FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF F/S

Multiple Choice
Identify the choice that best completes the statement or answers the question.

Prepare the necessary journal and adjusting entries

____ 1. On November 15, 2010, Manila company, a Philippine company ordered merchandise from US company for
3,500 US dollars. The merchandise was shippep and invoice on December 10, 2010. Manila company paid
the invoice on January 10,2010. The spot rates for US dollars on the respective dates were:
November 15, 2010 P49.85
December 10, 2010 48.65
December 31, 2010 45.25
January 10, 2011 46.75
In Manila’s December 31, 2010, income statement, what is the foreign exchange gain (loss)?
a. P16,100 c. P(11,900)
b. P(16,100) d. P11,900
____ 2. On October 1, 2010,Pinoy company sold goods on account to a Thai corporation for 9,000 Baht. The date of
delivery is October 7, 2010 and payment is due on January 30,2011. Exchange rates were as follows:
BID rate OFFER rate
Oct. 01, 2010 P47.50 P49.20
Oct. 27, 2010 48 46
Dec. 31, 2010 44.70 43
Jan. 30 2011 42 45.50
How much is the forex gain or loss to be recognized on January 30, 2011?
a. P22,500 gain c. P24,300 gain
b. P24,300 loss d. P22,500 loss
____ 3. A corporation received a promissory note denominated in foreign currency from the sales made to a
Singaporean customer. The following were the related transactions: (in Singaporean dollars). On December 1,
A corporation sold merchandise to a S ingaporean customer for 60-ady, 15% promissory note for $48,000, at
a buying rate of $1 to P47.50. On December 31, the buying spot rate is $1 to P46.85. On January 30, the
butying spot rate is $1 to P47.75.
On the settlement date, how much is theforex gain or loss?
a. P43,740 gain c. P31,590 gain
b. P31,590 loss d. P43,740 loss
____ 4. On December 1, 2010, M Company acquired goods on account from a Korean Company. The amount of
purchase was 370,000 Korean won. M will settle the account on January 2, 2011. On December 1, the spot
rate was 25 Korean won for one Philippine peso. Also on December 1, M entered into a futures contract to
purchase 370,000 Korean won on January 2, 2011 at a forward rate of 50 Korean won for one Philippine
peso. The spot rate and forward rate for one Philippine peso on December 31, 2010 is 40 Korean won.

How much is the foreign exchange gain or loss on hedging instrument - forward contract?
a. P5,550 gain c. P1,850 gain
b. P5,550 loss d. P1,850 loss
____ 5. The following data applies to Davao Company’s sale of 8,250 foreign currency units under a forward contract
dated November 1, 2010 for delivery on January 31, 2011:

11/1/10 12/31/10
Spot Rates P55 P53
 30-day forward rate 51 50
90-day forward rate 48 45
Davao entered into the forward contract to speculate in the foreign currency.

In its income statement for the year ended December 31, 2010, what amount of loss should Davao report from
this forward contract?
a. P41,250 c. P16,500
b. P24,750 d. -0-
____ 6. Given the following information (for $1):

Buying Spot Rate Selling Spot Rate

Transaction Date P44 P46
Balance Sheet Date 49 50
Settlement Date 46 54

Forward Rates
120-day futures 90-day futures 60-day futures 30-day futures
Transaction Date P44 P46 P45 P47
Balance Sheet Date 43 47 49 51
Settlement Date 46 49 50 53

On Dec 1, 2010, B Company sold merchandise to US Company. The price of $7,450 is to be collected on Feb
28, 2011. To hedge this foreign currency exposure, B Company sold $7,450 for delivery on Feb 28, 2011.

How much is the forex gain (loss) on the forward contract on the balance sheet?
a. P22,650 gain c. P37,250 gain
b. P22,350 loss d. P37,250 loss
____ 7. O Company acquired merchandise for 36,000 pounds from a vendor in London on December1, 2010.
payment in British pounds was due on March 31, 2011. On the same date, O entered into a 120 day futures
contract to purchase 36,000 pounds from a bank. Exchange rate for pound on different dates are as follows:

Dec. 1 Dec. 31 March 31

Spot Rate P81.4 P82.3 P81.9
30 day futures 82.3 82.5 83.2
60 day futures 81.8 82.2 82.6
90 day futures 80.6 82.6 83.4
120 day futures 81.2 82.8 82.9

