COLLEGE OF ACCOUNTING EDUCATION COMPETENCY APPRAISAL COURSE

ADVANCED FINANCIAL ACCOUNTING & REPORTING FEBRUARY 9, 2020

1. A Philippine company that has purchased inventory from a German vendor

would be exposed to net exchange gain on the unpaid balance if the
a. Amount to be paid was denominated in pesos
b. Peso weakened relative to the Euro and the Euro was the denominated
currency
c. Peso strengthened relative to the Euro and the Euro was the
denominated currency
d. Philippine company purchased a forward contract to buy Euros

2. Foreign operations that are an integral part of the operations of the

entity would have the same functional currency as the entity. Where a
foreign operation functions independently from the parent, the functional
currency will be
a. That of the parent
b. Determined using the guidance for determining an entity’s functional
currency
c. That of the country of incorporation
d. The same as the presentation currency

3. An entity started trading in country A, whose currency was the dollar.

After several years, the entity expanded and exported its product to
country B, whose currency was the euro, and conducted business through a
branch. The functional currency of the group was deemed to be the dollar
but by the end of the current year, 80% of the business was conducted in
country B using the euro. At the end of the prior year, 30% of the business
was conducted in the euro. The functional currency should
a. Remain the dollar
b. Change to the euro at the beginning of the current year
c. Change to the euro at the end of the current year
d. Change to the euro at the end of the current year if it is considered
that the underlying transactions, events and conditions of business
have changed

On September 1, 2016, Bain Corp. received an order for equipment from a

foreign customer for 300,000 local currency units (LCU) when the peso
equivalent was P 96,000. Bain shipped the equipment on October 15, 2016, and
billed the customer for 300,000 LCU when the peso equivalent was P 100,000.
Bain received the customer’s remittance in full on November 16, 2016, and
sold the 300,000 LCU for P 105,000.

4. In its income statement for the year ended December 31, 2016, Bain should
report a foreign exchange gain of
a. Zero
b. P 4,000
c. P 5,000
d. P 9,000

October 15, 2016 value of 300,000 LCU on shipment date 100,000

November 16, 2016 value of 300,000 on settlement 105,000
Foreign Exchange Gain 5,000

On September 1, 2016, Cano & Co. sold merchandise to a foreign firm for
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 1.20 per franc. At
December 31, 2016, Cano’s year-end, the spot rate was P 1.19, but the rate
increased by P 1.22 by February 1, 2017, when payment was received.

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5. How much should Cano report as foreign exchange transaction gain or loss
in its 2017 income statement?
a. Zero
b. P 2,500 loss
c. P 5,000 gain
d. P 7,500 gain

December 31, 2016 value of 250,000 francs (250,000 x 1.19) 297,500

February 1, 2017 value of 250,000 francs (250,000 x 1.22) 305,000
Foreign Exchange Gain 7,500

CC Corporation subsidiary buys marketable equity securities and inventory

on April 1, 2014, for 100,000 foreign currencies each. It pays for both
items on June 1, 2014, and they are still on hand at year-end. Inventory is
carried at cost under the lower-of-cost-or-market rule. Currency exchange
rates for 1 peso follow:
January 1, 2014 P 0.15 = 1 FC
April 1, 2014 P 0.16 = 1 FC
June 1, 2014 P 0.17 = 1 FC
December 31, 2014 P 0.19 = 1 FC

6. Assume that the FC (foreign currency) is the subsidiary’s functional

currency. What balances does a consolidated balance sheet report as of
December 31, 2014?
a. Marketable equity securities = P 16,000 and Inventory = P 16,000
b. Marketable equity securities = P 17,000 and Inventory = P 17,000
c. Marketable equity securities = P 19,000 and Inventory = P 16,000
d. Marketable equity securities = P 19,000 and Inventory = P 19,000

Marketable Securities (100,000 FCU x P 0.19) 19,000

Inventory (100,000 FCU x P 0.19) 19,000

7. Assume that the peso is the subsidiary’s functional currency. What balances
does a consolidated balance sheet report as of December 31, 2014?
a. Marketable equity securities = P 16,000 and Inventory = P 16,000
b. Marketable equity securities = P 17,000 and Inventory = P 17,000
c. Marketable equity securities = P 19,000 and Inventory = P 16,000
d. Marketable equity securities = P 19,000 and Inventory = P 19,000

Marketable Securities (100,000 x P 0.19) 19,000

Inventory (100,000 FCU x P 0.16) 16,000

8. A sale of goods denominated in a currency other than the entity’s

functional currency resulted in a receivable that was fixed in terms of
the amount of foreign currency that would be received. Exchange rates
between the functional currency and the currency in which the transaction
was denominated changed. The resulting gain should be included as a:
a. Transaction gain reported as a separate component of stockholders’
equity.
b. Transaction gain reported as a component of income from discontinuing
operations.
c. Transaction gain reported as a component of other noncurrent assets.
d. Transaction gain reported as a component of income from continuing
operations.

