberry  report  as  foreign  exchange  gain  or  loss  in  its  2016  and  2017  income  statement?  
 
5.   Coach  Inc.,  is  a  parent  company  of  a  group  of  companies,  but  also  does  its  own  trading.    The  company  bought  a  fixed  
asset  for  FC36,000  on  November  1  when  the  exchange  rate  was  FC1=P23.00.    At  December  31,  the  company’s  year-­‐‑
end,  the  supplier  of  the  fixed  asset  has  not  been  paid  and  the  exchange  rate  at  the  time  was  FC1=P25.  
What  should  be  the  valuation  of  the  fixed  asset,  the  account  payable  to  the  creditor  and  the  foreign  exchange  gain  or  
loss  for  the  transaction  as  of  December  31?  
 
6.   The  accounts  of  Fendi  Company  show  P81,300  accounts  receivable  and  P38,900  accounts  payable  at  December  31  of  
the  current  year  before  adjustments.    An  analysis  of  the  balances  reveals  the  following:  
Accounts  receivable        
Accounts  receivable  in  pesos   ₱28,500  
Receivable  denominated  in  20,000  FC  1      11,800    
Receivable  denominated  in  25,000  FC  2    41,000    
 
Accounts  payable    
Payable  denominated  in  pesos   ₱6,850  
Payable  denominated  in  10,000  FC  3    7,600    
Payable  denominated  in  15,000  FC  2    24,450    

 
Accounting  for  Foreign  Currency  Translation,  Conversion  and  Financial  Reporting  for  Foreign  Economies  
 
Current  exchange  rates  for  foreign  currency  (FC)  1,  FC  2  and  FC  3  at  December  31  are  P0.66,  P1.65  and  P0.70,  
respectively.  
 
Determine  the  net  foreign  exchange  gain  or  loss  that  should  be  reflected  in  Fendi’s  income  statement  for  the  current  
year.  
 
HEDGING  
7.   On  September  1,  2017,  Givenchy  Co  purchased  goods  on  account,  payable  on  February  1,  2018  for  FC15,000.    On  the  
same  date,  the  company  entered  into  a  forward  contract  with  a  financing  company  to  hedge  the  account.    The  related  
spot  and  forward  rates  are  as  follows:  
 Spot  rates     Forward  rates  
1-­‐‑Sep   ₱25.00   ₱25.50  
31-­‐‑Dec   ₱27.00   ₱27.90  
1-­‐‑Feb   ₱26.00   ₱26.90  
Determine  the  net  effect  of  the  foreign  currency  transactions  on  the  company’s  2017  and  2018  income  statement.  
 
8.   On  November  1,  2016,  Goyard  Company  entered  into  a  forward  contract  to  purchase  goods  for  FC5,000  on  February  
1,  2017.    The  spot  and  forward  rates  for  this  transaction  are  as  follows:  
Spot  rates   Forward  rates  
1-­‐‑Nov   ₱15.00   ₱16.25  
31-­‐‑Dec   ₱13.00   ₱14.75  
1-­‐‑Feb   ₱14.00   ₱15.50  
 
a.   Determine  the  net  effect  of  the  foreign  currency  transaction  on  the  company’s  2016  and  2017  income  
statement.  
b.   Assume  the  same  data  above,  except  that  the  transaction  is  for  speculation,  determine  the  net  effect  of  the  
foreign  currency  transactions  on  the  company’s  2016  and  2017  income  statement.  
9.   Gucci  Company  sold  goods  on  account  for  FC25,000  on  September  1,  2016  payable  on  April  1,  2017.    On  November  1,  
2016,  the  company  entered  into  a  forward  contract  to  hedge  this  transaction.    The  spot  and  forward  rates  of  the  
finance  company  for  this  transaction  are  as  follows:  
Forward   Buying  Spot   Selling  Spot  
rates   rates   rates  
1-­‐‑Sep   ₱20.00   ₱23.25   ₱23.45  
1-­‐‑Nov   ₱23.00   ₱24.50   ₱25.00  
31-­‐‑Dec   ₱24.00   ₱26.75   ₱26.90  
1-­‐‑Apr   ₱22.00   ₱25.10   ₱25.40  
 
