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Theories

3. The functional currency of Dahl Inc.’s subsidiary is the French franc. Dahl * 5. In foreign exchange transactions, the ratio at which the currencies of two *
I. Theories borrowed French francs as a partial hedge of its investment in the subsidiary. In countries are exchanged at a particular time
preparing consolidated nancial statements, Dahl’s debit balance of its
cumulative translation adjustment exceeded is exchange gain on the borrowing. Spot Rate
* Indicates required question
How should the cumulative translation adjustment and the exchange gain be
Closing rate
reported in Dahl’s consolidated nancial statements?

Exchange Rate
Email * The cumulative translation adjustment should be netted against the exchange gain
and the excess cumulative translation adjustment should be reported in the income Forward Rate
Record my email address with my response
The cumulative translation adjustment should be reported separately in the
stockholders’ equity section of the balance sheet and the exchange gain should
reported in the income statement.
6. On October 2, 2024, Louis Co., a U.S. company, purchased machinery from *
1. At which rate should an entity's non-current assets be translated when its * The cumulative translation adjustment should be netted against the exchange gain
and the excess cumulative translation adjustment should be reported in the
Stroup, a German company, with payment due on April 1, 2025. If Louis’ 2024
functional currency gures are being translated into a different presentation
stockholders’ equity section of the balance sheet. operating income included no foreign exchange gain or loss, then the transaction
currency according to IAS21: The effects of changes in foreign exchange rates?
could have
The cumulative translation adjustment should be reported in the income statement
Closing Rate and the exchange gain should be reported separately in the stockholders’ equity
Been denominated in U.S. dollars
section of the balance sheet.
Average Rate
Resulted in an extraordinary gain

Spot Exchange Rate Caused a foreign currency translation gain to be reported as a separate component
4. If P26.50 can be exchanged for 1US dollar, the direct and indirect exchange * ofstockholders’ equity
Historical Rate
rate quotations are
Caused a foreign currency gain to be reported as a contra account against
machinery.
P26.50 and 1 US dollar, respectively

2. What is the currency other than the reporting currency of an enterprise * P26.50 and 0.038 US dollar, respectively

Foreign Operation P1.00 and 26.50 US dollar, respectively 7. Queens Inc. is the foreign subsidiaries of Philippine Royal Corporation. Which *
account(s) in Queens.’ subsidiary trial balance should not be translated to pesos
Functional Currency P1.00 and 0.038 US dollar, respectively in terms of the current rate of exchange.

Presentation Currency
Long term liabilities

Foreign Currency
Non-Current Accounts Receivables

Sales

Inter-company payables during the year

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8. An indication that a foreign subsidiary’s functional currency is the currency of * 11. JPIA Exports, Inc. exported baskets to the Japan valued at ¥5,000. The export * 13. The exchange rate on a particular day for the exchange of foreign currencies *
the parent company is provided by: thus resulted in a receivable xed in terms of the Japanese Yen that would be on that day (which approximates the interbank guiding rate)
received. The peso-yen exchange rate deteriorated thus JPIA incurred a loss. This
A high volume of intercompany transactions loss should be included as a: Spot Rate

Sales prices set by local competition in the subsidiary’s country. Closing Rate
Transaction loss reported as a component of income from continuing operations

Expenses that are primarily local costs Buying Rate

Translation loss reported as a separate component of stockholders’ equity.

Local nancing of subsidiary operations. Separately shown in the equity section of the balance sheet “as accumulated Bank Rate
translation adjustment.”

Part of additional paid-in capital.

9. When translating an amount for xed assets shown on the statement of * 14. When should the the historical rate of exchange be applied in the conversion *
nancial position of a foreign subsidiary, the appropriate rate of translation is the of the trial balance of a foreign branch to pesos

Average exchange rate for the current year

12. Which among the following statements is not valid with respect to * Revalued PPE
accounting for changes in the foreign exchange rates?
Historical exchange rate. Importation of capital equipment covered by forward exchange contracts.
Any exchange differences arising on other charges to stockholders’ equity in the
Average exchange rate over the life of each xed asset. foreign entity are recognized in stockholders’ equity Sales

Current Exchange Rate A foreign currency transaction is recorded as of the occurrence of the transaction Inventories
normally using the exchange rate on that date.

