Chapter 6

True-False Statements
1. Entities of any size may be involved in foreign currency transactions

2. Transactions conducted with a company outside of the Philippines will always

result in a foreign currency transaction for the Philippine company.

3. The currency that is ultimately received or paid as a result of a transaction is said

to be the currency in which the transaction is denominated.

4. The relative value between two currencies is called the exchange rate.

5. When a fixed exchange rate between two currencies exists, the exchange rate
will be the same for all types of transactions.

6. A fixed exchange rate is the exchange rate between two currencies determined
by market conditions.

7. Floating exchange rates allow the exchange rate among currencies to fluctuate
based on supply and demand.

8. Changes in the supply and demand for a currency and therefore the exchange
rate are based solely on interest rates.

9. When the market value of a currency increases, that currency is said to

strengthen against the other currencies.

10. When the value of a currency increases relative to other currencies, it is easier
for businesses in the country where the currency has strengthened to export
products.

11. The spot exchange rate is the forecasted exchange rate that will exist in 30 days.

12. The difference between the exchange rate to buy a currency and the exchange
rate to sell a currency is called the spread.

13. When a purchase or sale occurs and it is denominated in a foreign currency, the
amount recorded is the estimated value of the foreign currency based on the
exchange rate that exists at the transaction date.

14. The values recorded, when a purchase with immediate payment occurs, are
different when the payment is in dollars versus in some other currency.
15. When payment for a foreign currency purchase occurs at a date subsequent to
the purchase, the currency in which the transaction is denominated makes a
different in the values recorded to recognize the payment.

16. When inventory is sold with payment to occur at a later date, and the transaction
is denominated in a foreign currency, the amount recorded at the date of the sale
is the known value of the currency that will be received at a later date.

17. The IASB views the purchase or sale denominated in a foreign currency as
separate from any change in value of the receivable or payable that may occur
between the transaction date and the settlement date.

18. The settlement date in a foreign currency transaction is the date on which the
domestic company enters into a transaction denominated in a foreign currency.

19. The amount recorded at the date of a foreign currency purchase transaction is an
estimated amount because the value of the currency to be exchanged is
unknown at the date of the initial transaction.

20. A foreign currency purchase transaction requires the recognition of gains and
losses at the balance sheet date because one or more of the accounts on the
financial records is a monetary account.

21. For an account to qualify as a monetary account, it must be fixed in units of a

foreign currency.

22. An adjusting entry recorded at the balance sheet date between the date of a
foreign currency transaction and the exchange of currency occurs because of a
change in the estimated value of the foreign currency to be exchanged.

Conceptual Multiple Choice Questions

1. Which of the following is not a foreign currency transaction?

a. IBM sells computers to a company in India with payment to be made in
rupee
b. Pratt and Whitney sells jet engines to an airplane manufacturer in Britain
with payment to be made in dollars
c. Allied Chemical purchases raw materials from a supplier in Mexico with
payment to be made in pesos
d. All of the above are foreign currency transactions

2. Which of the following terms describes the change in currency values relative to
one another as a result of market conditions?
a. Exchange rate
b. Fixed exchange rate
c. Floating exchange rate
 d. Pegged exchange rate

3. Which of the following terms describes the change in currency values relative to
one another as a result of decisions made by politicians?
a. Exchange rate
b. Fixed exchange rate
c. Floating exchange rate
d. Pegged exchange rate

4. Which of the following terms describes currency values relative to one another?
a. Exchange rate
b. Fixed exchange rate
c. Floating exchange rate
d. Pegged exchange rate

5. Which of the following statements is not accurate with regard to a purchase or

sale denominated in a foreign currency?
a. The account titles would be the same as a similar transaction undertaken
with a Philippine company
b. Future fluctuations of the foreign currency’s value are not anticipated
c. The amount recorded in the financial records will be the estimated value of
the foreign currency paid or received
d. The amount recorded in the financial records is the number of foreign
currency units exchanged

6. What is the date called when a foreign currency transaction is originally

recorded?
a. Origination date
b. Balance sheet date
c. Transaction date
d. Settlement date

7. What is the date called when a foreign currency transaction is paid through the
exchange of currency?
a. Origination date
b. Balance sheet date
c. Transaction date
d. Settlement date

