ASIAN ACADEMY FOR EXCELLENCE FOUNDATION, INC.

2044 C.M. Recto , Bgy. 390, Zone 40, Quiapo, Manila

3rd Floor, San Agustin Mall Builders, San Agustin, San Fernando, Pampanga

PRACTICAL ACCOUNTING 2
FXCY/FS CONSOLIDATION

CPA Review
M. C. Cerda,CPA, MBA

O2016
Topic Review Notes

Foreign currency Transactions a transaction that requires settlement or

payment in a foreign currency. These cover transactions negotiated and settled in
terms of the foreign companys currency unit. This requires foreign currency
translation , which is accomplished by applying the appropriate exchange rate
between the foreign currency and the Philippine peso.
A transaction with a foreign company that is to be paid in Philippine peso is
not a foreign currency transaction to a Philippine company because the amount of
pesos to settle the account is fixed and is not affected by exchange rate changes.

Exchange Rate rate in which the currencies of two countries are exchanged at a
particular time
** Selling spot rate exchange rate charged by the bank for current sales of a
foreign currency
** Buying spot rate exchange rate paid by the bank for current purchase of a
foreign currency
** Forward exchange rate exchange rate used for foreign currency
transactions ( for forward exchange contracts ) to be consummated on a future
date

Forms of Foreign Currency Transactions

1. Importation and Exportation of Goods
a. At the date transaction is first recognized, each asset, liability, revenue,
gain or loss arising from the transaction is measured and recorded in
Philippine peso, that is, units of foreign currency x spot rate in effect
on a given date
b. At each balance sheet that occurs between transaction sate and
settlement date, recorded balances denominated in a foreign currency
are adjusted to reflect the exchange rate in effect at the balance sheet
date. Foreign currency gain or loss is recognized, for the difference in
exchange rates between transaction date and balance date
c. At settlement date, difference between exchange rates between balance
sheet date and settlement date is recognized as a foreign currency gain
or loss.
2. Borrowing or Lending, Denominated in Foreign Currency same
procedures applicable as in importation and exportation, where a foreign
currency gain or loss is recognized, between transaction date and balance
sheet date, and between balance sheet date and settlement date.

3. Forward Exchange Contracts ( Buying and Selling of Foreign Currency ).

Forward contract is an agreement to exchange currencies of different countries
on a specified future date at the specified forward rate in effect when the
contract was made. Forward rates may be more or less than the spot rates for a
foreign currency.
Forward contracts are derivative instruments whose value changes in
response to specified indices. Derivative instruments are reported in the
balance at its fair values. Changes in its values ( as affected by exchange rate
changes ) are recognized in the income statement as foreign currency gain or
loss.
Forward contracts are entered into for the following purposes:
a. To hedge an exposed foreign currency asset or liability
b. To hedge a foreign currency denominated firm commitment
c. To hedge a net investment in foreign operation
d. To hedge a foreign currency forecasted transaction

Steps in the Translation and Consolidation of Foreign Entitys FS

1. Translate foreign currency reported in the foreign entitys f/s to Philippine
peso, using the appropriate exchange rate, as follows:
Revenues & expenses - exchange rates at the dates of the transactions
( or at the average rate for the period when there is a reasonable
approximation )
Assets & liabilities closing exchange rate on f/s date
Shareholders equity historical exchange rate
2. Consolidate the translated foreign entitys accounts ( now converted in
Philippine peso ) with the Philippine companys accounts.
Since various rates are used to translate the foreign entitys individual
accounts, a balancing item - Foreign currency Translation Adjustment
account is to be reported under the companys equity section.