10. Exchange differences arising from short-term foreign currency items should
be:
Deferred and amortized over the life of the obligation.
Part of additional paid-in capital
Separately shown in the equity section of the balance sheet “as accumulated
translation adjustment
Current practice is the same with respect to the accounting treatment of gains or
losses arising from foreign currency transactions not settled at the balance sheet
* date. 15. A U.S. rm purchases merchandise from a Canadian rm with payment due *
in 60 days and denominated in Canadian dollars. The U.S. rm will report an
At each balance sheet, foreign currency monetary items that results from
exchange gain or loss on settlement if the transaction is:
transactions should be reported at the closing rate except when a forward exchange
contract is entered into.
Recorded in U.S. dollars.
Measured in U.S. dollars
Settled after an exchange rate change has occurred.

Charged against income of the current year.

Not hedged through a forward contract.

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5/20/23, 1:45 AM I. Theories 5/20/23, 1:45 AM I. Theories 5/20/23, 1:45 AM I. Theories

16. Which of these considerations would not be relevant in determining the * 19. On disposal of a foreign operation, all exchange differences accumulated in a * 22. On January 1, 2024, Clara Co. enters into a forward contract to purchase *
entity’s functional currency? separate component of equity should be: 10,000 shares of stock from Mara Co. on December 31, 2024 at a forward price of
₱100 per share. Clara Co. prepays the shares at ₱100 per share which is the
The currency that inuences the costs of the entity. Added to the gain, or loss, on disposal in the income statement. current price of the shares on January 1, 2024. Which of the following is correct?

The currency in which nance is generated. Recognized directly in equity

The forward contract meets the denition of a derivative.

The currency in which receipts from operating activities are retained.
The currency that is the most internationally acceptable for trading.
Ignored. The forward contract fails the “underlying” test for a derivative since the current
price and forward price are equal on inception.
either recognized directly in equity or ignored
The forward contract fails the “future settlement” test for a derivative since Clara Co.
prepaid the shares at inception at an amount equal to settlement price. Prepayment
at an amount equal to settlement price is tantamount to settlement.

17. The date of the transaction is * 20. Which of the following are types of hedging relationship? * The forward contract fails the “no initial net investment or an initial net investment
I. Cash ow hedge that is smaller than would be required for other types of contracts that would be
The date when the transaction is contracted or recognized. II. Credit risk hedge expected to have a similar response to changes in market factors” test for a
derivative.
III. Interest rate hedge
The date cash is transferred
IV. Fair value hedge

When the transaction is entered into the books of account.

I. only
23. A contract, traded on an exchange, that allows a company to buy a specied *
The date when the rights or obligations on the contract are settled or discharged.
I and II quantity of a commodity or a nancial security at a specied price on a specied
future date is referred to as a(n).
1 and IV
interest rate swap.
18. If the $ (dollar) strengthens: * all of these
forward contract
Less pesos would be received from an account receivable in $.
futures contract
More pesos would be received from an account receivable in $
21. Techniques such as hedging, forward contracts and options can: *
Option
Less pesos would be paid to settle an account payable in $.
Reduce risk
1st and 3rd option
Increase risk

Eliminate Risk

Are purely for speculation

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24. A contract giving the owner the right, but not the obligation, to buy or sell an * 27. If an oil wholesaler expects to buy some gasoline for his customers in the * 29. Using the preceding information, how much foreign currency will it cost Bricks *
asset at a specied price any time during a specied period in the future is future and wants to hedge his risk, he needs to to nally pay the payable on June 7?
referred to as a(n)
sell gasoline now P 2,440,000
interest rate swap
sell crude oil futures contract P 2,400,000
forward contract.
buy crude oil futures contract P 1,666,667
futures contract.
do nothing P 2,520,000
Option

