CHAPTER 19

Accounting for Foreign Currency Transaction

I. DISCUSSION

Foreign Currency Transaction versus Foreign Currency Translation

It is important to know the distinction between the transaction and translation

• Foreign Currency Transaction – are transactions to be settled in a foreign

currency and financial statement of an affiliate maintained in a foreign currency are
translated into pesos by multiplying the number of units of the foreign currency by
a direct exchange rates.
• Foreign Currency Translation – is the process of expressing monetary amounts
that are stated in terms in a foreign currency into the currency of the reporting entity
by using appropriate exchange rates.

Measured versus Denominated

It is useful to have an understanding of these two terms used in accounting of foreign

currency transaction.

Assets and liabilities are denominated in one currency if their amount is fixed in terms of
that currency. However, they must be measured in another currency for financial reporting
purposes.

When transaction is to be settled by the receipt or payment of a specified currency, the

receivable or payable is said to be denominated in that currency. Regardless of the currency in
which a transaction is denominated, the party to the transaction measures and records the
transaction in the currency in which the party is located which is the local currency.

Exchange Rates

• Spot Rate – it is the rate in which currencies can be exchanged today.

• Forward/Future Rate - is the rate at which currencies can be exchanged at some future
day.
 Dates to remember

• At the date the transaction is first recognized (Transaction Date)

Each asset, liability, revenue, gain or loss arising from the transaction is measured and
recorded in Philippine pesos by multiplying the units of foreign currency by the closing exchange
rate, that is, the spot rate in effect on a given time.

• At each balance sheet date that occurs between the transaction date and
settlement date (Balance Sheet Date)

Recorded balances that are denominated in a foreign currency are adjusted to reflect the
closing exchange rate in effect at the date of the statement of financial position. Foreign exchange
gain or loss is recognized for the difference in the exchange rate between the transaction date and
the balance sheet date.

• At the settlement sate (Settlement Date)

In the case of a foreign currency payable, a Philippine company must convert Philippine
pesos into foreign currency units to settle the account, while foreign currency units received to
settle a foreign currency receivable will be converted into pesos. Although translation is not
required, foreign exchange gain or loss is recognized if the amount of pesos paid or received upon
conversion does not equal the carrying value of the related payable or receivable.

Hedging

Hedging is a risk management technique that involves using one or more derivatives or other
hedging instruments to offset changes in fair value or cash flows of hedged items.

The general provisions on hedging and hedge accounting are contained in PAS 39.

Two Components of Hedging Relationship

1. Hedged Item- an asset, liability, firm commitment, highly probable forecast transaction,
or net investment in a foreign operation. It should expose the entity to risk of changes in
fair value or future cash flows.
 2. Hedging Instrument- a designated derivative or a designated non-derivative financial
asset or non-derivative financial liability whose fair value or cash flows are expected to
offset changes in fair value or cash flows of a designated hedged item.

Example of a Hedge

Assuming that a Philippine company that normally operates in peso, recently, the company has
decided to spread its business to United States and made a sale of some goods to an American
customer for 200 000 dollars. Invoice to American customer is due after ten (10) months.

However, the Philippine company is afraid that due to movements in foreign currency rates, it will
get significantly less pesos after ten (10) months and therefore, it enters into offsetting foreign
currency forward contract with bank to sell 200 000 dollars for some fixed (forward/future) rates
after ten (10) months.

What’s the hedge here?

• Hedged risk is a foreign currency risk.

• Hedged item is a receivable in foreign currency exposed receivable.
• Hedging instrument is a foreign currency forward contract to sell U.S. dollar for a fixed
(forward/future) rate at a fixed future date.

Three Types of Hedging Relationships

1. Fair Value Hedge- a hedge of the exposure to changes in fair value of a recognized asset
or liability or an unrecognized firm commitment that is attributable to a particular risk,
and that could affect profit or loss.
2. Cash Flow Hedge- a hedge of the exposure to variability in cash flows that is attributable
to particular risks associated with a recognized asset or liability or a highly probable
forecast transactions and could affect profit or loss.
3. Foreign Currency Hedge-a hedge of the exposure to foreign currency exchange gains or
losses on an entity’s net investment in a foreign operation (which is the amount of the
entity’s interests in the net asset of that operation).

Hedge Accounting
Hedge accounting recognizes the offsetting effects on profit or loss of changes in the fair value
of the hedging instrument and the hedge items every accounting period.

To qualify for hedge accounting the hedging relationship should meet the following conditions:

1. There is a formal designation and documentation of the hedging relationship and the entity’s
risk management objective and strategy for undertaking the hedge.

2. The hedge is expected to be highly effective in achieving offsetting changes in fair value or cash
flows attributable to the hedged risk.

3. The effectiveness of the hedge can be measured reliably.

4. The hedge is assessed on an ongoing basis and determined actually to have been highly effective
throughout the financial reporting periods for which the hedge was designate.

5. For cash flow hedges, a hedged forecast transaction must be highly probable and must present
an exposure to variations in cash flows that could ultimately affect profit or loss.

Foreign Currency Forward Contract

A foreign currency forward contract is an agreement to exchange currencies of different

countries on specified future date at the specified rate (the forward rate).

Foreign currency forward contracts are usually entered into for the following purposes:

1. A fair value hedge – this includes hedges against a change in the fair value of:

• A recognized foreign currency denominated asset or liability.

• An unrecognized foreign currency firm commitment.

2. A cash flow hedge – this includes hedges against a change in cash flow associated with:

• A forecasted foreign currency transaction.

• An unrecognized foreign currency firm commitment.

Fair Value Hedge of an Exposed Net Asset or Net Liability Position

 a) A foreign currency exposed net asset position is the excess of assets denominated in foreign
currency over the liabilities denominated in the same foreign currency and translated at the
current rate.
b) A foreign currency exposed net liability position is the excess of liabilities denominated in
a foreign currency over assets denominated in that foreign currency and translated at the
current rate.

Companies enter into forward contracts to limit the amount of gains or losses from the delayed
settlement of foreign-currency-denominated accounts receivable and payables.