9. Which of the following is not considered when directly computing the

translation adjustment for foreign financial statements?
a. Beginning amount of net assets held by the domestic investor

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b. Increase or decrease in net assets for the period excluding capital

transactions
c. Increase or decrease in net asset as a result of capital transactions
d. All are considered when directly computing the translation adjustment

10. Which of the following suggests that the foreign entity’s functional
currency is the parent’s currency?
a. Intercompany transaction volume is low
b. Debt is serviced through local operations
c. There is an active and primarily local market
d. Sale prices are influenced by international factors

Day Corp. purchased merchandise from an unaffiliated foreign company for

10,000 units of foreign company’s local currency. Day paid the bill in full
on March 1, 2017 when the spot rate was P 0.45. The spot rate was P 0.60 on
April 8, 2016 and was P 0.55 on December 31, 2016.

11. For the year ended December 31, 2017, Day should report a transaction
gain of
a. P 1,500
b. P 1,000
c. P 500
d. Zero

December 31, 2016 value of 10,000 FCU (10,000 x P 0.55) 5,500

March 1, 2017 value of 10,000 FCU (10,000 x P 0.45) 4,500
Foreign Exchange Gain 1,000

Phil-Export Corp. sold to American customer merchandise worth 10,000 USD. As

of Phil-Export’s balance sheet cut-off date on June 30, 2016, the exchange
rate was P 26.60. On August 15, 2016, payment was received in the form of a
bank transfer whereby Phil-Export’s account was credited the amount of P
265,400 before any charges. At the time of acceptance of the merchandise in
San Francisco, the exchange rate was P 26.75.

12. The appropriate exchange rate for the recognition of the sale was:
a. P 26.54
b. P 26.60
c. P 26.63
d. P 26.75

Local Corp. imported a heavy machine from the US for 50,000 USD on October
10, 2016. A letter of credit was opened with a Makati branch based on the
commercial invoice for 50,000 USD, on which Local Corp. made a 100% deposit
cover based on the exchange rate of 1 USD to P 27.50. Shipment of the heavy
machine was effected on December 30, 2016, at which time the exporter
collected the proceeds of the letter of credit when the prevailing exchange
rate was 1 USD to P 28.000.

13. From the exchange rate fluctuation, Local Corp. realized:

a. No gain, no loss
b. P 5,000 gain
c. P 25,000 gain
d. P 25,000 loss

A Meisner Co. ordered parts costing 100,000 baht for a foreign supplier on
May 12 when the spot rate was P 0.24 per baht. A one-month forward contract
was signed on that date to purchase 100,000 baht at a forward rate of P 0.25
per baht. On June 12, when the parts were received and payment was made, the
spot rate was P 0.28 per baht.

14. At what amount should inventory be reported?

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a. P 28,000
b. P 25,000
c. P 24,200
d. Zero

Measured at the spot rate on the date parts were received (100,000 baht x P 0.28) 28,000

15. In preparing consolidated financial statements of a Philippine parent

company with a foreign subsidiary, the foreign subsidiary’s functional
currency is the currency
a. In which the subsidiary maintains its accounting records
b. Of the country in which the subsidiary is located
c. Of the country in which the parent is located
d. Of the environment in which the subsidiary primarily generates and
expends cash

16. Where the hedge arrangement completely eliminates the consequences of

adverse exchange rate fluctuations, the purchase or sales arrangement is
considered to be:
a. Partially hedged
b. Positively hedged
c. Perfectly hedged
d. Negatively hedged

17. For a cash flow hedge relating to the purchase of a particular asset,
foreign exchange gains and losses made on the hedging instrument:
a. Are all passed to profit or loss

b. Are passed to equity accounts up to the time of the underlying

transaction, at which time they are then included as part of the cost
of the asset. After this date, they are passed directly to profit or
loss
c. Are all passed to the cost of the asset
d. Are passed directly to profit or loss up to the time of the expiration
of the hedging instrument, at which time they are then included as
part of the cost of the asset

18. If one Taiwanese dollar can be exchanged for P 1.025, the fraction for
computing indirect quoatation of exchange rate expressed in Taiwanese
currency would be:
a. 0.975/1.00
b. 1.00/0.975
c. 1.00/1.025
d. 1.025/1.00