II. Problems
30. Ball Corp, a parent company of a group of companies acquired machinery for *
25. When gains or losses on derivatives designated as fair value hedges exceed * US $50,000 on October 31, 2021 when the peso/dollar rate was P26, the liability is
28. Bricks purchase raw material from its foreign supplier, Bolivian Clay on May 8. *
the gains or losses on the item being hedged, the excess to be paid six-months after. By the end of the year, the peso/dollar drastically
Payment of P 2,000,000 FCU is due in 30 days. May 31 is Bricks’ scal year-end.
increased to P32 and this is considered as a devaluation or severe uctuation. On
Pertinent exchange rates were as follows:
affects reported net income its year end balance sheet, Ball Corp should report the machinery at:

is recognized as an equity adjustment. Spot Rates:

P 1,040,000
May 8- P 1.25
is recognized as part of comprehensive income. May 31- P 1.26 P 1,280,000
June 7- 1.20
is not recognized
P 1,300,000
For what amount should Bricks’ Accounts Payable be credit on May 8?
P 1,600,000

P 2,500,000
26. Which of the following statements about options and their underlying assets *
is FALSE? P 2,440,000
31. If P1.5625 can be exchanged for 1 British pound, the direct and indirect *
The value of an option, in comparison to its underlying asset, has the potential of P 1,600,000 exchange rate quotation are
creating an arbitrage opportunity.
P 1,639,344
The owner of the option is legally required to engage in a transaction involving the P1.5625 and 1 British pound, respectively
asset.
P1.5625 and 0.64 British pounds, respectively.
The holder of a long position on an option is the only party with the right to initiate a
transaction involving the asset. P1.00 and 1.5625 British pounds, respectively

The seller of the option is legally required to engage in a transaction involving the P1.00 and 0.64 British pounds, respectively
asset.

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32. On December 15, 2020, Celeron Company received a sales order from a
foreign company for $20,000. The goods are to be delivered on January 14, 2021.
The company was concerned about the uctuation in the US Dollars, so on this
date, the company entered into a 30-day forward contract to sell $20,000.
How much is the gain or loss to be recognized with respect to the hedging
instrument on December 31, 2020?
* 36. Refer to No. 32. What is the net impact on the income statement in 2021 as a * 39-40. On January 1, 2021, ABC Company formed a foreign branch. The branch *
result of the hedge? purchased merchandise at a cost of 720,000 local currency units (LCU) on
February 15, 2021. The purchase price was equivalent to P180,000 on this date.
Zero The branch’s inventory at December 31, 2021, consisted solely of merchandise
purchased on February 15, 2021, and amounted to 240,000 LCU. The exchange
rate was 6 LCU to P1 on December 31, 2021, and the average rate of exchange
was 5 LCU to P1 for 2021. Assume that the LCU is the functional currency of the
37. Refer to No. 32. What amount should be recognized as sales on January 14, * branch.
2021
In ABC’s December 31, 2021 balance sheet, the branch inventory balance of
240,000 LCU should be translated to United States dollars at
49,600

P48,000
200 loss
P60,000
38. The following balance sheet accounts of a foreign subsidiary at December 31, *
2011, have been translated into U.S. dollars as presented on the table bellow. P84,000

33. Refer to preceding problem. What is the rm commitment balance on *

P40,000
December 31, 2020? What total should be included in the translated balance sheet at December 31,
2011, for the items below? Assume the U.S. dollar is the functional currency.

200 Asset

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34. Refer to No. 32. How much is the gain or loss to be recognized with respect *
to the hedge instrument on January 14, 2021?

1,200 Gain
$1,270,000

$1,288,000

35. Refer to No. 32. How much is the gain or loss to be recognized with respect * $1,300,000
to the hedge item on January 14, 2021?
$1,354,000

1,200 loss

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