Determine  the  net  effect  of  the  foreign  currency  transactions  on  the  company’s  2016  and  2017  income  statement.  
10.   On  August  31,  2016,  Jimmy  Choo  Company  purchased  merchandise  on  account  from  a  foreign  vendor  amounting  to  
FC  10,000  payable  on  January  1,  2017.    Jimmy  Choo  Company  entered  into  a  forward  contract  for  the  transaction  on  
November  1,  2016.    On  October  1,  2016,  the  company  also  entered  into  a  forward  contract  to  purchase  merchandise  
amounting  to  FC  15,000  on  March  31,  2017.  
From  the  data  above,  assume  that  the  company’s  spot  and  forward  rates  were  as  follows:  
Buying  Spot   Selling  Spot   Forward  
rates   rates   rates  
31-­‐‑Aug-­‐‑16   ₱15.00   ₱14.00   ₱16.00  
1-­‐‑Oct-­‐‑16   ₱13.00   ₱15.00   ₱17.00  
1-­‐‑Nov-­‐‑16   ₱15.00   ₱12.00   ₱17.00  
31-­‐‑Dec-­‐‑16   ₱16.50   ₱14.50   ₱18.00  
31-­‐‑Jan-­‐‑16   ₱17.00   ₱17.00   ₱19.00  
1-­‐‑Mar-­‐‑17   ₱16.00   ₱14.00   ₱20.00  
 
Determine  the  net  effect  of  the  forward  contracts  on  Jimmy  Choo  Company’s  net  income  for  years  2016  and  2017.  
 

 
Accounting  for  Foreign  Currency  Translation,  Conversion  and  Financial  Reporting  for  Foreign  Economies  
11.   Judith  Leiber’s  purchased  goods  costing  FC  3,000  on  account  on  August  31,  2017  due  on  February  29,  2018.    On  
September  30,  the  company  entered  into  a  forward  contract  to  hedge  this  transaction,  the  related  spot  and  forward  
rates  for  this  transaction  are  as  follows:  
08/31/17   09/30/17   10/31/17   11/30/17   12/31/17   01/31/17   Feb-­‐‑29  
Spot  rate   ₱22.00   ₱24.00   ₱25.00   ₱26.00   ₱25.90   ₱24.00   ₱25.25  
30-­‐‑day  forward  rate   ₱22.75   ₱24.35   ₱25.95   ₱26.35   ₱26.90   ₱25.35   ₱26.00  
60-­‐‑day  forward  rate   ₱23.25   ₱25.10   ₱26.25   ₱26.75   ₱27.45   ₱26.00   ₱26.65  
90-­‐‑day  forward  rate   ₱24.55   ₱25.65   ₱26.85   ₱27.15   ₱28.00   ₱26.40   ₱27.00  
120-­‐‑day  forward  rate   ₱25.35   ₱26.05   ₱27.10   ₱27.80   ₱28.10   ₱27.00   ₱27.10  
150-­‐‑day  forward  rate   ₱25.95   ₱26.25   ₱27.85   ₱28.05   ₱28.40   ₱27.25   ₱27.95  
180-­‐‑day  forward  rate   ₱26.10   ₱27.00   ₱28.00   ₱28.20   ₱29.00   ₱27.55   ₱28.30  
 
Determine  the  effect  of  the  foreign  currency  transactions  on  the  company’s  2017  and  2018  income  statement.  
 
