Effects of Changes in For Ex Rates PDF

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The Effects of Changes in Foreign Exchange Rates1 Multiple Choice – Computational Foreign currency transaction – Direct quotation – Purchase Use the following information for the next six questions: On November 29, 20x1, ABC Co. placed a non-cancellable purchase order for the importation of a machine with a purchase price of €40,000 from a company based in France. The contract term is FOB shipping point. The machine was shipped on December 1, 20x1 and was received by ABC on December 15, 20x1. The purchase price was settled on January 3, 20x2. The following are the exchange rates: November 29, 20x1………………………………………..₱55:€1 December 1, 20x1…………………………………………..₱58:€1 December 15, 20x1………………………………………..₱57:€1 December 31, 20x1………………………………………..₱60:€1 January 3, 20x2……………………………………………..₱61:€1 1. The entry on November 29, 20x1 includes a. a debit to accounts payable for ₱2,320,000. b. a credit to machinery for ₱2,320,000. c. a debit to machinery for ₱2,320,000 d. none of these 2. The entry on December 1, 20x1 includes a. a debit to accounts payable for ₱2,320,000. b. a credit to machinery for ₱2,320,000. c. a debit to machinery for ₱2,320,000 d. none of these 3. The total FOREX gain (loss) recognized in 20x1 is a. 40,000 b. (80,000) c. (200,000) d. (120,000) 4. The adjustment to the machinery account on December 31, 20x1 is – increase (decrease) a. 80,000 b. (80,000) c. 40,000 d. 0 5. The total FOREX gain (loss) recognized in 20x2 is a. (40,000) b. (80,000) c. (200,000) d. (120,000) 6. The net adjustment to the machinery account on January 3, 20x2 is – increase (decrease) a. 80,000 b. (120,000) c. (40,000) d. 0 Foreign currency transaction – Direct quotation – Sale Use the following information for the next four questions: On November 29, 20x1, ABC Co. received a non-cancellable sale order for the exportation of inventories from a UK-based company. The contract price is £40,000 (pound sterling). The contract term is FOB shipping point. The inventories were shipped on December 1, 20x1. The sale was settled on January 3, 20x2. The following are the exchange rates: November 29, 20x1………………………………………..₱67:£1 December 1, 20x1…………………………………………..₱68:£1 1

Adapted from Advanced Accounting by Millan

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December 31, 20x1………………………………………..₱70:£1 January 3, 20x2……………………………………………..₱71:£1 7. How much sale revenue is recognized in 20x1? a. 2,680,000 b. 2,720,000 c. 2,800,000 d. 2,840,000 8. How much FOREX gain (loss) is recognized in 20x1? a. 120,000 b. (120,000) c. 80,000 d. (80,000) 9. How much FOREX gain (loss) is recognized in 20x2? a. 40,000 b. (40,000) c. 120,000 d. 160,000 10. How much is the total FOREX gain (loss) resulting from the sale transaction? a. 160,000 b. 120,000 c. 80,000 d. 40,000 Foreign currency transaction – Indirect quotation Use the following information for the next two questions: ABC Co. had the following transactions during the last month of the current reporting period:  Purchased raw materials from Pakistani Co., a company based in Pakistan, for 400,000 rupees on December 17, 20x1 to be settled on January 5, 20x2.  Sold inventory to Swedish Co., a company based in Sweden, for 80,000 kroners on December 20, 20x1 to be settled on January 5, 20x2. The exchange rates are as follows: Rupee Dec. 17, 20x1…………Php 1: PKR 2.04 Dec. 20, 20x1…………Php 1: SEK 0.1667 Dec. 31, 20x1…………Php 1: PKR 2 Jan. 5, 20x2………….Php 1: PKR 2.083

Kroner

Php 1 : SEK 0.2000 Php 1 : SEK 0.2400

11. How much are the total FOREX gains/losses recognized by ABC Co. from the purchase and sale transactions described above? Purchase Sales a. (4,048) 146,570 b. 4,048 (146,572) c. 3,922 (66,667) d. (3,922) 66,667 12. How much are the total FOREX gains/losses recognized by Pakistani Co. and Swedish Co. from the purchase and sale transactions, respectively? Pakistani a. (4,048) b. 3,922 c. (3,922) d. 0