MULTIPLE CHOICE
FXCY TRANSACTIONS
For questions 1 to 3
North Company, a Philippine entity, sold inventory on December 1, 2015 with
payment of 10,000 FCUs to a foreign customer, to be received in 60 days. The
pertinent exchange/spot rates are as follows:
December 1, 2015
P1.7241
December 31, 2015
1.8182
January 30, 2016
1.6666
1. On December 1, 2015, Sales would be credited for:
A. 5,500
B. 16,667
C. 16,949

D. 17,241

2. The foreign exchange gain/(loss) to be recorded on December 31, 2015 is:

A. 300
B. (300)
C. 941
D. (941)
3. The foreign exchange gain/(loss) to be recorded on January 30, 2016 is:

A. 500

B. (500)

C. 1,516

D. (1,516)

For questions 4 to 6
Braxton Company purchases raw materials from its foreign supplier on May 8,
2016 Payment of 2,000,000 FCUs is due in 30 days. May 31 is Divinos fiscal
year-end. The pertinent spot exchange rates are as follows: May 8, 2016 P1.25;
May 31, 2016 = P1.26; June 7, 2016 = P1.20.
4. Accounts payable on May 8, 2016 would be credited for:
A. 1,600,000
B. 1,666,667
C. 2,440,000
D. 2,500,000
5. The foreign currency exchange gain/( loss ) to be recorded on May 31, 2016 is:
A. 20,000
B. ( 20,000 )
C. 80,000
D.( 80,000 )
6. The peso equivalent that Divino will cost to finally pay its importation on June 7,
2016 is:
A. 1,666,667
B. 2,400,000
C. 2,440,000
D. 2,500,000
For questions 7 & 8
On April 1, 2015, Sharon Corporation, a Philippine company, borrowed 100,000
FCUs from a foreign lender by signing an interest-bearing note due April 1, 2016.
The peso value of the loan on the following dates are:
April 1, 2015
P 97,000
December 31, 2015
103,000
April 1, 2016
105,000
7. The foreign exchange gain/(loss) to be reported in the 2015 income statement is:
A. 3,000
B. (3,000)
C. 6,000
D. (6,000)
8. The foreign exchange/gain/(loss) to be reported in the 2016 income statement is:
A. 1,000
B. (1,000)
C. 2,000
D. (2,000)

For questions 9 & 10

Spartan Company purchased interior decoration materials from a foreign supplier
for 100,000 FCUs on September 5, 2016, with payment due on December 2,
2014. . Additionally, on September 5, 2016, Spartan acquired a a 90-day forward
contract to purchase 100,000 FCUs ( 1 FC = P.1850 ). The forward contract was
acquired to manage the exposed net liability position in foreign currency, but it
was not designated as a hedge. The spot rates on various dates are:
September 5, 2016
P.1835
December 2, 2016
.1865
9. The journal entry on December 2, 2016 to revalue foreign currency receivable to
current peso equivalent value would include a:
A. Credit to Foreign Currency Transaction Gain for P150.
B. Credit to Other Comprehensive Income for P300.
C. Debit to Accounts Receivable for P18,350.
D. Debit to Foreign Currency Units for P18,500.
10. On December 2, 2016, Accounts Payable would be debited for:
A. 18,350
B. 18,500
C. 18,650

D. 18,800

For questions 11 to 13
Stars Company placed an order for inventory costing 500,000 FCUs with a
foreign vendor on April 15, 2016, when the spot rate was 1 FC = P0.683. Stars

