AFAR 06-WEEK 7

Question 1
A foreign subsidiary of MINDANAO COMPANY. (a Philippine firm) has certain balance
sheet accounts on December 31, 2020. The subsidiary is a self-sustaining operation. 
The parent’s books are kept in Philippine pesos and will consolidate in its functional
currency. Information relating to these accounts in Phil. Pesos is as follows:
 

Translated at

Current rate Historical rate

Accounts receivable P75,000 P85,000

Inventories (carried at average cost) 600,000 700,000

Prepaid Insurance 25,000 30,000

Land 55,000 70,000

 
What amount should be included as total assets on MINDANAO’ balance sheet on
December 31, 2020 as the result of above information?
Response: P875,000
Feedback:
 
75,000+ 600,000+ 25,000 + 55,000 = 755,000
Correct answer: P755,000
Score: 0 out of 1 No

Question 2
 The PANGASINAN, INC. owns a foreign subsidiary that had net income for the year
ended December 31, 2019 of FC 4,800,000, which was approximately translated into
P800,000.
On December 15, 2019, when the rate of exchange was FC 5.7 to P1.00, the foreign
subsidiary paid a dividend of FC 2,400,000. The dividend represented the net income of
the foreign subsidiary for the six months ended June 30, 2018, during which time the
weighted average exchange rate was FC 5.81 to P1.00. the exchange rate in effect at
December 31, 2019 was FC5.9 to P1.00.
What rate of exchange should be used to translate the dividend for the December 31,
2019 financial statements?
Response: FC 5.80 to P1.00
Feedback: Dividends are translated using historical rate
Correct answer: FC 5.70 to P1.00
Score: 0 out of 1 No

Question 3
On December 10, 2019, QUEZON CORP entered into a 90 day forward exchange
contract involving FC 1,000,000 in anticipation that the FC would weaken. The following
direct exchange rates are assumed:

(for March 10, 2020)

Spot  rate
Forward rate

Dec. 10, 2019 P0.90 P0.86

Dec. 31, 2019 0.80 0.87

Mar. 10,  2020 0.91 Na

 
The amount of the foreign currency transaction gain or loss that would be reported in
the income statement for the year 2019 on the forward exchange contract, assuming
that the contract is a hedge of a recorded but unsettled inventory sale transaction is
Response: P27,000 gain
Feedback: 1M x ( 0.86- 0.87) = (10,000) Inc in CP
Correct answer: P10,000 loss
Score: 0 out of 1 No

Question 4
 On December 1, 2018, a Philippine firm purchased a speculative hedge to buy 30,000
foreign currency when the spot rate was P1.10 and a 60 day forward rate was P1.12.
The spot rate at December 31 (the company’s year-end was P1.25 and a 30-day
forward rate was P1.13. When the speculative hedge was exercised on January 31,
2019 the spot rate was P1.11 and a 30 day forward rate, P1.12.

The journal entry to record this hedge would include a debit to Contract Receivable in
the amount of
Response: P33,600
Feedback: DR:Contract receivable (FC) 33,600
CR:Contract payable 33,600
(30,000 * 1.12)
Correct answer: P33,600
Score: 1 out of 1 Yes

Question 5
On June 15, 2019, BULACAN CORP purchased merchandise worth 100,000 Swiss
francs from its Swiss supplier payable within 30 days under an open account
arrangement. BULACAN issued a 30-day 6% note payable in Swiss francs. On July 15,
2019 BULACAN paid the note in full. The following information on spot rates (P/SF) are
provided:

Buying Selling

June 15, 2019 P24.03 P24.15

July   15, 2019 24.10 24.22

 
BULACAN’s foreign exchange gain or (loss) for the transaction is
Response: (P5,040)
Feedback:
 
6% / 12months= Effective rate per month of 0.5%
(100,000* 1.005) x (24.15-24.22) = (7,035) Inc in AP
Correct answer: (P7,035)
Score: 0 out of 1 No

Question 6
On June 15, 2019, BULACAN CORP purchased merchandise worth 100,000 Swiss
francs from its Swiss supplier payable within 30 days under an open account
arrangement. BULACAN issued a 30-day 6% note payable in Swiss francs. On July 15,
2019 BULACAN paid the note in full. The following information on spot rates (P/SF) are
provided:
 Buying Selling

June 15, 2019 P24.03 P24.15

July   15, 2019 24.10 24.22

 
How much did BULACAN pay the Swiss supplier on July
Response: P2,434,110
Feedback:
 
(100,000* 1.005) x 24.22 = 2,434,110
Correct answer: P2,434,110
Score: 1 out of 1 Yes

Question 7
 On April 8, 2019, CALAMBA CORPORATION purchased merchandise from an
unaffiliated foreign company for 5,000 units of the foreign company’s local currency.
CALAMBA paid the bill in full on March 1, 2020 when the spot rate was P0.45. The spot
rate was P0.60 on April 8, 2019 and was P0.55 on December 31, 2019 .

