CRC-ACE REVIEW SCHOOL

The Professional CPA Review School

 735-9031 / 735-8901

PRACTICAL ACCOUNTING 2 B.N. CASTUCIANO/ R. E.

HERMOSILLA
FOREIGN CURRENCY TRANSACTIONS, FINANCIAL STATEMENTS TRANSLATION &
REMEASUREMENT, INVESTMENT IN FOREIGN ENTITY, CONSOLIDATED FINANCIAL
STATEMENTS OF PARENT AND SUBSIDIARY FOREIGN ENTITY
(US) FASB SFAS 52 & SFAS 133, IAS 21 & IAS 39

I. Exchange Rates
The direct foreign exchange rates in Phil. pesos are:
1 US dollar = P55.8490 1 Japanese yen = P0.4802
Required: a. What are the indirect exchange rates for the US dollar and Japanese yen?
b. How many dollars must a US firm pay to purchase goods costing P300,000 from a Filipino
firm?
c. How many Phil. pesos must be paid for a purchase of costing 6,000,000 Japanese yen?

II. Foreign transaction - purchase

Malaysia produces automobiles transmissions, which are then sent to the Philippines where they are
installed in domestically built cars. Francisco Motors, a Filipino auto company received a shipment of
transmissions on December 15, 20x1. The transmissions were subsequently paid for on January 30,
20x2. The invoice was denominated in Malaysian ringgit and totalled 5,000,000 ringgit. The relevant
exchange rates are as follows:
December 15, 20x1 - P13.68 December 31, 20x1 - P13.40 January 30, 20x2 - P13.20
Required: Provide the necessary journal entries to record the above transactions assuming
Francisco Motor’s fiscal year ends December 31.

III. Accounting for a hedge of a currency exposure resulting from a purchase.

On June 1, x6, Phil. Corp. purchased 60,000 Swiss francs worth of chocolate from the Swiss
Chocolate Company, payable on August 1, x6. To hedge this foreign currency exposure, Phil. Corp.
bought 60,000 Swiss francs on June 1, x6, for delivery on August 1, x6. The following exchange rates
applied:
June 1, x6 60-day forward rate SFr 1 = P35.856
Spot rate SFr 1 = P35.654
June 30, x6 (fiscal year-end) 30-day forward rate SFr 1 = P36.035
Spot rate SFr 1 = P35.859
August 1, x6 Spot rate SFr 1 = P36.135
Required: Prepare journal entries to record the above transactions on the books of Phil.
Corporation.

IV. Hedge against an exposed net asset position

RD Company, a Filipino firm, sold hospital equipment to Salem, Ltd. of UK on November 2, 20x7 for
100,000 UK pounds, payable in 90 days, on January 30, 20x8. Also, on November 2, RD entered into
a 90-day forward contract to hedge its exposed net asset position. Exchange rates for pounds are as
follows:
11/2/x7 12/31/x7 1/30/x8
Spot rate P81.50 P81.60 P81.65
30-day forward 81.42 81.55 81.61
90-day forward 81.38 81.42 81.56
180-day forward 81.30 81.32 81.47
 Required:
1. Prepare journal entries to record the sale of merchandise to Salem, Ltd. and the related contract
with the exchange broker.
2. Prepare adjusting entries for the sale and related hedge on December 31, 20x7.
3. Salem, Ltd settles its accounts on January 30, 20x8. Prepare the journal entries necessary to
settle the accounts with Salem Ltd. and the exchange broker.