Swedish 146,572 (66,667) 66,667 0

Subsequent measurement Use the following information for the next five questions: On December 1, 20x1, ABC Co. acquired equipment for BRL 40,000 (Brazilian reals) when the exchange rate is ₱24:BRL1. ABC Co. reported foreign exchange loss of ₱80,000 in its 20x1 statement of

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profit or loss and a ₱20,000 foreign exchange gain of ₱20,000 in its 20x2 statement of profit or loss. 13. What is the exchange rate on December 31, 20x1? a. ₱24:BRL1 b. ₱26:BRL1 c. ₱25.5:BRL1 None of these

d.

14. What is the exchange rate on settlement date in 20x2? a. ₱24:BRL1 b. ₱26:BRL1 c. ₱25.5:BRL1 None of these

d.

15. What is the carrying amount of the accounts payable in the 20x1 statement of financial position? a. 1,040,000 b. 960,000 c. 1,020,000 d. None of these 16. How much is the cost of the equipment in the 20x1 statement of financial position? a. 1,040,000 b. 960,000 c. 1,020,000 d. None of these 17. How much is the cost of the equipment in the 20x2 statement of financial position? a. 1,040,000 b. 960,000 c. 1,020,000 d. None of these Exchange rate on initial recognition 18. ABC Co. obtained a $40,000 loan at the middle of the year. At the end of the year, the loan payable is appropriately reported at ₱2,200,000. None of the principal on the loan has been paid during the year. There has been a 10% increase in the exchange rate (expressed in direct quotation) from the date the loan has been obtained to the end of reporting period. What is the exchange rate at the date the loan has been obtained? a. ₱55:$1 b. ₱50:$1 c. ₱45:$1 d. ₱60:$1 Loan transaction 19. On July 1, 20x1, ABC Co. obtained a $40,000 loan that bears 10% annual interest when the spot exchange rate is ₱50:$1. The closing rate on December 31, 20x1 is ₱55:$1. No payments had been made on the loan during the year. How much is the foreign exchange gain (loss) to be recognized in the year-end statement of profit or loss? a. (200,000) b. (220,000) c. (210,000) d. 210,000 Cash account Use the following information for the next two questions: ABC Co., a domestic corporation based in the Philippines, frequently sells goods overseas through the internet. All online sales are on cash basis. The movements in ABC’s US dollar account are shown below: Cash in bank - U.S. dollar Jan. 1 (₱48:$1) $40,000 Sept. 30 (₱45:$1) 80,000 20,000 Dec. 16 (₱44:$1) $100,000 Dec. 31 (₱45:$1) 20. How much is the balance of cash in bank to be presented in the year-end statement of financial position? a. 4,640,000 b. 4,500,000 c. 100,000 d. 4,650,000

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21. What is the net foreign exchange gain (loss) to be recognized in the year-end statement of profit or loss? a. 100,000 b. (100,000) c. (140,000) d. 140,000 Average rate Use the following information for the next two questions: On December 15, 20x1, ABC Co. sent one of its key management personnel to a seminar in Malaysia. ABC Co. advanced MYR 40,000 (ringgits) to the manager subject to liquidation. The exchange rate on December 15, 20x1 is ₱14: MYR1. The liquidation report submitted by the key manager showed the following:  MYR 32,000 were spent from December 15 to December 31, 20x1. The exchange rate on December 31, 20x1 is ₱13: MYR 1.  MYR 6,000 were spent from January 1, 20x2 to January 3, 20x2. The manager returned the MYR 2,000 excess to the cashier on January 3, 20x2. The exchange rate on January 3, 20x2 is ₱12: MYR 1. 22. How much is the total FOREX gain (loss) on December 31, 20x1? a. (24,000) b. (32,000) c. 24,000 d. (38,000) 23. How much is the FOREX gain (loss) on January 3, 20x2? a. (5,000) b. (4,000) c. (7,000) d. (2,000) Items measured at other than historical cost Use the following information for the next two questions: ABC Co. had the following foreign currency transactions during the year:  Acquired equipment on January 1, 20x1 for THB 40,000 (bahts) from a Thailand-based company when the current exchange rate was ₱1.2: THB 1. The equipment is depreciated over 5 years using the straightline method.  Purchased inventories on December 1, 20x1 for ZAR 4,000 (rands) from a company based in South Africa when the current exchange rate was ₱5: ZAR 1. Both the acquisitions described above are on cash basis. At year-end, ABC Co. determined the following:  The equipment was found to have a recoverable amount of THB 28,000. The closing rate is ₱1.3: THB 1.  Half of the inventories purchased remain unsold. ABC estimated that the net realizable value of the unsold inventories is ZAR 1,200. The closing rate is ₱6. 24. How much is the impairment loss on the equipment? a. 11,600 b. 2,000 c. 9,280 d. None 25. How much is the impairment loss on the inventory? a. 2,800 b. 800 c. 2,240 d. None

