final exam ADVANCED ACCOUNTING II 2nd Sem 2011-2012

MULTIPLE CHOICE

1. On January 2, 2010, the FB Company purchased the net assets of CP

Company by issuing shares of stocks at P1,500,000 fair market value. Book
value and fair value balances sheet data on January 1, 2010, are as follows:
FB Company CP Company
Book Fair Book
Value Value Value Fair Value
P P P
Cash 2,300,000 P2,300,000 150,000 150,000
Accounts
receivable 500,000 500,000 490,000 490,000

Inventory 750,000 650,000 355,000 300,000

Building &
Equipment, net 900,000 730,000 760,000 532,000

Goodwill - - 45,000 40,000

P
TOTAL ASSETS 4,450,000 P4,180,000 P1,800,000 P1,512,000

P P P P
Liabilities 500,000 500,000 285,000 285,000

Capital stock 800,000 300,000

Additional paid
in capital 450,000 480,000
Retained
earnings 2,700,000 735,000
P
TOTAL LIAB & SHE 4,450,000 P1,800,000

FB incurred and paid legal and brokerage fees of P45,000 for business
combination; and P15,000 indirect acquisition costs. Contingency fee of
P20,000 for additional legal services would be paid within the year.
Immediately after the business combination:

The combined total assets is:

a. P4,750,000 c. P6,195,000
b. P6,240,000 d. P6,300,000

ANS: C

2. BGP, SRL and KCJ agreed to a business combination. Their condensed

balance sheets before combination show:
 SRL KCJ
Book Fair Book
BGP value value value Fair value

ASSETS P7,000,000 P875,000 P950,000 P9,625,000 P9,000,000

Liabilities 4,987,500 307,000 2,625,000

Capital stock, P100
par 2,625,000 437,500 1,750,000
Additional paid in
capital 218,000 700,000
Retained
earnings(deficit) (612,500) (87,500) 4,550,000

LIABILITIES & SHE P7,000,000 P875,000 P9,625,000

It was agreed that BGP will be the continuing entity and shall issue 4,180 shares
to SRL and 60,800 shares to KCJ. Market value of BGP’s share on the date of
business combination is P102. Immediately after the business combination:
The stockholders’ equity of BGP increased by:
a. P6,237,920 c. P7,018,000
b. P9,030,500 d. P6,627,960

ANS: C

3. Sun Co. is a wholly owned subsidiary of Star Co. Both companies have
separate general ledgers, and prepare separate financial statements. Sun
requires stand-alone financial statements. Which of the following statements is
correct?
a. Consolidated financial statements should be prepared for both Star
and Sun.
b. Consolidated financial statements should only be prepared by Star
and not by Sun.
c. After consolidation, the accounts of both Star and Sun should be
changed to reflect the consolidated totals for futrue ease in
reporting.
d. After consolidation, the accounts of both Star and Sun should be
combined together into one general-ledger accounting system for
future ease in reporting.
ANS: B
Answer A is incorrect. Consolidated financial statements should be prepared
for Star but not for Sun.
Answer B is correct. Star owns Sun. Therefore, consolidated financial
statements should be prepared for Star but not Sun.
Answer C is incorrect. The accounts of the two companies are maintained
separately; consolidation is simply performed for financial reporting purposes.
 Answer D is incorrect. The accounts of the two companies are mainted
separately; consolidation is simply performed for financial reporting purposes.

4. In a business combination accounted for as a purchase, the appraisal values

of the identifiable assets acquired exceeds the acquisition price. The excess
appraisal value should be reported as a
a. Deferred credit.
b. Reduction of the values assigned to current assets and a deferred
credit for any unallocated portion.
c. A bargain purchase.
d. Pro rata reduction of the values assigned to current and noncurrent
assets.
ANS: C
Answer A is incorrect because only the unallocated portion is reported as a
deferred credit.
Answer B is incorrect because the negative goodwill is allocated only to
noncurrent assets.
Answer C is correct. When the fair value of net identifiable assets exceeds the
consideration paid, a bargain purchase occurs and is treated as a gain in the
curent period.
Answer D is incorrect because the negative goodwill is allocated only to
noncurrent assets.