Normally, banks set the forward rate at an amount different from the spot rate on the contract date.
The difference between these rates represents the cost of avoiding the risk of exchange rate
fluctuations.

Fair Value Hedge of a Foreign Currency Denominated Commitment

A foreign currency commitment is a contract or agreement to purchase or sell goods to a foreign

entity in the future, to be settled in the foreign currency. The settlement will not be made until after
delivery of the goods; therefore, it is exposed to changes in currency exchange rates before the
transaction date (the date of the delivery of the goods).

Cash Flow Hedge of a Foreign Currency Forecasted Transaction

Unlike a foreign currency commitment, a forecasted transaction is anticipated but not

guaranteed. Under cash flow hedge, the changes in fair value of the hedging instrument is deferred
and recognized as other comprehensive income. This is accumulated and reported as a separate
line in the stockholders’ equity section of the statement of financial position.

Summary of Hedging Transactions

Hedge of a Hedge of an Hedge of

Forecasted Identifiable Firm Denominated Asset
Transaction Commitment or Liability
 1. Type of Hedge Cash Flow Hedge Fair Value Hedge or Fair Value Hedge or
Cash Flow Hedge. Cash Flow Hedge.
Most often fair value. Most often fair value.

2. Basic Purpose of Hedge against Hedge against Hedge the exchange

Hedge changes in the cash exchange rate risk rate risk between the
flows due to occurring between transaction date and
exchange risk the commitment date the
occurring between and the transaction payment/settlement
the time of the date. date.
probable forecasted
transaction and the
resulting actual
transaction.

3. Recognition over Changes in value are Changes in value are Changes in value are
time of changes in the recognized as a recognized currently recognized currently
value of the component of OCI. as a component of as a component of
derivative income. income.

Swaps

A swap contract is an arrangement whereby two counter parties contractually agree to swap or
exchange one stream of cash flows for another, over a period of time.

Two Types of Swaps

1. Interest Rate Swaps

2. Cross-currency Swaps

Option Contracts

An option contract between two parties – the buyer and the seller – gives the buyer (option
holder) the right, but not the obligation, to purchase or sell something to the seller (option writer)
at a date in the future at a price agreed to at the time the option contract is exchanged.
A foreign currency option contract is a contractual agreement giving the holder the right to buy
or sell a given amount of currency at a specified price (the strike price) for a period of time or a
point in time.

Two Basic Types of Option

1. Call Option- an option granting the right to buy the underlying.

2. Put Option- an option granting the right to sell the underlying.

Foreign Currency Option Situations

Option Spot Market Price = Spot Market Price > Spot Market Price <
Exercise Strike Exercise Strike Exercise Strike
Price Price Price

Call (buy) At the money In the money Out of the money

Put (sell) At the money Out of the money In the money

• In the money- the holder would exercise the option since it is favorable to him.
• Out of the money- the holder would not exercise the option since it is unfavorable to him.

Accounting for Foreign Currency Option Premiums

a) Time Value Element. If at the inception of the foreign currency option, the option is either
out of the money or at the money, the entire premium is called the time value.
b) Intrinsic Value. If at the inception of the foreign currency option, the option is in the
money, the option holder will have paid a higher premium – the incremental amount
equaling the difference between spot market price and the exercise strike price – to be
placed in this favorable position.

Treatment of the changes in the intrinsic value and the time value of the option

Fair Value Hedge Cash Flow Hedge

 Increase in Intrinsic Value Gain on Hedge Activity Other Comprehensive
Income

Decrease in Intrinsic Value Loss on Hedge Activity Other Comprehensive

Income

Increase in Time Value Gain on Hedge Activity Gain on Hedge Activity

Decrease in Time Value Loss on Hedge Activity Loss on Hedge Activity

CHAPTER 20
Translation of Foreign Financial Statements (IAS 21)

I. DISCUSSION

As a rule, financial results and financial position of a company should be measured

using its functional currency, which is the currency that the company uses in the majority of
its business transactions.

If a foreign business entity operates primarily within one country and is not dependent
upon the parent company, its functional currency is the currency of the country in which its
operations are located and the currency in which Financial statements are
recorded(LCU=FCU=PCU). When the local currency unit, functional currency unit and the
presentation currency unit are the same, foreign currency translation is not use. However,
companies with significant overseas operations may have different local currency unit,
functional currency unit and the presentation currency unit, foreign currency translation is
use.

Foreign currency translation–the process of expressing amounts denominated or

measured in foreign currencies into amounts measured in the reporting currency of the
domestic entity. Foreign currency translation is complicated by the reality that the foreign
financial statements may have been prepared using accounting principles that are different
from those of the domestic reporting entity. Thus, prior to translation, the statements of a
foreign entity must be adjusted to reflect the principles employed by the domestic reporting
entity.

Translation VS. Conversion

Translation is not the same as conversion, which is the physical exchange of one
currency for another. Translation is simply a change in monetary expression, as when a
balance sheet expressed in British pounds is restated in U.S. dollar equivalents . No physical
exchange occurs, and no accountable transaction takes place as it does in conversion.

Corporate Accounting Concepts and Relationships

The accounting treatment of domestic and foreign entity relationships that involve some
degree of control are summarized as follows:

Domestic entity Foreign entity Accounting treatment

Home office Branch Branch accounting

Parent Subsidiary Consolidated financial

statements

Investor Investee Investment in foreign entity

at cost or equity

The above relationships suggest the need to combine or consolidate the foreign entity’s
financial statements with those of the domestic entity. The financial statements of a foreign
entity typically are measured in the currency of that foreign country. The currenc y is usually
different from the reporting currency of the domestic entity. Hence, a methodology must be
developed to express the foreign entity’s financial statements in the reporting currency of the
domestic entity.

Accounting for Translation Adjustments (Current/Closing rate method)

Translation adjustments result from the process of translating foreign financial statements
from their functional currency into the domestic entity’s reporting currency. Because various
exchange rates are used in the translation process, the basic equality of the balance sheet
equation is not preserved. From a mechanical viewpoint, the translation adjustment is an
amount necessary to balance a translated entity’s trial balance. Translation adjustments do
not exist in terms of the functional currency and have no immediate effect on the cash flows
of the foreign or domestic entity. At the time of the translation, the effect that exchange rate
fluctuations may have on the reporting (parent) entity is uncertain and remote. It would be
improper to include the translation adjustment in current reported earnings. The translation
should be included as a component of equity.