Fair  value  and  Cash  Flow  Hedge  
12.   On  September  1,  2018,  Louis  Vuitton  Company  obtained  a  non-­‐‑cancellable  sales  order  from  a  Foreign  Company  for  a  
skin  whitening  product.    The  contract  price  amounted  to  100,000  Foreign  currencies.    On  the  same  date,  Louis  Vuitton  
entered  into  a  foreign  exchange  forward  contract  to  sell  100,000  foreign  currencies  on  January  15,  2019  at  a  forward  
rate  of  P3.15.    the  whitening  product  was  delivered  on  December  15,  2018  with  payment  to  be  made  on  January  15,  
2019.    The  relevant  exchange  rates  were  as  follows:  
9/1/18   12/15/18   12/31/18   1/15/19  
Spot  rate   ₱3.20   ₱3.00   ₱3.09   ₱2.97  
Forward  rate   ₱3.15   ₱2.98   ₱3.08   ₱2.97  
If  the  hedging  of  the  unrecognized  foreign  currency  firm  sales  commitment  was  accounted  for  as  a  fair  value  hedge,  
determine  the  journal  entries  that  should  have  been  made  by  the  company.  
 
13.   On  December  1,  2018,  Marc  Jacobs  estimates  that  they  will  purchase  from  a  foreign  company  inventory  items  costing  
500,000  foreign  currencies.    The  transaction  is  probable  and  it  is  to  be  denominated  in  foreign  currencies.    Sales  of  the  
inventory  items  are  expected  to  to  occur  in  the  next  six  months  following  the  purchase.    On  December  1,  2018,  the  
company  enters  into  a  forward  contract  to  purchase  500,000  foreign  currencies  on  January  31,  2019  for  P1.01.    the  
spot  and  forward  rates  are  as  follows:  
12/1/18   12/15/18   1/31/19  
Spot  rate   ₱1.03   ₱1.00   ₱0.98  
Forward  rate   ₱1.01   ₱0.99   ₱0.00  
 
a.   Determine  the  journal  entries  to  be  made  by  Marc  Jacobs  for  the  hedge  of  a  forecasted  transaction.  
b.   Suppose  that  in  February,  the  inventory  was  sold  for  P600,000,  what  would  be  the  gross  profit  assuming  any  
adjustment  (if  any)  regarding  exchange  differential  will  be  thru  the  cost  of  goods  sold  account?  
 
14.   On  November  1,  2018,  Marni  Company  concluded  that  the  foreign  currency  would  weaken  during  the  next  six  months  
against  the  peso.    In  hopes  of  taking  advantage  of  this  situation,  Marni  entered  into  a  forward  exchange  contract  for  
speculation  on  November  1,  2018  to  sell  1,000,000  foreign  currencies  on  April  30,  2019  at  the  forward  rate.    The  
following  are  the  relevant  spot  and  forward  rates:  
11/1/18   12/31/18   4/30/19  
Spot  rate   ₱1.190   ₱1.180   ₱1.210  
Forward  rate   ₱1.199   ₱1.187   ₱1.210  
Determine  the  journal  entries  to  be  made  by  the  company.  
 
15.   On  December  1,  2018,  Michael  Kors  enters  into  a  forward  for  speculative  purposes  to  acquire  100,000  foreign  
currencies  on  March  1,  2019.    The  following  are  the  spot  and  forward  rates:  
12/1/18   12/31/18   3/31/19  
Spot  rate   ₱2.35   ₱2.40   ₱2.42  
Forward  rate   ₱2.36   ₱2.37   ₱2.42  
Determine  the  forex  gain/loss  to  be  reported  for  2018  and  2019.  
 
16.   Miu  Miu  Company,  a  local  company  in  the  Philippines  purchased  a  30%  interest  of  Mulberry  Co.,  a  foreign  entity  for  
FC45,000  on  January  1,  2017.    On  this  date,  the  book  values  of  Mulberry  Co  approximated  their  fair  values.    During  the  

 
Accounting  for  Foreign  Currency  Translation,  Conversion  and  Financial  Reporting  for  Foreign  Economies  
year,  Mulberry  Co  declared  a  FC5,000  cash  dividend  on  November  1,  2017  payable  on  January  31,  2018.    Mulberry  
also  reports  net  income  of  FC20,000.    The  peso  equivalent  of  the  foreign  currencies  on  their  respective  dates  are  as  
follows;  January  1,  2017,  P45;  November  1,  2017,  P42;  December  31,  2017,  P40;  January  31,  2018,  P41  and  the  
average  for  the  year  2017,  P43.  
Prepare  the  journal  entries  to  be  made  for  2017  and  2018.  
 
