ACFA 3257 - Forex - Class Consultation PDF

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ACAFA 3257Class Consultation – ForexI- Exchange RatesSuppose the direct foreign exchange rates in Philippine peso are: 1 US dollar = P40. 1 Singapore dollar = P32. Required: 1. What are the direct exchange rates for the Philippine peso to US dollar and the Singapore Dollar? 2. What are the indirect ...

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ACAFA 3257 Class Consultation – Forex

I-Exchange Rates Suppose the direct foreign exchange rates in Philippine peso are: 1 US dollar = P40.00 1 Singapore dollar = P32.00 Required: 1. What are the direct exchange rates for the Philippine peso to US dollar and the Singapore Dollar? 2. What are the indirect exchange rates for the US dollar and the Singapore Dollar? 3. How many US dollars must a U. S. company pay to purchase goods costing P8,000 from a Philippine company? 4. How many Philippine peso must be paid for a purchase costing 4,000 Singapore dollars?

Answer - Problem I: 1.

Indirect Exchange Rates Philippine Viewpoint: 1 Peso = ;1

2.

FCU

=

Peso Direct Exchange Rate

P8,000 P40.00

=

=

= P8,000 x $1/P40 = $200 3.

4,000 Singapore dollars x P32

II - Importing Transaction (Exposed Liability) Assume that on November 1, 20x4 ordered 1,200 units of inventory from a U. S. firm for $24,000. The inventory was shipped and invoiced to the Philippine firm on to be paid on The firm’s fiscal . Assume further that the Philippine firm did not engage in any form of hedging activity. The spot rates for U. S. dollars at various times are as follow: November 1, 20x4 . . . . . . . . . . . . . . . . December 1, 20x4 . . . . . . . . . . . . . . . . December 31, 20x4 . . . . . . . . . . . . . . March 1, 20x5 . . . . . . . . . . . . . . . . . . .

Buying Spot Rates P39.80 40.00 40.70 40.60

Selling Spot Rates P 40.25 40.55 40.80 40.65

Required: 1. Prepare all entries on Petra Corporation’s books to record the above transactions. 2. Determine the following: a. Foreign exchange gain or loss on: a.1. December 1, 20x4 a.2. December 31, 20x4 a.3. March 1, 20x5 b. On December 31, 20x4: b.1. Accounts payable b.2. Inventory Answer - Problem II: 1. December 1, 20x4 (Transaction date): Purchases…………………….. Accounts payable ($24,000 x

973,200 ………………………………

973,200

December 31, 20x4 (Balance sheet date): Foreign currency .………………….. Accounts payable [$24,000 x ( )]……… Accounts payable valued at 12/31 Balance Sheet ($24,000 x P40.80)………

6,000 6,000

Accounts payable valued at 12/1 Date of Transaction ($24,000 x P40.55)……… Adjustment to accounts payable needed………..

973,200 P 6,000

March 1, 20x5 (Settlement date): Accounts payable………………… Foreign currency transaction gain [$24,000 x ( Cash ($24,000 x ………….

979,200 ]

3,600 975,600

2. a. a.1. None – transaction date (December 1, 20x4) a.2. P6,000 loss a.3. P3,600 gain (March 1, 20x5) b. b.1. b.2.

spot rate on the balance sheet date or current rate on the balance sheet spot rate on the transaction date or historical rate on the balance sheet date.

III - Exporting Transaction (Exposed Asset) On November 1, 20x4, a Philippine firm received an order for 120 units of inventory for $60,000 to a U. S. firm. The Philippine firm shipped the inventory and billed the U. S. firm on The Philippine firm received the customer’s . The firm’s fiscal Assume further that the Philippine firm did not engage in any form of hedging activity. The spot rates for U. S. dollars at various times are as follow: Buying Spot Rates P39.80 40.00 40.70 40.60

November 1, 20x4 . . . . . . . . . . . . . . . . December 1, 20x4 . . . . . . . . . . . . . . . . December 31, 20x4 . . . . . . . . . . . . . . March 1, 20x5 . . . . . . . . . . . . . . . . . . . .