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Buying and selling rates Use the following information for the next two questions: ABC Co. had the following foreign currency transactions on April 1, 20x1:  Purchased goods worth CHF 40,000 (francs) from Swiss Company, a company based in Switzerland.  Sold goods with sale price of VEB 4,000 (bolivars) to Venezuelan Company, a company based in Venezuela. Both the transactions were settled on April 30, 20x1. The following were the spot exchange rates: Buying Selling Swiss Francs April 1, 20x1…………………………₱44:CHF1 ₱48: CHF1 April 30, 20x1……………………….₱47:CHF1 ₱50: CHF1 Bolivars April 1, 20x1…………………………₱10:CHF1 April 30, 20x1……………………….₱13:CHF1

₱12: CHF1 ₱16: CHF1

26. How much is the FOREX gain (loss) on the purchase transaction? a. (120,000) b. 120,000 c. 80,000 d. (80,000) 27. How much is the FOREX gain (loss) on the sale transaction? a. 16,000 b. 12,000 c. (16,000) d. (12,000) Revaluation of asset 28. On January 1, 20x1, ABC Co. acquired equipment for MWK 4,000,000 (kwachas) from a company based in Malawi. The equipment ’s estimated useful life is 4 years. ABC Co. uses the straight line method of depreciation and the revaluation model. On December 31, 20x1, the equipment was determined to have a net appraised value of MWK 4,800,000 (kwachas). The relevant rates are as follows: Jan. 1, 20x1…………………………………………..₱0.20 : MWK 1 Dec. 31, 20x1………………………………………..₱0.26 : MWK 1 How much is the revaluation surplus? a. 648,000 b. 3,461,538 c. 448,000

d. None

Exchange difference recognized in OCI 29. ABC Co. has a wholly-owned subsidiary in Indonesia. The following information is available about the subsidiary for the year to December 31, 20x1: (IDR Rupiahs) Net assets, Jan. 1, 20x1 400,000,000 Profit for the year 160,000,000 Dividends Net assets, Dec. 31, 20x1 560,000,000 No goodwill the relevant Jan. 1, Average

arose from the business combination. The following are exchange rates: 20x1………………………………………..₱0.003 : IDR 1 for the year…………………….₱0.004 : IDR 1

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Dec. 31, 20x1…………………………….₱0.005 : IDR 1 How much is the total gain (loss) on translation for the year? a. 1,280,000 b. (1,120,000) c. 1,120,000 d. 960,000 Goodwill Use the following information for the next two questions: On January 1, 20x1, a Philippine holding company acquired 100% interest in a subsidiary based in Kenya for KES 40M (shillings). The fair value of the net assets of the subsidiary at that date was KES 32 million (shillings). The following are the relevant exchange rates: Jan. 1, 20x1……………………………………….₱0.04 : KES 1 Dec. 31, 20x1………………………………………₱0.05 : KES 1 The group determined that there is no impairment in goodwill. 30. How much is the goodwill as of January 1, 20x1? a. 100,000 b. 240,000 c. 320,000 d. 480,000 31. How much is the goodwill as of December 31, 20x1? a. 400,000 b. 440,000 c. 480,000 d. 560,000 Translation of a subsidiary’s financial statements Use the following information for the next nine questions: ABC Co. owns 80% of the ordinary shares of a foreign subsidiary, XYZ, Inc., a company based in Korea. XYZ, Inc.'s functional currency is won. The subsidiary was acquired at the start of the reporting period for 6,000,000 wons, when the subsidiary's retained earnings were 3,200,000 wons. At the date of the acquisition the fair value of the net assets of the subsidiary were 5,600,000 wons. This included a fair value adjustment in respect of land. ABC Co. elected to measure non-controlling interest at the NCI’s proportionate share of the fair value of the subsidiary‘s net assets. The group determined at year-end that goodwill is not impaired. There were no changes in the share capital of the subsidiary during the year. The relevant exchange rates are as follows: Date Exchange rates Jan. 1, 20x1………………………………….₱0.03: KRW 1 Average for the year………………₱0.04: KRW 1 Dec. 31, 20x1……………………………….₱0.05: KRW 1 A summary of the individual financial statements of the entities at the end of reporting period are shown below:

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Statements of financial position As at December 31, 20x1 ASSETS Investment in subsidiary Other assets TOTAL ASSETS LIABILITIES AND EQUITY Liabilities Share capital Retained earnings Total equity TOTAL LIABILITIES AND EQUITY

ABC Co. (pesos) 180,000 8,000,000 8,180,000

XYZ, Inc. (wons) 5,200,000 5,200,000

1,600,000 4,000,000 2,580,000 6,580,000 8,180,000

240,000 800,000 4,160,000 4,960,000 5,200,000

ABC Co. (pesos) 3,600,000 (2,160,000) 1,440,000

XYZ, Inc. (wons) 2,400,000 (1,440,000) 960,000

Statements of profit or loss For the year ended December 31, 20x1

Revenues Expenses Profit for the year

32. How much is the goodwill as of December 31, 20x1? a. 45,600 b. 76,000 c. 66,500 d. 64,500 33. How much is the non-controlling interest in the net assets of the subsidiary (NCI) as of December 31, 20x1? a. 39,360 b. 56,600 c. 54,360 d. 65,600 34. How much is the consolidated retained earnings as of December 31, 20x1? a. 2,618,400 b. 2,702,400 c. 2,672,340 d. 2,610,720 35. How much is the total translation gain (loss) to be recognized in other comprehensive income in 20x1? a. 152,000 b. 121,600 c. 161,600 d. 136,000 36. How much is the consolidated profit in 20x1? a. 1,478,400 b. 1,488,000 c. 1,596,400 d. 1,696,000 37. How much is the consolidated total comprehensive income in 20x1? a. 1,640,000 b. 1,630,400 c. 1,718,000 d. 1,832,000 38. How much is the comprehensive income attributable to owners of the parent? a. 1,592,320 b. 1,606,080 c. 1,598,400 d. 1,638,080 39. How much is the consolidated total assets as of December 31, 20x1? a. 8,416,000 b. 9,680,000 c. 8,340,000 d. 9,860,000 40. How much is the equity attributable to owners of the parent as of December 31, 20x1? a. 6,676,320 b. 6,828,320 c. 6,738,400 d. 6,804,000

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Net investment in a foreign operation Use the following information for the next six questions: On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc., a company situated in a foreign country. The currency of this country is the Armenian Dram (AMD). ABC elected to measure non-controlling interest as its proportionate share of the fair value of the subsidiary‘s net assets. The year-end financial statements of the combining constituents show the following information: Statements of financial position As of December 31, 20x1

Current assets Investment in subsidiary Property, plant and equipment TOTAL ASSETS Current liabilities Noncurrent liabilities Total liabilities Share capital Share premium Retained earnings Total equity TOTAL LIABILITIES AND EQUITY *Amounts in millions.

ABC Co. ₱m* 8,000 1,760 12,000 21,760

XYZ, Inc. ADMm* 8,800

4,000 4,800 8,800

4,000 2,800 6,800

4,000 2,000 6,960 12,960 21,760

400 800 8,000 9,200 16,000

7,200 16,000

Statements of profit or loss For the year ended December 31, 20x1

Revenue Cost of sales Gross profit Operating expenses Dividends received Interest expense Interest income Profit before tax Income tax expense Profit after tax Extraordinary item Profit for the year

