44843597 - Note PDF

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P a g e | 1PAS 21 The Effects of Changes in Foreign Exchange RatesQUIZ:Use the following information for the next two questions: You are an auditor. ABC Philippines Co., your client, is not sure on what to disclose in its inancial statements as its functional currency. Relevant information follows:A...

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PAS 21 The Effects of Changes in Foreign Exchange Rates QUIZ: Use the following information for the next two questions: You are an auditor. ABC Philippines Co., your client, is not sure on what to disclose in its financial statements as its functional currency. Relevant information follows: ABC Philippines Co. is a branch of ABC U.S. Co. ABC Philippines operates in a Philippine Economic Zone Authority (PEZA) Special Economic Zone. ABC Philippines is engaged in the apparel business. All of its raw materials are imported from the main office in the U.S. and all of its finished products are exported directly to U.S. customers. The U.S. customers remit payments to the U.S. main office. The U.S. main office will then provide the Philippine branch its working capital needs. None of ABC Philippines Co.s’ finished products are sold in the Philippines. The raw materials imported and finished goods exported are denominated in U.S. dollars. 1. What is ABC Philippines Co.’s functional currency? a. Philippine peso b. U.S. dollar c. a or b d. none of these 2. ABC Philippines Co. is required to file audited financial statements with the Philippine Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR). What is the presentation currency for the financial statements to be filed with the said government agencies? a. Philippine peso b. U.S. dollar c. a or b d. none of these 3. These are those which do not give rise to a right to receive (or an obligation to deliver) a fixed or determinable amount of money. a. Monetary items b. Non-monetary items c. Financial items d. Non-financial items 4. On December 1, 20x1, you imported a machine from a foreign supplier for $100,000, due for settlement on January 6, 20x2. Your functional currency is the Philippine peso. When preparing the December 31, 20x1 statement of financial position, which of the following will you translate to the closing rate? a. machine b. accounts payable c. a and b d. none of these

5. Use the information in Problem #4 above. The relevant exchange rates are as follows: Dec. 1, 20x1 Dec. 31, 20x1 Jan. 6, 20x2 ₱50:$1 ₱52:$1 ₱47:$1 How much foreign exchange gain (loss) will you recognize on December 31, 20x1? a. 200,000 c. 100,000

Page | 2 b. (200,000)

d. (100,000)

“The discerning heart seeks knowledge, but the mouth of a fool feeds on folly.” (Proverbs 15:14)

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SOLUTIONS: 1. Using the primary factors under PAS 21, ABC Philippines Co.’s functional currency is the U.S. dollar because this is the currency that mainly influences ABC Philippines Co.’s sale prices and costs. Additionally, ABC Philippines Co. is essentially an extension of the U.S. main office. Therefore, ABC Philippines Co.’s functional currency is the U.S. dollar, i.e., the same with the main office’s functional currency. 2. ABC Philippines Co.’s presentation currency is the Philippine peso. ABC Philippines Co.’s annual financial statements to be filed with the Philippine SEC and the BIR shall be presented in Philippine pesos. 5. B [$100,000 x (52 – 50)] = 200,000 loss (increase in payable)...