How much is the net forex gain or loss on the settlement date?
a. P7,200 loss c. P10,800 loss
b. P7,200 gain d. P10,800 gain
____ 8. On November 1, S Company entered into a firm commitment to acquire a machinery Delivery and passage of
title would be on February 28, 2011 at the price of HK$8,000. On the same date, to hedge against unfavorable
changes in the exchange rate, S entered into a 120 forward contract with China Bank for HK$8,000.
Exchange rate were as follows:

Spot Rate Forward Rate

Nov. 10, 2010 P36 P34
Dec. 31, 2010 37 36
Feb. 28, 2011 39 39
 How much is the forex gain or loss recognized by the S Company on the firm commitment on December 31,
2010?
a. P8,000 gain c. 8,000 loss
b. P16,000 loss d. P16,000 gain
____ 9. On January 1, 2010 XYZ Corporation organized Avenue Company as a subsidiary in Hong Kong with an
initial investment cost of HK$90,000. Avenue’s December 31, 2010, trial balance in HK$ is as follows:

Debit Credit
Cash HK$ 10,500
Accounts receivable (net) 30,000
Receivable from XYZ 7,500
Inventory 37,500
Plant and equipment 150,000
Accumulated depreciation HK$ 15,000
Accounts payable 18,000
Bonds payable 75,000
Common stock 90,000
Sales 225,000
Cost of goods sold 105,000
Depreciation expense 15,000
Operating expense 45,000
Dividends paid 22,500

Total HK$ 423,000 HK$423,000

Additional Information
1. Purchases of inventory goods are made evenly during the year. Items in the ending inventory were
purchased November 1.
2. Equipment is 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 March 1.
3. The dividends were declared and pain on November 1.
4. Exchanges rates were as follows:

January 1 HK$1 = P3.30

March 1 HK$1 = 3.40
November 1 HK$1 = 3.70
December 1 HK$1 = 3.00
2010 Average HK$1 = 3.50
Required
Prepare a schedule of financial position accounts in a foreign subsidiary of Pinay Company on December 31,
2010, have been translated in Philippine Pesos as follows:

Translated at
Current Rates Historical Rates
Accounts receivable P175,000 P192,500
Prepaid insurance 43,750 52,500
Pland and equipment 87,500 96,250
Patents 70,000 78,750
 What total asset should be included in Pinay’s statement of financial position for December 31, 2010, for the
above assets?
a. P376,250 c. P393,750
b. P402,500 d. P420,000
____ 10. A wholly-owned foreign subsidiary of Malakas Inc. has certain expense accounts for the year ended
December 31, 2010, stated in local current units (LCU) as follows:

LCU
Depreciation of equipment (related assets
were purchased Janaury 1, 2008) 210,000
rovision for uncollectible accounts 140,000
Rent 350,000

The exchange rates at various dates were as follows:

Peso Equivalent of
1 LCU
January 1, 2008 P .50
December 31, 2010 .40
Average, 2010 .44

What peso amount should be included in Malakas’income statement to reflect the preceding expenses for the
year ended December 31, 2010?
a. P280,000 c. P294,000
b. P308,000 d. P320,000
____ 11. ABC Corporation has a 30% equity investment in a Company in Singapore, NS Company. On december 31,
2009, the balance in ABC’s Investment in NS account is P945,000, equal to 30% of NS’s net assets of
P75,000 Singapore Dollars times a P42 year-end exchange rate. On this date, ABC has no adjustment balance
relative to its investment in NS. To hedge its net investment in NS, ABC borrows 18, 750 Singapore Dollars
for one year at 12% interest on January 1, 2020 at a spot rate of P42. The loan is denominated in Sinagpore
Dollars, with principal and interest payable on janaury 1, 2011. Assume that on November 2, 2010, NS
declares and pays a 3,750 Sinagpore Dollars dividend, when the spot rate is P43.50. On December 31, 2010, P
reports net income of 15,000 Singapore dollars. The weighted average exchange rate for the year 2010 is P43,
and the closing exchange rate on December 31, 2010 is P44.