8. After a purchase or sale denominated in a foreign currency occurs, what is

created on a Philippine company’s financial records as a result of the change in
the exchange rate of a foreign currency?
a. Foreign currency option
b. Exchange losses and gains
c. Settlement date
d. Foreign currency forward contract
9. Which of the following statements is correct with regard to foreign currency
transactions?
a. The company must hedge a foreign currency transaction if there is a
balance sheet date between the transaction date and the settlement date
b. When there is a balance sheet date between the transaction date and the
settlement date, the transaction is initially recorded using the projected
spot rate on the settlement date
c. An adjusting entry is required on the balance sheet date to reflect the
change in the estimated value of the monetary account associated with
the transaction
d. Any gains or losses are amortized on the period from the date of the initial
transaction until the settlement date using the effective interest method

10. Which of the following is a monetary account?

a. Accounts payable
b. Inventory
c. Unearned revenue
d. Prepaid rent

11. Which of the following is not a monetary account?

a. Accounts receivable
b. Accounts payable
c. Bonds payable
d. Unearned revenue

12. The exchange loss or gain recognized on the balance sheet date that occurs
between the transaction date and the settlement date of a foreign currency
transaction is based on what exchange rates?
a. The spot rate at the transaction date and the spot rate at the balance
sheet date
b. The forward rate at the transaction date and the spot rate at the balance
sheet date
c. The spot rate at the transaction date and the forward rate at the balance
sheet date
d. The forward rate at the transaction date and the forward rate at the
balance sheet date

Straight Problems
1. On July 1, 20x4, BY Company borrowed 1,680,000 local currency units (LCU) from a
foreign lender evidenced by an interest-bearing note due on July 1, 20x5, which is
denominated in the currency of the lender. The Philippine peso equivalent of the
note principal was as follows:
Date Amount
7/1/x4 (date borrowed) P210,000
12/31/x4 (BY’s year-end) 240,000
 7/1/x5 (date repaid) 280,000
In its income statement for 20x5, what amount should BY include as a foreign
exchange gain or loss on the note principal?

2. Cassowary Corporation’s balance sheet at December 31, 20x3 included a P20,400

account receivable from foreign customer. The account receivable was
denominated as 30,000 foreign currency units (FCUs). What entry did Cassowary
make on January 16, 20x3 when the account receivable was collected and the
exchange rate for 1 FCU was P.67?
a. Cash 20,100
Accounts Receivable 20,100
b. Cash 20,100
Exchange Loss 300
Accounts Receivable 20,400
c. Cash 20,400
Accounts Receivable 20,400
d. Cash 20,700
Accounts Receivable 20,400
Exchange Gain 300

3. On March 1, 20x4, Wilson Corporation sold goods for a peso equivalent of P31,000
to a foreign supplier. The transaction is denominated in foreign currency (FC). The
payment is received on May 10. The exchange rates were:
March 1: 1 FC = P.31
May 10: 1 FC = P.34
What entry is required to revalue foreign currency payable to peso equivalent value
on May 10?
a. Account Receivable . . . . . . . . . . . . . . . . . . . . . . . . 93
Foreign Currency Transaction Gain . . . . . . . . . . 93
b. Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Foreign Currency Transaction Gain . . . . . . . . . . 3,000
c. Foreign Currency Transaction Loss . . . . . . . . . . . . . . 3,000
Accounts Receivable . . . . . . . . . . . . . . . . . . . . 3,000
d. Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Foreign Currency Transaction Gain . . . . . . . . . . 93

4. On 9/30/x6, a domestic importer acquired inventory from an Italian firm for 100,000
FCUs (foreign currency units). On that date, the direct spot rate was P.90. At
l2/31/x6, the direct spot rate was P.85. On l/7/x7, when the direct spot rate was
P.93, the domestic importer made full payment of 100,000 FCUs. In the importer’s
20x6 financial statements, what should be reported as an FX gain or loss?

Use the following information for questions 5 to 6.

RD Corporation purchases memory on March 15 from a Taiwanese company for
6,500,000 FCUs (Foreign Currency Units). Payment for the inventory occurs on May
15. The exchange rate is 1 FCU = P.029 on March 15 and 1 FCU = P.025 on May 15.
5. What is the amount recorded on RD’s financial records for the inventory on March
15?
6. What is the credit to cash when RD pays for the inventory on May 15?
Wizard Corporation sells inventory on June 20 to a German company for 86,000 FCUs
(Foreign Currency Units). Payment occurs on August 10. The exchange rate on June
20 is 1 FCU = P1.016 and 1 FCU = P1.022 on August 10.

7. What is the amount on Exchange Gain or Loss recorded on Wizard’s financial

records on August 10?

