CHAPTER 10:

Accounting for Foreign Currency

Transactions, Forward Contract (Hedging)
Transactions, Foreign Currency Financial
Statement Translation, and Financial
Reporting in Hyperinflationary Economies
(CONTINUATION)

Ronelle S. Sison
2 BSA - 1
 PROBLEMS

Use the following information to answer questions 56 to 57 below:

A Philippine Company purchases a 90-day certificate deposit from a foreign bank on September 15. The certificate
has a face value of FC (foreign currency) 1,000,000 costs FC 800,000, and pays interest at an annual rate of 2
percent. On December 13, the certificate of deposit matures and the company receives principal and interest of FC
1,005,000. Th spot rate on December 14 is P0.77/FC. The average spot rate for the period September 15 – December
13 is P0.79/FC.
56. The exchange gain or loss on the investment is:
a. P30,000 gain c. P10,000 loss
b. P30,000 loss d. P10,000 gain
Answer: B
Solution:
FC-1,000,000 x (P0.77-0.80) = 30,000 loss

57. The interest income on the invested is reported at:

a. P15,400 c. P3,950
b. P4,000 d. P3,850
Answer: D
Solution:
FC- 5,000 x P0.77= P3,850

Foreign Currency Financial Statement Translation

58. Certain balance sheet accounts of a foreign subsidiary of Rowan Inc., at December 31, 20x6, have been
translated into Philippine peso as follows:

Translate at
Current rates Historical rates
Note receivable long term P240,000 P200,000
Prepaid Rent 85,000 80,000
Patent 150,000 170,000
P475,000 P450,000

The subsidiary’s functional currency is the currency o the country in which it is located. What total amount should
be included in Rowan’s December 31, 20x6 consolidated balance sheet for the account above?
a. P450,000 c. P475,000
b. P455,000 d. P495,000 (AICPA Modified)
Answer: C
Solution:
All asset should be translated at closing (current) rate at the balance sheet date as required by PAS No. 21
(revised)

59. A foreign subsidiary of Decker Corporation has certain balance sheet accounts at December 31, 20x6.
Information relating to these accounts in Philippine pesos is as follows:
Translated at
Current rates Historical rates
Marketable Securities at cost P65,000 P75,000
Inventories at Average cost 500,000 550,000
Patent 80,000 85,000
P645,000 P710,000
What amount should be included in Decker’s December 31, 20x6 consolidated balance sheet for the above accounts
if the subsidiary foreign operation operates independently or foreign operation is not integral for the parent’s
operation?
a. P710,000 c.P660,000
b. P700,000 d. P645,000 (AICPA Modified)
Answer: D
 60. A wholly owned subsidiary of ward Inc., has the certain expense account for the year-ended December 31,
20x6 stated in local currency units (LCU) as follows
LCU
Depreciation of equipment (acquired 1/1/20x4) 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, 20x6 P.40
Average for year ended 12/31/20x6 .44
January 1, 20x4 .50

Assume that the LCU is the subsidiary’s functional currency. The charges to expenses accounts occurred
approximately during the year. What total peso amount should be included in Ward’s consolidated income statement
to reflect these expenses?
a. P160,000 c.P176,000
b. P168,000 d. P183,200 (AICPA)
Answer: C
Solution:
Using the closing/current rate method since expenses were occurred approximately evenly during the year,
average rate would be more practicable to be applied. Therefore, it should be translated at P0.44
(120,000+80,000+200,000) = 176,000

61. A wholly owned foreign subsidiary of Philippine Company had selected expenses accounts stated in Local
Currency Units (LCU) for the fiscal year ended November 30, 20x6 as follows”
Bad debts expense 60,000
Amortization of patent 40,000
Rent expense 100,000
The exchange rates for LCU’s at various dates are as follows;
November 30, 20x6 .20
Average for fiscal year ended November 30, 20x6 .22
December 31, 20x6 .25
If the subsidiary foreign operation is integrated with parent’s operation, what is the peso amount to be included in
the translated profit or loss of the Philippine company’s for fiscal year ended November 30, 20x6 for the forgoing
expenses accounts?
a. P44,000 c. P42,000
b. P40,000 d. P45,200 (AICPA)
Answer: D
Solution:
Since the foreign operation is integral to the operations of the parent, therefore, temporal method would be
most appropriate.
In remeasuring amounts of expenses that correspond with the dates of the underlying transactions i.e.,
expense related in non-monetary asset should be measured using the same rate used in remeasuring the asset account
– historical rate.
If transactions are numerous and spread over an extended period of time, the average of the rates existed
during the period may be used to provide an approximation for the actual rates (historical rates). i.e., expense not
related in non-monetary asset should be measured by using average rates for the year.
Therefore,
Bad debts expense (not related in non-monetary item):
60,000 LCU x P.22 average rate P13,200
Amortization of patent (related in non-monetary item):
40,000 LCU x P.25 historical rate- date of acquisition 10,000
Rent expense (not related in non-monetary item):
100,000 LCU x P.22 average rate 22,000
45,200
 62. On January 1, 20x6, Kiner Company formed a foreign branch. The branch purchased merchandise at a
cost of 720,000 local currency units (LCU) on February 15, 20x6. The purchase price was equivalent to
P180,000 on this date. The branch’s inventory on December 31, 20x6 consisted solely of merchandise
purchased on February 15, 20x6, and amounted to 240,000 LCU. The exchange rate was 6 LCU to P1 on
December 31, 20x6.and the average rate of exchange was 5 LCU to P1 for 20x6. The Kiner December 31,
20x6 balance sheet, the branch inventory balance of 240,000 LCU should be translated into Philippines
pesos at (using closing rate method).
a. P40,000 c. P60,000
b. 48,000 d. 84,000
Answer: A
Solution:
40,000 (240,000/6) asset should be measured using closing rate if closing method is used.

63. Certain Balance sheet accounts in foreign subsidiary of Rose Company at December 31, 20x6, have been
stated into Philippines pesos as follows:
Stated at
Current Rates Historical Rates
Accounts receivable, long term P200,000 P220,000
Accounts receivable, long term 100,000 110,000
Prepaid Insurance 50,000 55,000
Goodwill 80,000 85,000
P430,000 P470,000
This subsidiary functional currency is a foreign currency. What total amount should be included in Rose’s balance
sheet for the preceding item?
a. P430,000 c. P440,000
b. P435,000 d. P450,000
Answer: A
Solution:
Because the foreign currency is the functional currency, a translation is required. All asset accounts are
translated at current rates.

64. Using the same information in No 63, and the subsidiary functional currency is peso. What total amount
should be included in Rose’s balance sheet for the preceding item?
a. P430,000 c. P440,000
b. P435,000 d. P450,000
Answer: C
Solution:
Because the peso is the functional currency, a remeasurement or temporal method is required. All
receivables are remeasured at current rates. Assets carried at historical cost, such as prepaid insurance and goodwill
are remeasured at historical rates.

65. Reynolds (Philippine company) acquires 70 percent of ownership of Pishot’s (Indonesian company) on
January 1. At the acquisition date, Pishot’s plant asset have an historical cost, accumulated depreciation
and remaining life of 675,000,000-rupiah, 135,000,000 rupiah and eight years respectively. On May 1,
Pishot acquired plants asset for 60,000,000 rupiah. All assets are depreciated straight line with 10-year
life and no salvage value. Below are relevant exchange rates for the year:
January 1 P.0086
May 1 P.0088
December 31 P.0085
Average January 1 – May 1 P.0089
Average May 1 – December 31 P.0083
Average January 1 – December 31 P.0084
What is the peso amount of (i) depreciation expense and (ii) accumulated depreciation on Philippine peso trial
balance if the temporal method is applied?
a. (i) P615,700 (ii) P1,776,700
b. (i) P616,800 (ii) P1,776,700
 c. (i) P615,700 (ii) P1,772,250
d. (i) P616,800 (ii) P1,772,250
Answer: A
Solution:
(i) [(675,000,000 -135,000,0000/8] P.0086 + (60,000,000/10) (8/12) P.0086 = 615,700
(ii) Beginning balance 135,000,000 x P.0086 1,161,000
(iii) Current period depreciation expense
[(675,000,000 -135,000,0000/8] P.0086 + (60,000,000/10) (8/12) P.0086 = 615,700

P1,776,700
Items 66 and 67 are based on the following information:
Precious (Philippine currency) acquired 90percent ownership of Estrella (Foreign company). The beginning
inventory at the acquisition date was 530,000 FC (foreign currencies). During the year Estrella purchased 2,300,000
FCs of inventory and ending inventory amounted to 600,000 FCs. The ending inventory was acquired during the
fourth quarter of the year. The acquisition date, average for the year, fourth quarter average and the end of the year
rates were P.74, P.75, P.71 and P.73 respectively.