5. Key Corp. issued 1,000 shares of its nonvoting preferred stock for all of Lev
Corp.'s outstanding common stock. At the date of the transaction, Key's
nonvoting preferred stock had a market value of P100 per share, and Lev's
tangible net assets had a book value of P60,000. In addition, Key issued 100
shares of its nonvoting preferred stock to an individual as a finder's fee for
arranging the transaction. As a result of this capital transaction, Key's total net
assets would increase by
a. P0 b. P 90,000 c. P100,000 d. P110,000

ANS: C
Answer C is correct. A business acquisition is accounted for using fair values;
the net assets acquired are recorded at their fair value or the fair value of the
stock issued, whichever is more objectively determinable. In this case, the fair
value of the stock issued is a better measure of the value of the purchase
(1,000 shares x P100 per share = P100,000). The total cost of acquiring the net
assets is the fair value of the preferred stock (P100,000). The finder's fee is
treated as an expense of the period.

6. On October 1, Company X acquired for cash all of the outstanding common

stock of Company Y. Both companies have a December 31 year-end and
have been in business for many years. Consolidated net income for the year
ended December 31 should include net income of
 a. Company X for 3 months and Company Y for 3 months.
b. Company X for 12 months and Company Y for 3 months.
c. Company X for 12 months and Company Y for 12 months.
d. Company X for 12 months; but no income from Company Y until
Company Y distributes a dividend.
ANS: B
Answer B is correct. In an acquisition treated as a purchase, the acquirer
includes net income for the acquiree only from the date of purchase (see ASC
Topic 810).

7. On January 1, 2010, Neel Corp. issued 400,000 additional shares of P10 par
value common stock in exchange for all of Pym Corp.'s common stock.
Immediately before this business combination, Neel's stockholders' equity was
P16,000,000 and Pym's stockholders' equity was P8,000,000. On January 1, 2010,
fair value of Neel's common stock was P20 per share, and fair value of Pym's
net assets was P8,000,000. Neel's net income for the year ended December 31,
2010, exclusive of any consideration of Pym, was P2,500,000. Pym's net income
for the year ended December 31, 2010, was P600,000. During 2010 Neel paid
dividends of P900,000. Neel had no business transactions with Pym in 2010.

Assuming that this business combination is appropriately accounted for as a

business acquisition, consolidated stockholders' equity at December 31, 2010,
should be
a. P17,600,000 b. P18,200,000 c. P26,200,000 d. P27,100,000

ANS: C
Answer C is correct. The requirement is to determine the consolidated
stockholders' equity after an acquisition accounted for as an acquisition.
Under the acquisition method, the assets and liabilities are brought over at
their fair value (ASC Topic 810). Therefore, the increase in stockholders' equity
resulting from the acquisition will be the fair value of the stock issued, or
P8,000,000 (P20 x 400,000). The consolidated stockholders' equity immediately
after the business combination is P24,000,000 (P16,000,000 + P8,000,000).
Stockholders' equity is then increased by the consolidated net income of
P3,100,000 (P2,500,000 + P600,000) and decreased by the P900,000 of
dividends paid. Thus, stockholders' equity at December 31, 2010, is P26,200,000
(P24,000,000 + P3,100,000 - P900,000). Note that under the purchase method,
only the results of operations of the acquired company subsequent to the date
of combination is combined with the acquiring company's results. It is because
the combination was entered into January 1, that the entire year's income of
the acquired company is included.
8. On January 2, of the current year, Peace Co. paid P310,000 to purchase 75%
of the voting shares of Surge Co. Peace reported retained earnings of P80,000,
and Surge reported contributed capital of P300,000 and retained earnings of
P100,000. The purchase differential was attributed to depreciable assets with a
remaining useful life of 10 years. Peace used the equity method in accounting
for its investment in Surge. Surge reported net income of P20,000 and paid
dividends of P8,000 during the current year. Peace reported income, exclusive
of its income from Surge, of P30,000 and paid dividends of P15,000 during the
current year. What amount will Peace report as dividends declared and paid
in its current year’s consolidated statement of retained earnings?
a. P8,000 b. P15,000 c. P21,000 d. P23,000

ANS: B
Answer B is correct. The requirement is to determine the amount of dividends
declared and paid in the current year’s statement of retained earnings. Peace
will report only the dividend of the parent company in the consolidated
financial statements. The dividends declared and paid by Surge will be
eliminated in the consolidated worksheet entries. Therefore, answer B is correct
because the dividends reported in the consolidated statement of retained
earnings would be P15,000.