As a result of the hedging, how much is the translation adjustment that will appear in the stockholders’equity
section of the balance sheet of ABC Corporation on December 31, 2010?
a. P48,937.50 c. P9,187.50
b. P37,500 d. P11,437.50
____ 12. On November 3, 2010, KLM Corporation acquired 450 shares of QRS Company at a cost of P12 per share.
KLM classifies them as available-for-sale securities. On this same date, KLM decides to hedge against a
possible decline in the value of the securities by purchasing, at a cost of P450, an at-the-money put option to
sell the 450 shares at P12 per share. The option expires on march 3, 2011. The fair values of the investment
and the options follow:

11/3/10 12/31/1 3/3/11

0
QRS Company shares:
Per share P12 P11 P10.50
 Put Option (450 shares)
Market value P450 P630 P675
Intrinsic value -0- 450 675
Time value P450 P180 P-0-

Required:
a. Prepare the entries required on November 3, 2010, to record the change in QRS stock and the put
options.
b. Prepare the entries required on december 31, 2010, to record the change in intrinsic value and time value
of the options, as well as the revaluation of the available-for-sale securities.
c. Prepare the entries required on March 3, 2011, to record the exercise of the put option and the sale of the
securities at the date.
a. aa c. cc
b. bb d. dd
____ 13. TUV Company believes the price of oil will increase in the coming months. Therefore, it decides to purchase
call options on oil to hedge the expected increase in prices of an anticipated purchase of oil. On November 30,
2010, TUV purchases call options for 10,000 barrels of oil at P45 per barrel at a premium of P3 per barrel,
with a March 1, 2011, call date. The following is the pricing information for the term of the call:

Futures Price
Date Spot Price (for March 1, 2011
delivery)
November 30, 2010 P45 P46.50
December 31, 2010 46.50 48
March 1, 2011 49.50

The date for the change in the fair value of the options follows:
Date Total value Intrinsic value Time value
November 30,2010 P30,000 P -0- P30,000
December 31, 2010 24,000 15,000 9,000
March 1, 2011 45,000 45,000
On March 1, 2011, TUV sells the options at thier value on that date and acquires 10,000 barrels of oil at the
spot price. On June 1, 2011, TUV sells the oil for P51 per barrel.

Required: Prepare all journal entries on November 30, 2010, december 31, 2010, March 1, 2011 and June 1,
2011.
a. aa c. cc
b. bb d. dd
____ 14. On December 1, 2010, P Company paid cash to purchase 90 - day “at the money” call option for 500,000
Thailand baht. The option’s purpose is to protect an exposed liability of P500,000 Thailand baht relating to an
inventory purchase received on december 1, 2010 and to be paid on March 1, 2011.

12/1/10 12/31/10 3/1/11

Spot rate (market price) 1.20 1.28 1.27
Strike price (exercise price) 1.20 1.20 1.20
Fair value of call option 3,000 42,000 35,000

The foreign exchange gain or loss on option contract due to change in the effective portion on december 31,
2010 if the changes in the time value will be excluded from the assessment of hedge effectivenss should be:
a. 1,000 loss c. 39,000 gain
 b. 1,000 gain d. 40,000 gain
____ 15. On January 1, 2010, GBX Inc. paid P40,000 cash to acquire a put foreign exchange option for 1,000,000
rupee. With an expiration date of December 31, 2010. The option hedges 2010’s forecasted exporting sales of
1,000,000 rupee. GBX fiscal year end June 30.

Jan 1 2010 June 30 2010 Dec 31 2010

Spot Rate 1.18 1.12 1.15
Strike Price 1.19 1.19 1.19
Fair value of put option 202,500

Which of the following is true?

a. The forex loss to be presented in the c. The forex gain or loss on option contract
income statement on December 31, 2010 on June 30, 2010 should be P162,500 if
amounted to P132,5000, if the time value the time value element is included in
element is included in the assessment of assessing the hedge effectiveness.
the hedge effectiveness.
b. The forex gain to be presented in the d. The intrinsic and time value of opting on
stockholders equity on June 30, 2010 is Janaury 1, 2010 were 0 and P16,000
P70,000, if the time value element is respectively.
excluded from the assessment of hedge
effectiveness.
FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF F/S
Answer Section

MULTIPLE CHOICE

1. ANS: D PTS: 1
2. ANS: B PTS: 1
3. ANS: A PTS: 1
4. ANS: C PTS: 1
5. ANS: C PTS: 1
6. ANS: B PTS: 1
7. ANS: C PTS: 1
8. ANS: B PTS: 1
9. ANS: A PTS: 1
10. ANS: B PTS: 1
11. ANS: D PTS: 1
12. ANS: A PTS: 1
13. ANS: D PTS: 1
14. ANS: D PTS: 1
15. ANS: C PTS: 1