Current method is used on the following basis:

1. Foreign operation operates independently in economic and financial matters (or not
integral to the operations of the parent)
2. Functional currency (is not the presentation currency) should be the LCU (Local
currency unit – the currency of the country in which the subsidiary operates) or a third
country currency
3. The functional currency is no the currency of a hyperinflationary economy, otherwise
apply PAS 29.

The main feature of the closing/ current rate method is summarized as follows:

1. Assets and liabilities both monetary and non-monetary are translated at current rate on
the date of the balance sheet.
2. Stockholder’s equity accounts are translated using historical rates in effect at the time
equities were first recognized (date of investment) in the foreign entity’s accounting
records, except:
• Beginning retained earnings is set equal to the ending balance of last year
• Dividends- historical rate on date of declaration, otherwise date of payment
 3. Revenue and expense of the foreign operation are translated at the dates of transaction
but for practical reason, the average rate is usually used for items whose transactions
are numerous and occur evenly throughout the year.
4. All resulting difference shall be recognized in other comprehensive income until the
disposal of the foreign operation, when they are included in profit or loss.

Although translation adjustments have no immediate effect on reported earnings they may
ultimately affect income when there is a partial or complete sale or complete or substantially
complete liquidation of the investment in the foreign entity. Although the translation
adjustment is a balancing amount necessary to satisfy the balance sheet equation, the current
period’s adjustment may be calculated directly as follows:

1. The change in exchange rates during the period multiplied by the amount of net assets (i.e.,
owners equity) held by the domestic investor at the beginning of the period plus

2. The difference between the weighted average exchange rate used in translating income
elements and the end-of-period exchange rate multiplied by the increase or decrease in net
assets for the period, excluding capital transactions, plus (minus)

3. The increase (or decrease) in net assets as a result of capital transactions, including
investments by the domestic investor during the period (e.g., stock issuances and retirements
and dividends), multiplied by the difference between the end-of-period exchange rate and the
exchange rate at the time of the transaction.

After the first year of operation, the annual translation adjustments will be accumulated and
presented as a component of equity. Problem 1 is an illustration of this process. The separate
component of equity in which cumulative translation adjustments are reported also should
include gains and losses attributable to:

1. Foreign currency transactions that are designated and effective as economic hedges of a
net investment in a foreign entity, commencing as of the designation date
 2. Intercompany foreign currency transactions that are of a long-term investment nature when
the entities to the transaction are consolidated, combined, or accounted for by the equity
method

Remeasured Financial Statements (Temporal method)

So far we have assumed that the currency of the foreign entity was the functional currency.
There are certain instances when the functional currency is not the currency of the foreign
entity. In these instances, the financial statements of the foreign entity m ust be remeasured
into the functional currency before the financial statements can be translated. The
remeasurement process is intended to produce financial statements that are the same as if the
entity’s transactions had been originally recorded in the functional currency. Generally, the
remeasurement process is based on the same temporal method. In essence, the historical
exchange rates between the functional currency and the foreign currency are used to
remeasure certain accounts. The adjustment resulting from the remeasurement process is
referred to as a remeasurement gain or loss and is included as a component of net income.
The remeasurement process is encountered in two situations. One arises when the entity’s
financial statements are prepared in a currency that is not the functional currency. Another
situation occurs when the foreign entity is in a highly inflationary economy.

Temporal Method is used on the following basis:

• Foreign operation is integrated with parent’s operation.

• Functional currency should be the reporting/presentation currency

The main features of the temporal or remeasurement method are summarized as follows:

1. Monetary assets and liabilities shall be translated using closing rate

2. Non-monetary items at historical cost or carried at past exchange prices shall be translated
using the exchange rate at the date of acquisition(historical rate)
3. Non-monetary items at fair value or at current of future exchange prices shall be translated
using exchange rate at the date of the revaluation or fair value determination
4. Stockholders’ equity accounts are translated using the historical rates in effect at the time
equities were first recognized in the foreign entity’s accounting records, except:
• Beginning retained earnings is set equal to the ending balance of last year
• Dividends- historical rate on date of declaration, otherwise date of payment

Income statement items:

5. Related to non-monetary items such as cost of sale, depreciation of plant assets, amortization
of intangible assets, amortization of deferred charges and other allocation of non-monetary
item shall be translated using historical rates
6. Not related to non-monetary item such as sales, purchases, expenses and income items that
result in inflow/outflow of monetary items shall be measured using actual rate; however for
practical reasons, an average rate may be used.

Books of Record Not Maintained in Functional Currency–a foreign entity may maintain its
records in a currency that is not the functional currency. For example, assume a Fr ench
subsidiary of an American company buys materials from British vendors with amounts due
payable in British pounds. The materials are assembled in France and then returned to the
UK for sale. Sales revenues are collected in pounds. The pound would be the functional
currency. However, the French company maintains its books in Euros. The financial
statements prepared in Euros would have to be remeasured into pounds before they could be
translated into dollars.

Assume a French subsidiary of an American firm purchased its materials in the US, payable
in dollars and then sold the finished goods in the US, collectible in dollars. The French firm’s
functional currency would be the dollar although it maintained its books in Euros. The
financial statements would have to be remeasured into dollars. However, there is no need for
translation. The remeasurement process requires that both current and historical exchange
rates be used. These exchange rates represent the relationship between the books of record
currency and the functional currency. Examples of accounts that should be remeasured at
historical rates include:
A special remeasurement rule is necessary for inventory (and other assets, such as marketable
securities) when the rule of cost or market, whichever is lower, is applied. Before the rule is
applied, the inventory cost and market amounts must be expressed in the functional currency.
A possible result is for an inventory write-down to occur in the functional currency, even if
no write-down is suggested in the books of record currency. It is also possible for a write-
down in the books of record currency to be no longer appropriate in the functional currency.

