Gicale, Deanna Mae T.

Sec 12
BOOK ASSIGNMENT
Chapter 6: Theories
1. Actually, changing one currency into another currency is called
Answer: None of the above
Explanation: Forex is the correct answer.

2. Floating exchange rates are also referred to as:

Answer: None of the above
Explanation: Floating exchange rate is sometimes called as “Flexible Exchange
Rate”

3. Which of the following items is not a cause that affects the price of a currency in
either the short run or the long run?
Answer: Purchasing power parity theory
Explanation: Purchasing power parity is a popular metric used by macroeconomic
analysts that compares different countries' currencies through a "basket of goods"
approach.

4. For unhedged importing and exporting transactions involving credit and requiring
settlement in foreign currency, which of the following dates would never be of
concern or have accounting significance?
Answer: The forward rate date
Explanation: A forward rate is a contracted price for a transaction that will be
completed at an agreed upon date in the future. In bond markets, forward rate refers
to the future yield based on interest rates and maturities)

5. For importing transactions denominated in a foreign currency, any change in the

exchange rate between the transaction date and any intervening financial reporting
date(s) is reported as
Answer: A gain or loss in the current income statement
Explanation: Income statement somehow focuses on gains or losses.

6. For importing and exporting transactions, recognizing in the income statement FX

transaction gains or losses resulting from adjustments made at intervening financial
reporting dates is not:
Answer: Consistent with the one-transaction perspective
Explanation: Treats sale and collection as one transaction which is complete when
foreign currency is received
7. A domestic exporter has a foreign currency receivable. The exporter’s risk exposure
that the:
Answer: Foreign currency will strengthen
Explanation: It is because exports appear less expensive.

8. The exchange rate quoted for future delivery of foreign currency is the definition of
a(n):
Answer: Forward exchange rate
Explanation: This pertains to the definition of forward exchange rate.

9. A transaction loss would result from:

Answer: A decrease in the exchange rate applicable to an asset denominated in a
foreign currency
Explanation: It is because any losses pertain to decrease amount of transaction.

10. A Philippine company that has purchased inventory from a German vendor would be
exposed to a net exchange gain on the unpaid balance if the
Answer: Peso strengthened relative to the Euro and the Euro was the denominated
currency
Explanation: A stronger peso lowers the peso prices of imported goods as well as
import‐intensive services such as transport, thereby lowering the rate of inflation

11. A forward exchange contract is being transacted at a premium if the current forward
rate is
Answer: greater than the current spot rate
Explanation: A forward premium is a situation in which the forward or expected
future price for a currency is greater than the spot price. It is an indication by the
market that the current domestic exchange rate is going to increase against the
other currency.

12. A transaction involving foreign currency will most likely result in gains and losses to
the reporting entity if the
Answer: Transaction is denominated in a foreign currency and measure in the
reporting entity’s currency
Explanation: It is because the foreign currency changes any time.

13. Which of the following does not represent an exchange risk on an exposed position
to a company transacting business with a foreign vendor?
Answer: Firm commitment to purchase inventory denominated in U.S dollars
Explanation: It is because the firm commitment is to purchase inventory
denominated in U.S. dollars, there is no exchange risk associated with this
transaction.
14. Concerning importing and exporting transactions, which of the following statements
is false?
Answer: When a domestic company has gain or loss as a result of adjusting a
foreign currency receivable or payable, the foreign company will have the opposite
result

15. What is the date called when a foreign currency transaction is paid through the
exchange of currency?
Answer: Settlement date
Explanation: A foreign-currency transaction is one that requires settlement, either
payment or receipt, date and the settlement date/

Chapter 6 – Problems
1. Detroit based Auto Corporation, purchased ancillaries from a foreign firm on
December 1, 20x4 for 1,000,000 foreign currencies (FCSs), when the spot rate for 1
FC was P.0095. On December 31, 20x4, the spot rate stood at P.0096. On January
10, 20x5 Auto paid 1,000,000 FCs acquired at a rate of P.0094. Auto’s incom
statements should report a foreign exchange gain or loss for the years ended
December 31, 20x4 and 20x5 of:
Answer: B. P100 loss, P200 gain
Solution:
Transaction Date: (1,000,000 x .0095) = 9,500
Balance Sheet Date: (.0095-.0096) x 1,000,000 = P 100 Loss
Settlement Date: (.0096-.0094) x 1,000,000 = P 200 gain