For the year ended December 31, 2020, CALAMBA should report a transaction gain of
Response: P1,500
Feedback: 5,000 x (.45 - .55) = 500 Decrease in AP
Correct answer: P500
Score: 0 out of 1 No

Question 8
Inflation rate of a foreign country for three years are as follows:
 Change in Annual rate of
Index
Index Inflation

Jan. 1, 2017 150

Jan. 1, 2018 200 50 50/150 = 33%

Jan. 1, 2019 250 50 50/200 = 25%

Jan. 1, 2020 330 80 80/250 = 32%

 
The cumulative three-year inflation rate is
Response: 120%
Feedback:  (330- 150) 150 = 120%
Correct answer: 120%
Score: 1 out of 1 Yes

Question 9
 If one New Taiwan dollar can be exchanged for P1.025 Philippine money, the fraction
to be used to compute indirect quotation of exchange rate expressed in Taiwanese
currency is
Response: 0.975/1.00
Feedback: 1/direct quoted rate = 1/1.025
Correct answer: 1.00/1.025
Score: 0 out of 1 No

Question 10
On December 10, 2019, QUEZON CORP entered into a 90 day forward exchange
contract involving FC 1,000,000 in anticipation that the FC would weaken. The following
direct exchange rates are assumed:
 (for March 10, 2020)
Spot  rate
Forward rate

Dec. 10, 2019 P0.90 P0.86

Dec. 31, 2019 0.80 0.87

Mar. 10,  2020 0.91 Na

 
The amount of the foreign currency transaction gain or loss that would be reported in
the income statement for the year 2019 on the forward exchange contract, assuming
that the forward exchange contract pertains to speculation in foreign currency.
Response: P30,000 loss
Feedback: 1M x ( 0.86- 0.87) = (10,000) Inc in CP
Correct answer: P40,000 loss
Score: 0 out of 1 No

Question 11
 NEGROS OCCIDENTAL, INC., has the following foreign currency transactions during
2018:

Merchandise was purchased from a foreign supplier on January 10, 2018, for the Phil-
peso equivalent of P600,000. The invoice was paid on April 20, 2018, at the Philippine
peso equivalent of P608,000.

On September 1, 2018, NEGROS OCCIDENTAL borrowed the Philippine peso

equivalent of P3,000,000 evidenced by a note that was payable in the lender’s local
currency on September 1, 2018. On December 31, 2018, the Philippine peso equivalent
of the principal amount and accrued interest were P3,200,000 and P120,000
respectively. Interest on the note is 10%.

In NEGROS OCCIDENTAL’ 2018 income statement, what amount should be included

as foreign Exchange losses
Response: P40,000
Feedback: Transaction 1: 608,000- 600,000 = (8,000) Inc in AP
Transaction 2:
Principal: 3.2M - 3M= (200,000) Inc in AP
Interest: 120,000- (3M x 10% x 4/12) = (20,000)
Total Loss = 228,000
Correct answer: P228,000
Score: 0 out of 1 No

Question 12
CAGAYAN DE ORO CORP.. has acquired a fully-controlled subsidiary in Thailand on
January 1, 2019. The determined functional currencies of the entities are: for the parent,
Philippine pesos; for the subsidiary, Thailand baht.
The following are summarized from the balance sheets of the affiliated companies at
December 31, 2019. (Summary figures exclude inter-company balances.)

Phil Parent Thai Subsidiary

Monetary assets P10,000,000 B3,000,000

Non-monetary assets P20,000,000 B6,500,000

 
The relevant spot rates are to be used
Current Rate                          TB1     is to          P1.50
Historical rate                       TB1     is to          P1.40
Weighted average rate           TB1     is to          P1.45
 
Based on the above data, determine the consolidated balances (1) for monetary assets,
and (2) for non-monetary assets, if the group decide on a baht presentation currency.
Response: (1) B  9896, 552; (2) B20,833,333
Feedback:
Monetary: (10M/ 1.50) + 3M = 9,666,667
Non Monetary: (20M/1.5) + 6.5M = 19,833,333
 
We use translation: Phil parent functional Currency as the PHP and the Presentation
currency as TB
Correct answer: (1) B  9,666,667; (2) B19,833,333
Score: 0 out of 1 No

Question 13
DAVAO CORPORATION sold handicraft goods to a US firm for $100,000 in 2018.
Pertinent information on exchange rates follows:
 Conversion
Rate
(Peso to US$)

September 4 Receipt of order P45.80

October 15 Date of shipment P47.00

Date of balance
December 31 P47.20
sheet

January 6,
Date of settlement P46.00
2019

 
The sale would be appropriately recorded at
Response: P4,700,000
Feedback:
100,000 * 47.00 = 4,700,000
DOT is date of delivery/shipment
Correct answer: P4,700,000
Score: 1 out of 1 Yes

Question 14
 On July 1, 2019, BORACAY, INC. lent FC 100,000 to a foreign supplier, evidenced by
an interest-bearing note due on July 1, 2020. The note is denominated in the currency
of the borrower and was equivalent to P840,000 on the loan date. The note principal
was approximately included at P820,000 in the receivables section of TAWI-TAWI’s
December 31, 2019 balance sheet. The note principal was repaid to BORACAY on the
July 1, 2020 due date when the exchange rate was FC 1 to P8.