received the goods on May 2, 2016, when the spot rate was 1 FC = P0.687. Also
on May 2, 2016, Stars entered into a 90-day forward contract to purchase 500,000
FCUs at a forward rate of 1 FC = P0.693. Payment was made to the foreign
vendor on August 1, 2016, when the sport rate is 1 FC = P0.696.
Stars year-end date was June 30. On this date, the spot rate is 1 FC = P0.691, and
the forward rate on the contract was 1 FC = P0.695. Changes in the current value
of the forward contract are measured as the present value of the changes in the
forward rates over time. The relevant discount rate is 6%.
11. The foreign exchange gain/(loss) on the forward contract as hedging instrument
on June 30, 2016 is:
A. 0
B. 995
C. (1,000)
D. 2,000
12. The net income effect on June 30, 2016 is:
A. 0
B. 1,000
C. 1,005
D. 2,000
13. The foreign exchange gain/(loss) on the forward contract as hedging instrument
on August 1, 2016 is:
A. 505
B. 1,500
C. 2,000
D. 2,500
For questions 14 to 16
Jacks Restaurant purchased green rice, a special variety of rice, from a foreign
country for 100,000 FCUs on November 2, 2015. Payment is due on January 31,
2016. On November 2, 2015, the company also entered into a 90-day forward
contract to purchase 100,000 FCUs. The forward contract is not designated as a
hedge. The rates on various dates are as follows:
Spot Rate Forward Rate for March 1
November 2, 2015
P120
P126 ( 90-days )
December 31,2015
124
P129 ( 30 days )
P130 ( 60 days )
P131 ( 90 days )
January 31, 2016
127
14. The entry on November 2, 2015 to record the forward contract would include a:
A. Credit to dollar Payable to Exchange Broker for P12,600.
B. Credit to Premium on Forward Contract for P600.
C. Debit to Foreign Currency Receivable from Exchange Broker for P12,600.
D. Debit to foreign Currency Receivable from Exchange Broker for P100,000.
15. The entries on December 31, 2015 would include a:
A, Credit to Foreign currency Payable to Exchange Broker for P300.
B. Debit to Financial Expense for P300.
C. Debit to Foreign Currency Receivable from Exchange Broker for P300.
D. Debit to Foreign Currency Receivable from Exchange Broker for P12,600.
16. The entries on January 31, 2016 would include a:
A. Credit to Cash for P12,600.
B. Credit to Foreign Currency Receivable from Exchange Broker for P12,600.
C. Credit to Premium on Forward contract for P12,600.
D. Debit to Dollar Payable to Exchange Broker for P12,000.
17. On November 2, 2015, Fame Corporation acquired 100 shares of KK Company at
P120 per share. The securities qualify as available-for-sale securities. On the
same date, JJ decides to hedge against a possible decline in these securities by
purchasing at a cost of P100, a put option to sell the 100 shares at P12per share.
The option expires on March 3, 2016. The fair values of the investment and put
option are as follows:
11/03/2015
12/31/2015
3/03/2016
KK Company shares, per share
P12
P 11
P10.50

Put option, 100 shares

Market value
P100
P140
P150
Time value
100
40
0
Intrinsic value
0
100
150
The net gain/(loss) on hedging activity to be recognized on December 31, 2015 is
A. 60
B. ( 60 )
C. 120
D. ( 120 )
18. Guts Inc. had a trade account receivable from a foreign customer stated in the
local currency of the foreign customer. The trade account receivable for 900,000
local currency units (LCUs) had been restated to P315,000 in Guts June 30, 2016
balance sheet. On July 28, 2016, the account receivable was collected in full when
the exchange rate was 1 LCU = P.3333.
What will be the journal entry to record the collection of the trade receivable?
A.
Cash
P315,000
Accounts Receivable
P315,000
B.
Cash
P300,000
Accounts Receivable
P300,000
C.
Cash
P300,000
Translation Adjustment
15,000
Accounts Receivable
P315,000
D.
Cash
P300,000
Forex loss
15,000
Accounts Receivable
P315,000
For questions 19 & 20
On December 1, 2015, Panthers enters into a forward contract for speculative
purposes to acquire 100,000 Mexican New Peso on March 1, 2016, a currency in
which the company has no receivables, payables, or commitments. The firms
fiscal year ends on December 31.
Following are the spot rates and forwards rates at various dates:
12/01/2015 12/31/2015 3/01/2016
Spot rate ( M. New Peso )
P2.35
P2.40
P2.42
Forward rate ( M. New Peso ) 2.36
2.37
2.42
19. The December 31, 2015 profit and loss statement would show forex gain or loss
on the forward contract at
A. 1,000 gain
B. 1,000 loss
C. 5,000 gain
D. 5,000 loss
20. On March 1, 2016, the forex gain or loss on the forward contract will amount to
A. 2,000 gain
B. 2,000 loss
C. 5,000 gain
D. 5,000 loss
FXCY FS CONSOLIDATION
21. DD Inc. had a trade account receivable from a foreign customer stated in the local
currency of the foreign customer. The trade account receivable for 900,000 local
currency units (LCUs) had been restated to P315,000 in DDs June 30, 2016 f/s. On
July 28, 2016, the account receivable was collected in full when the exchange rate
was 1 LCU = P.3333.
What will be the journal entry to record the collection of the trade receivable?
A.
Cash
P315,000
Accounts Receivable
P315,000
B.
Cash
P300,000
Accounts Receivable
P300,000
C.
Cash
P300,000
Translation Adjustment
15,000

Accounts Receivable

P315,000

D.