2. Echo Inc., a Philippine company, sold materials to Radar Corporation, a foreign

customer on October 26 for 25,000 FCUS (Foreign currency units). Payment is due
on March 1 and Echo’s accounting period ends on December 31. The spot rates on
October 26, December 31, and March 1 are 1 FCU = P1. 14, P1. 06, and -1. 0,
respectively. What is the peso amount of sales recorded in the accounting records
on October 26?
Answer: D. P28,500
Solution: Transaction Date: (25,000 x 1.14) = 28,500

3. What is the peso amount of accounts receivable on the December 31 balance

sheet?
Answer: B. 26,500
Solution: (25,000 x 1.06) = P 26,500
4. What is the peso amount of the exchange loss or gain recorded on the income
statement at December 31?
Answer: A. P2,000 loss
Solution: (1.06 – 1.14) x 25000 = P 2,000 loss
5. What is the peso amount of the exchange loss or gain recorded on the income
statement at March 1?
Answer: D. P 750 gain
Solution: (1.06-1.09) x 25000 = 750
Use the following information for questions 6 - 8:
6. Norton Co., a Philippine corporation sold inventory on December 1, 20x4, with
payment of 10,000 foreign currencies (FC) to a foreign customer to be received in
sixty days. The pertinent exchange rates were as follows:
December 1 Spot Rate: P1.7242
December 31 Spot Rate: P1.8182
January 30 Spot Rate: P1.666
For what amount should Sales be credited on December 1?
Answer: D. 17,241
Solution: Transaction Date: (10,000 x 1.7242) = 17,242
7. What amount of foreign exchange gain or loss should be recorded on December 31?
Answer: E. P941 gain
Solution: Balance Sheet Date: (1.7242 – 1.8182) x 10,000 = 940
8. What amount of foreign exchange gain or loss should be recorded on January 30?
Answer: B. P1,516 loss
Solution: Settlement Date: (1.8182 x 1.6666) x 10,000 = P 1,516

Use the following information for questions 9 - 10

9. Brisco Bricks purchases raw materials from its foreign supplier on May 8. Payment
of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco’s fiscal
year-end. The pertinent exchange rates were as follows:
May 8 Spot Rate: P1.25
May 31 Spot Rate: P1.26
June 30 Spot Rate: P1.20
For what amount should Brisco’s Accounts Payable be credited on May 8?
Answer: A. P 2,500,000
Solution: (2,000,000 x 1.25) = 2,500,000
10. How much foreign Exchange gain or loss should Brisco record on May 31?
Answer: C. P20,000 loss
Solution: Balance Sheet Date: (1.25 – 1.26) x 2,000,000 = 20,000
Chapter 7: Theories
1. Question: Which of the following is not an existing asset or liability exposure that
could be hedged?
Answer: E. None of the above.
Explanation: All of the following are an existing asset or liability exposure that could
be hedged.

2. Question: Which of the following terms is a correct item?

Hedged Instrument Hedging Item
Answer: D. No (hedged instrument) & No (Hedging Item)
Explanation: It should be “Hedged Item” and “Hedging Instrument”
3. Question: In a hedge of a firm purchase commitment using an FX forward, how
should FX gains and losses during the commitment period be reported?
Answer: A. Recognize currently in earnings.
Explanation: Hedge of a firm commitment is a fair value hedge. A fair value hedge
recognizes gain/losses and reported it in the profit/loss.

4. Question: Derivative financial instruments are contracts that create

Answer: C. Both rights and obligations
Explanation: Derivative financial instruments create rights and obligations that have
the effect of transferring between the parties to the instrument one or more of the
financial risks inherent in an underlying primary financial instrument.

5. Question: Which of the following is not one of the four types of hedging categories
that exists?
Answer: E. None of the above
Explanation: Four types of hedging categories include: Fair Value Hedge, Cash Flow
Hedge, Net Investment Hedge and Undesignated Hedge.

6. Question: Which of the following is not one of the four types of hedging categories
that exists?
Answer: D. Designated hedge
Explanation: Designated hedge is not included in the four types of hedging
categories.
7. Question: Hedging a firm commitment is a
Answer: Fair Value Hedge
Explanation: A hedge of a firm commitment is a fair value hedge because the
commitment carries a contractual obligation that is tied to a fixed price, and thus
exposes the company to the risk that a change in the marketplace will result to loss
or gain on the commitment.
8. Question: Hedging a forecasted transaction is a
Answer: Cash Flow Hedge
Explanation: The hedge of a highly probable forecasted transaction is accounted for
as a cash-flow hedge.