66. Assuming inventory records are maintained on a First-in First out basis, what is the converted cost of
goods sold if the temporal method is applied?
a. P1,505,250 c. P1,672,500
b. P1,522,080 d. P1,691,200
Answer: C
Solution:
Beginning inventory P530,000
Purchases 2,300,000
Ending inventory (600,000)
Cost of Goods Sold (at average rate for the year) 2,230,000 x P.75 = P1,672,500

67. Assuming inventory records are maintained on a First-in First out basis, what is the converted inventory
if the current rate method is applied?
a. P383,400 c P426,000
b. P394,200 d. P438,000
Answer: D
Solution:
Ending inventory (600,000 x P.73 current rate) = 438,000 B/S account

Items 68 and 69 are based on the following information:

Jocksonville (Philippine company) acquire 90 percent ownership of Jentan (Indian Company) the beginning
inventory at acquisition date was 510,000 rupees. During the year Jentan purchased 840,00 rupees of inventory and
ending inventory amounted to 570 rupees. The ending inventory was acquired during the fourth quarter of the year.
The acquisition date, average for the year, fourth quarter average and the end of the year rates were P.97, P.99, P1.03
and P1.01 respectively.

68. Assuming inventory records are maintained on a First-in First out basis, what is the converted cost of goods
sold if the temporal method is applied?
a. P739,200 c P772,200
b. P762,000 d. P794,000
Answer: A
Solution:
Beginning inventory (510,000 x P.97) P494,700
Purchases (840,000 x P.99) 831,600
Ending inventory (570,000 x P1.03) (587,100)
Cost of Goods Sold P739,200

69. Assuming inventory records are maintained on a First-in First out basis, what is the converted cost of
goods sold if the temporal method is applied?
 a. P556,500 c P575,700
b. P564,300 d. P587,100
Answer: D
Solution:
Ending inventory (570,000 x P1.03) 587,100

70. An entity acquired all the share capital of a foreign entity at a consideration of 9 million baht on June 30,
20x6. The fair value of the net assets of the foreign entity at that date was 6 million baht. The functional
currency of the entity is the peso. The financial year end of the entity is December 31, 20x6. The exchange
rates at June 30, 20x6 and December 31, 20x6 were 1.5 baht =P1 and 2 baht =P1 respectively. What figure
of goodwill should be included in the financial statement in the year end December 31, 20x6?
a. P2 million c P1.5 million
b. 3-million-baht d. P3 million
Answer: C
Solution:

Consideration transferred 9.0 million

Less; Fair value of asset acquired 6.0 million
Goodwill 3.0 million
Divide by: closing/current rate on the balance sheet 2.0 baht per peso
Goodwill in the consolidated balance sheet 1.5 million

Examines or students may be misled that since the functional currency is the peso but, such is not the case,
when goodwill arises from consolidation wherein PAS 21 par 47 should be applied.

Goodwill arising from the acquisition of subsidiaries (date of acquisition)

When company equation for the invitation another company excess of the purchase price over the acquirer's
interest in the fair value of the identifiable net assets of acquired company is recognizes goodwill on consolidation.
In the context of a foreign company the issue arises as to whether goodwill is an asset of the acquired company or an
asset in the acquirer's book. If it is an asset of the acquirer’s subsidiary the goodwill is a foreign asset which should
be translated in the same manner as any other asset at the acquired subsidiary, which may give rise to a translation
difference. However, if it is treated as an asset in the acquirer's book, there is no need for translation.

PAS 21 par 47 states that:

“Any goodwill arising on the acquisition of foreign operation and any fair value adjustments to the carrying
amount of assets and liabilities arising on the acquisition of the foreign operation shall be treated as assets and
liabilities of the foreign operations. Thus, they shall be expressed in the functional currency of the foreign operation
and shall be translated at the closing rate…”

71. The Pinoy Company acquired a foreign subsidiary (Taiwan) on August 15 20x6. Goodwill arising on the
acquisition was Nt Dollar (Taiwan currency) 175,000. Consolidated financial statement are prepared at the
year end of December 31, 20x6 requiring the translation of all foreign currency operation into the
presentation of the currency of peso.

The following rates of exchange have been identified:

Rate at August 15 20x6 Nt Dollar 1.321 :1
Rate at December 31, 20x6 Nt Dollar 1.298 :1
Average rate for year ended December 31, 20x6 Nt Dollar 1.302 :1
Average rate for the period from August 15 to December 31, 20x6 Nt Dollar 1.292 :1

According to PAS 21 (The effects of changes in Foreign exchange rates) at what amount should the
goodwill be measured in the consolidated statement of financial position?
a. P134,409 c P134,823
 b. P135,449 d. P312,449
Answer: C
Solution:
Goodwill arising from acquisition Nt Dollar 175,000
Divided by :closing/current rate (Nt Dollar: peso) Nt Dollar 1.298
Goodwill in the consolidated balance sheet P134,823

In the consolidated financial statements, any goodwill arising on the acquisition of a foreign operation should be
treated as an asset of the foreign operation. The goodwill should therefore be expressed in the functional currency of
the foreign operation and translated at the closing rate at the date of each statement of financial position. The same
treatment is required of any fair value adjustments the carrying amounts of assets and liabilities arising on the
acquisition of a foreign operation. In both cases, exchanges differences are recognized in other comprehensive
income rather than as part of the profit or loss for the period.

72. An entity acquires a foreign subsidiary on August 15 20x6. The goodwill arising on the acquisition was 400
baht. At the date of the acquisition the exchange rate into the parent’s functional currency is 4 baht: 1. At
the parent entity’s year end the exchange rate is 5 baht: 1. The exchange loss at year end amounted to:
a. Nil or Zero c P20,000 gain
b. P20,000 loss d. Cannot be determined
Answer: B
Solution:
The goodwill at the date of acquisition is P100,000 (400,000 x P1/4 baht). At the year-end it is translated to
P80,000 (400,000 x P1/5 baht). The difference iof P20,000 is recorded as an exchange loss and reported in other
comprehensive income.

73. The entity acquired 60% of the share capital of a foreign entity on June 30, 20x6. The fair value of the net
assets of the foreign entity at that date was 6 million baht. This value is 1.2 million higher than the carrying
amount of the net assets of the foreign entity. The excess was due to the increase in value of non-
depreciable land. The functional currency of the entity is the peso. The financial year end of the entity is
December 31, 20x6. The exchange rates at June 30, 20x6 and December 31, 20x6 were .5 baht =P1 and 2
baht =P1 respectively. What figure of fair value adjustments should be included in the group financial
statement in the year end December 31, 20x6?
a. P600,000 c P2 million
b. P800,000 d. P3 million
Answer: A
Solution:

Allocated excess arising from transactions 1,200,000

Divided by: closing/current rate on the
balance sheet (baht per peso) 2.0
Allocated excess (over/under evaluation) P600,000

Refer to Nos 70 and 71 for further discussion using the closing/current rate. Again, the same with No. 58, the
functional currency of peso is somewhat misleading. It does not refer to the use of temporal method on the date of
acquisition.