17.   Certain  balance  sheet  accounts  of  a  foreign  subsidiary  of  Prada  Inc.,  at  December  31,  2017  have  been  translated  into  
Philippine  pesos  as  follows:  
Translated  at  
  Current  rates   Historical  rates  
Notes  receivable,  long-­‐‑term   ₱375,000   ₱350,000  
Prepaid  rent   ₱295,000   ₱280,000  
Patent   ₱265,000   ₱275,000  
 
The  subsidiary’s  functional  currency  is  not  the  currency  of  a  hyperinflationary  economy.    What  total  amount  should  
be  included  in  Prada’s  December  31,  2018  consolidated  statement  of  financial  position  for  the  above  accounts?  
 
18.   Certain  balances  sheet  accounts  in  a  foreign  subsidiary  of  Tiffany  &  Co.  at  December  31  of  the  current  year  have  been  
stated  in  Philippine  pesos  as  follows:  
Current   Historical  
rates   rates  
Accounts  receivable,  Short  term   ₱200,000   ₱220,000  
Accounts  receivable,  Long  term   ₱100,000   ₱110,000  
Prepaid  insurance   ₱50,000   ₱55,000  
Goodwill   ₱80,000   ₱85,000  
Total   ₱430,000   ₱470,000  
a.   If  the  subsidiary’s  functional  currency  is  a  foreign  currency,  what  amount  would  Tiffany  &  Co.’s  balance  sheet  
includes  in  the  preceding  items?  
b.   If  the  subsidiary’s  functional  currency  is  in  Philippine  pesos,  what  amount  would  Tiffancy  &  Co.’s  balance  
sheet  includes  in  the  preceding  items?  
 
19.   The  Tory  Burch  acquired  a  foreign  subsidiary  on  August  15,  2017.    Goodwill  arising  on  the  acquisition  was  FC  
175,000.    Consolidated  financial  statements  are  prepared  at  the  year  end  of  December  31,  2017  requiring  the  
translation  of  all  foreign  operations’  results  into  the  presentation  currency  of  peso.  
The  following  exchange  rates  have  been  identified:  
  Rate  at  August  15,  2017;  1FC=P1  
  Rate  at  December  31,  2017;  FC1.298  =  P1  
  Average  for  the  period  August  15  to  December  31;  FC  1.292=P1  
  Average  for  the  period  2017;  FC  1.298=P1  
According  to  PAS  21,  at  what  amount  should  the  goodwill  be  measured  in  the  consolidated  statement  of  financial  
position?  
 
20.   An  entity  acquires  a  foreign  subsidiary  on  August  15,  2017.    The  goodwill  arising  on  the  acquisition  is  400,000  baht.    
At  the  date  of  acquisition,  the  exchange  rate  into  the  parent’s  functional  currency  is  4  baht:  P1.    At  the  parent’s  year  
end  the  exchange  rate  is  3baht:  P1.    What  is  the  exchange  rate  loss  at  year-­‐‑end?  
 
21.   Valentino  Company  acquired  the  Versace  Company,  a  foreign  subsidiary  on  August  1,  of  the  current  year.    The  fair  
values  of  the  assets  of  Versace’s  company  approximated  their  fair  values  except  for  land  whose  fair  value  was  
FC50,000  greater  than  its  carrying  amount.    This  fair  value  adjustment  has  not  been  recognized  in  the  separate  
financial  statements  of  Versace.    Consolidated  financial  statements  are  prepared  at  the  year-­‐‑end  of  December  31  
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  FC1.62=P1  
  Rate  at  December  31  FC1.56=P1  
According  to  PAS  21,  The  effect  of  changes  in  foreign  exchange  rates,  what  fair  value  adjustment  is  required  to  the  
carrying  amount  of  land  in  the  consolidated  statement  of  financial  position?  
 