9. Question: Hedging an investment in equity securities classified as an AFS is a:

Answer: Net investment Hedge
Explanation: Net investment hedge is used to o hedged an investment in a
subsidiary.

10. Question: FX gains and losses on fair value hedges are

Answer: A. Always reported in currently in earnings
Explanation: In Fair value hedges, gain or losses are recognized immediately in
Profit/Loss.

11. Question: FX gains and losses on cash flow hedged are:

Answer: C. Initially reported in other comprehensive income and later reclassified to
earnings.
Explanation: In cash flow hedge, the gain or loss on hedging instrument is initially
reported in the comprehensive income and subsequently reclassified to profit when
the hedged item affects profit.

12. Question: FX forwards are valued using

Answer: A. The change in the forward rate.
Explanation: Forward rate is the rate in the future.

13. Question: The exchange rate quoted for future delivery of foreign currency is the
definition of a(n)
Answer: D. Forward exchange rate.
Explanation: Forward rate is the rate in the future. It is also used to in future contract.

14. Question: The time value of an option is the difference between the:
Answer: B. Premium paid and its intrinsic value
Explanation: Time value is calculated by taking the difference between the option’s
premium and the intrinsic value.

15. Question: Which of the following is true of the financial statement presentation of
gain/losses from cash flow hedges and fair value hedges?
 Cash flow hedge Fair value hedge
gains/losses are reported in: gains/losses are reported in:
Answer: Other Comprehensive Income (Cash flow hedge) & Current Earnings (FV
hedge)
Explanation: In cash flow hedge, the gain or loss on hedging instrument is initially
reported in the comprehensive income. While, In Fair value hedges, gain or losses
are recognized immediately in Profit/Loss.

Chapter 7: Problems

Hedging Exposed Assets and Liabilities – Forward Contracts

1. On 11/10/x6, Buymax entered into a 60-day FX forward involving 100,000 foreign
currency units (FCUs) to hedge a FCU payable arising from an importing
transaction. Direct exchange rates on the respective dates are as follows:

11/10/x6 12/31/x6 1/9/x7

Spot Rate P 1.63 P 1.60 P 1.58
Forward Rate (for 1/9/x7) 1.64 1.59 1.58
What is the FX gain or loss to be reported in earnings for 20x6 on FX forward?
Answer: E. P5,000 loss
Solution: (1.64 – 1.59) x 100,000 = 5,000 loss

2. On 11/10/x6, Selmax entered into a 90-day FX forward involving 100,000 foreign

currency units (FCUs) to hedge a FCU receivable arising from an importing
transaction. Direct exchange rates on the respective dates are as follows:

10/22/x6 12/31/x6 1/30/x7

Spot Rate P .46 P .44 P .47
Forward Rate (for 1/9/x7) .45 .445 .47
What is the FX gain or loss to be reported in earnings for 20x6 on FX forward?
Answer: A. P 500 gain
Solution: (.45-.445) x 100,000 = 500 gain

Use the following information for questions 4 to 13:

3. Custom Enterprises makes a sale of 15,000,000 foreign currency unit (FCUs) to a
foreign customer on May 16 with payment due before July 10. Management of
Custom immediately enters into a forward contract to hedge this transaction.
Customer prepares quarterly financial statements with a December 31 year-end.
The relevant exchange rates and forward contract fair values are as follows:
 July 10 Forward Contract
Date Spot Rate Forward Rate Fair Value
May 16 P .0092 P .0093 P 0
June 30 P .0094 P .0090 P 4,500
July 10 P .0091 P .0091 P 3,000

What is the balance in the accounts receivable account on May 16?

Answer: C. P 138,000
Solution: 15,000,000 x .0092 = P 138,000

4. What is the balance in the accounts receivable account in June 30?

Answer: B. P 141,000
Solution: 15,000,000 x .0094 = P 141,000

5. What is the amount of the exchange loss or gain recognized with respect to the
accounts receivable account on June 30?
Answer: B. P 3,000 gain
Solution: (.0092 – .0094) x 15,000,000 = P 3,000

6. What is the balance in the accounts receivables account on July 10, immediately
before collection?
Answer: D. P 136,500
Solution: 15,000,000 x .0091 = P 136,500

7. What is the amount of the exchange loss or gain recognized with respect to the
accounts receivable account on July 10?
Answer: C. P 4,500 loss
Solution: (.0091-.0094) x 15,000,000 = P 4,500

8. What is the balance in the forward contract account on May 16?

Answer: A. 0
Solution: Forward contract is 0 on the date of hedging.