74. The Pinoy company acquire the Kanchengjunga Company (Taiwan currency) a foreign subsidiary on
September 10, 20x6. The fair value of the assets of Kanchengjunga was the same as their carrying amount
except for land where the fair value was Nt Dollar 50,000 greater than the carrying amount. The fair value
adjustment has not been recognized in the separate financial statements of Kanchengjunga. Consolidated
financial statements are prepared at the year end of December 31, 20x6 requiring the translation of all
foreign currency operation into the presentation of the currency of peso. The following rates of exchange
have been identified:
Rate at 10 September 20x6 Nt Dollar 1.62 :1
Rate at 31 December 20x6 Nt Dollar 1.56 :1
 Average rate for year ended December 31, 20x6 Nt Dollar 1.60 :1
Average rate for the period from 10 September to December 31, 20x6 Nt Dollar 1.58 :1

According to PAS 21 (The effects of changes in Foreign exchange rates) at what fair value adjustment
is required to the carrying amount of land in the consolidated statement of financial position?
a. P30,864 c P31,250
b. P32,051 d. P31,646
Answer: B
Solution:
Refer to No. 70,71,72 and 73
Fair value adjustment (undervaluation of land) P50,000
Divided by: closing/current rate on the
balance sheet (Nt Dollar per peso) 1.56
Fair value adjustments P32,051

PAS 21 par 47 requires fair value adjustments to the carrying amounts of assets and liabilities arising from
the acquisition of a foreign operation to be treated as assets and liabilities of the foreign operation. Therefore, they
are translated at the closing rate of exchange.

75. An entity has a subsidiary that operates in a foreign country. The subsidiary issued a legal notice of a
dividend to the parent of 2.4 million baht, and this was recorded at parent entity’s financial statements. The
exchange rate at the date was 2 baht =1. The functional currency of the entity is the peso. At the date of
receipt of the dividend the exchange rate had moved to 3 baht =1. The exchange different arising on the
dividend would be treated in which way in the financial statements?
a. No exchange difference will arise as it will be eliminated on consolidation
b. An exchange difference of P400,000 will be taken to equity
c. An exchange difference of P400,000 will be taken to the parent entity’s income statement and in
the group income statement
d. An exchange difference of P400,000 will be taken to the parent entity’s income statement only.
Answer: C
Solution:
The exchange difference to be presented to profit or loss is computed as follows:
Date of declaration (receivable) 2,400,000-baht x P1/ 2 baht P1,200,000
Date of receipt/payment 2,400,000-baht x P1/ 3 baht 800,000
Exchange difference P400,000

The accounting treatment of intercompany transactions between a parent and its foreign operation and the
resulting gain exchange gains or losses on monetary items depend on whether or not the monetary item is part of the
parent’s net investment in the foreign operation. The dividends declared and paid by the foreign operation is not part
of parents investment in the foreign operation any gain or loss be recorded on the parent's profit and loss and will
flow through consolidated or group profit and loss and will not be eliminated on consolidation as the gains or losses
are "one-sided" and will only arise in the financial statements of the party that is exposed to the foreign currency
intercompany payable or receivable

76. An entity has a subsidiary that operates in a foreign country. The entity sold goods to the parent for 2.1
million baht. The cost of goods sold of the subsidiary was 1.2 million baht. The goods were recorded by the
entity at P1.05 million (2 baht=1) and were all unsold at the year-end December 31, 20x6. The exchange
rate at the date was 1.5 baht =1. What is the value of the intragroup profit that will be eliminated at
December 31, 20x6?
a. P205,000 c P450,000
b. 350,000 d. 600,000
Answer: C
Solution:
The gross profit arising from upstream sales:
Sales to parent 2,100,000 baht
 Less: cost of goods sold 1,200,000 baht
Gross profit 900,000
Divided by: historical rate
(date of intercompany sale – baht per peso) 2 baht
Gross profit P450,000

As with any transactions within the group the effects of transactions between a parent and its foreign
subsidiaries or between foreign subsidiaries must be eliminated in full. Neither PAS 21 nor PAS 27 provides specific
guidance in relation to transactions with foreign entities. A matter of concern is whether the adjustment should be
affected by changes in the exchange rate. In this regard, note paragraphs 136 and 137 as the Basis for Conclusions
relating to the US Statement of Financial Accounting Standard (SFAS) No. 52 Foreign Currency Translation

136. An intercompany sale or transfer of inventory machinery etc., includes a component of intercompany profit the
board consider whether computation of the amount of intercompany profit to be eliminated should be based on
exchange rates in effect on the date of intercompany sale or transfer.

137. The Board decided that any intercompany profit occurs on the date of sale or transfer and that exchange rate in
effect on that date or reasonable approximations thereof should be used to compute the amount of any
intercompany profit to be eliminated the effect of subsequent changes in exchange rates rather than being
attributable to intercompany of profit.

77. A subsidiary of Salisbury Inc. located in a foreign country whose functional currency is the foreign
currency (which is not the currency of hyperinflationary economy). The subsidiary acquires inventory on
credit on November 1, 20x6, for 100,000 foreign currencies (FC) that s sold on January 17, 20x7 for
130,000 foreign currencies (FC). The subsidiary pays for the inventory on January 31, 20x7. Currency
exchange rate for 1 foreign currency (FC) are as follows:
November 1, 20x6 P.16 =1
December 31, 20x6 .17=1
January 17, 20x7 .18=1
January 31, 20x7 .19=1
Average for 20x7 .20=1

What amount does Salisbury’s consolidated balance sheet report for this inventory at December 31,
20x6?
a. P16,000 c P18,000
b. P17,000 d. P19,000
Answer: B
Solutions:
The foreign currency is the functional currency so a translation method or closing rate method is appropriate
cost. All assets (including inventory) are translated at the current exchange rate (100,000 x P.17)

78. Using the same information in No 77, What amount does Salisbury’s consolidated income statement report
for cost of goods sold for the year ending December 31, 20x7?
a. P16,000 c P18,000
b. P17,000 d. P19,000
Answer: C
Solutions:
The foreign currency is the functional currency so a translation method or closing rate method is appropriate
cost of goods sold is translated at the exchange rate in effect of the date of accounting (historical rate)
recognition, which is the date the goods were sold (100,000 x P.18). Historical rate is used since there is no
indication as to its impractically and at the same the read is available.
 79. Using the same information in No 77, What amount does Salisbury’s consolidated income statement report
for cost of goods sold for the year ending December 31, 20x7 assuming current exchange rate for 1 foreign
currency (FC):
November 1, 20x6 P.16 =1
December 31, 20x6 .17=1
January 17, 20x7 .18=1
January 31, 20x7 .19=1
Average for 20x7 .20=1

a. P16,000 c P18,000
b. P17,000 d. P19,000
Answer: D
Solutions:

The foreign currency is the functional currency so a translation method or closing rate method is appropriate.
Cost of goods sold is transferred at the average rate for 20x7. (historical rate i.e., rate on January 17
impracticable to use since it is not given) the cost of goods sold amounted for P20,000 (100,000 x P.20)

80. Blyke Corporation subsidiary buys marketable equity securities and inventory on April 1, 20x6 for 100,000
foreign currencies (FC) each. It pays for both items on June 1, 20x6 and they are still on hand at year end.
Inventories are carried as cost under lower-of-cost-or-market rule. Currency exchange rates for 1 foreign
currency (FC):

January 1, 20x6 P.15=1

April 1, 20x6 .16=1
June 1, 20x6 .17=1
December 31, 20x6 .19=1

Assume that the foreign currency is the subsidiary’s functional currency. What amount does a
consolidated balance sheet report as of December 31, 20x6?

a. Marketable equity securities =16,000 and inventory =16,000

b. Marketable equity securities =17,000 and inventory =17,000
c. Marketable equity securities =19,000 and inventory =16,000
d. Marketable equity securities =19,000 and inventory =19,000
Answer: D
Solutions:

The foreign currency is the functional currency so a translation method or closing rate method is appropriate.
All assets are translated at the current exchange rate of P.19

81. Using the same information in No 79, and assume that the peso is the subsidiary’s functional currency, what
balance a consolidated balance sheet report as of December 31, 20x6?
a. Marketable equity securities =16,000 and inventory =16,000
b. Marketable equity securities =17,000 and inventory =17,000
c. Marketable equity securities =19,000 and inventory =16,000
d. Marketable equity securities =19,000 and inventory =19,000
Answer: C
Solutions:

The peso is the functional currency so remeasurement or temporal method is appropriate. Inventory (carried
at cost) is remeasured of the historical exchange rate of P.16. Marketable equity securities at market value are
remeasured at the current exchange rate of P.19
 82. Houston Corporation operates a branch operation in a foreign country. Although this branch deals with
foreign currency (FC), the peso is viewed as its functional currency. Thus, a remeasurement is necessary to
produce financial information for external reporting purposes. The branch began the year with 100,000 FCs
in cash and no other assets and liabilities. However, the branch immediately used 60,000 FCs to acquire
equipment. On May 1 it purchased inventory costing 30,000 FCs for cash and it sold on July 1 for 50,000
FCs cash. The branch transferred 10,000 FCs to the parent on October 1 and recorded depreciation on
equipment of 6,000 FCs for the year. Currency exchange rates for 1 foreign currency (FC) follow:
January 1 P.16=1
May 1 .18=1
July 1 .20=1
October 1 .21=1
December 31 .22=1
Average for the year .19-1

What is the remeasurement gain to be recognized in the consolidated income statement?

a. P2,100 c P2,700
b. P2,400 d. P3,000
Answer: A
Solutions:

Beginning net monetary assets 1/1 P100,000 x P.16 = P16,000

Increases in net monetary assets: Sale of inventory 500,000 x P.20= P10,000

Decreases in net monetary assets:

Purchase of inventory (60,000) x P.16 = P(9,600)

Purchase of equipment (30,000) x P.18= P(5,400)

Transfer to parent (10,000) x P.21= P(2,100)

Ending net monetary assets 12/31 P50,000 P8,900

Ending net monetary assets at the current exchange rate P50,000 x P.22 = (11,000)

Remeasurement gain P(2,100)

83. Using the same information in No 82, which of the following item is not remeasurement using historical
exchange rate under the temporal or remeasurement method?
a. Accumulated depreciation on equipment
b. Cost of goods sold
c. Marketable equity securities
d. Retained Earnings
Answer: C
Solutions:

Marketable equity securities are carried at market value and therefore translated at the current exchange rate
under the temporal method or the remeasurement method.

84. The subsidiary in Japan of Manila company, a Philippine enterprise has a plant asset with a cost of
3,600,000 yen on December 31, 20x7. On this amount, plant asset with a cost of 2,400,000 yen were
acquired in 20x5 when the exchange rate was 1 yen = P0.625; and plant asset with a cost of 1,200,000 yen
were acquired in 20x6 when the exchange rate was 1 yen= P0.556. the exchange rate on December 31,
20x7 was 1 yen = P0.500 and the weighted average rate for 20x7 was 1 yen = P0.521. The Japanese
 subsidiary depreciates plant assets by the straight-line method over 10 years economic life with no residual
value.

If the subsidiary foreign operation is integrated with parent’s operation. What is the 20x7 depreciation
expense for the Japanese subsidiary in Philippine peso for translated income statement?
a. P216,720 c P150,000
b. P207,820 d. P66,720
Answer: A
Solutions:

The subsidiary's operation is integral to the operation of the parent's operation, so a remeasurement or
temporal method is appropriate .Depreciation is an expense related to non-monetary items recorded at past
(historical exchange price, therefore, historical rate should be used to remeasure expenses as follows:

Depreciation expenses:

20x5 acquisition: 2,400,000 /10 years = 240,000 yens x P.625 = P150,000

20x6 acquisition: 1,200,000 /10 years = 120,000 yens x P.556= 66,720

P216,720

85. Westmore, Ltd. Is a Thailand subsidiary of a Philippine Company. Westmore functional currency is baht.
The following exchange rate were in effect during 20x6:
January 1 P1= .625 Baht
June 30 P1= .610 Baht
December 31 P1= .620 Baht
Weighted average rate for the year P1= .630 Baht

Westmore reported sales of baht 1,500,00 during 20x6. What amount (rounded) would have been
included for this subsidiary in calculating consolidated sales?
a. P2,380,592 c P2,429,150
b. P2,400,000 d. P2,419,355
Answer: A
Solutions:

The foreign currency is the local currency unit (LCU), so a translation method or closing rate method is
appropriate. Sales are translated at the average rate (historical rate i.e., rate on January 17 impracticable to use
since it is not given) the sales amounted to P2,380,952 (1,500,000 baht/.630 baht).

86. Using the same information in No 85, Westmore had accounts receivable of baht 280,000 on December 31,
20x6. What amount (included) would have been included for this subsidiary in calculating consolidated
accounts receivable?
a. P444,444 c P142,600
b. P451,613 d. P176,400
Answer: B
Solutions:

The foreign currency is the functional currency so a translation method or closing rate method is
appropriate. all assets are translated at the current exchange rate of P.620. thus, accounts receivable will amount to
P451,613 (280,000 baht/.620 baht)
 87. An entity has a subsidiary that operates in a country where the exchange rates fluctuates wildly and there
are seasonal variations in the income and expenses patterns. Which of the following rates of exchange
would probably be used o translate the foreign subsidiary’s income statement?
a. Year-end spot rate
b. Average for the year
c. Average for the quarter-end rates
d. Average rate for each individual month of the year
Answer: D
Solutions:

PAS 21 (revised) requires that all income statement accounts is to be translated at the spot rate at the date of
transaction average rates are allowed is there is no great fluctuation in the exchange rate since there is a seasonal
variation if would be preferred that average monthly rate should be used.

88. Ace Corporation starts a subsidiary in a foreign country; the subsidiary’s functional currency is the LGU.
On January 1, Ace buys all of the subsidiary’s common stock of LGU of 20,000 foreign currencies (FC).
On April 1, the subsidiary purchases the inventory for 20,000 FCs with payment made on May 1, and sells
this inventory on August 1 for 3,000 FCs which it collects on October 1. Currency exchange rates for 1
foreign currency (FC) follow:
January 1 P.15=1
April 1 P.17=1
May 1 P.18=1
August 1 P.19=1
October 1 P.20=1
December 31 P.21=1

In preparing consolidated financial statements, what transition adjustment will Ace report at he end of
the current year?
a. P400 positive (credit) c P1, 400 positive (credit)
b. P600 positive (credit) d. P1,800 positive (credit)
Answer: C
Solutions:

The foreign currency is the local currency units (LCU) so translation method or closing method is appropriate.
Foreign currencies Exchange rate Peso

Net asset (SHE), beginning 20,000 .15 (HR) 3,000

Add: Net Income (30,000-20,000) 10,000 .19 (HR) 1,900

Net asset (SHE), ending 4,900

Net asset (SHE), ending 30,000 .21 (CR) 6,300

Total adjustment (positive -credit – gain 1,400

HR (historical rate) was used for the net income (sales and cost of sales since the details of transactions
were given)

All assets and liabilities are translated at the current exchange rate does CR was used to determine the
ending balance of net assets so the translation game should properly be determined

89. Using the same information in No 88, in the translated financial statement what transition adjustments will
Ace report at the end of the current year?
a. Current year method, income statement translated at average exchange rate for the year.
b. Current year method, income statement translated at balance sheet date.
 c. Temporal method
d. Monetary/non-monetary method
Answer: C
Solutions:

By translating items carried at historical cost by the historical exchange rate the temporal method maintains the
underlying valuation method used by foreign subsidiary

90. Malinaw has year ended December 31, 20x6 and uses the peso as its functional currency. On November 29,
20x6, Malinaw received a loan from a foreign bank for 1,520,000 yens. The proceeds was used to finance,
in part, the purchase of a new office block. The loan remained unsettled at the year end.

Exchange rates:
November 29, 20x6 1 peso=1.52
December 31, 20x6 1 peso=1.66

The following amount should be recorded by Malinaw, ignoring interest payable on the loan. On
November 29, 20x6 the cash advance from bank account amounted to:
a. P1,520,000 c P915,622
b. P1,000,000 d. Cannot be determined
Answer: B
Solutions:

On November 29, 20x6, the following amounts should be recorded by Malinaw, ignoring interest payable
and the loan. The cash advance from the bank is translated at the rate on the date that it was received (1,520,000
yens x P1/1.52 yens = P1,000,000) and a liability recorded for the same amount.