Cash
P300,000
Forex loss
15,000
Accounts Receivable
P315,000
22. Certain f/s date accounts of a foreign subsidiary in Japan of HH Company at
December 31, 2016 have been translated into Philippine pesos as follows:
Historical rate Translated at current rate
Accounts receivable
P150,000
P180,000
Prepaid expenses
75,000
82,500
PPE ( net )
427,500
412,500
Under the current rate method , what total amount should be included in HHs
December 31, 2016 consolidated statement of financial position for the above
accounts?
A. 637,500
B. 652,500
C. 660,000
D. 675,000
23. A wholly-owned subsidiary of II Corporation in Hongkong has certain expense
accounts for the year ended December 31, 2016 stated in Hongkong dollars as
follows:
Hongkong Dollars
Depreciation ( related assets
acquired 1/02/2016
18,000
Doubtful accounts
12,000
Rent
30,000
The exchange rates at various dates are as follows:
Peso Eqvlt. Of 1HkgS
January 2, 2016
P4.80
December 31, 2016
5.90
Average for year ended 12/31/2016
5.80
Assume that the current rate method is used and charges to expense accounts
occurred approximately evenly during the year.
What is the total peso amount to be included in IIs 2016 consolidated income
statement to reflect these expenses?
A. 288,000
B. 334,200
C. 348,000
D. 354,000
24.On January 2, 2016, JJ Corporation acquired a foreign subsidiary. On February 15,
2016, JJs subsidiary purchased 100,000 LCUs of inventory; 25,000 LCUs of the
original inventory purchased on February 15, 2016 made up the entire inventory on
December 31, 2016. The subsidiarys functional currency is the Phil. peso. The
exchange rates are as follows:
January 1 to June 30, 2016
2.2 LCU = P1
July 1 to December 31, 2016
2.0 LCU = P1
The December 31, 2016 inventory balance of JJs foreign subsidiary should be remeasured into Philippine pesos in the amount of
A. 10,500
B. 11,364
C. 11,905
D. 12,500
25. KK Companys foreign subsidiary had the following amounts in foreign currency
units (FCUs) in 2016:
Cost of goods sold
10 million FCU
Beginning inventory
200,000 FCU
Ending inventory
500,000 FCU
The average exchange rate during 2016 was P.80 = 1FCU. The beginning inventory
was acquired when the exchange rate was P1.00 = 1FCU. The ending inventory was
acquired when the exchange rate was P.75 = 1FCU. The exchange rate at December
31, 2016 was P.70 = 1FCU.