9. What is the balance in the forward contract account on June 30?

Answer: B. P 4,500
Solution: (.0093 - .0090) x 15,000,000 = P 4,500

10. What is the amount of the exchange loss or gain recognized with respect to the
forward contract on June 30?
Answer: D. 4,500 gain
Solution: 4,500 – 0 = P 4,500
11. What is the balance in the forward contract account on July 10, immediately before
collection?
Answer: C. P3,000

12. What is the amount of the exchange loss or gain recognized with respect to the
forward contract on July 10?
Answer: C. P 1,500 loss
Solution: 3,000 – 4,500 = P 1,500 loss

Chapter 8: Theories
1. Under the temporal method, monetary assets and liabilities are translated by using
the exchange rate existing at the
Answer: C. Balance sheet date
Explanation: This technique of foreign currency translation is used when the local
currency of the subsidiary is not the same as the currency of the parent company.
2. The process of translating the accounts of a foreign entity into its functional currency
when they are stated in another currency is called:
Answer: C. Remeasurement
Explanation: This is included in the definition of remeasurement.

3. Paid-in capital accounts are translated using the historical exchange rate under:
Answer: C. Both the current rate and temporal methods
Explanation: To approximate the exchange rate in effect when the items were
recognized.

4. Which of the following would be restated using the current exchange rate under the
temporal method?
Answer: A. Inventory carried at the market
Explanation: The current rate method is utilized in instances where the subsidiary is
not integrated with the parent company, and the local currency where the subsidiary
operates is the same as its functional currency.

5. The translation adjustment that results from translating the financial statements of a
foreign subsidiary using the current rate method should be:
Answer: A. included as a separate item in the stockholders’ equity section of the
balance sheet
 Explanation: In reporting Common or Preferred stock, we also must include the
details in the accounts including par, no-par or stated value and shares authorized,
issued and outstanding.

6. The objective of remeasurement is to:

Answer: D. None of the above
Explanation: to produce a set of remeasured financial statements as if all
transactions occurred in the functional currency

7. Assuming that a foreign entity is deemed to be operating in an environment

dominated by the local currency, the entity's assets are translated using:
Answer: A. the current rate
Explanation: The current rate method is a standard method of currency translation
that utilizes the current market exchange rate.

8. Which of the following best describes the accounting for a foreign entity requiring
translation or remeasurement if the local economy is classified as highly inflationary?
Answer: A. The entity’s financial statements are first adjusted for inflation and then
translated into the domestic currency.
Explanation: The unadjusted trial balance is remeasured regardless of functional
currency.

9. At what rates should the following balance sheet accounts in foreign statements be
translated (rather than remeasured) into pesos?
Accumulated Depreciation – Equipment Equipment
Answer: A. Current; Current
Explanation: All asset accounts are translated at current rates.

10. In the translated financial statements, which method of translation maintains the
underlying valuation methods used in the foreign currency financial statements?
Answer: C. Temporal Method
Explanation: By translating items carried at historical cost by the historical exchange
rate, temporal method maintains the underlying valuation method used by the
foreign subsidiary.

11. Which of the following items is not remeasured using historical exchange rates
under the temporal method?
Answer: C. Marketable Equity Securities
Explanation: Marketable equity securities are carried at market value and therefore
translated at the current exchange rate under temporal method.
12. In accordance with PH GAAP, which translation combination is appropriate for a
foreign operation whose functional currency is the US dollar?
Answer: B. Temporal; Gain/Loss in net income
Explanation: When the US Dollar is the functional currency. It requires
remeasurement using the temporal method with remeasurement gains and losses
reported in income.

13. A foreign subsidiary’s functional currency is its local currency, which has not
experienced significant inflation. The weighted average exchange rate for the current
year is the appropriate exchange rate for translating:
Answer: B. Yes (Wages Expense); No (Wages Payable)
Explanation: Wages payable is translated at the current exchange rate.