9. Pride, Inc. owns 80% of Simba, Inc.'s outstanding common stock. Simba, in turn,
owns 10% of Pride's outstanding common stock. What percentage of the
common stock cash dividends declared by the individual companies should
be reported as dividends declared in the consolidated financial statements?

Dividends declared by Dividends declared by

Pride Simba
A. 90% 0%
B. 90% 20%
C. 100% 0%
D. 100% 20%

a. A b. B c. C d. D

ANS: A
Answer A is correct because of the reciprocal ownership relationship that exists
between the two companies. Pride (the acquirer) owns 80% of Simba (the
acquiree), and Simba owns 10% of Pride. When Pride declares a cash
dividend, 90% of it is distributed to outside parties and 10% goes to Simba.
Because Simba is part of the consolidated entity, its 10% share is eliminated;
thus, only 90% of dividends declared by Pride are reported in the consolidated
statements. When Simba declares a dividend, 80% is distributed to Pride and
20% to outside parties. Pride's 80% share is eliminated as an intercompany
transaction and the remaining 20% is also excluded because, from the
acquirer's point of view, acquiree dividends do not represent dividends of the
consolidated entity and must be eliminated.
10. Par Corp. owns 60% of Sub Corp.'s outstanding capital stock. On May 1, 2010,
Par advanced Sub P70,000 in cash, which was still outstanding at December
31, 2010. What portion of this advance should be eliminated in the preparation
of the December 31, 2010, consolidated balance sheet?
a. P70,000 b. P42,000 c. P28,000 d. P0

ANS: A
Answer A is correct. Consolidated statements are prepared as if the acquirer
and acquiree were one economic entity. From the point of view of the
consolidated entity, the P70,000 is not payable to or receivable from any
outside company. In other words, the consolidated entity does not have a
receivable or payable. Therefore, the entire P70,000 payable on Sub's books
and the entire P70,000 receivable on Par's books must be eliminated against
each other. The level of ownership (60%) does not affect this elimination.

11. Dunn Corp. owns 100% of Grey Corp.'s common stock. On January 2, 2010,
Dunn sold to Grey for P40,000 machinery with a carrying amount of P30,000.
Grey is depreciating the acquired machinery over a 5-year life by the
straight-line method. The net adjustments to compute 2010 and 2011
consolidated income before income tax would be an increase (decrease) of
2010 2011
A. P (8,000) P2,000
B. P (8,000) P0
C. P (10,000) P2,000
D. P (10,000) P0

a. A b. B c. C d. D
ANS: A
Answer A is correct. When computing consolidated income, the objective is to
restate the accounts as if the intercompany transactions had not occurred. In
2010, the gain on the sale of the equipment (P40,000 – P30,000 = P10,000) must
be eliminated, since the consolidated entity has not realized any gain. Also in
2010, some depreciation expense must be eliminated because the subsidiary
computed depreciation based on a cost of P40,000 rather than on the original
carrying amount of P30,000. Additional depreciation of P2,000 [(P40,000 –
P30,000) / 5] must be eliminated. Therefore, 2011 consolidated income must be
adjusted downward by P8,000 (P10,000 – P2,000). 2010 consolidated income
must also be adjusted for the additional depreciation, so it must be adjusted
upward by P2,000.

12. A 70%-owned subsidiary company declares and pays a cash dividend. What
effect does the dividend have on the retained earnings and noncontrolling
interest balances in the parent company's consolidated balance sheet?
a. No effect on either retained earnings or minority interest.
b. No effect on retained earnings and a decrease in minority interest.
 c. Decrease in both retained earnings and minority interest.
d. A decrease in retained earnings and no effect on minority interest.

ANS: B
Answer B is correct. Retained earnings reported on the consolidated balance
sheet would equal the acquiree's retained earnings balance at year-end.
Thus, even though declaration and payment of a dividend by the acquiree
would decrease The acquiree's retained earnings, there would be no effect on
consolidated retained earnings. Noncontrolling interest equals the fair value of
the noncontrolling shares of stock of the acquisition. This balance would be
increased by the noncontrolling interests percentage of income of the
acquiree, and decreased by the noncontrolling interest's share of the dividend
of acquiree. This balance would include subsidiary retained earnings which
would have been decreased by the declaration and payment of dividends.
Thus, noncontrolling interest would also have decreased and answer B is
correct.

