Problem 1

On December 1, 20x1, Local Corporation, a Philippine Company based in Makati, ordered 1,000 units of merchandise
from a US Firm, FOB Shipping Point, for $10,000, payable on January 15, 20x2. The merchandise was shipped on
December 10, 20x1, and was received by the company on December 17, 20x1. The company paid the invoice on due
date. The corporation did not enter into any form of hedging activity.
On March 15, 20x2, 300 units of the merchandise purchased were sold in cash to Bonnie Company, a Taguig-based
firm, at a total price of P250,000.
The spot rates for US Dollars on different dates are:
Buying Rate Selling Rate
December 1, 2021 39.00 40.00
December 10, 2021 38.90 40.10
December 17, 2021 40.00 40.30
December 31, 2021 40.60 40.85
January 15, 2022 40.40 40.60
The Company uses the perpetual inventory system to account for its inventories.
Compute for the following:
1. Foreign Exchange gain/loss in 20x1
2. Accounts payable as of December 31, 20x1
3. Foreign Exchange gain/loss in 20x2
4. Net income of the company, assuming no other transactions occurred in 20x2

Problem 2
SOLAR, a Philippine Corporation, bought inventory items from a foreign supplier in US on November 5, 20x8 for
US$150,000, when the spot rate was P41.00. SOLAR’s December 31, 20x8 year-end, the spot rate was P40.50. On
January 15, 20x9, SOLAR bought US$150,000 at the spot rate of P40.90 and paid the invoice.
How much should SOLAR report as foreign exchange gain/(loss)in its 20x8 and 20x9 income statements?

Problem 3
On July 1, 20x8 LOKAL Co lent P600,000 to a foreign supplier, evidenced by an interest-bearing note due on July 1,
20X9. The note is denominated in the currency of the borrower and P1 was equivalent to 7 local currency units (LCU)
on the date. The note’s principal was repaid to LOKAL on the July 1, 20x9 due date. The exchange rates on December
31, 20x8 and July 1, 20x9 were 6 LCU and 8 LCU to P1, respectively
In its income statement for the year ended, December 31, 20x9, what amount should LOKAL include as a
foreign currency transaction gain/(loss)?

Problem 4
On October 5, 20x8, MARIA COMPANY sold goods on account to a Malaysian Corporation for FC60,000. The date
of invoice is October 29, 20x8 and payment is due on January 30, 20x9. Exchange rates were as follows:
BID rate OFFER rate
Oct 5, 20x8 67.50 69.20
Oct 29, 20x8 68.70 66.80
Dec 31, 20x8 64.10 63.40
Jan 30, 30x9 62.40 65.60
What is the reportable foreign exchange gain/(loss) in MARIA COMPANY’s 20x9 income statement?

Problem 5
LOCAL CORPORATION issued a promissory note denominated in foreign currency for the purchase of goods from
an Italian supplier. The following were the related transactions (in Italy Lire). On December 1, LOCAL
CORPORATION purchased merchandise from an Italian supplier for 60-days, 18% promissory note for 100,000 Italy
lire, at a selling rate of 1FC to P74.20. On December 31, the selling spot rate is 1FC to P75. On January 30, the
selling spot rate is 1FC to P75.75.
On the settlement date, how much is the foreign exchange gain/(loss)
Problem 6
Certain balance sheet accounts of a foreign subsidiary of Susy Company at December 31, 20x7, have been converted
into Philippine pesos as follows:
Current Rates Historical Rates
Notes receivable, current 240,000 200,000
Prepaid Insurance 10,000 8,000
Prepaid Rent 85,000 80,000
Patent 150,000 170,000
Marketable Securities, at cost 120,000 130,000
Trademarks 50,000 55,000
Goodwill 200,000 210,000
Marketable Securities, at MV 110,000 90,000
Inventories 90,000 95,000
Deferred Charges 88,000 85,000
Accounts Receivable 15,000 20,000
Cash 100,000 110,000
Customer List 60,000 70,000
Buildings (net) 400,000 420,000
Totals 1,718,000 1,743,000

a. Assume that the LCU is the subsidiary’s functional currency. What is the total assets to be
reported in the consolidated balance sheet?
b. Assume that the Philippine Peso is the subsidiary’s functional currency. What is the total assets
to be reported in the consolidated balance sheet?

Problem 7
A wholly owned subsidiary of Angela Inc. has certain expense accounts for the year ended December 31, 20x8, stated
in LCU as follows:
Depreciation of equipment (purchased 1/1/20x5) 120,000
Provision for doubtful accounts 80,000
Rent 200,000

The exchange rates at various dates are as follows:

Peso Equivalent of 1 LCU

December 31, 20x8 0.40
Average for the year ended 12/31/20x8 0.44
January 1, 20x5 0.50

Assume that the LCU is the subsidiary’s functional currency. The charges of the expenses accounts occurred
approximately evenly during the year.
What total peso amount should be included in Angela’s 20x8 consolidated income statement to reflect these
expenses?