Let us now consider a remeasurement problem involving the Clancy Corporation. When an
entity’s financial statements are expressed in the functional currency, the statements are
translated directly into the parent’s reporting currency. This procedure is not followed for a
foreign entity with a functional currency of a nation that has a highly inflationary economy.
The accounting experts decided against adjusting foreign amounts for inflationary effects and
instead decided that the domestic currency (dollars) should serve as the foreign entity’s
functional currency. The foreign entity’s statements should be remeasured into the functional
currency (US dollars). It is important to note that this will result in the remeasurement of the
statements into dollars making any further translation unnecessary and the remeasuremen t
gain or loss should be included in the income for the period.

Net investment hedge

In the past chapters, we learned about fair value hedge and cash flow hedge which helped to
minimize the risk of changing exchange rates. Just like the two types of hedgin g, net
investment hedge can also help to minimize the risk of changing exchange rate.

In this type of hedge, the hedged item is the net asset of the company and the hedging
instrument can be a loan.

Hedging instrument(overseas loan) Hedged Item(overseas investment)

 The loan is retranslated and matched The investment is retranslated and any gain
gains/losses offset against gains/losses on or loss is recorded through other
the overseas investment. comprehensive income.

If the there is a gain in hedged item, there is a loss in hedge instrument and vice versa. The
gains and losses will be recorded through other comprehensive income

Example- Net Investment hedge

ABC co owns 100% investment in an overseas subsidiary that was purchased for 1000,000
yen and finances it using a loan of 900,000 yen, which is designated at inception as hedging
instrument. ABC has the functional currency of PHP.

The PHP:YEN exchange rates are as follows:

Inception of hedge 1PHP:0.9YEN
Reporting date 1PHP:0.85YEN
Determined net gain(loss) to be recognized in OCI at year end.
Hedged Item Hedging instrument

Date of 900,000/.9= 1000,000 1000,000/.9=1111,111

inception

Reporting 900,000/.85=1,058,823 1000,000/.85=1,176,470

Date

Gain(Loss) (58,823) Gain 65360

OCI

Net Gain 6537

Gain(loss)

OCI
 As we can see in the problem, supposedly the gain of the company is 65360PHP but
because of the hedging instrument, the gain is only 6537.

Definition of terms

Attribute. The quantifiable characteristic of an item that is measured for accounting purposes. For
example, historical cost and replacement cost are attributes of an asset.

Conversion. The exchange of one currency for another.

Current Rate. The exchange rate in effect at the relevant financial statement date.

Direct Quote. the exchange rate specifies the number of domestic currency units needed to acquire
a unit of foreign currency

Discount. When the forward exchange rate is below the current spot rate.

Exposed Net Asset Position. The excess of assets that are measured or denominated in foreign
currency and translated at the current rate over liabilities that are measured or denominated in
foreign currency and translated at the current rate.

Foreign Currency. A currency other than the currency of the country being referred to; a currency
other than the reporting currency of the enterprise being referred to.

Foreign Currency Financial Statements. Financial statements that employ foreign currency as
the unit of measure.

Foreign Currency Transactions. Transactions (e.g., sales or purchases of goods or services or

loans payable or receivable) whose terms are stated in a currency other than the entity’s functional
currency.

Foreign Currency Translation. The process of expressing amounts denominated or measured in

one currency in terms of another currency by use of the exchange rate between the two currencies.

Foreign Operation. An operation whose financial statements are (1) combined or consolidated
with or accounted for on an equity basis in the financial statements of the reporting enterprise and
(2) prepared in a currency other than the reporting currency of the reporting enterprise.
Forward Exchange Contract. An agreement to exchange currencies of different countries at a
specified rate (forward rate) at a specified future date.

Functional Currency. The primary currency in which an entity does business and generates and
spends cash. It is usually the currency of the country where the entity is located and the currency
in which the books of record are maintained.

Historical Rate. The foreign exchange rate that prevailed when a foreign currency asset or liability
was first acquired or incurred.

Local Currency. Currency of a particular country being referred to; the reporting currency of a
domestic or foreign operation being referred to.

Monetary Items. Obligations to pay or rights to receive a fixed number of currency units in the
future.

Reporting Currency. The currency in which an enterprise prepares its financial statements.

settlement date. The date on which a payable is paid or a receivable is collected.

Spot Rate. The exchange rate for immediate exchange of currencies.

Transaction Date. The date at which a transaction (e.g., a sale or purchase of merchandise or
services) is recorded in a reporting entity’s accounting records.

Translation Adjustments. Translation adjustments result from the process of translating financial
statements from the entity’s functional currency into the reporting currency.

Unit Of Measure. The currency in which assets, liabilities, revenue, and expenses are measured.
Problem I (FOREIGN CURRENCY TRANSACTION-IMPORTATION)

On November 1, 2016, KAPUSO ENTERPRISES whose functional currency is Philippine Peso,

purchases an equipment from a UAE exporter. The company will pay 150,000 dirhams at this date
when the spot rate is P12.3263 per dirham. As is customary in the industry, the foreign seller does
not require immediate payment and allows KAPUSO 90 days to pay for its purchase. The following
are the relevant spot rates at pertinent dates: 11/30/2016-P12.3288; 12/31/2016- P12.3300;
1/30/2017- P12.3416; 2/28/2017-P12.3425. Assume the payment of KAPUSO was made at due date.
Prepare journal entries in the books of KAPUSO for the above foreign currency transaction.

PROBLEM II (FOREIGN CURRENCY TRANSACTION- EXPORTATION)

On December 10, 2016 KAPAMILYA Corporation sold merchandise to a Danish importer invoiced at
100,000 kroners to be settled on 2/28/2017. The following exchange rates are relevant:

12/10/2016 P8.3098
12/31/2016 P8.3365
2/28/2017 P8.2615
Assume the foreign currency transaction was settled by the foreign buyer at due date. Prepare
Journal Entries in the books of KAPAMILYA for the above transaction.