91. Using the same information in No 90, the December 31, 20x6 bank loans payable exchange rate difference
that should be recognized in profit or loss for the period amounted to:
a. Nil or Zero c P84,337 loss
b. P84,337 gain d. P604,338 gain
Answer: B
Solutions:

As the loan was still outstanding at the end of the period and it is a monetary item it should be retranslated
at the exchange rate at the date of the reporting period (1,520,000 yens x P1/1.66 yens = P915,663). The exchange
difference should be recognized as a gain in profit or loss for the period (P1,000,000 less P915,663 = P84,337)

PAS 21 par 28 states that exchange difference arising on the settlement of monetary items (i.e., bank loan payable in
this case) or on translating monetary items at rates different from those at which they were translated on initial
recognition during the period or in previous financial statements shall be recognized in profit or loss in the period in
which they arise

92. The Wiley Company has the peso as its functional currency. On October 16, 20x6, Wiley ordered some
inventory from a foreign supplier and agreed a purchase price of 160,000 yens. The inventory was received
on November 15,20x6.

On December 31, 20x6, the inventory remained on hand and trade payable balance for the inventory
purchased remained outstanding. The supplier was paid on January 27,20x7 and the inventory was sold
on January 31, 20x7.

The following information about exchange rates are available:

October 16, 20x6 P1=2.60 yens
November 15,20x6 P1=2.50 yens
 December 31, 20x6 P1=2.40 yens
January 27,20x7 P1=2.25 yens

According to PAS 21 (The effects of changes in Foreign exchange rates) at what amount should the
trade payable balance due to the supplier be presented in the statement of financial position of Wiley
on December 31, 20x6?
a. P61,538 c P66,667
b. P64,000 d.P71,111
Answer: C
Solutions:

-160,000 yens x P1/2.40 yens= P66,667

PAS 21 par 23 (a) requires the foreign currency monetary items such as trade payables of an entity to be retranslated
at the closing rate at the date of a reporting period.

93. Connie Corp. had a realized foreign exchange loss pf P15,000 for the year ended December 31, 20x6 and
must also determine whether the following item will require year-end adjustment:

 Connie had an P8,000 loss resulting from the transition of the accounts of the wholly owned
foreign subsidiary for the year ended December 31, 20x6.
 Connie had an accounts payable to an unrelated foreign supplier payable in the supplier’s
local currency. The Philippines peso equivalent of the payable was P64,000 on the October
31, 20x6 invoice date and it was P60,000 on December 31, 20x6. The invoice was payable on
January 31,20x7.
In Connie’s 20x6 consolidated income statement, what amount should be included as foreign exchange
loss?
a. P11,000 c P19,000
b. P15,000 d.P23,000 (AICPA)
Answer: A
Solutions:

The reported foreign exchange loss is determined as follows:

Foreign exchange loss before adjustment P15,000

Gain on transaction determined in foreign currency 4,000

Foreign exchange loss for 20x6 P11,000

The payable for unrelated flooring supplier is a transaction denominated in a foreign currency. The payable
was initially recorded of P64,000. It was included in December 31, 20x6 balance sheet at P60,000. The decrease in
the table represents a P4,000 transaction gains which is recognized in income from continuing operations in 20x6.
On the other hand, the P8,000 loss resulting from the translation of the accounts of the foreign subsidiary is not
recognized in the 20x6 income statement. Translation gains and losses translation reserve are reported in the balance
sheet as a separate component of owner's equity.

94. Post Inc., had a credit translation adjustment of P30,000 for the year ended December 31, 20x7. The
functional currency of Post subsidiary was the currency of the country in which it was located.
Additionally, Post had a receivable from foreign customer payable on a local currency of the costumer. On
December 31, 20x6, this receivable for 200,00o local currency units (LCU) was correctly include in Post’s
balance sheet at P110,000. When the receivable was collected on February 15,20x7, the Philippine peso
equivalent was P120,000. In Post’s 20x7 consolidated income statement, how much should be reported as
foreign exchange gain?
a. 0 c P30,000
 b. P10,000 d. 40,000 (AICPA)
Answer: B
Solutions:

Translation adjustment under current rate method to functional currency is (LCU) relating to foreign
subsidiaries are not included in the determination of consolidated income these adjustments are reported in other
comprehensive income (OCI). Post's receivable from a foreign customer was denominated in a foreign currency;
therefore changes in the relative value of the peso in the foreign currency results in exchange gains or losses which
are included in the determination of net income. The recorded amount of the receivable was P110,000 and it was
settled for P120,000 does Post had a P10,000 foreign exchange gain in this transaction.

Use the following information for questions 95-10 below:

A Philippine Company has a foreign subsidiary on January 1, 20x4. The subsidiary trial balance for January 1 and
December 31, 20x4 are presented below, in FCs (foreign currencies):

January 1, 20x4 December 31, 20x4

balance Dr (Cr) balance Dr (Cr)
Cash receivable FC 37,000 FC 20,000
Plant and equipment, net 400,000 435,000
Labilities (172,000) (165,000)
Capital Stock (115,000) (115,000)
Retained earnings, January 1 (150,000) (150,000)
Dividends 10,000
Sales revenue (800,000)
Operating expenses 765,000

Total FC -0- FC -0-

New plant and equipment of FC 85,000 was acquired in 20x4. Operating expenses include FC 50,000 on
depreciation of plant and equipment on which FC 5,000 is related to plant and equipment purchased on 20x4.

Exchange rate
January 1, 20x4 P1.45
Plant and equipment acquired 1.40
Average for 20x4 1.30
Dividends declared 1.26
December 31, 20x4 1.25

For question 95-99, assume that the subsidiary’s functional currency is the FC/
95. What is the translation gain or loss for 20x4?
a. P54,650 loss c. P67,250
b. P59,500 gain d. P67,350
Answer: A
Solutions:

FC Rate Peso

Beginning expensed position (FC115,000+ FC150,000) 265,000 1.45 P384,250

Net income (FC800,000 – FC765,000) 35,000 1.30 45,500

Dividends (10,000) 1.26 112,600

P417,150
Ending exposed position (FC115,000+ FC150,000 +

FC800,000 – FC765,000-FC10,000) 290,000 1.25 362,500

Translation loss P54,650

Notes for 96-99

Translated financial statements

Balance sheet 12/31/20x4 FC Rate Peso

Cash receivable 20,000 1.25 25,000

Plant and equipment, net 435,000 1.25 543,750

Total assets 455,000 568,750

Liabilities 165,000 1.25 206,250

Capital stocks 115,000 1.45 166,750

Retained earnings 175,000 250,400

Accumulated other comprehensive loss (54,650)

Total liabilities and equity 455,000 568,750

Income statement 20x4

Sales 800,000 1.30 1.040,000

Operating expense (765,000) 1.30 (994,500)

Net Income 35,000 45,500

Retained earnings 12/31/20x4

Retained earnings, January 1 150,000 1.45 217,500
Net income 35,000 1.30 45,500
Dividends (30,000) 1.26 (12,600)
Retained earnings, December 31 125,000 250,400

96. What are translated total asset for the subsidiary on December 31, 20x4?
a. P659,750 c. P591,500
b. P651,750 d. P568,750
Answer: A

97. What are translated 20x4 operating expenses for the subsidiary?
a. P994,500 c. P1,001,750
b. P987,750 d. P1,109,750
Answer: B

98. What is translated 20x4 net income for the subsidiary?

 a. P(9,150) c. P42,650
b. P38,250 d. P45,500
Answer: D

99. What is the subsidiary’s translated December 31, 20x4 retained earnings balance?
a. P217,500 c. P250,400
b. P243,150 d. P263,000
Answer: C

For question 100-104, assume that the subsidiary’s functional currency is the Philippine peso.
100.What is the remeasurement gain or loss for 20x4?
a. P37,250 gain c. P25,650 loss
b. P35,600 gain d. P24,600 loss
Answer: B