Problem 8
CJ Company operates in a hyperinflationary economy. Its balance sheet at December 31, 20x8, follows (in FCs):
PPE 900,000
Inventory 2,700,000
Cash 350,000
Share capital (issued 20x4) 400,000
Retained earnings 2,350,000
Noncurrent liabilities 500,000
Current liabilities 700,000

The general price index had moved this way:

December 31
 20x4 100
20x5 130
20x6 150
20x7 240
20x8 300

The property plant and equipment were purchased on December 31, 20x6, and there is a six months’ inventory held.
The noncurrent liabilities were a loan raised on March 31, 20x8.

a. What is the total assets in FCs after adjusting for hyperinflation?

b. What is the retained earnings in FCs on December 31, 20x8?
c. What is the retained earnings in Php on December 31, 20x8 assuming the following exchange rates:
20x4 1.20 20x7 1.50
20x5 1.24 20x8 1.75
20x6 1.27

Problem 9
On December 1, 20x8 Local company shipped goods to an overseas company. The sales price was FC1,000,000 and
the 90-day receivable was denominated in FCs. As a protection against FC loses, the company entered into a forward
exchange contract to deliver FC1,000,000 on March 1, 20x9, the payment date.
60-day forward 90-day forward
Date Spot rate rate rate
December 1, 20x8 P0.140 P0.138 P0.137
December 31, 20x8 P0.138 P0.139 P0.138
March 1, 20x9 P0.136 -- --
1. What is the amount receivable from the foreign exchange broker?
2. For the year ended December 31, 20x8, what is the income statement amount associated with the
forward exchange contract?
3. On December 31, 20x8, how and how much should the forward contract be recorded as?
4. What is the combined net effect for 20x8 associated with both the receivable and the forward contract?
5. For the year 20x9, what is the combined income effect associated with the receivable and the forward
contract?
6. For the year ended December 31, 20x9, what is the income statement amount associated with the FC
receivable?

Problem 10
On November 1, 20x5, Local company purchased goods from an overseas company. Payment is due on February 1,
20x6. The purchase price was FC1,000. As protection against FC losses, the company entered into a forward contract
to buy FC1,000 on February 1, 20x6.
30-day forward 90-day forward
Date Spot rate rate rate
November 1, 20x8 P40.00 P38.00 P37.00
December 31, 20x8 P038.00 P39.00 P38.00
February 1, 20x9 P35.00 -- --
1. What is the amount payable to the foreign exchange broker?
2. On December 31, 20x5, how and how much should the forward contract be recorded as?
3. For the year ended December 31, 20x5, what is the income statement amount associated with the
forward exchange contract?
4. For the year ended December 31, 20x6, what is the income statement amount associated with the
forward contract?
5. What is the combined net effect for 20x6 associated with both the receivable and the forward contract?

Problem 11
On September 1, 20x7, Cookie Co sold goods on account, receivable on February 1, 20x8 for FC15,000. On the same
date, the company entered into a forward contract with a financing company to hedge the account. The related spot
and forward rates are as follows:
 Spot rates Forward rates
September 1 25 25.50
December 31 27 27.90
February 1 26 26.90
Prepare journal entries for years 20x6 and 20x7.

Problem 12
On October 1, 20x8, Ramos Inc ordered a custom-built motor vehicle from a Foreign Manufacturing Firm. The non-
cancelable purchase order amounted to 2,000,000 Foreign Currencies with delivery to take place on February 28,
20x9. On October 1, 20x8, Ramos entered into a forward to buy 2,000,000 Foreign Currencies on February 28, 20x9
for P0.57. The custom-built motor vehicle was delivered on February 28, 20x9 and the following rates were as
follows:
10/1/08 12/31/08 2/28/09
Spot rate P0.50 P0.56 P0.57
Forward rate 0.53 0.58 0.57
a. If the purchase commitment was accounted for as a Fair Value Hedge, determine the journal entries
that should have been made by the company.
b. If the purchase commitment was accounted for as a Cash Flow Hedge, determine the journal entries
that should have been made by the company.

Problem 13
On October 1, 20x6, Claire Co took to delivery inventory items from a foreign company amounting to FC 25,000 on
account due on February 1, 20x7. On the same date, the company entered into a 120-day call option paying P1,500
for FC25,000. The related rates are as follows:
10/1/x6 12/31/x6 2/1/x7
Spot rate (market price) P5.00 P5.25 P5.10
Strike price (exercise price) 5.00 5.00 5.00
Fair value of call option P1,500 7,000 2,500

Determine the journal entries to be made for the above transactions for years x6 and x7 for the foreign currency
transaction, option contract transaction using non-split accounting and split accounting.

Problem 14
John Co, a local company in the Philippines purchased a 30% interest of Kelly Co, a foreign entity for FC45,000 on
January 1, 20x7. On this date, the book values of Kelly Co approximated their fair values. During the year, Kelly Co
declared a FC5,000 cash dividend on November 1, 20x7 payable on January 31, 20x7. Kelly also reports net income
of FC20,000. The peso equivalent of the foreign currencies on their respective dates are as follows; January 1, 20x7,
P45; November 1, 20x7, P42; December 31, 20x7, P40; January 31, 20x8 P41 and the average for the year 20x7, P43.
Determine the journal entries to be made for 20x7 and 20x8.