Problem III

BICOLANDIA COMPANY purchased merchandise from a foreign vendor for FC 100,000. The
merchandise is received on November 1, 2016 payment is due on January 31, 2017. Also, on
November 1, 2016 the company entered into a 90-day forward contract for the purchase of FC
100,000 for delivery on January 31, 2017 as a hedge of the foreign currency transaction. Relevant
exchange rates for the foreign currency follow:

11/01/2016 12/31/2016 1/31/2017

Spot rate P .55 P .56 P .55
30-day forward .56 .58 .57
60-day forward .56 .59 .58
90-day forward .57 .58 .59
Prepare the journal entries of the BICOLANDIA COMPANY for the above transactions.

Problem IV

ILOCANDIA CORPORATION, a Filipino Company enters into a forward exchange contract on

October 1, 2016 to hedge a foreign currency risk in US dollars. The contract is for sale of FC 100,000
to the international bank for delivery on March 31, 2017. The company anticipates the dollar will
weaken against the peso. Relevant exchange rates for the US dollars are as follows:

10/01/2016 12/31/2016 03/31/2017

Spot rate P46.35 P46.00 P45.60
30-day contract 46.25 45.5 46.00
90-day contract 46.28 45.80 45.60
180-day contract 46.30 43.60 45.00

Problem V (FV HEDGE OF A FOREIGN CURRENCY DENOMINATED COMMITMENT)

On October 1, 2016 Pilipino Corporation entered into a firm commitment with a Japanese Firm to
acquire a machine with delivery and passage of title on March 31, 2017 at a price of 1,000,000 yen.
On the same date, to hedge against risk the company entered into a 180-day forward contract with
bank of PI for 1,000,000 yen. The relevant exchange rates are as follows:

1/1/16 12/31/16 3/31/17

Spot rate P.40 P.41 P.38
Forward rate .425 .41 .38
Prepare all the journal entries on the books of the Pilipino Company for the above transactions.
 FOREIGN CURRENCY TRANSACTIONS
1. On November 15, 20x4, CC Inc., a Philippine company, ordered merchandise
FOB shipping point from a German company for 200,000 foreign currency
units (FCU). The merchandise was shipped and invoice on December 10,
20x4. CC paid the invoice on January 10, 20x5. The spot rates for FCU on the
respective dates were:
November 15, 20x4 P .4955
December 10, 20x4 .4875
December 31, 20x4 .4675
January 10, 20x5 .4475

In CC’s December 31, 20x4, income statement, the foreign exchange gain is:

2. 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?

3. Greco, Inc. a Philippine corporation, bought machine parts from Franco

Company of Germany on March 1, 20x4, for 70,000 foreign currency units
(FCUs), when the spot rate for FCU was P0.5395. Greco’s year-end was March
31, 20x4, when the spot rate for FCU was P0.5445. Greco bought 70,000 FCUs
and paid the invoice on April 20, 20x4, when the spot rate was P0.5495. How
much should be shown in Greco’s income statements as foreign exchange
(transaction) gain or loss for the years ended March 31, 20x4 and 20x5?

4. 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

1
 Accounts Receivable 20,400

c. Cash 20,400

Accounts Receivable 20,400

d. Cash 20,700

Accounts Receivable 20,400

Exchange Gain 300

5. Kettle Company purchased equipment for 375,000 FCUs (foreign currency

units) from a supplier in a foreign country on July 3, 20x4. Payment in FCU is due
on Sept. 3, 20x4. The exchange rates to purchase one FCU is as follows:
July 3 August 31, (year end) September 3
Spot-rate 1.58 1.55 1.54
30-day rate 1.57 1.53 --
60-day rate 1.56 1.49 --
On its August 31, 20x4, income statement, what amount should Kettle report
as a foreign exchange transaction gain:

6. 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
7. On 12/12/x6, a domestic exporter sold inventory to a foreign company for
100,000 FCUs (foreign currency units). On that date, the direct spot rate was
P.20. At 12/31/x6, the direct spot rate was P.24. On l/22/x7, when the direct
spot rate was P.21, the domestic exporter received full payment of 100,000
FCUs. In the importer’s 20x6 financial statements, what should be reported as
an FX gain or loss?

8. 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

2
 FCUs. In the importer’s 20x6 financial statements, what should be reported as
an FX gain or loss?

9. Greco, Inc. a Philippine corporation, bought machine parts from Franco

Company of foreign country on March 1, 20x4, for 70,000 foreign currencies
(FCs), when the spot rate for FC was P0.5395. Greco’s year-end was March 31,
20x4, when the spot rate for marks FCs P0.5445. Greco bought 70,000 FCs and
paid the invoice on April 20, 20x4, when the spot rate was P0.5495. How much
should be shown in Greco’s income statements as foreign exchange
(transaction) gain or loss for the years ended March 31, 20x4 and 20x5?
20x4 20x5 20x4 20x5
a. P-0- P-0- c. P350 loss P-0-
b. P-0- P350 loss d. P350 loss P350 loss
Use the following information for questions 10 to 12.
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.
10. What is the amount recorded on RD’s financial records for the inventory on
March 15?
11. What is the amount on Exchange Gain or Loss recorded on RD’s financial
records on May 15?
12. What is the credit to cash when RD pays for the inventory on May 15?

Use the following information for questions 13 to 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.
13. What is the amount recorded on Wizard’s financial records for the sale on
June 20?
14. What is the amount on Exchange Gain or Loss recorded on Wizard’s financial
records on August 10?
15. What is the debit to cash when Wizard collects the Accounts Receivable on
August 10?