In its income statement for the year ended December 31, 2019, the amount Conception
should include as a foreign currency transaction gain or (loss) is
Response: P(40,000)
Feedback: 840,000 - 820,000 = (20,000) Decrease in AR
Correct answer: P(20,000)
Score: 0 out of 1 No

Question 15
 On July 1, 2019, TARLAC CORPORATION borrowed 1,680,000 yen from a Japanese
Lender evidenced by an interest-bearing note due July 1, 2020. The Philippine Peso
equivalent of the note principal was as follows:

July 1, 2019; - Date borrowed P210,000

Dec. 31, 2019; - Balance sheet date P240,000
July 1, 2020; - Date repaid P280,000

In its income statement for 2020, what amount should TARLAC include as a foreign
Exchange gain or loss?
Response: P70,000 gain
Feedback: 280,000 – 240,000 = (40,000) Inc in AP
Correct answer: P40,000 loss
Score: 0 out of 1 No

Question 16
 Alecks Corporation had the following foreign currency transactions during 2019

Merchandise was purchased from foreign supplier on January 20, 2019 for the Peso
equivalent of P90,000. The invoice was paid on March 20, 2019 at the Phil. Peso
equivalent of P96,000.

On July 1, 2019, Alecks borrowed the Philippine peso equivalent of P500,000

evidenced by a note that was payable in the lender’s local currency on July 1, 2020. On
December 31, 2019, the Phil. Peso equivalent of the principal amount and accrued
interest were P520,000 and P26,000 respectively. Interest on the note is 10% per
annum.

In Aleck’s income statement, the amount that should be included as a foreign exchange
loss
Response: P6,000
Feedback: Transaction a: 90,000- 96,000 = (6,000) Inc in AP
Transaction b:
Principal 520,000- 500,000 = (20,000) Inc in AP
Interest (500k x 10% x 6/12) – 26,000 = (1,000)
Total Loss= (27,000)
Correct answer: P27,000
Score: 0 out of 1 No

Question 17
 On September 1, 2019 Junjun Company received an order for equipment form a
foreign customer for FC 300,000 when the Philippine peso equivalent was P96,000.
Junjun shipped the equipment on October 15, 2019, and billed the customer for FC
300,000 when the Phil. Peso equivalent was P100,000. Junjun received the customer’s
remittance in full on November 16, 2019, and sold the FC 300,000 for P105,000.

In its income statement for the year ended December 31, 2019, Junjun should report a
foreign exchange gain of
Response: P5,000
Feedback: 105,000 – 100,000 = 5,000
Correct answer: P5,000
Score: 1 out of 1 Yes

Question 18
On December1, 2019, SULU, INC. received an order for equipment FOB shipping point
from a Swiss Company. The order is billed for 86,000 Swiss Francs, payable on
January 31, 2020. The equipment was shipped and invoiced to the Swiss Company on
December 12, 2019.
 
Relevant spot exchange rates for Swiss Francs on various dates follow:

Buying Spot
Selling Spot Rate
Rate

December 1,
P51.45 P51.60
2019

December 12,
P51.58 P51.84
2019

December 31,
P51.72 P51.96
2019

January 31, 2020 P51.68 P51.89

 
On the December 31, 2019 income statement of SULU CORPORATION, how much is
the FOREX gain or (loss) to be reported on this transaction?
Response: (P14,280)
Feedback: 86,000 * (51.72- 51.58) = 12,040     Inc in AR
Correct answer: P12,040
Score: 0 out of 1 No

Question 19
 On December 1, 2018, a Philippine firm purchased a speculative hedge to buy 30,000
foreign currency when the spot rate was P1.10 and a 60 day forward rate was P1.12.
The spot rate at December 31 (the company’s year-end was P1.25 and a 30-day
forward rate was P1.13. When the speculative hedge was exercised on January 31,
2019 the spot rate was P1.11 and a 30 day forward rate, P1.12.

The amount of foreign exchange gain/loss that would appear on the income statements
of the Philippine company resulting from this speculative hedge for the years ended
2018 and 2019 are
Response: 2018 = P300 loss; 2019 = 600 loss
Feedback: 2018: 30,000 * (1.12 - 1.13) = 300 Inc in CR
2019: 30,000 * (1.13 - 1.11) = (600) Dec in CR
Correct answer: 2018 = P300 gain; 2019 = 600 loss
Score: 0 out of 1