13. On January 1, 2010, Ritt Corp. purchased 50,000 shares of Shaw Corp. stock
which represented 80% of Shaw’s P10 par common stock for P19.50 per share.
On the date of acquisition, the fair value of the 12,500 shares representing the
noncontrolling interest in Shaw was P18 per share. On this date, the carrying
amount of Shaw’s net assets was P1,000,000. The fair values of Shaw’s
identifiable assets and liabilities were the same as their carrying amounts. For
the year ended December 31, 2010, Shaw had net income of P190,000 and
paid cash dividends totaling P125,000. In the December 31, 2010, consolidated
balance sheet, noncontrolling interest should be reported at
a. P200,000 b. P225,000 c. P233,000 d. P238,000

ANS: D
Answer D is correct. The percentage of the acquiree’s stockholders’ equity not
owned by the acquirer company represents the noncontrolling interest. The
acquisition date noncontrolling interest is valued based on the fair value of the
shares, which is 12,500 (20% × 50,000) × P18 = P225,000. At 12/31/10 the
noncontrolling interest is computed below

1/1/10 noncontrolling interest P225,000

2010 net income (20% × P190,000) 38,000
2010 dividends (20% × P125,000) (25,000)
Noncontrolling interest at 12/31/10 P238,000

14. Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp. Twill
purchases merchandise inventory from Webb at 140% of Webb's cost. During
2010, merchandise that cost Webb P40,000 was sold to Twill. Twill sold all of this
merchandise to unrelated customers for P81,200 during 2010. In preparing
combined financial statements for 2010, Nolan's bookkeeper disregarded the
common ownership of Twill and Webb. By what amount was unadjusted
revenue overstated in the combined income statement for 2010?
a. P16,000 b. P40,000 c. P56,000 d. P81,200
 ANS: C
Answer C is correct. When computing combined revenue, the objective is to
restate the accounts as if the intercompany transaction had not occurred.
Assuming that there was no sale between Twill and Webb, the correct amount
of consolidated revenue would be the P81,200 sold to unrelated customers.
Thus, unadjusted revenue is overstated by the P56,000 (P40,000 x 140%)
intercompany revenue recognized by Webb.

15. A December 15, 2012 purchase of goods was denominated in a currency

other than the entity's functional currency. The transaction resulted in a
payable that was fixed in terms of the amount of foreign currency, and was
paid on the settlement date, January 20, 2013. The exchange rates between
the functional currency and the currency in which the transaction was
denominated changed between the transaction date and December 31,
2012, and again between December 31, 2012, and January 20, 2013. Both
exchange rate changes resulted in gains. The amount of the gain that should
be included in the 2013 financial statements would be
a. The gain from December 31, 2012, to January 20, 2013.
b. The gain from December 15, 2012, to January 20, 2013.
c. The gain from December 15, 2012, to December 31, 2013.
d. Zero.

ANS: A
Answer A is correct. Foreign currency transactions (economic activities
denominated in a currency other than the entity's recording currency) must be
translated into the currency used by the reporting company at each balance
sheet date as well as at the settlement date. The difference between the
original payable and the translated amount is a foreign exchange transaction
gain or loss to be recognized in the period of the adjustment. Thus, the gain
caused by exchange rate fluctuations between 12/31/12 and 1/20/13 should
be reported on the 2013 income statement.

16. On July 1, 2012, Stone Company lent P120,000 to a foreign supplier, evidenced
by an interest-bearing note due on July 1, 2013. The note is denominated in the
currency of the borrower and was equivalent to 840,000 local currency units
(LCU) on the loan date. The note principal was appropriately included at
P140,000 in the receivables section of Stone's December 31, 2012 balance
sheet. The note principal was repaid to Stone on the July 1, 2013 due date
when the exchange rate was 8 LCU to P1. In its income statement for the year
ended December 31, 2013, what amount should Stone include as a foreign
currency transaction gain or loss?
a. P0. c. P15,000 gain.
b. P15,000 loss. d. P35,000 loss.