Wild, Inc. sold merchandise for 500,000 FC to a foreign vendor on November

30, 2015. Payment in foreign currency is due January 31, 2016. Exchange rates
to purchase 1 foreign currency unit are as follows:
Nov. 30, 2015 Dec. 31, 2015 Jan. 31, 2016
Spot P 1.49 P 1.45 P 1.44
30 Day P 1.48 P 1.43 P 1.43
60 Day P 1.46 P 1.41 P 1.42

19. In the year in which the sale was made, 2015, what amount should Wild
report as foreign exchange gain/loss from this transaction?
a. P 25,000
b. P 20,000
c. P 5,000
d. Zero

Foreign Exchange Gain (500,000 FC x 0.04) 20,000

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Larson, Inc. sold merchandise for 600,000 FC to a foreign vendor on November

30, 2015. Payment in foreign currency is due January 31, 2016. On the same
day, Larson signed an agreement with a foreign exchange broker to sell
600,000 FC on January 31, 2016. Exchange rates to purchase 1 FC are as
follows:
Nov. 30, 2015 Dec. 31, 2015 Jan. 31, 2016
Spot P 1.49 P 1.46 P 1.43
30 Day P 1.48 P 1.43 P 1.44
60 Day P 1.47 P 1.40 P 1.42

20. What will be the amount of the Forward Contract Receivable-Dollars on

November 30, 2015?
a. P 894,000
b. P 888,000
c. P 882,000
d. P 858,000

FC Receivable – Dollars (500,000 FC x P 1.47) 882,000

Happ, Inc. agreed to purchase merchandise from a British vendor on November

30, 2013. The goods will arrive on January 31, 2014 and payment of 100,000
British pounds is due February 28, 2014. On November 30, 2013, Happ signed
an agreement with a foreign exchange broker to buy 100,000 British pounds on
February 28, 2014. Exchange rates to purchase 1 British pound are as follows:
Nov. 30, 2013 Dec. 31, 2013 Jan. 31, 2014 Feb. 28, 2014
Spot P 1.65 P 1.62 P 1.59 P 1.57
30 Day P 1.64 P 1.59 P 1.60 P 1.59
60 Day P 1.63 P 1.56 P 1.58 P 1.58

21. Because of this commitment hedge, Happ, Inc. will record the
merchandise at what value when it arrives in January?
a. P 165,000
b. P 164,000
c. P 160,000
d. P 159,000

Recorded on the spot rate on date of order (100,000 Pounds x P 1.65) 165,000

22. IAS 21, The Effects of Changes in Foreign Exchange Rates, requires that
foreign currency monetary items outstanding at reporting date must be:
a. Translated at the spot rate at the transaction date
b. Reported at the forward-exchange rate based on the 90-day bank bill
at that date
c. Translated at the spot rate at reporting date
d. Translated at the spot rate at settlement date

23. On October 1, 2016, Mild Co., purchased machinery from a foreign company
with payment due on April 1, 2017. If Mild’s 2016 operating income included
no foreign currency transaction gain or loss, the transaction could have
been
a. Resulted in an extraordinary gain
b. Been denominated in Philippine pesos
c. Cause a foreign currency transaction gain to be reported as a contra-
account against machinery
d. Caused a foreign currency translation gain to be reported in other
comprehensive income

24. On October 1, 2016, Velee Co. contracted to purchase foreign goods

requiring payment in local currency units (LCU) one month after the receipt
of the goods at Velee’s factory. Title to the goods passed on December
15, 2016. The goods were still in transit on December 31, 2016. Exchange
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rates were one peso to 22 LCUs, 20 LCUs, and 21 LCUs on October 1, December
15, and December 31, 2016, respectively. Velee should account for the
exchange rate fluctuation in 2016 as
a. An ordinary loss included in net income
b. An ordinary gain included in net income
c. An extraordinary gain
d. An extraordinary loss

On December 12, 2016, INGRAM Company entered into three forward exchange
contract to purchase 100,000 FC (foreign currency) in 90 days. The relevant
exchange rates are as follows:
Spot Rate Forward Rate (for March 12, 2017)
November 30, 2016 P 0.87 P 0.89
December 12, 2016 P 0.88 P 0.90
December 31, 2016 P 0.92 P 0.93

25. INGRAM entered into the first forward contract to hedge a purchase of
inventory in November 2016, payable in March 2017. At December 31, 2016,
what amount of foreign currency transaction gain from this forward contract
should INGRAM include in net income?
a. Zero
b. P 3,000
c. P 5,000
d. P 10,000