3
 HEDGING TRANSACTIONS
1. On August 1, 20x4, a Philippine firm purchased a machine costing
200,000,000 foreign currency units (FCU) from a foreign firm to be paid for on
October 1, 20x4. Also on August 1, 20x4, the Philippine firm entered into a
contract to purchase 200,000,000 FCU to be delivered on October 1, 20x4, at
a forward rate of 1 FCU = P0.00783. The exchange rates were as follows:
Spot
August 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FCU = P0.00781
August 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FCU = P0.00777
October 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 FCU = P0.00779
Which of the following statements is incorrect concerning the accounting
treatment of these transactions?
a. The machine's final recorded value was P1,558,000.
b. The beginning balance in the accounts payable was P1,562,000.
c. An exchange gain on the accounts payable of P4,000 was recognized
on October 1, 20x4.
d. The value of the accounts payable just before payment, on October 1,
20x4, was P1,558,000.
Use the following information for questions 2 and 3:
Spartan Company purchased interior decoration material from foreign supplier
for 100,000 foreign currencies (FC) on September 5, 20x4, with payment due on
December 2, 20x4. Additionally, on September 5, Spartan acquired a 90-day
forward contract to purchase 100,000 FC of 1 = P.1850. The forward contract
was acquired to manage the exposed net liability position in FC, but it was not
designated as a hedge. The spot rates were:
September 5, 20x4 . . . . . . . . . . . . . . FC1 = P0.1835
December 2, 20x4 . . . . . . . . . . . . . . FC1 = P0.1865
2. In the entry made on December 2nd to revalue foreign currency receivable
to current equivalent peso value,
a. Accounts Payable will be debited for P18,350.
b. Foreign Currency Units will be debited for P18,500.
c. Foreign Currency Transaction Gain will be credited for P150.
d. Other Comprehensive Income will be credited for P300.
3. Based on the preceding information, what is the entry required to settle
foreign currency payable on December 2?
4. On January 15, a Philippine company purchases merchandise from a foreign
supplier for 1,000,000 foreign currency (FC) , when the spot rate is P0.15/1 FC
On the same date, it enters a forward contract for delivery of FC 1,000,000 on
March 15, at a price of P0.148/FC. On March 15, when the spot and forward
rate for March 15 delivery are P0.156/FC, the company closes the forward

4
 contract and pays for the merchandise. The merchandise has not yet been
sold at March 15. What amount, in pesos, does the company pay for the
merchandise? At what amount, in pesos, does the merchandise appear on
the company’s March 15 balance sheet?
Amount paid Merchandise balance
a. P148,000 P148,000
b. P148,000 P150,000
c. P156,000 P150,000
d. P150,000 P156,000
5. A Philippine company issues a purchase order for merchandise to a foreign
supplier. The agreed upon total price is 1,200,000 foreign currency units
(FCU), and the current spot rate is P1/FC 1. Suppose the company enters a
forward contract when the purchase order is issued, at a rate of P0.95/FC 1,
for delivery when the merchandise is received. If the spot rate rises to P1.05
when the merchandise is received and paid for, at what value will the
merchandise be reported on the company’s books?
a. P1,020,000 c. P1,200,000
b. P1,140,000 d. P1,260,000
Use the following Information for Questions 6 to 9:
Taste Bits Inc. purchased chocolates from foreign supplier for 200,000 foreign
currencies (FC) on December 1, 20x4. Payment is due on January 30, 20x5. On
December 1, 20x4, the company also entered into a 60-day forward contract to
purchase 200,000 FC. The forward contract is not designated as a hedge. The
rates were as follows:
Spot Rate Forward Rate
December 1, 20x4 P0.89 P0.90 (60 days)
December 31, 20x4 0.91 0.93 (30 days)
January 30, 20x5 0.92
6. The entries on December 31, 20x4, include a:
a. Credit to Foreign Currency Payable to Exchange Broker, P4,000.
b. Debit to Foreign Currency Receivable from Exchange Broker,
P6,000.
c. Debit to Foreign Currency Receivable from Exchange Broker,
P186,000.
d. Debit to Foreign Currency Transaction Gain, P4,000.
7. The entries on January 30, 20x5, include a:
a. Debit to Pesos Payable to Exchange Broker, P180,000.
b. Credit to Cash, P184,000.
c. Credit to Premium on Forward Contract, P4,000.
d. Credit to Foreign Currency Receivable from Exchange Broker,
P180,000.

5
8. The entries on January 30, 20x5, include a:
a. Credit to Foreign Currency Units, P184,000.
b. Credit to Cash, P180,000.
c. Debit to Foreign Currency Transaction Loss, P4,000.
d. Debit to Pesos Payable to Exchange Broker, P184,000.
9. The entries on January 30, 20x5, include a:
a. Debit to Pesos Payable to Exchange Broker, P184,000.
b. Credit to Foreign Currency Transaction Gain,P4,000.
c. Credit to Foreign Currency Receivable from Exchange Broker,
P180,000.
d. Debit to Foreign Currency Units, P184,000.
10. On September 1, 20x4, Philippine Company entered into a foreign exchange
contract for speculative purposes by purchasing 50,000 foreign currencies
(FCs) for delivery in 60 days. The rates to exchange pesos for FCs follow:
9/1/x4 9/30/x4
Spot rates . . . . . . . . . . . . . . P. 75 P0.70
30- day forward rate . . . . 0.73 0.72
90- day forward rate . . . . 0.74 0.73
In its September 30, 20x4, income statement, what amount should JS report as
foreign exchange loss
Use the following information for questions 11 and 12:
11. On September 1, 20x4, Mudd Plating Company entered into two forward
exchange contracts to purchase 250,000 foreign currencies (FCs) each in 90
days. The relevant exchange rates are as follows:
Spot rate Forward rate For Dec. 1, 20x4
September 1, 20x4 1.46 1.47
September 30, 20x4 (year-end) 1.50 1.48
The first forward contract was to hedge a purchase of inventory on September
1, payable on December 1. On September 30, what amount of foreign
currency transaction loss should Mudd Plating report in income?
12. The second forward contract was strictly for speculation. On September 30,
20x4, what amount of foreign currency transaction gain should Mudd Plating
report in income?
13. On November 1, 20x4, National Company sold inventory to a foreign customer.
The account will be settled on March 1 with the receipt of 200,000 foreign
currency units (FCU). On November 1, National also entered into a forward
contract to hedge the exposed asset. The forward rate is P0.80 per unit of
foreign currency. National has a December 31 fiscal year-end. Spot rates on
relevant dates were:
Date Per unit of Foreign Currency
November 1 P0.83
December 31 0.81