Assuming that the operations of the subsidiary is integral to the operations of the
parent, at what amount should the foreign subsidiarys cost of goods sold be reflected
in the Phil. peso income statement?
A. 7,815,000
B. 8,040,000
C. 8,065,000
D. 8,090,000
26. LL Inc. starts a subsidiary in New Zealand the subsidiary had the NZ dollar as its
functional currency. On January 2, 2016, LL acquired all of the subsidiarys common
stocks for 30,000 NZ dollar. On April 1, 2016, the subsidiary purchased inventory for
30,000 NZ dollar, with the payment to be made on May 1, 2016. The inventory is sold
on August 31, 2016 for 45,000 NZ dollars, which is collected on October 1, 2016.
Currency exchange rates for every 1 NZ Dollar are as follows:
January 2, 2016
P15.00
August 1, 2016
P19.00
April 1, 2016
17.00
October 1, 2016
20.00
May 1, 2016
18.00
December 31, 2016
21.00
In preparing consolidated financial statements, what foreign currency translation
adjustment will be reported at the end of 2016?
A. 60,000
B. 90,000
C. 210,000
D. 270,000
27. MM Corporation operates a branch in Germany. This branch deals in German marks,
however, the Philippine peso is viewed as its functional currency. A re-measurement
is necessary to produce financial information for external reporting purposes.
The branch begins the year with 15,000 marks in cash and no other assets or
liabilities. However, the branch immediately uses 9,000 marks to acquire equipments.
On May 1, 2016, inventory costing 4,500 marks are purchased for cash. This
merchandise is sold on July 1, 2016 for 7,500 marks. The branch transfers 1,500
marks to the Home Office on October 1, 2016. Depreciation recorded for the year
2013 was 750 marks.
Currency exchange rates ( for every 1 mark ) are as follows:
January 2
P16
October 1
P21
May 1
18
December 31
22
July 1
20
Average for the year 19
How much foreign currency transaction gain is to be recognized in the years
consolidated income statement?
A. 31,500
B. 36,000
C. 40,500
D. 45,000
28. NN Company was organized as a wholly-owned subsidiary by OO Company in 2014,
when P 1 was worth 20 Singaporean dollar. At that time, NN purchased for 400,000
dollars equipments with an estimated useful life of 10 years with no salvage value. In
2014, Singapore devalued the Singaporean dollar by 100% and allowed corporation
to revalue their fixed assets by 100%. NN wrote-up the equipment to 800,000 dollars
and the related accumulated depreciation to 320,000 dollars. The December 31, 2016
trial balance of NN Company includes the equipment of 800,000 dollars, the
accumulated depreciation at 560,000 dollars, and depreciation expenses of 80,000
dollars. The average as well as the year-end rate is P1 = 50 Singapore dollars.
If OO Corporation uses the current rate method to translate NNs financial statements
into Phil pesos, it should report the equipment, the accumulated depreciation, and the
depreciation expense, respectively at the following amounts
A. 8,000; 5,600; 800
C. 16,000; 11,200; 1,600
B. 20,000; 14,000; 2,000
B. 8,000; 5,600; 1,600

For questions 29 & 30

MAXIM Inc., a Philippine company, acquired 100% of the ordinary shares of an Indian
company on January 2, 2016, for P804,000. The subsidiarys net assets amounted to
600,000 rupees on said date, with their book values approximating their fair values. On
December 31, 2016, the Indian subsidiarys trial balance ( in pesos ) contained P24,000
more debits than credits. For 2016, the subsidiary reported net income for 50,000 rupees
and paid cash dividends of 10,000 rupees on November 15, 2016. Included in the
subsidiarys income statement was a depreciation expense of 5,000 rupees.
Maxim uses the equity method in its investment in Indian company. It also determined
that goodwill in its first year of operations had an impairment loss of 10%. Exchange
rates for every rupee at various dates during 2015 are as follows:
January 2, 2016
P1.20
December 3, 2016 P1.32
November 15, 2016
1.30
Average for 2016
1.24
29. In Maxims consolidated statement of financial position at December 31, 2016, the
amount to be reported for goodwill is
A. 75,320
B. 75,600
C. 79,600
D. 83,160
30. In its shareholders equity section at December 31, 2016, the balance of translation
adjustment account to be reported is
A. 16,160
B. 24,000
C. 26,800
D. 31,840
For questions 31 to 34
During June and July, 2016, CALTEX PHILS. , which reports on a calendar year basis
and issues quarterly financial statements, had the following transactions with foreign
businesses.
Billing
Exchange
Date
Nature of Transactions
Currency
Rate
VENDOR A
6/15/156 Imported merchandise costing
10,000 euros from French manufacturer
Euros
P65
7/15/156 Paid entire amount owed
62
CUSTOMER A
6/20/16 Sold merchandise for 20,000 rial
to a Brazilian retailer
Rial
P23
7/10/16 Received full payment
22
On June 30, 2016, the spot exchange rate for euros was P64 and for rial was
P22.60.
31. What is the forex gain or loss on June 30, 2016 arising from the French
manufacturer?
A. 10,000 gain
B. 10,000 loss
C. 20,000 gain
D. 30,000 gain
32. What is the forex gain or loss on July 15, 2016 arising from the French
manufacturer?
A. 10,000 gain
B. 20,000 gain
C. 20,000 loss
D. 30,000 gain
33. What is the forex gain or loss on June 30, 2016 arising from the Brazilian retailer?
A. 8,000 gain
B. 8,000 loss
C. 12,000 loss
D. 20,000 loss
34. What is the forex gain or loss on July 10, 2016 arising from the Brazilian retailer?
A. 8,000 loss
B. 12,000 gain
C. 12,000 loss
D. 20,000 loss
For questions 35 & 36
On December 1, 2015, ALBERT COMPANY enters into a forward contract for
speculative purposes to acquire 100,000 Mexican New Peso on March 1, 2016, a