14. The functional currency of DZ, Inc.’s British subsidiary is the British pound. DZ
borrowed pounds as a partial hedge of its investment in the subsidiary. In preparing
consolidated financial statements, DZ’s negative translation adjustment on its
investment in the subsidiary exceeded its foreign gain on its borrowing. How should
DZ’s report the effects of the negative translation adjustment and foreign exchange
gain in its consolidated financial statements?
Answer: C. Report the translation adjustment less the foreign exchange gain in
Other Comprehensive Income on the balance sheet.
Explanation: Gains and losses on hedges of net investment are offset against the
translation adjustment being hedged.

15. Gains from remeasuring a foreign subsidiary’s financial statements from the local
currency, which is not the functional currency into the parent’s currency should be
reported as a(n)
Answer: D. Part of continuing operations.
Explanation: Remeasurement gains are reported in the income statement as part of
income from continuing operations.
Chapter 8: Problems
Using the following information for questions 1 and 2;
1. Certain balance sheet accounts of a foreign subsidiary of Parker Company at
December 31, 20x4, have been restated into pesos as follows:

  Restated at
Historical
  Current Rates
Rates
 Cash P47,500 P45,000

Accounts Receivable 95,000 90,000

Inventory, at market 76,000 72,000

Land 57,000 54,000

Equipment (net) 142,500 135,000
Total P418,000 396,000

Assuming the functional currency of the subsidiary is the peso, what total should be
included in Parker’s consolidated balance sheet at December 31, 20x4, for the
above items?
Answer: A. P407,500
Solution:

 
Current Historical
 
Rates Rates
Cash P47,500
Accounts
95,000
Receivable
Inventory, at
76,000
market
Land 54,000
Equipment
135,000
(net)
Total 218,500 189,000
P 407,500

2. Assuming the functional currency of the subsidiary is the local currency, what total
should be included in Parker’s consolidated balance sheet at December 31, 20x4,
for the above items?
Answer: B. P418,000
 Solution:
  Current Rates
Cash P47,500

Accounts
95,000
Receivable

Inventory, at
76,000
market

Land 57,000
Equipment (net) 142,500
Total P418,000

3. The following balance sheet accounts of a foreign subsidiary at December 31, 20x4,
have been translated into pesos as follows:

  Translated at
Current Historical
 
Rates Rates
Accounts
Receivable, P600,000 P660,000
current
Accounts
Receivable, 300,000 324,000
long-term
Inventories
carried at 180,000 198,000
market
Goodwill 190,000 220,000
1,402,00
Total P1,270,000
0

What total should be included in the translated balance sheet at December 31, 20x4,
for the above items? Assume the local currency unit is the functional currency.
Answer: B. P 1,300,0000
Solution:
 Current Rates
Accounts Receivable, P600,000
current
Accounts Receivable, 300,000
long-term
Inventories carried at 180,000
market
Goodwill
Total: P1,080,000
P1,300,000

4. A foreign subsidiary of Jag Jeans Corp. (a Philippine firm) has certain balance sheet
accounts on December 31, 20x4. The functional currency is the peso and currency
of record is the US dollars and the parent’s books are kept in pesos. Information
relation to these accounts in pesos is as follows:

  Remeasured at
Current Historical
 
Rates Rates
Accounts P175,00
P190,000
Receivable 0

Inventories 400,000 450,000

Prepaid
40,000 45,000
Insurance
Land 30,000 100,000

What total should be included as total assets on Dallas Jean’s balance sheet on
December 31, 20x4 as the result of the above information?
Answer: C. P770,000
Solution:
Current Rates Historical Rates
Accounts
P175,000
Receivable
Inventories 450,000
Prepaid Insurance 45,000
Land 100,000
175,000 595,000
Total 770,000
5. Certain balance sheet accounts in a foreign subsidiary of SS company on December
31 20x4, have been restated in pesos as follows:
Restated at
Current Rates Historical Rates
Accounts P100,000 P110,000
Receivable, current
Accounts 50,000 55,000
Receivable, long-
term
Prepaid Insurance 25,000 30,000
Patents 40,000 45,000
Total P215,000 P240,000

What total should be included in SS’ balance sheet for December 31, 20x4, for the
above items?
Functional Currency – LCU Functional Currency is Peso
Answer: D. P215,000; P225,000
Solution: Functional Currency – LCU from the total current rates restated above
which is 215,000.
Functional Currency is Peso:

Current Rates Historical Rates

Accounts P100,000
Receivable,
current
Accounts 50,000
Receivable, long-
term
Prepaid Insurance 30,000
Patents 45,000
P150,000 P75,000
Total 225,000
6. LL Corporation owns a foreign subsidiary with 2,600,000 local currency units (LCU)
of property, plant, and equipment before accumulated depreciation on December 31,
20x4 of this amount. 1,700,000 LCU were acquired in 20x2 when the rate of
exchange was 1.5 LCU = P1, and 900,000 LCU were acquired in 20x3 when the rate
of exchange was 1.6 LCU = P1. The rate of exchange in effect on December 31,
20x4, was 1.9 LCU = P1. The weighted average of exchange rates that were in
effect during 20x4 was 1.8 LCU = P1. Assuming that the property, plant, and
equipment are depreciated using the straight-line method over a 10-year period with
no salvage value.
How much depreciation expense relating to the foreign subsidiary's property, plant,
and equipment should be charged in LL’s statement of income for 20x4?

Functional Currency – LCU Functional Currency is Peso

Answer: A. P144,444; P169,583
Solution: Functional Currency – LCU: 2,600,000/10 = 260,000 / 1.8 = P 144,444
Functional Currency - Peso: 1,700,000/10 = 170,000 / 1.5 =
113,333
900,00/10 = 90,000/1.6 = 56,250
113,333 + 56,250 = P 169,583

7. On January 1, 20x4, PP Company formed a foreign subsidiary. On February 15,

20x4, PP's subsidiary purchased 100,000 local currency units (LCU) of inventory. Of
the original inventory purchased on February 15, 20x4, 25,000 LCU made up the
entire inventory on December 31, 20x4. The exchange rates were 2.2 LCU = P1
from January 1, 20x4, to June 30, 20x4, and 2 LCU = P1 from July 1, 20x4, to
December 31, 20x4. The December 31, 20x4, inventory balance for PP's foreign
subsidiary should be restated in pesos in the amount of:
Functional Currency – LCU Functional Currency is Peso
Answer: A. 12,500; P11,364
Solution: Functional Currency – LCU: 25,000/2 = P 12,500
Functional Currency - Peso: 25,000/2.2 = P11,364

8. GG Inc. had a credit adjustment of P30,000 for the year ended December 31, 20x4,
from restating its foreign subsidiary's accounts from currency units into pesos.
Additionally, GG had a receivable from a foreign customer payable in the customer's
local currency. On December 31, 20x3, this receivable for 200,000 local currency
 units (LCU) was correctly included in GG's balance sheet at P110,000. When the
receivable was collected on February 15, 20x4, the peso equivalent was P120,000.
In GG's 20x4 consolidated statement of income. How much should be reported as
foreign exchange gain in computing net income?

Functional Currency – LCU Functional Currency is Peso

Answer: A. P10,000; P40,000
Solution: Foreign Currency – LCU: 120,000 – 110,000 = P 10,000
Functional Currency - Peso: 10,000 + 30,000 = P 40,000

9. The balance in SM Corp.’s foreign exchange loss account was of P15,000 on

December 31, 20x2, before any necessary year-end adjustment relating to the
following:
(1) SM had a P20,000 debit resulting from the restatement in pesos of the accounts
of its wholly owned foreign subsidiary for the year ended December 31, 20x2.
(2) SM had an account payable to an unrelated foreign supplier, payable in the
supplier's local currency. The Philippine peso equivalent of the payable was
P100,000 on the November 28,20x2, invoice date and P106,000 on December 31,
20x2.
In SM’s 20x2 consolidated income statement, what amount should be included as
foreign exchange loss in computing net income?
Functional Currency – LCU Functional Currency is Peso
Answer: A. P 21,000; P41,000
Solution: Foreign Currency – LCU: 15,000 + 6,000 = P21,000
Functional Currency - Peso: 15,000 + 6,000 + 20,000 = P41,000

10. Nichols Company owns 90% of the capital stock of a foreign subsidiary. As a result
of translating the subsidiary's accounts, a debit of P160,000 was needed in the
translation adjustments account so that the foreign subsidiary's debits and credits
were equal in pesos. How should Nichols report its translation adjustments on its
consolidated financial statements?

Answer: B. As a P144,000 reduction in consolidated comprehensive net income

Solution: P144,000 is computed as a debit of P160,000 multiply by the 90% of the
capital stock. We have to deduct the debit of P144,000 as the normal balance of
translation adjustment is credit.