100,000 FC x (P 0.93 – P 0.90) 3,000

26. At December 31, 2016, what amount of foreign currency transaction loss
should INGRAM include in income from the revaluation of the Accounts
Payable of 100,000 FC incurred as a result of the purchase of inventory
at November 30, 2016 payable in March 2017?
a. Zero
b. P 3,000
c. P 4,000
d. P 5,000

100,000 FC x (P 0.92 – P 0.87) 5,000

27. INGRAM entered into the second forward contract to hedge a commitment
to purchase equipment being manufactured to INGRAM’s specifications. The
expected delivery date is March 2017, at which time settlement is due to
the manufacturer. The hedge qualifies as a fair value hedge. At December
31, 2017. What amount of foreign currency transaction gain from this
forward contract should INGRAM include in net income when the Forward Rate
on March 12, 2017 is P 0.96?
a. Zero
b. P 3,000
c. P 5,000
d. P 10,000

100,000 FC x (P 0.96 – P 0.93) 3,000

28. INGRAM entered into the third forward contract for speculation. At
December 31, 2016, what amount of foreign currency transaction gain from
this forward contract should INGRAM include in net income?
a. Zero
b. P 3,000
c. P 5,000
d. P 10,000

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100,000 FC x (P 0.93 – P 0.90) 3,000

29. An entity will primarily generate and expend cash in one primary
economic environment. According to IAS 21, The Effects of Changes in
Foreign Exchange Rates, the correct term for the currency of this primary
economic environment is
a. Presentation currency
b. Reporting currency
c. Functional currency
d. Foreign currency

30. According to IAS 21, The Effects of Changes in Foreign Exchange Rates,
at which rate should an entity’s non-current assets be translated when
its functional currency figures are being translated into different
presentation currency?
a. The historical rate
b. The closing rate
c. The average rate
d. The spot exchange rate

31. IAS 21, The Effects of Changes in Foreign Exchange Rates, requires that
the initial recognition of a foreign currency transaction be:
a. In the amount of the foreign currency
b. The closing rate at balance sheet date
c. The rate the currency is expected to be exchanged at on the settlement
date for the monetary assets or liability based on the current market
price of future contracts for the relevant foreign currency
d. The spot rate at the date of the transaction

On July 1, 2011, Bato Company lent P 120,000 to a foreign supplier evidenced

by an interest bearing note due on July 1, 2012. 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 receivables section of Bato’s December 31, 2011 balance
sheet. The note principal was repaid to Bato on the July 1, 2012 due date
when the exchange rate was 8 LCU to P 1.

32. In its income statement for the year ended December 31, 2012, what
amount should Bato include as a foreign currency transaction gain or loss?
a. Zero
b. P 15,000 loss
c. P 15,000 gain
d. P 35,000 loss

Value of 840,000 LCU on December 31, 2011 140,000

Value of 840,000 on July 1, 2012 (840,000 x 1/8) 105,000
Foreign Exchange Loss 35,000

In October 2011, United Corporation obtained a loan amounting to US $ 120,000

for the purchase of machinery and equipment. By the end of the year, one-
half of the loan was still unpaid and a ten per cent decrease has taken
place.

33. If the foreign loan payable account is correctly reported in the balance
sheet at P 1,848,000, the rate of exchange at the time the loan was
obtained must have been:
a. $ 1 = P 27
b. $ 1 = P 28
c. $ 1 = P 29
d. $ 1 = P 30

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1,848,000 / 110% = 1,680,000

1,680,000 x 2 = 3,360,000
3,360,000 / 120,000 = 28

On May 1, 2011, the Manila Museum purchase an original Picasso’s of drawing

for 100,000 French francs, payable in 30 days. On May 1, the spot rate is P
6.26 to 1 French franc and the 30 day forward rate is P 6.50 per French
franc. On May 30, when the bill is paid, the spot rate is P 6.70 per French
franc.

34. The cost of the drawing should be recorded at:

a. P 650,000
b. P 670,000
c. P 626,000
d. P 15,974

100,000 French Francs x P 6.26 = 626,000

On July 1, 2011, Magnolia Company purchases 1,000 pounds of Swiss chocolate

for 50,000 Swiss francs, payable in 60 days. On July 1, a Swiss franc is
worth P 27.29; by August 30, the day of payment, the Swiss franc is worth P
27.000. The 60-day forward rate on July 1 is 1 Swiss franc = P 28.00.

35. Magnolia Company should record the cost of the chocolate as:
a. P 1,350,000
b. P 1,364,500
c. P 1,400,000
d. P 1,832,000

50,000 Swiss Francs x P 27.29 = 1,364,500

END OF ASSESSMENT

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