6
 March 1 0.84
What will be the adjusted balance in the Accounts Receivable account on
December 31, and how much gain or loss was recorded as a result of the
adjustment?
Receivable Balance Gain/Loss Recorded
a. P170,000 P4,000 gain
b. P162,000 P4,000 loss
c. P168,000 P2,000 gain
d. P164,000 P2,000 loss
Use the following information for questions 14 and 15:
On April 1, 20x4, Manatee Company entered into two forward exchange
contracts to purchase 300,000 foreign currencies (FCs) each in 120 days. The
relevant exchange rates are as follows:
Forward Rate
Spot rate For Aug. 1, 20x4
April 1, 20x4 1.16 1.17
April 30, 20x4 (year-end) 1.20 1.18
14. The first forward contract was to hedge a purchase of inventory on April 1,
payable on December 1. On April 30, what amount of foreign currency
transaction loss should Manatee report in income?
15. The second forward contract was strictly for speculation. On April 30, 20x4,
what amount of foreign currency transaction gain should Manatee report in
income.
16. On November 1, 20x4, Cone Company sold inventory to a foreign customer.
The account will be settled on March 1 with the receipt of 250,000 foreign
currency units (FCU). On November 1, Cone also entered into a forward
contract to hedge the exposed asset. The forward rate is P0.90 per unit of
foreign currency. Cone has a December 31 fiscal year-end. Spot rates on
relevant dates were:
Date Per Unit of Foreign Currency
November 1 P0.93
December 31 0.91
March 1 0.94
The entry to record the forward contract is
a. FCU Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
Premium on Forward Contract . . . . . . . . . . . . . . . . . . 7,500
Pesos Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,500
b. Pesos Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,500
Discount on Forward Contract . . . . . . . . . . . . . . 7,500
FCU Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
c. FCU Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,500
Discount on Forward Contract . . . . . . . . . . . . . . 7,500
Pesos Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
d. Pesos receivable from exchange broker. . . . . . . . . . 225,000

7
 FCU Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
17. Pile, Inc. purchased merchandise for 500,000 FC from a foreign vendor on
November 30, 20x4. Payment in foreign currency is due January 31, 20x5. On
the same day, Pile signed an agreement with a foreign exchange broker to
buy 500,000 FC on January 31, 20x5. Exchange rates to purchase 1 FC are as
follows:
Nov. 30, 20x4 Dec. 31, 20x4 Jan. 31, 20x5
Spot . . . . . . . . . . . . . . . . . . . . P1.49 P1.45 P1.44
30 day . . . . . . . . . . . . . . . . . . P1.48 P1.43 P1.43
60 day . . . . . . . . . . . . . . . . . . P1.46 P1.41 P1.42
What will be the adjustment to the account payable included in the journal
entry record on November 30, 20x4?
a. P20,000 debit c. P30,000 debit
b. P20,000 credit d. P-0-
18. Larson, Inc. sold merchandise for 600,000 FC to a foreign vendor on
November 30, 20x4. Payment in foreign currency is due January 31, 20x5. On
the same day, Larson signed an agreement with a foreign exchange broker
to sell 600,000 FC on January 31, 20x5. Exchange rates to purchase 1 FC are
as follows:
Nov. 30, 20x4 Dec. 31, 20x4 Jan. 31, 20x5
Spot P1.49 P1.46 P1.43
30 day P1.48 P1.43 P1.44
60 day P1.47 P1.40 P1.42
What will be the amount of the Forward Contract Receivable-Dollars on
November 30, 20x4?

Use the following information for questions 19 and 21:

Car Corp. (a Philippine based company) sold parts to a foreign customer on
December 16, 20x4, with payment of 10 million foreign currencies (FC) to be
received on January 15, 20x5. The following exchange rates applied:

Date Spot Rate Forward Rate to Jan. 15

December 16, 20x4 P 00090 P .00098
December 31, 20x4 .00092 .00093
January 15, 20x5 .00095 .00095
19. Assuming a forward contract was not entered into, what would be the net
impact on Car Corp.'s 20x4 income statement related to this transaction?

20. Assuming a forward contract was entered into, what would be the net
impact on Car Corp's 20x4 income statement related to this transaction?
Assume an annual interest rate of 12% and a fair value hedge. The present
value for one month at 12% is .9901.

8
21. Assuming a forward contract was entered into on December 16, what would
be the net impact on Car Corp.'s 20x5 income statement related to this
transaction?
22. On August 31, Ram Corporation, a Philippine company, expects to order
merchandise from a foreign supplier in three months, denominating the
transaction in foreign currency (FC). On August 31, the spot rate is P1.19 per
FC and Quality enters into a three-month forward contract to purchase
600,000 FC at a rate of P1.20. At the end of three months, the spot rate is
P1.21 per FC and Ram orders and receives the merchandise, paying 600,000
FC. What are the effects on net income from these transactions?
a. P6,000 Discount Expense plus a P6,000 negative Adjustment to Net
Income when the merchandise is sold
b. P6,000 Discount Expense plus a P12,000 negative Adjustment to Net
Income when the merchandise is sold
c. P6,000 Premium Expense plus a P6,000 negative Adjustment to Net
Income when the merchandise is sold
d. P12,000 Premium Expense plus a P6,000 positive Adjustment to Net
Income when the merchandise is sold
e. P12,000 Discount Expense plus an P12,000 positive Adjustment to Net
Income when the merchandise is sold

9
Problem I

On December 1, 2014, VENEZUELA COMPANY expects to purchase a machine for FC

1,200 from a foreign country on March 1, 2015. The transaction is probable but there is
no binding agreement for this purchase and is to be denominated in FC. Thus,
transaction and settlement for the purchase of the machine is March 1, 2015. Also on
December 1, 2014, the company entered into a forward contract to purchase FC 1,200
on March 1, 2015 for 40.15. The company designates the forward contract as a hedging
instrument in a cash flow hedge of the exposure to increases in FC rate. Prepare entries
to record the above hedging item and instrument transactions.