currency in which the company has no receivables, payables, or commitments. The firms
fiscal year ends on December 31.
Following are the spot rates and forwards rates at various dates:
12/01/2015 12/31/2015 3/01/2016
Spot rate ( M. New Peso )
P2.35
P2.40
P2.42
Forward rate ( M. New Peso ) 2.36
2.37
2.42
35. The December 31, 2015 profit and loss statement would show forex gain or loss on
the forward contract at
A. 1,000 gain
B. 1,000 loss
C. 5,000 gain
D. 5,000 loss
36. On March 1, 2016, the forex gain or loss on the forward contract will amount to
A. 2,000 gain
B. 2,000 loss
C. 5,000 gain
D. 5,000 loss
For questions 37 & 38
On December 31, 2015, ONDOY COMPANY, the parent of the 100% owned Japanese
subsidiary expected the yen to weaken by the end of 2016. Accordingly, Ondoy
contracted with a foreign exchange trader on December 31, 2015 to sell 2,300,000 yen
in365 days at the forward rate of P0.435. The following direct exchange rates are as
follows:
12/31/2015
12/31/2016
Inception Date
Expiration/Reporting Date
Spot rate
P0.440
P0.400
Forward rate
0.435
0.400
The January 1, 2016 balance of the translation reserve ( cumulative, debit ) amounted to
P129,000 and translation reserve loss for 2016 is P100,000.
37. The December 31,2016 forex gain or loss on forward contract amounted to - and to be
charged to
A. 80,500 gain equity
C. 80,500 loss - equity
B. 80,500 gain earnings
D. 92,000 gain- equity
38. The December 31, 2016 translation reserve balance amounted to
A. 148,500 debit
C. 229,200 debit
B. 148,500 credit
D. 309,500 debit
For questions 39 & 40
On December 16, 2016, GUMAMELA TRADING sold flowers to a Venezuelan firm.
Payment of 1,000,000 Venezuelan Bolivar is due on February 14, 2017. Concurrently,
Gumamela paid P400,000 cash to acquire a 60-day put option for 1,000,000 Venezuelan
Bolivar. Gumamela follows calendar basis of reporting:
12/16/2016
12/31/2016 2/14/2017
Spot rate ( market price )
P0.16
P0.15
P0.147
Strike price ( exercise price) 0.16
0.16
0.16
Fair value of call option
P4,000
P13,300
P13,000
39.The forex gain or loss on option contract ( hedging instrument ) due to change in
intrinsic value on December 31, 2016 if changes in time value will be excluded from
the assessment of hedge effectiveness should be:
A. 700 loss
B. 9,300 gain
C. 10,000 gain
D. 10,000 loss
40. The forex gain or loss on option contract ( hedging instrument ) on December 31,
2016 if changes in time will be included from the assessment of hedge effectiveness
should be:
A. 0
B. 700 loss
C. 9,300 gain
D. 10,000 gain

KEY ANSWERS
P2 FXCY/CONSOLIDATION
O2016
1. D
2. C
3. D
4. D
5. B
6. B
7. D
8. D
9. C
10. A
11. B
12. C
13. A
14. C
15. C
16. A
17. B
18. D
19. A
20. C
21. D
22. D
23. C
24. B
25. C
26. C
27. A
28. C
29. D
30. D
31. A
32. B
33. B
34. C
35. A
36. C
37. A
38. A
39. C
40. C

Government acctg find articles about discuss with BSP. DBM or

BIR. Arial 12.
Accounting information system
Long term fin
Equity finan
Thursday
1 and half - mancon
remaining gov acctg