Solutions:

FC Rate Peso

Beginning expense position (FC37,000-FC172,000) (135,000) 1.45 (195,750)

+Sales revenue 800,000 1.30 1,040,000

-Out of pocket expense (FC765,000-FC50,000) (715,000) 1.30 (929,500)

-Dividends (10,000) 1.26 (12,600)

-Plants and equipment purchase (85,000) 1.4 (119,000)

216,850

Ending expense position (FC20,000-FC165,000) (145,000) 1/25 (181,250)

Remeasurement gain P35,600

Note for question 101-104

Remeasured financial statement

Balance sheet 12/21/x4

Cash receivable 20,000 1.25 25,000

Plant and equipment, net 435,000 626,750

Total assets 455,000 651,750

Liabilities 165,000 1.25 206,250

Capital stocks 115,000 1.45 166,750

Retained earnings 175,000 278,750

Total liabilities and equity 455,000 651,750

Income statement 20x4

Sales 800,000 1.30 1.040,000

Out of pocket operating expenses (715,000) 1.30 (929,500)

Depreciation expense (50,000) 73,850

Remeasurement gain 35,600

Net Income 35,000 73,850

Retained earnings 12/31/20x4

Retained earnings, January 1 150,000 1.45 217,500
Net income 35,000 73,850
Dividends (10,000) 1.26 (12,600)
Retained earnings, December 31 175,000 278,750

Remeasurement of 20x4 for depreciation expense

Depreciation on plant and equipment on hand

At the date of the acquisition 45,000 1.45 65,250

Depreciation on plant and equipment

Acquired during 20x4 5,000 1.40 7,000

Total 72,250
Remeasurement of 12/31/x4 for depreciation expense
Plant and equipment on hand at the date of the

Acquisition (FC400,000-FC45,000) 355,000 1.45 514,750

Plant and equipment acquired during 20x4

(FC85,000-FC5,000) 80,000 1.40 112,000

Total 626,750

101.What are remeasured total assets for the subsidiary at December 31, 20x4?
a. P568,750 c. P651,750
b. P634,000 d. P672,750
Answer: C
Solutions:

102.What are remeasured 20x4 operating expenses for the subsidiary?

a. P994,500 c. P1,001,750
b. P999,500 d. P1,102,000
Answer: C
Solutions:

103.What are remeasured 20x4 net income for the subsidiary?

a. P38,250 c. P68,750
b. P45,500 d. P73,850
Answer: D
Solutions:
 104. What is the subsidiary's remeasured December 31, 20x4 retained earnings balance?
a. P218,750 c. P278,750
b. P243,150 d. P73,850
105. Property was purchased on December 31, 20x6 for 20 million baht. The general price index in the country
was 60.1 on that date. On December 31, 20x8, the general price index had risen to 240.4. If the entity
operates in a hyperinflationary economy, what would be the carrying in the financial statements of the
property after restatement?
a. 20-million-baht c. 80 million baht
b. 1,200.2 million baht d. 4,808 million baht

Answer: C
Solutions:

Since it is a non-monetary asset resumed recorded at book value or at cost it is therefore necessary to
restate such account in accordance with PAS No. 29. Thus, 20,000,000-baht X 240.4/60.1 = 80,000,000 baht

106. Using the same information in No. 105, the following exchange rates were available on the following
dates:

December 31,20x5 P1.20

Average for 20x5. P1.15

December 31, 20x6 P1.22

Average for 20x6. P1.18

December 31, 20x7. P1.25

Average for 20x7. P1.23

What would be the translated peso amount in the consolidated balance sheet on December 31, 20x7?

a. P100.0 million c. P97.6 million

b. P98.4 million d. P96.0 million

Answer: A
Solutions:

80,000,000-baht x 1.25 = P100,000,000

107. The following equity relates to an operating in a hyperinflationary economy:

Before PAS 29 After restatement

Share capital 100. 170

Revaluation reserve 20 -

Retained earnings 30 -

150 170

What would be the balances on the revaluation reserve and retained earnings after the restatement for PAS 29?

a. Revaluation reserve 0, retained earnings 100

 b. Revaluation reserve 100, retained earnings 0
c. Revaluation reserve 20, retained earnings 80
d. Revaluation reserve 70, retained earnings 30

Answer: A
Solutions:
Any gain or loss arising from net monetary position (because of hyperinflation) should be presented in the net
income which will eventually be closed to retained earnings account.

108. Pinoy company operates in a hyperinflationary economy its balance sheet of December 31, 20x9, follows:

Baht ('000)

Property plant and equipment 900

Inventory 2,700

Cash 350

Share capital (issued 2005) 400

Retain their earnings 2,350

Non-current liabilities 500

Current liabilities 700

The general price index had move in this way:

December 31

20x5 100

20x6 130

20x7 150

20x8 240

20x9 300

The property, plant and equipment was purchased on December 31, 20x8 and there is a six months inventory held.
The non-current liabilities were a loan raised on March 31, 20x9. the total assets after adjusting for
hyperinflationary on December 31, 20x9 should be: ('000)

a. P1,150 c. P5,850
b. P5,150 d. P11,850

Answer: B
Solutions:

Property, plant and equipment(900x300/150) 1,800

Inventory(2,700x300/270) 3,000
Cash 350
Total assets 5,150

The inventory has been restated assuming that the index increases proportionately over time (i.e.,
(240+300) / 2 = 270) the cash and loan a monetary item and therefore is not restated. If the loan had been index
linked, then it would have been restated in accordance with the loan agreement
 109. Using the same information in no 108, determined the retained earnings on December 31 20x9: ('000)
a. P2,350 c. P2,937
b. P2,750 d. P7,050

Answer: B
Solutions:

Share capital(400x300/100) 1,200

Retained earnings December 31,20x8 (balancing figure) 2,750

Noncurrent liabilities 500

Current liabilities 700

Total liabilities and equity (same with total asset No.108) 5,150

110. Using the same information in no 108 determined the retained earnings on December 31, 20x9 (in '000's)
assuming the following exchange rates:

December 31

20x5 P 1.20

20x6 1.24

20x7 1.27

20x8 1.50

20x9 1.75

a. P4,812.50 c. P3,525.00
b. P4,125.00 d. P2,750.00

Answer: A
Solutions:

Assets

Property, plant and equipment(900x300/150) x 1.75 3,150.00

Inventory(2,700x300/270) x 1.75 5,250.00
Cash250 x 1.75 612.5
Total assets 9,012.5

Equity and liabilities

Share capital(400x300/100) x 1.75 2,100.00

Retained earnings December 31,20x8 (balancing figure) 4,812.5

Noncurrent liabilities 500 x 1.75 875.00

Current liabilities 700 x 1.75 1,225.00

Total liabilities and equity (same with total asset No.108) 9,012.5

111. Lori Corporation has a foreign subsidiary located in a country experiencing high rates at inflation,
information concerning this country's inflation rates experiences is given below.

Date Index Changes in Index Annual rate of inflation

January 1, 20x7 90

January 1, 20x8 120 30 30/100=30.00%

January 1, 20x9 150 30 30/130= 23.08%

January 20x0 210 60 60/160= 37.50%

The inflation rate in 20x0 that is used in determining if the subsidiary is operating on a highly inflationary economy
is:

a. None c. 90.58%
b. 37.50% d. 133.33%

Answer: D
Solutions:

PAS No. 29 does not establish an absolute rate at which hyperinflation is deemed to arise that allows
judgment as to when restatement of financial statements becomes necessary one of the characteristic of the
economic environment of a country which indicate the existence of hyperinflation includes:

“the cumulative inflation rate over three years approaches an exceeds 100%’’

The computation of cumulative inflation rate over three years is as follows (210 -90 )/ 90 = 133.33%

112. (IASB-SFAS 52 versus IAS 29) A Philippine parent company consolidate an Indian subsidiary, who
functional currency is the rupee. During 20x5 the rupee is considered to be a hyperinflationary currency
(US GAAP term) highly inflationary term (IFRS term). The subsidiary owns land costing rupee 10 million,
acquired when the rupee was worth P0.90. At the end of 20x5 when the subsidiary's accounts are translated
into pesos for consolidation for rupee is worth P0.20. The general price index was 100 at the date the land
was acquired and is 400 at the end of 20x5. What is the land balance at the end of 20x5, in pesos following
the IFRS and US GAAP?