V. Hedge of an identifiable foreign currency purchase commitment

On November 2, 20x1, Import Bazaar, a Filipino retailer, ordered merchandise from Matsushita
Company of Japan. The merchandise is to be delivered to Import Bazaar on January 30, 20x2 at a
price of 1,000,000 yen. Also, on November 2, Import Bazaar hedged the foreign currency
commitment with Matsushita by contracting with its exchange broker to buy 1,000,000 yen for
delivery on January 30, 20x2. Exchange rates for yen are:
11/2/x1 12/31/x1 1/30/x2
Spot rate P0.4375 P0.4376 P0.4378
30-day forward rate P0.4376 P0.4377 P0.4379
90-day forward rate P0.4378 P0.4379 P0.4380
Required:
1. Prepare the entry (or entries) on Import Bazaar’s books on November 2, 20x1.
2. Prepare the adjusting entry on December 31, 20x1.
3. Prepare the entries on January 30, x2.
VI. Accounting for a hedge of an identifiable foreign currency commitment.
On October 1, x3, Host Corporation (a Filipino company) secured an order from a company located in
Thailand to be delivered on April 1, x4. The sales price, which is payable upon delivery is 15,000
Thailand baht.
The spot rate for baht on October 1, x3, is P1.20. In order to protect itself against foreign
currency fluctuation, Host Corporation sold 15,000 baht for delivery in 180 days at a price of P1.16 in
forward market.
The following additional exchange rates prevailed:
December 31, x3 Forward rate for 90-day delivery 1 baht = P1.17
(Host fiscal year-end) Spot rate 1 baht = P1.21
April 1, x4 Spot rate 1 baht = P1.18
Required: Assume that the forward contract qualifies as a hedge of an identifiable foreign currency
commitment prepare the necessary journal entries for the above transactions on the books of Host
Corporation.

VII. Foreign contract - Speculative

Martin, Inc., a Pinoy import-export firm, enters into a forward contract on October 2, 20x3 to
speculate in Swiss francs. The contract requires Martin to deliver 1,000,000 Swiss francs to the
exchange broker on March 31, 20x4.
Quoted exchange rates for Swiss francs are as follows:
10/2/x3 12/31/x3 3/31/x4
Spot rate P34.590 P34.500 P34.550
30-day forward P34.580 P34.450 P34.500
90-day forward P34.560 P34.410 P34.460
180-day forward P34.530 P34.360 P34.400
Required: Prepare the journal entries on Martin’s books to account for the speculation throughout
the life of the contract.

VIII. Accounting for speculative positions in foreign currencies.

West Company, a Filipino based firm, entered into the following forward exchange contracts for
speculative purposes.
 1. October 1, x6. 180-day contract to buy 400,000 euro. On this date, the spot rate was P51.38,
and the 180-day future rate was P51.40. On December 31, x6, the spot rate was P51.39, and
the 90-day forward rate was P51.41. On April 1, x7, the spot rate was P51.43.
2. December 1, x6. 90-day contract to sell 2 million Japanese yen. On December 1, x6, the spot
rate was P0.4348, and the forward rate was P0.4346. On December 31, x6, the spot rate was
P0.4347, and the 60-day forward rate was P0.4345. On March 1, x7, the spot rate was
P0.4349.
Required: Prepare all journal entries necessary to record the above events on the books of West
Company. Assume a December 31, x6 fiscal year-end.

IX. Hedge of a net investment in a foreign entity

Phillip Corporation of Atlanta paid $ 1,920,000 for a 40% interest in Slusser Co. Ltd. of London on
January 1, 20x1 when Slusser’s net assets totalled 3,000,000 British pounds and the exchange rate
for pounds was $ 1.60. A summary of changes in Slusser’s net assets during 20x1 is as follows:

British Pounds Exchange Rate U.S. Dollars

Net Assets January 1 3,000,000 $1.60 $ 4,800,000
Add: Net Income 20x1 600,000 1.55 930,000
Less: Dividends 20x1 (200,000) 1.54 (308,000)
Less: Equity Adjustment from translation (322,000)
Net Assets December 31, 20x1 3,400,000 $ 5,100,000
Phillip Corporation anticipated a strengthening of the U.S. dollar against the British pound during the
last half of 20x1 and it borrowed 1,200,000 pounds from a London bank for one year at 10% interest
on July 1, 20x1 to hedge its net investment in Slusser. The loan was made when the exchange rate
for British pounds was $1.55. The loan was denominated in British pounds and the current exchange
rate at December 31, 20x1 was $ 1.50.