12/1/14 12/31/14 3/1/15

Spot rate P40.00 P40.30 P40.2
30-day forward rate 40.05 40.45 40.40
60-day forward rate 40.1 40.4 40.5
90-day forward rate 40.15 40.45 40.6

Problem II

On June 2, 2014, REPUBLICA DOMINICANA INC. ordered merchandise from a foreign

supplier for FC 350,000. Delivery was scheduled for August 1, 2014 with payment to be
made in full on delivery. Upon placing the order, the company immediately entered into
a 60-day forward contract with its bank to purchase FC 350,000 on August 1 at the
forward rate of P1.28 per FC. The year-end is June 30.On August 1, the merchandise
was received and REPUBLICA DOMINICANA purchased the FC from the bank and
paid its supplier. The relevant exchange rates are as follows:

6/2/2014 6/30/2014 8/1/2014

Spot rate P1.26 P1.268 P1.272
30-day forward rate 1.27 1.275 1.276
60-day forward rate 1.28 1.279 1.278
Prepare all the journal entries pertaining to the hedged item and hedging instrument
assuming the following:

a. Fair value Hedge Designation

b. Cash Flow Hedge Designation
c. Hedging- not a hedge accounting

Problem III

On December 1, 2014, PUERTO RICO CORPORATION paid cash to purchase a 90-

day “at-the-money” call option for 60,000 Thailand Baht. The option’s purpose is to
protect an exposed liability of 60,000 Thailand Baht relating to an inventory purchase
received on December 1, 2014 and to be paid on March 1, 2015.

12/1/14 12/31/14 3/1/15

Spot rate P1.2 P1.28 P1.27
Strike Price 1.2 1.2 1.2
Fair value of call P360 P5,040 P4,200
option
Prepare entries to record the above hedged item and instrument transactions.
Problem IV

COLOMBIA COMPANY entered into a forward contract for speculative purposes in

anticipation for a gain, and enters into a contract on December 1, 2014 to acquire FC
1,000 on March 1, 2015 for 40.15. Relevant rates follow:

Spot rate Forward rate

12/1/14 P40.00 P40.15
12/31/14 40.3 40.4
1/1/15 40.2 40.2
Prepare all the entries necessary with respect to the above transactions.

Problem V

EL SALVADOR INC. ordered equipment from foreign supplier on November 20, 2014 at
a price of 50,000 FC when the spot rate was P0.20 per FC. Delivery and payment were
scheduled for December 20, 2014. On November 20, 2014, the company acquired a 30-
day call option on 50,000 FC at a strike price of P0.20 paying a premium of P100.00. It
designates the option as fair value hedge of a foreign currency firm commitment. The
fair value of the firm commitment is measured by referring to changes in spot rate. The
part arrived and the company makes payment accordingly. The relevant rates and
option premium are as follows:

11/20/14 12/20/14
Spot rate P0.20 P0.21
Strike Price 0.20 0.20
Fair value of the option P100 P500
Prepare all the entries in the books of the company for the above transactions.
Problem I
KAPATID CORPORATION, A Philippine company forms a wholly-owned subsidiary in a
foreign country (Foreign Company) on December 31, 2016. On that date, KAPATID
invested P300,000 in exchange for all of the subsidiary’s common stock. The exchange
rate on this date is P0.60 per FC unit. The initial capital investment was FC 500,000,
150,000 of which was immediately invested in inventory and the remainder held in cash.
The balance sheet of the Foreign company (whose functional currency is the FC) when
it began operation on January 1, 2017 follows:
Cash FC 350,000 Common Stock FC 100,000
Inventory FC 150,000 APIC FC 400,000
Total FC 500,000 Total FC 500,000
During 2017, foreign company generated income after taxes of FC 470,000 and
declared dividends of FC 150,000 on October 1, 2017.
The financial statements of foreign company for 2017 are as follows:
Income Statement for the year ended COGS Statement for the year 2017
December 31, 2017 Inventory, Jan. 1 FC 150,000
Sales FC 4,000,000 Purchases in 2017, evenly throughout
COGS (3,000,000) the year 3,250,000
Gross Profit 1,000,000 Inventory, Dec 31(evenly throughout the
Depreciation (100,000) 4th quarter) (400,000)
Amortization (10,000) Total COGS 3,000,000
Other expenses (220,000)
Income before tax 670,000 Statement of Retained Earnings for the
Income taxes (200,000) year ended December 31, 2017
Net Income (470,000) RE, Jan. 1 FC 0
Net Income for 2017 470,000
Dividends paid (150,000)
Total RE, Dec. 31 320,000

Balance Sheet as of December 31, 2017

Cash FC 130,000 Accounts payable FC 600,000
Accounts Receivable 200,000 LTD 250,000
Inventory 400,000 Common Stock 100,000
PPE, net 900,000 APIC 400,000
Patent, net 40,000 RE 320,0000
Total 1,670,000 Total 1,670,000

The relevant exchange rates in Philippine pesos are as follows:

January 1, 2017 P0.60
Average for 2017 0.65
March 15, 2017(date when PPE was 0.61
acquired and LTD was incurred)
April 10, 2017 (date when patent was 0.62
acquired)
October 1, 2017 (date when dividends 0.67
were declared)
4th quarter average rate 0.68
December 31, 2017 0.70
Required:
1. Assuming the functional currency of foreign subsidiary is the local currency,
translate its FS into the peso functional and presentation currency of the parent
company.
2. Assuming the functional currency of foreign subsidiary is the Philippine peso, re-
measure its FS into its functional currency.

Problem II
SPRATLYS Inc. whose functional currency is the peso acquired a 100% interest in
EFCEE ENTERPRISES a foreign company several years ago. EFFCEE’s functional
currency is the FC. As at December 31, 2016 EFCEE’s share capital was FC 1,000,000
and retained earnings is FC 200,000. The exchange rate on 12/31/2016 was P1.85 to 1
FC. On the same date SPRATLYS Inc decided to hedge its investment in EFCEE by
taking a loan of FC 1,200,000 at 5% interest. For the year ended December 31, 2017
EFCEE reported a net profit of FC 380,000. No dividend has been paid. The exchange
rate on 12/31/2017 was P1.70 to 1 FC; the average exchange rate for the year was
P1.78 to 1 FC. Assume that the foreign currency translation reserve in the group
accounts as at 12/31/2016 showed a credit balance of P15,000.

Required:
1. Calculate the change in foreign currency translation reserve during 2017 and the
cumulative balance at the end of 2017.
2. Prepare journal entries in the books of SPRATLYS for the above-mentioned
CASH FLOW HEDGE of its net investment in EFCEE ENTERPRISES.