ANS: D
 Answer D is correct. Since the rate is denominated in a foreign currency at a
fixed 840,000 (LCU), fluctuations in the exchange rates will produce foreign
currency gains (losses). The increase (decrease) in expected functional
currency cash flows is a foreign currency transaction gain (loss) to be included
in income in the period during which the exchange rate changes. At
December 31, 2012, changes in the exchange rates produce a recognized
gain of P20,000 (P140,000 - P120,000). At the repayment date (July 1, 2013)
changes in the exchange rate resulted in a realized loss of P35,000 computed
as follows:

Received from borrower 840,000 LCU ÷ 8 LCU for each P1 = P105,000

Note carrying value P

140,000
Cash received (105,000)
Translation loss P 35,000

17. On November 15, 2012, Celt, Inc., a local company, ordered merchandise FOB
shipping point from a foreign company for 200,000 LCUs. The merchandise was
shipped and invoiced to Celt on December 10, 2012 but received January 2,
2013 due to some problems encountered during its delivery. Celt paid the
invoice on January 10, 2013. The spot rates for LCUs on the respective dates
are as follows:

November 15, 2012 P.4955

December 10, 2012 .4875
December 31, 2012 .4675
January 02, 2013 .4075
January 10, 2013 .4475

In Celt's December 31, 2012 income statement, the foreign exchange

transaction gain(loss) is
a. P9,600 loss c. P4,000 gain
b. P8,000 gain d. P-0-

ANS: C
Answer C is correct. No journal entry is prepared on 11/15/09 when the goods
are ordered, so the spot rate for LCUs on that date (P.4955) is not relevant to
the solution of this problem. On 12/10/09, Celt would record the purchase and
related accounts payable at P97,500 (200,000 LCUs × P.4875). A foreign
exchange transaction gain (loss) be recognized if the spot rate on the
settlement date (or any intervening balance sheet date) is different from the
rate on the transaction date. At 12/31/09, the spot rate is P.4675, which means
the account payable must be adjusted down to P93,500 (200,000 LCUs ×
P.4675), resulting in a gain of P4,000. A shortcut approach is to multiply the
change in the exchange rate (P.4875 - P.4675 = P.02) by the payable balance
in LCUs (P.02 × 200,000 LCUs = P4,000).
18. Dale, Inc., a local corporation, bought machine parts from Kluger Company of
Germany on March 1, 2009, for 30,000 euros, when the spot rate for euros was
P1.10. Dale's year-end was March 31, 2009, when the spot rate for euros was
P1.07. Dale bought 30,000 euros and paid the invoice on April 20, 2009, when
the spot rate was P1.12. How much should be shown in Dale's income
statements as foreign exchange transaction gain or loss for the years ended
March 31, 2009 and 2010?

2009 2010
A. P0 P0
B. P0 P900 loss
C. P900 loss P0
D. P900 gain P1,500 loss

a. A c. C
b. B d. D

ANS: D
Answer D is correct. When payment for a purchase is in a currency other than
the functional currency of the purchaser (in this case, the currency for the
transaction is the euro), a foreign exchange transaction (gain) loss will result if
the spot rate on the settlement date is different than the rate existing on the
transaction date. Additionally, a provision must be made at any intervening
year-end date for such rate changes. At 3/31/09 a P900 gain [30,000 × (P1.07 -
P1.10)] would be recognized. On the date of settlement (4/20/09), a P1,500 loss
[30,000 × (P1.12 - P1.07)] would be recognized. Therefore, Dale's income
statements would show a P900 foreign exchange transaction gain in F/Y 09
and a P1,500 loss in F/Y 10.

19. For an unrecognized firm commitment to qualify as a hedged item it must

a. Be binding on both parties. c. Contain a nonperformance
clause that makes performance
probable.
b. Be specific with respect to all d. All of the above.
significant terms.
ANS: D
Answer D is correct. For an unrecognized firm commitment to qualify as a
hedged item it must

1. Be binding on both parties.

2. Be specific with respect to all significant items

3. Contain a nonperformance clause that makes performance probable.

20. CPA Co.’s wholly owned subsidiary, BSAC Corporation maintains it accounting
records in German marks. Because all of BSAC’s branch offices are in Switzerland, its
functional currency is the Swiss francs. Remeasurement of its 2013 financial statement
resulted in P3,800 gain and translation of its financial statement resulted in P4,050 gain.
What amount should CPA Co. report as foreign exchange gain is included in the
income statement for the year ended December 31, 2013?
a. P-0- b. P3,800 c. P4,050 d. P7,850

ANS: A

21. On November 15, 2010, Manila Company, a Philippine company ordered

merchandise from the US company for 3,500 US dollars. The merchandise was shipped
and invoiced, on December 10, 2010. Manila Company paid the invoive on January
10, 2011. The spot rates for US dollars on the respective dates where:

Nov. 15, 2010 P49.85

Dec. 10, 2010 48.65
Dec. 31, 2010 45.25
Jan. 10, 2011 46.75

In Manila’s December 31, 2010 income statement, what is the foreign exchange gain
(loss)?
a. P16,100 b. (P16,100) c. P11,900 d. (P11,900)
ANS: C

22. On October 1, 2010, Pinoy Company sold goods on account to a Thai Corporation for
9,000 Baht. The date of delivery is October 27, 2010 and the payement is due on
January 30, 201. Exchange rates were as follows:
Bid rate Offer rate
Oct. 01, 2010 P47.50 49.20
Oct. 27, 2010 48.00 46.00
Dec. 31, 2010 44.70 43.00
Jan. 30, 2011 42.00 45.50

How much is the forex gain or loss to be recognized on January 30, 2011?
a. P22,500gain c. P24,300loss
b. P24,300gain d. P22,500loss

ANS: C
The buyer of foreign currency unit is the bank and the bank sets the rate that is why
bid rate shall be the basis for recording.

23. Abi Corporation received a promissory note denominated in foreign currency from
the sales made to a Singaporean customer. The following were the related
transactions: (in Singaporean dollars) On December 1, Abi Corporation sold
merchandise to a Singaporean customer for 60-day, 15% promissory note for $48,000,
at a buying rate of $1 to P47.50. On December 31, the buying spot rate is $1 to P46.85.
On January 30, the buying spot rate is $1 to P47.75.

On the settlement date, how much is the forex gain or loss?

 a. P43,740 loss c. P31,590 loss
b. P31,590 gain d. P43,740 gain

ANS: D

24. On December 1, 2013, M Company acquired goods on account from a Korean

Company. The amount of purchase was 370,000 Korean won. M will settle the
account on January 2, 2014. On December 1, the spot rate was 25 Korean won for
one Philippine peso. Also on December 1, M entered into a futures contract to
purchase 370,000 Korean won on January 2, 2014 at a forward rate of 50 Korean won
for one Philippine peso. The spot rate and the forward rate for one Philippine peso on
December 31, 2013 is 40 Korean won.

How much is the foregn exchange gain or loss on hedging instrument - forward
contract?
a. P1,850 gain b. P1,850 loss c. P5,550 loss d. P5,550 gain

ANS: A

25. The following data applies to Davao Company’s sale of 8,250 foreign currency units
under a forward contract dated November 1, 2010, for the delivery on January 31,
2011:

11/1/10 12/31/10
Spot rates P55.00 P53.00
30-day forward rate 51.00 50.00
90-day forward rate 48.00 45.00
Davao entered into a forward contract to speculate in the foreign currency.

In its income statement for the year ended December 31, 2010 what amount of loss
should Davao report from this forward contract?
a. P-0- b. P16,500 c. P41,250 d. P24,750

ANS: B

26. Given the following information (for $1):

Buying spot rate Sellling spot
rate
Transaction date P44 P46
Balance Sheet date 49 50
Settlement date 51 54

Forward rates
120-day 90-day futures 60-day 30-day
futures futures futures
Transaction P44 P46 P45 P47
date
Balance sheet 43 47 49 51
Settlement 46 49 50 53
date
 On December 1, 2010, B Company sold merchandise to US Company. The price of
$7,450 is to collected on February 28, 2011. To hedge this foreign currency exposure, B
Company sold $7,450 for delivery on February 28, 2011.

How much is the foregn currency exchange gain (loss) on the forward contract on
balance sheet date?
a. P22,350 loss c. P37,250 gain
b. P22,350 gain d. P37,250 loss

ANS: A

27. O Company acquired merchandise for 36,000 pounds from s vendor in London on
December 1, 2010. Payments in British pounds was due on March 31, 2011. On the
same date, O enetered into a 120-day futures contract to purchase 36,000 pounds
from a bank. Exchange rate for pound on different dates are as follows:
Dec. 1 Dec. 31 March 31
Spot rate P81.40 P82.30 P81.90
30-day futures 82.30 82.50 83.20
60-day futures 81.80 82.20 82.60
90-day futures 80.60 82.60 83.40
120-day futures 81.20 82.80 82.90

How much is the net forex gain or loss on the settlement date?
a. P7,200 loss c. P10,800 gain
b. P7,200 gain d. P10,800 loss
ANS: D