IAS/IFRS US GAAP IAS/IFRS US GAAP

a. P8,000,000 P9,000,000 c. P36,000,000 P40,000,000

b. P9,000,000 P8,000,000 d. P40,000,000 P36,000,000

Answer: A
Solutions:
IAS/IFRS 10,000,000x400/100xP0.20= P8,000,000

U.S GAAP 10,000,000 xP.90= P9,000,000

 113. (IASB-SFAS 52 versus IAS 29) A Philippine Corporation's foreign subsidiary had these amounts in
foreign currency units (FCU) in 20x6:

Cost of goods sold FCU 10,000,000

Ending inventory 500,000

Beginning inventory 200,000

The average exchange rate during 20x6 was. P.80 = 1 FCU. The beginning inventory was acquired when the
exchange rate was P1 = 1 FCU. Ending inventory was acquired when the exchange rate was P.75 = 1 FCU. The
exchange rate at December 31,20x6 was P.70 = FCU 1. Assuming that the foreign country is highly inflationary, at
what amount should the foreign subsidiary’s cost pf good sold be reflected in Philippine peso in income statement?

a. P8,000,000 c. P8,065,000
b. P8,040,000 d. P8,090,000

Answer: B
Solutions:
PFRS (PAS 29)

PAS 29(IAS 29) par 42 states that:

(a) All amounts assets liabilities equity items income and expenses including comparatives should be
translated in the closing rate at the date of the most recent statement of financial position…

(b) …adjusted for subsequent changes in the price level…

Therefore, applying PAS 29 the translated amount of cost of goods sold is P 8,000,000 which will readjusted for
price index.

IASB (FASB 52)

On the other hand the IASB’s belief that the currency of a country that has a highly inflationary economy
has lost its ability as a store of value and cannot be functional measuring units as a practical solution to the problem
the board in FASB 52 prescribed to the financial statements of a foreign entity operating in a highly inflationary
economy should be remeasured as if the functional currency where the reporting currency (peso). For such entities
this means that the fallen financial statements should be translated using the temporal method. Accordingly, the
remeasurement of cost of goods sold amount to 8,065,000.

FCU Remeasured Exchange rate

Beginning inventory 200,000 P1.00 P200,000
Purchases 10,300,000 P0.80 8,240,000
Ending inventory (500,000) P0.75 (375,000)
Cost of Goods Sold 10,000,000 8,065,000
 THEORIES

41. Which of the following affects exposure to translation gains or losses?

a. Investments in AFS securities c. Purchases of inventory
b. Borrowing money from the bank d. Depreciation expense

ANSWER: D

42. Which of the following affects exposure to remeasurement gains or losses?

c. Investments in AFS securities c. Purchases of inventory
d. Borrowing money from the bank d. Depreciation expense

ANSWER: C

43. A subsidiary’s functional currency is its local currency. Which of the following subsidiary’s translation
bellow will affect exposure to translation gains or losses?
a. Refinancing existing notes payable by issuing more notes payable.
b. Recording amortization expense on intangible assets.
c. Borrowing money to invest in plant and equipment.
d. Paying cash to invest in held-for-trading securities.

ANSWER: B

44. Which financial ratio is the same whether using local currency balances or translated balances?
a. Receivable turnover (credit sales/average receivables)
b. Total asset turnover (sales/average asset)
c. Return on asset (profit/asset)
d. Leverage (total liabilities/total asset)

ANSWER: D

45. Remeasurement gains and losses are

a. Reported on the income statement.
b. Reported as a direct adjustment to retained earnings.
c. Reported in other comprehensive income.
d. Not reported.

ANSWER: A

46. A Philippines Company consolidates a subsidiary whose account is imported in euros. The subsidiary’s
functional currency is the euros. During the consolidation elimination entries, consolidated other
comprehensive income changes because
a. Revaluation and subsequent write-off of the subsidiary’s asset and liabilities change exposure to
translation gains or losses.
b. Subsidiary has now additional available-for-sale securities which change in value.
c. Elimination of the investment account in parent’s book reduces subsidiary’s assets.
d. The non-controlling interest in the subsidiary must share in the subsidiary’s equity.

ANSWER: A

47. When analyzing year-to-year changes in internationally subsidiary’s functional performance.

a. Translation overstates the percentage change in local currency income.
b. Remeasurement understates the percentage change in local currency income.
c. If the same exchange rate is used in both years, both remeasurement and translation accurately
report the percentage change in local currency income.
d. If the same exchange rate is used in both years, translation accurately report the percentage change
in local currency income, but remeasurement does not.
ANSWER: D

48. The Philippine company has a subsidiary in US. If the company statement of stockholder’s equity reports a
credit to other comprehensive income for translation adjustment. It means that
a. The dollar has strengthened against the Philippine peso and the subsidiary’s functional currency is
the dollar.
b. The dollar has weakened against the Philippine peso and the subsidiary’s functional currency is
the Philippine peso.
c. The dollar has strengthened against the Philippine peso and the subsidiary’s functional currency is
the Philippine peso.
d. The dollar has weakened against the Philippine peso and the subsidiary’s functional currency is
the dollar.

ANSWER: A

49. Which statement is most likely to be true concerning remeasurement and translation of the accounts of a
Philippine subsidiary in Portugal? Assume that the Philippine peso has been steadily strengthened against
the against the euro and operating profit excludes remeasurement gains and losses
a. Remeasured operating profit as a percent of asset will be the same as local currency percent of
asset.
b. Remeasured operating expenses will be higher than translated operating expenses.
c. Translated total assets will be higher than remeasured total assets.
d. Remeasured operating profit as a percent of asset will be higher than translated operating profit
percent of asset.

ANSWER: B

50. Several years ago, a Philippines company acquired a subsidiary located in Singapore. The Philippine has
been steadily weakening with respect to the Singaporean dollar. Which statement is most likely to be true
concerning the translated and remeasures accounts of the subsidiary?
a. The translation loss reported in other comprehensive income has been steadily growing.
b. Remeasure cost of goods sold is higher than translated cost of goods sold.
c. Remeasured sales revenue is higher than translated sales revenue.
d. Remeasure depreciation expense is higher than translated depreciation expense.

ANSWER: B

51. Assume that the Philippine peso has been steadily weakening with respect to the Australian dollar. You’re a
client, a Philippine company with subsidiary in Australia, wants to know the effect of the weakening
Philippine peso on its consolidated financial statements. The company’s functional currency is the
Australian dollar. Which statement below is true?
a. Sales revenue will be higher
b. Translated net income will be lower
c. Translated assets will be lower
d. Losses will be reported in OCI

ANSWER: A

52. A Philippine parent has wholly owned subsidiary in US. The Philippine accounts are reported in dollar.
Under what circumstance will the Philippines parent translate the subsidiary’s account from dollar to
Philippine peso?
a. The subsidiary’s functional currency is a currency other than dollars or the Philippine peso.
b. The subsidiary’s functional currency is the Philippine peso.
c. US has a highly inflationary economy
d. The subsidiary’s functional currency is the dollar

ANSWER: D
 53. The Philippine company has a Canadian subsidiary. The peso has been steadily weakening against
Canadian dollar. If the subsidiary’s functional currency is the peso, which statement below is most likely to
be true?
a. A remeasurement gain would be reported
b. Total assets will be higher if the subsidiary’s functional currency is the Canadian dollar.
c. Remeasurement operating income (sales less depreciation and out of pocket expenses) would be
higher if the subsidiary’s functional currency is the Canadian dollar.
d. Remeasured liabilities would be lower than if liabilities are translated.

ANSWER: C

54. What is ‘’presentation currency’’ as used in IFRS?

a. The subsidiary’s functional currency.
b. The parent company’s reporting currency.
c. The currency which the subsidiary reports its accounts.
d. The currency into which the subsidiary’s accounts are remeasured prior to its translation.