On January 1, 20x4, HB Inc. issued 10,000,000 FCU (foreign currency units) of bonds
payable. The bonds are due on December 31, 20x6. Over the life of the bonds, the
exchange rates were as follows:
January 1, 20x4 FCU 1 = P1.40
December 31, 20x4 FCU 1 = P1.45
December 31, 20x5 FCU 1 = P1.50
December 31, 20x6 FCU 1 = P1.48

8. Assume that exchange gains and losses on long-term monetary are recognized in
income immediately. What is the exchange gain (loss) recognized in income during
20x6?

The following information pertains to questions 9 through 10:

On January 1, 20x3, Original Pilipino Music (OPM), a manufacturer of high-end
recording equipment based in a foreign country, shipped 120,000 FCU (foreign currency
units) worth of inventory to its main foreign distributor, with full payment of these goods
to be paid by February 28, 20x3. OPM has a January 31 year end. A list of significant
dates and exchange rates is shown below.
Transaction Date: January 1, 20x3 FCU 1= P1.1410
Year-End Date: January 31, 20x3 FCU 1= P1.1420
Settlement Date: February 28, 20x3 FCU 1= P1.1450
The invoice price billed by OPM was 120,000 FCUs
9. At what value did OPM record the initial sale to its American distributor?
10. What is the amount of OPM’s foreign exchange gain or loss on February 28th?

11. On December 5, 20x3, Goose Corporation, a foreign firm, bought inventory items
from a foreign supplier for 1,000,000 foreign currency units (FCUs) when the spot
rate for FCU was P0.168. At Goose’s December 31, year-end, the spot rate was
P0.167. On January 4, 20x4, Goose purchased 1,000,000 FCUs for P167,500
and paid the invoice. How much gain or (loss) did Goose report in its 20x3 and
20x4, respectively, income statements?

Multiple Choice Problem

Question 1 – 6
On July 1, 20x2 CDN purchased inventory from its foreign supplier RNB Enterprises at
a cost of 1,000 FCUs. CDN’s year end is on July 31. Some important dates regarding
this transaction, as well as the exchange rates in effect at each of these dates are
shown below:
Transaction date: July 1, 20x2: 1 FCU = P0.82
Year End: July 31, 20x2: 1 FCU = P0.81
Settlement Date: July 31, 20x2: 1 FCU = P0.8050

1. What was the amount paid to RNB by CDN at the settlement date?
a. 820 FCU
b. P820
c. P810
d. P805

2. At what amount would CND record its inventory purchase from RNB at the time of
purchase?
a. 820 FCU
b. P820
c. P810
d. P805

3. At what amount would CDN record its Liability to RNB at the time of purchase?
a. 820 FCU
b. P820
c. P810
d. P805

4. What would be the amount of the foreign exchange gain or loss recorded at the
balance sheet date under the one-transaction approach?
a. Nil
b. A P10 Exchange loss
c. A P10 Exchange gain
d. A P15 Exchange loss

5. What would be the amount of the foreign exchange gain or loss recorded at the
balance sheet date?
a. Nil
b. A P10 Exchange loss
c. A P10 Exchange gain
d. A P15 Exchange loss

6. What would be the amount of the foreign exchange gain or loss recorded at the
settlement date?
a. A P5 Exchange gain
b. A P10 Exchange loss
c. A P10 Exchange gain
d. A P5 Exchange loss
Question 7 – 10

XYZ Corp. has a calendar year end. On January 1, 20x0, the company borrowed
5,000,000 Foreign Currency Units (FCUs) from a foreign bank. The loan is to be repaid
on December 31, 20x3 and requires interest at 5% to be paid every December 31. The
loan and applicable interest are both to be repaid in pesos. XYZ does not hedge to
minimize its foreign exchange risk. The following exchange rates were in throughout the
term of the loan:

January 1, 20x0 FCU 1 = P1.1500

December 31, 20x0 FCU 1 = P1.1490
December 31, 20x1 FCU 1 = P1.1485
December 31, 20x2 FCU 1 = P1.1483
December 31, 20x3 FCU 1 = P1.1487

The average rates in effect for 2010 and 2011 were as follows:
20x0: FCU 1 = P1.1493
20x1: FCU 1 = P1.1487

7. At would amount would XYZ record its initial Loan Liability on January 1, 20x0.
a. P5,476,500
b. P5,750,000
c. P5,747,500
d. P5,471,500

8. What is the amount if interest paid during 20x0?

a. P250,000
b. P372,500
c. P287,330
d. P287,250

9. What is the amount of the foreign exchange gain or loss on the principal recognized
on the 20x0 Income Statement?
a. A P5,000 gain
b. A P5,000 loss
c. A P10,000 gain
d. A P10,000 loss

10. What is the amount of interest paid during 20x1?

a. P250,000
b. P372,500
c. P287,330
d. P287,125