Selling Spot Rates P 40.25 40.55 40.80 40.65

Required: 1. Prepare all entries on Petra Corporation’s books to record the above transactions. 2. Determine the following: a. Foreign exchange gain or loss on: a.1. December 1, 20x4 a.2. December 31, 20x4 a.3. March 1, 20x5 b. On December 31, 20x4: b.1. Accounts receivable b.2. Sales Answer - Problem III 1. December 1, 20x4 (Transaction date): Accounts receivable ($60,000 x P40.00)…… ……………………… Sales

2,400,000 2,400,000

December 31, 20x4 (Balance sheet date): Accounts receivable……….. Foreign currency transaction gain [$60,000 x ( Accounts receivable valued at 12/31 Balance Sheet ($60,000 x P40.70)……… Accounts receivable valued at 12/1 Date of Transaction ($60,000 x P40.00)……… Adjustment to accounts receivable needed………..

42,000 42,000

P2,442,000 2,400,000 P 42,000

March 1, 20x5 (Settlement date): Cash ($60,000 x …………….. Foreign currency transaction loss……… Accounts receivable ($60,000 x

2. a. a.1. None – transaction date a.2. P42,000 gain a.3. P6,000 loss (March 1, 20x5)

2,436,000 6,000 …….

2,442,000

b. b.1. P2,442,000 – spot rate on the balance sheet date or current rate on the balance sheet b.2. P973,200 – spot rate on the transaction date or historical rate on the balance sheet date.

IV-Changes in Exchange Rates Upon arrival at the international airport in the country of Singapore, CC exchanged the local currency unit. Upon departure from Singapore’s international airport on completion of his business, he exchanged his remaining s into Required: 1. Determine the currency exchange rates for each of the cells in the following matrix for CC’s business trip to Singapore. 2. Discuss and illustrate whether the peso strengthened or weakened relative to the Singapore dollars during CC’s stay in Singapore. 3. Did CC experience a foreign currency transaction gain or a loss on the 100 Singapore dollars he held during his visit to Singapore and converted to pesos at the departure date? Explain your answer. Arrival Date

Departure Date

Direct exchange rate Indirect exchange rate

Answer - Problem IV: a.

Exchange rates: Arrival Date

Direct Exchange Rate

Departure Date

1 Singapore dollar =

1 Singapore Dollar =

(P33,000 / 1,000 Singapore dollars)

(P3,250 dollars)

/

gapore dollars Indirect Exchange Rate

(1,000 Singapore dollars P33,000)

100

Singapore

gapore dollars /

(100 Singapore P3,250))

dollars

/

2.

The direct exchange rate has decreased. This means that the peso uring Mr. Alt's visit. For example, upon arrival, Mr. Alt had to pay P33 per each dollar. Upon departure, however, each dollar is worth just P32.50. This means that the relative value of the peso has increased or, alternatively, the value of the dollar has decreased.

3.

The Philippine peso equivalent values for the 100 Singapore dollars are: Arrival date 100 dollars x P33.00 = Departure date 100 dollars x P32.50 = Foreign Currency Transaction Loss

P3,300 3,250 P

Mr. Alt held dollars for a time in which the dollars was weakening against the peso. Thus, Mr. Alt experienced a loss by holding the weaker currency.

VI - Foreign C urrency T ransactions (Financial Asset – Equity Investment and Exposed Liability - Importation) John Corporation, whose functional currency is the domestic currency (DC) – peso, entered into the following transactions during 20x4 and 20x5. 1. On Jen purchased 1,200 shares of Orange Computers, Inc. (a listed company in the U. S.) at a price of $80 per share. Jen classified the – fair value through profit or loss financial asset. The peso/US$ exchange rates on November 1, 20x4 and December 31, 20x4 were P40 and P40.50 respectively. The price of Orange Computers, Inc shares on

2. On December 10, 20x4, John purchased equipment from an Italian company invoiced at 12,000 euros t o be settled on February 28, 20x5.The peso/euro exchange rates on December 10, 20x4, December 31, 20x4 and February 28, 20x5 were P53.00, P53.20 and P53.80, respectively.

Required: Prepare entries to record the above transactions. John Corporation's financial year ends on December 31

Answer - Problem VI: The entries to record these transactions and the effects of changes in exchange rates are as follows: November 1, 20x4 (Transaction date): Equity investment (FVTPL)/Financial Asset …………… Cash

3,840,000 3,840,000

To record the purchase of shares in Pineapple Computers at a cost of $96,000 at the exchange rate of P40.

December 10, 20x4 (Transaction date): Equipment ………………………… C h

636,000 636,000

To record the purchase of equipment costing 12,000 euros at the exchange rate of P53.