 
Accounting  for  Foreign  Currency  Translation,  Conversion  and  Financial  Reporting  for  Foreign  Economies  
22.   An  entity  has  a  subsidiary  that  operates  in  a  foreign  country.    The  subsidiary  sold  goods  to  the  parent  for  FC2.1  
million.    The  cost  of  goods  sold  of  the  goods  to  the  subsidiary  was  FC1.2  million  (FC2=P1)  and  were  all  unsold  at  the  
end  of  the  year.    The  exchange  rate  at  that  date  was  FC1.5=P1.    What  is  the  value  of  the  intragroup  profit  that  will  be  
eliminated  at  December  31?  
 
23.   A  Subsidiary  of  Tods  Co.,  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,  2017  for  
FC100,000  that  is  sold  on  January  17,  2018  for  FC130,000.    The  subsidiary  pays  for  the  inventory  on  January  31,  2018.    
Currency  exchange  rates  for  FC1  are  as  follows:  
Pesos   Foreign  currency  
Nov.  1,  2017   ₱0.16   1.00  
Dec.  31,  2017   ₱0.17   1.00  
Jan.  17,  2018   ₱0.18   1.00  
Jan.  31,  2018   ₱0.19   1.00  
Average  for  2017   ₱0.20   1.00  
Average  for  2018   ₱0.19   ₱1.00  
 
a.  What  amount  should  be  Tods’  consolidated  balance  sheet  report  for  this  inventory  at  December  31,  2017?  
b.  What  amount  should  Tods’  consolidated  income  statement  report  cost  of  goods  sold  for  the  year  ending  December  
31,  2017?  
c.  What  amount  should  Tods’  consolidated  income  statement  report  to  cost  of  goods  sold  for  the  year  ending  
December  31,  2018?  
 
24.   On  October  1,  2016,  Rebecca  Company  asked  for  the  delivery  inventory  items  from  a  foreign  company  amounting  to  
FC25,000  on  account  due  on  February  1,  2017.    On  the  same  date,  the  company  entered  into  a  120-­‐‑day  call  option  
paying  P1,500  for  FC25,000.    The  related  rates  are  as  follows:  
10/1/16   12/31/16   2/1/17  
Spot  rate  (market  price)   ₱5.00   ₱5.25   ₱5.10  
Strike  price  (exercise  price)   ₱5.00   ₱5.00   ₱5.00  
Fair  value  of  call  option   ₱1,500.00   ₱2,000.00    2,500.00    
 
Determine  the  journal  entries  to  be  made  for  the  above  transactions  for  years  2016  and  2017?  
 
25.   On  January  1,  2017,  Schouler  Company  paid  P12,000  cash  to  acquired  a  put  foreign  exchange  option  for  FC  750,000  
which  expires  at  the  end  of  the  year.    The  option  hedges  2017’s  forecasted  sales  of  FC750,000.    Schouler’s  fiscal  year  
ends  every  June  30.  
1/1/17   6/30/17   12/31/17  
Spot  rate  (market  price)   ₱3.45   ₱3.20   ₱3.30  
Strike  price  (exercise  price)   ₱3.40   ₱3.40   ₱3.40  
Fair  value  of  put  option     ₱50,500.00    
   
a.  Determine  the  option’s  time  value  at  inception.  
b.  Determine  the  intrinsic  value  at  inception  
c.   Determine  the  foreign  exchange  gain  or  loss  on  June  30  
d.  Determine  the  December  31  foreign  exchange  gain  or  loss  in  current  earnings  if  there  were  zero  export  sales  for  the  
year  
e.  Determine  the  December  31  foreign  exchange  gain  or  loss  in  current  earnings  if  all  export  sales  occurred  on  
December  31,  2017?  
f.   Determine  the  current  earnings  foreign  exchange  gain  or  loss  in  current  earnings  if  75%  of  the  export  sales  
occurred  during  the  first  six  months?