Required: 1. Prepare journal entries to account for Phillips’s investment in Slusser during 20X1.
2. Prepare journal entries for Phillip to:
a. Record the loan on July 1, 20x1
b. Adjust the loan payable at December 31, 20x1.
c. Accrue interest on the loan at December 31, 20x1. (The interest , not a part of the
hedge of the net investment , was incurred at a $ 1.525 average exchange rate.)

X. Hedge a foreign currency forecasted transaction (Cash Flow Hedge)

Bateman Industries, a Filipino corporation, anticipates a contract based on the
December 2, 20x1 discussions to sell equipment to Ramsay Ltd. of Hongkong for 500,000
Hongkong dollars. The equipment will likely be delivered and the amount collected on March
1, 20x2.
In order to hedge its anticipated commitment, Bateman entered into a forward contract
on December 2 to sell 500,000 Hongkong dollars for delivery on March 1.
Exchange rates for Hongkong dollars on selected dates are as follows:

12/2/x1 12/31/x1 3/1/x2

Spot rate P6.7000 P6.7100 P6.7200
60-day futures 6.6800 6.6900 6.7000
90-day futures 6.6600
Required: Prepare the necessary journal entries on Bateman’s books to account for:
 1. The forward contract on December 2, 20x1.
2. Year-end adjustments relating to the forward contract on December 31, 20x1.
3. The delivery of the equipment and settlement of all accounts with Ramsay Ltd. and
the exchange broker on March 1, 20x2.

XI. Investment in foreign entity

Pinoy Corporation acquired 40% of the common stock of Sakura Corporation, a Japanese company,
for P1,600,000 on January 2, 20x6, when the stockholders’ equity of Sakura consisted of 5,000,000
yen capital stock and 2,000,000 yen retained earnings. The spot rate for yen on this date was P0.50.
Any cost/book value difference is patent to be amortized over a 10-year period, and Sakura’s
functional currency is the yen.
Debits Credits
Cash ¥ 1,000,000 Accumulated depreciation – equipment ¥ 2,400,000
Accounts receivable 2,000,000 Accounts payable 3,600,000
Inventories 4,000,000 Capital stock 5,000,000
Equipment 8,000,000 Retained earnings January 1 2,000,000
Cost of sales 4,000,000 Sales 10,000,000
Depreciation expense 800,000
Operating expenses 2,700,000
Dividends 500,000 .
¥ 23,000,000 ¥ 23,000,000

Relevant exchange rates for yen are as follows:

Current exchange rate December 31, 20x6 P0.60
Average exchange rate 20x6 0.55
Exchange rate applicable to dividends 0.54
Required:
1. Prepare the income statement, retained earnings statement and the balance sheet of Sakura
Corporation in Philippine pesos.
2. Compute the balance of Investment in Sakura Corporation as of December 31, 20x6.

OPTION CONTRACTS (CASH FLOW HEDGE)

XII. A company purchase an option to purchase fuel, at a specified price. The option cost $1,000 and that
the company can exercise its option to purchase 100,000 gallons of fuel at $1 per gallon. The option
contract was signed on January 15, 2003, and the option expires on May 31, 2003.
Required:
1. Prepare the entry to record the purchase of option on January 15, 2003.
2. Assume the company prepares quarterly report on March 31, 2003. The market price of fuel
on March 31, 2003 is $1.25 per gallon and the company could exercise the option on this
date. Prepare the necessary adjusting entry on March 31, 2003.
3. On May 31, 2003, the fuel price is $1.30 per gallon and the company exercise the option.
Prepare the entries to record the fuel inventory purchased and the cash received from the
option writer.
4. On June 15, 2003, the fuel inventory was sold for $180,000. Prepare the entries necessary to
record the sales and cost of goods sold.