December 31, 20x4 (Balance sheet date): Equity investment (FVTPL)/Financial Asset …………… e of equity investment (financial asset) To record gain in fair value of Pineapple Computer’s share. 12/31/x4: Revalued Investment and translated at the rate on the date of revaluation (closing/current rate): (1,200 units x ……………. 11/1/x4: Investment, cost (1,200 units Unrealized gain on equity investment Less: Foreign currency transaction gain – equity investment 11/1/20x4: Date of transaction (1,200 units x $80 x P40).. Less: 12/31/20x4: B/S Date (1,200 units x $80 x P40.50)…. Other unrealized gain in the fair value of equity investment... Foreign currency transaction loss….………………….. Accounts payable [$96,000 x ( ]………

1,020,000 1,020,000

P4,860,000 3,840,000 P1,020,000 P3,840,000 3,888,000

48,000

19,200 19,200

To record exchange loss on accounts payable in euros.

Accounts payable valued at 12/31 Balance Sheet (1,200 x $80 x P53.20)……… Accounts payable valued at 12/1 Date of Transaction (1,200 x $80 x P53.00)……… Adjustment to accounts payable needed………..

5,107,200 5,088,000 P 19,200

February 3, 20x5 (Settlement date): Accounts payable………………… Foreign currency transaction loss [$96,000 x ( Cash ($96,000 x ………….

5,107,200 57,600 5,164,800

To record exchange loss on accounts payable in euros and settlement of accounts payable in euros at the spot rate of P53.80.

Note the following: • The investment in Pineapple Computers, Inc shares is a tem that is carried at fair value as it is classified as equity investment through profit or loss (or a financial asset – FVTPL refer PFRS 9). The investment is of revaluation, that is, December 31, 20x4. • The equipment is translated at the spot rate at the date of purchase and, being a nonmonetary item, is carried at cost. It is not adjusted for the change in the exchange rate at balance sheet date. The accounts payable in euros is a monetary item and is remeasured using the current /closing rate at balance sheet date. The exchange loss is expensed off to the income statement

X - Determining Year-End Account Balances for Import and Export Transactions DD Inc. has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. For each of the following independent cases, determine the December 31, 20x4, year-end balance in the appropriate accounts for the case. Write “NA” for “not applicable” in the space provided in the following chart if that account is not relevant to the specific case. Case 1.On November 12, 20x4, DD from a foreign company at a price of LCU 40,000 when the direct exchange rate was 1 LCU = P.45. The account has not been settled as of December 31, 20x4, when the exchange rate has decreased to 1 LCU = P.40. Case 2. On November 28, 20x4, DD to a foreign entity at a price of LCU 20,000 when the direct exchange rate was 1 LCU = P1.80. The account has not been settled as of December 31, 20x4, when the exchange rate has increased to 1 LCU = P1.90. Case 3. On December 2, 20x4, DD from a foreign company at a price of LCU 30,000 when the direct exchange rate was 1 LCU = P.80. The account has not been settled as of December 31, 20x4, when the exchange rate has increased to 1 LCU = P.90. Case 4. On December 12, 20x4, DD to a foreign entity at a price of LCU 2,500,000 when the direct exchange rate was 1 LCU = P.003. The account has not been settled as of December 31, 20x4, when the exchange rate has decreased to 1 LCU = P.0025. Required: Provide the December 31, 20x4, year-end balances on DD’s records for each of the following applicable items:

Accounts Receivable

Accounts Payable

Foreign Currency Transaction Exchange Loss

Foreign Currency Transaction Exchange Gain

Case 1 Case 2 Case 3 Case 4

Answer - Problem X:

Accounts Receivable

Accounts

Payable

Foreign Currency Transaction Exchange Loss

Foreign Currency Transaction Exchange Gain

Case 1

NA

P16,000(a)

NA

P2,000(b)

Case 2

P38,000(c)

NA

NA

P2,000(d)

Case 3

NA

P27,000(e)

P3,000(f)

NA

Case 4

P6,250(g)

NA

P1,250(h)

NA

(a) (b) (c) (d) (e) (f) (g) (h)

LCU 40,000 x P.40 LCU 40,000 x (P.40 - P.45) LCU 20,000 x P1.90 LCU 20,000 x (P1.90 - P1.80) LCU 30,000 x P.90 LCU 30,000 x (P.90 - P.80) LCU 2,500,000 x P.0025 LCU 2,500,000 x (P.0025 - P.003)...