ANSWER: B

55. Which of the following provides the best definition of a functional currency?
a. The currency that is the most useful to the companies in order to transact business.
b. The currency of the primary economic environment in which the subsidiary operates.
c. The currency with least fluctuation in peso value.
d. None of the above

ANSWER: B

56. Which of the following statements is correct?

a. The functional currency must be always the currency of the US parent company.
b. Non- US subsidiary always record transaction is $US.
c. If the foreign currency denominated subsidiary financial statements are already in the functional
currency, but not in the parent’s currency, then the financial information must be ‘translated’ into
the parent’s currency.
d. None of the above

ANSWER: C

57. Which of the following is not a factor that must be considered in determining the functional currency?
a. In which currency does subsidiary transact sales and ultimately generate its cash.
b. In which currency does subsidiary purchase labor, materials and other goods and services and
ultimately expend cash.
c. In which currency does subsidiary obtain its financing.
d. In which currency will fluctuations in peso value be minimized.

ANSWER: D

58. Which of the following statements is true?

a. The functional currency cannot be changed once it is selected.
b. If the functional currency is changed, prior financial statements continue to be reported in the
previous functional currency.
c. Th functional currency can be changed as often as is deemed necessary to minimize fluctuations in
reported earnings
d. Th functional currency is changed, previously issued financial statements should be restated into
the new functional currency.

ANSWER: B

59. Which of the following statements is true?

 a. Revenues and expenses can only be translated at the exchange rate in effect when recognized.
b. IFRS permits averaging at exchange rate in order to facilitate the translation process and prescribes
a specific approach for companies to use
c. Companies are required to use an averaging method that weights transaction by the relative
proportion at sales volume during the period.
d. Companies are permitted to use an averaging method for the period to translate revenues and
expenses under the assumptions that revenues and expenses occur evenly throughout the period.

ANSWER: D

60. Which of the following best describes current GAAP with respect to the translation process?
a. Assets and liabilities are translated at the exchange rate at the balance sheet date regardless of when
they arose.
b. Assets and liabilities are translated at the exchange rate in effect when they arose.
c. Assets are translated at the exchange rate at the balance sheet date, but liabilities are translated at
the exchange rate in effect with the liabilities were incurred.
d. Revenues and expenses must be translated at the exchange rate in effect then they are recognized.

ANSWER: A

61. An exchange rate of P1.34; 1 rupee

a. Can also be expressed as P1; 0.75 rupee
b. Means that each peso worth 1.34 rupee
c. Implies that the peso has strengthened vis-a-vis the rupee
d. Implies that the peso has strengthened vis-a-vis the peso

ANSWER: A

62. Which of the following is not a factor that can be considered in determining company’s functional
currency?
a. Cash flow related to foreign entities individual assets and liabilities are primarily in foreign
currency and do not directly affect the parent entity’s cash flow.
b. Sales pries for the foreign entity products are not primarily responsive on a short-term basis to
changes in exchange rates but are determined more by local competition or local government
regulation.
c. The sales market is mostly in the parent’s country and sales contracts are denominated in parent’s
currency.
d. Use of particular currency will minimize the fluctuations in profit.

ANSWER: D

63. Which of the following best describes the translation of financial statements?
a. All asset, liability and equity accounts are translated at the current exchange rate on the financial
statement date.
b. All asset, liability and equity accounts are translated at an average exchange rate for the period.
c. Common stock and APIC accounts are translated at their respective historical exchange rate.
d. All equity accounts are translated at their respective historical exchange rate.

ANSWER: C

64. Which of the following best describes the cumulative translation adjustment?
a. The cumulative translation adjustment is a plug figure to balance the net balance.
b. Changes in the cumulative translation adjustment are reflected in net income for the period.
c. The cumulative translation adjustment reflects changes in the fair value of marketable securities on
the balance sheet.
d. The cumulative translation adjustment can only be appositive dollar amount.
ANSWER: A

65. Which of the following best describes the translation of the statement of cash flow?
a. The statement of cash flow is prepared from the translated comparative balance sheet and income
statement.
b. All line items on the statement of cash flows are translated at the current exchange rate on the
statement date.
c. Translation of the statement of cash flows generally utilizes the weighted average exchange rate for
all line items except significant one-time transactions.
d. None of the above.

ANSWER: C

66. Which of the following indications that the subsidiary is not autonomous?
a. Significant asset may be acquired from the parent or otherwise by expending the parent’s functional
currency.
b. The sale of assets may make available to the parent unit of the parent’s functional currency.
c. Financing is primarily from the parent or otherwise in parent’s functional currency.
d. All of the above

ANSWER: D

67. Which of the following indications that the subsidiary is autonomous?

a. The subsidiary borrows in the parent’s functional currency.
b. The subsidiary operates from highly inflationary economy.
c. The subsidiary primarily sells goods that are sold by the parent.
d. The subsidiary pays for its purchase using the parent’s functional currency.

ANSWER: C

68. Monetary assets and liabilities are assets and liabilities:

a. Which include only cash and marketable securities.
b. Which are measured at fair value/
c. Whose amounts are fixed in terms of units of currency by contracts or
d. All of the above.

ANSWER: C

69. Which of the following best describes the accounting for nonmonetary assets and liabilities?
a. They are reported at their historical cost.
b. They are reported at market value.
c. Declines in market value are recognized, but only if other than temporary.
d. We recognize decreases in fair value but not increases.

ANSWER: A

70. Which of the following best describes the accounting for nonmonetary assets and liabilities?
a. They are reported at fair value.
b. Revenues and expenses arises from these assets are translated at historical cost.
c. They are reported at fair value only if less than historical cost.
d. None of the above are true

ANSWER: B

71. Which of the following statements is not true?

a. Gains and losses from remeasurement are reflected in current income.
b. Cost of Goods Sold is not computed as the product of the foreign currency amount and exchange
rate.
 c. There is no cumulative translation adjustment arising from the remeasurement process.
d. Remeasurement gains and losses are reflected in Other Comprehensive Income (OCI).

ANSWER: D

72. Upon the sale of a foreign subsidiary,

a. The gains and losses on the sales is affected by the balance of cumulative translation adjustment
account.
b. The gains and losses on the sales is only reflected in other comprehensive income (OCI) not in net
income.
c. The gains and losses on the sales is not affected by the balance of cumulative translation adjustment
account.
d. The equity adjustment account is first adjusted to current market value before the gains and losses
on the sales is recognized.

ANSWER: A

73. Which of the following best describes the accounting for the net investment in a foreign subsidiary?
a. The net investment in a foreign subsidiary is reported at fair value.
b. The companies can hedge the net investment in a foreign subsidiary like any other investment.
c. The net investment in a foreign subsidiary is reported at consolidated balance sheet at historical
cost.
d. Both a and b are true.

ANSWER: B

74. The hyperinflationary economy is best defined as: (US term: highly inflationary)
a. One which has cumulative inflation of over 100% over a three-year period.
b. One in which rate of inflation is greater than that of a parent company.
c. One with inflation that is greater than neighboring countries.
d. None of the above.

ANSWER: A

75. PFRS for converting the account balances of an international subsidiary in a hyperinflationary country to
the parent’s presentation currency requires
a. Remeasurement of the subsidiary’s accounts to the parent’s presentation currency.
b. Translation of the subsidiary account to the parent’s presentation currency.
c. Price level adjustment of the subsidiary’s accounts, and then remeasurement of the accounts to the
parent’s presentation currency.
d. Price level adjustment of the subsidiary’s accounts, and then translation of the accounts to the
parent’s presentation currency.

ANSWER: D

76. PFRS conversion of an international subsidiary’s accounts to the parent’s presentation currency.is the same
as US GAAP for non-hyperinflationary functional currencies.
a. With the exception that the remeasurement gains and losses are reported in OCI.
b. With the exception that the translation gains and losses are reported in income.
c. With the exception that translation is the only option; remeasurement is not allowed.
d. With no difference.

ANSWER: D