ABC Co. ₱m 16,000 (10,000) 6,000 (2,000) 240 (400) 160 4,000 (1,200) 2,800 2,800

XYZ, Inc. ADMm 32,000 (16,000) 16,000 (4,000) (1,200) 400 11,200 (4,000) 7,200 (800) 6,400

The movements in retained earnings during 20x1 are shown below: Retained earnings – Jan. 1, 20x1 4,560 4,800 Dividends paid (400) (3,200) Profit for the year 2,800 6,400 Retained earnings – Dec. 31, 20x1 6,960 8,000

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Additional information: a) XYZ, Inc. has applied local GAAP, but has made some attempt to adapt to IFRSs (to which PFRSs are consistent). As a result, XYZ, Inc. has written off research previously capitalized as an extraordinary item prior period adjustment in the sum of ADM400 million. The remainder of the extraordinary item is the recognition of a fall in value of some plant that was damaged during the year. b) The fair value of the net assets of XYZ, Inc. at acquisition was ADM8,000 million after taking into account the removal of capitalized research discussed above. Goodwill is unimpaired. c) The increase in the fair value of XYZ, Inc. over carrying value is attributable to machines which are depreciated over five years on the straight line basis. d) During the year, ABC Co. sold ₱120 million in goods to XYZ, Inc. at a margin of 20%. All of the goods had been utilized in production by year-end, but only one half of the relevant finished goods have been sold. XYZ, Inc. received the goods on September 1 and paid on September 21. The foreign exchange difference remains in current liabilities. e) ABC Co. made a loan of ₱200 million to XYZ, Inc. immediately after the acquisition on January 1. This is still outstanding at yearend. ABC Co. has recorded the asset in current assets. The subsidiary has recorded the liability in noncurrent liabilities at the rate ruling at year-start. f) The dividends were declared by XYZ, Inc. at year-end and received by ABC Co. on that day. The following exchange rates are relevant: ADM to ₱1.00 January 1…………………………………………………….5 September 1…………………………………………………6 September 21……………………………………………….6.5 December 31………………………………………………..8 Weighted average for year……………………………….. 7 41. How much is the goodwill as of December 31, 20x1? a. 4,000 b. 620 c. 500 d. 1,400 42. How much is the NCI in net assets as of December 31, 20x1? a. 523 b. 553 c. 624 d. 829.50 43. How much is the consolidated retained earnings as of December 31, 20x1? a. 7,176 b. 7,214 c. 7,245 d. 7,385 44. How much is the total translation gain (loss) to be recognized in other comprehensive income in 20x1? a. (1,087) b. (1,792) c. (1,903) d. (1,093) 45. How much is the consolidated profit in 20x1? a. 3,442 b. 3,483 c. 3,647 d. 3,328 46. How much is the comprehensive income attributable to NCI? a. 36 b. 38 c. 43 d. 41

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Disposal of a foreign operation 47. ABC Co. held 100% ownership interest of XYZ, Inc. but sold the entire investment on August 1, 20x1 for ₱500,000. The following information was determined as of this date: Carrying amount of XYZ’s net identifiable assets Carrying amount of NCI (including accumulated OCI attributable to NCI) Goodwill

412,000 82,400 12,000

ABC Co. had previously recognized translation gains of ₱3,200 in other comprehensive income on its investment in XYZ, Inc. How much is the total gain to be recognized in profit or loss on disposal date? a. 158,400 b. 161,600 c. 155,200 d. 164,800 Translation of a foreign operation – Hyperinflationary economy Use the following information for the next four questions: ABC Co., a corporation based in the Philippines, has a foreign branch that is operating in a hyperinflationary economy. The financial statements of the branch prior to restatement and translation are shown below: Statement of financial position As of December 31, 20x1 Amounts in Angolan Kwanza (AOA) Cash Accounts receivable Inventory Building Accumulated depreciation Total assets

184,000 296,000 160,000 400,000 (80,000) 960,000

Loan payable

120,000

Share capital Retained earnings Total equity Total liabilities and equity

400,000 440,000 840,000 960,000

Statement of profit or loss For the year ended December 31, 20x1 Amounts in Angolan Kwanza (AOA) Sales Cost of sales: Inventory - Jan. 1 240,000 Purchases 120,000 Total goods available for sale 360,000 Inventory - Dec. 31 ...