28. On November 1, S Company entered into a firm commitment to acquire a

machinery. Delivery and passage of title would be on February 28, 2011 at a price of
HK$8,000. Exchange rate were as follows:
Spot rate Forward rate
Nov. 1, 2010 P36 P34
Dec. 31, 2010 37 36
Feb. 28, 2010 39 39

How much is the foreign gain or loss recognized by the S Company on the firm
commitment on December 31, 2010?
a. P16,000 gain c. P8,000 gain
b. P16,000 loss d. P8,000 loss

ANS: B

29. Certain statement of financial position accounts in a foreign subsidiary of Pinay

Company on December 31, 2010, have been translated in Philippine pesos as follows:
Translated at
Current rates Historical rates
Accounts Receivables P175,000 P192,500
Prepaid insurance 43,750 52,500
Plant and Equipment 87,500 96,250
Patents 70,000 78,750
 What is the total to be included in Pinay’s statement of finncial position for
Decemeber 31, 2010 for the above assets?
a. P376,250 b. P402,500 c. P393,750 d. P420,000

ANS: A

30. A wholly owned subsidiary of Maganda Inc. has certain expense accounts for the
year ended December 31, 2010 stated in local currency units(LCU) as follows:
LCU
Deprecaition of Equipment (related assets were purchased 210,000
01/08/2008)
Provision for uncollectible accounts 140,000
Rent 350,000

The exchange rates for various dates are as follows:

Peso equivalent of 1 LCU
January 1, 2008 P0.50
December 31, 2010 0.40
Average 2010 0.44

What peso amount should be included in Maganda Inc.’s income statement to

reflect the preceding expenses for the year ended December 31, 2010?
a. P280,000 b. P308,000 c. P294,000 d. P320,600
ANS: B

31. ABC Corp. has a 30% equity investment in a company in Singapore, SS Co. On
December 1, 2009, the balance in ABC’s investment in SS account is P945,000 equal to
30% of SS’s net assets of 75,000 Singaporean dollars times a P42.00 year-end exchange
rate. On this date, ABC has no adjustment balance relative to its investment in SS. To
hedge its net investment in SS, ABC borrowed 18,750 Singaporean dollars for one year
at 12% interest on January 1, 2010 at a spot rate of P42.00. The loan is denomminated
in Singaporean dollars, with principal and interest payable on January 1, 2011.
Assume that on November 2, 2010, SS declares and pays a 3,750 Singaporean dollars
dividend, when the spot rate is P43.50. On December 31, 2010, P reports net income of
15,000 Singaporean dollars. The weighted average exchange rate for the year 2010 is
P43.00, and the closing rate on December 31, 2010 is P44.00.

As a result of the hedging, how much is the translation adjustment that will appear in
the stockholder’s equity sectikon of the ba;ance sheet of ABC Corporation on
December 31, 2010?
a. P48,937.50 b. P37,500.00 c. P9,187.50 d. P11,437.50
ANS: D

32. On December 1, 2010, P Company paid cash to purchase 90-day “at the money” call
option for 500,000 Thailand baht. The option’s purpose is to protect an exposed liability
of 500,000 baht relating to an inventory purchase received on December 1, 2010 and
to be paid on March 1, 2011.
 12/1/10 12/31/10 3/1/11
Spot rate(market price) 1.20 1.28 1.27
Strike price(exercise 1.20 1.20 1.20
price)
Fair value of call option 3,000 42,000 35,000

The foreign exchange gain or loss on option contract due to change in the effective
portion on December 31, 2010 if the changes in the time value will be excluded from
the assessment of hedge effectiveness should be:
a. 1,000 loss c. 39,000 gain
b. 1,000 gain d. 40,000 gain

ANS: D

33. On January 1, 2010, GBX Inc. paid P40,000 cash to acquire a put foreign exchange
option for 1,000,000 rupee. With an expiration date of December 31, 2010. The option
hedges 2010’s forcasted exporting sales of P1,000,000 rupee. GBX fiscal year end June
30.
Jan. 1, 2010 June 30, 2010 Dec. 31,
2010
Spot rate 1.18 1.12 1.15
Strike price 1.19 1.19 1.19
Fair value of put option 202,500

Which of the following is true?

a. The forex loss o be presented in the income statement on December 31,
2010 amounted to P132,500, if the time value element is included in the
assessment of hedge effectiveness.
b. The forex gain to be presented in the stockholders equity on June 30, 2010 is
P70,000 if the time value element is excluded from the assessment of hedge
effectiveness.
c. The forex gain or loss on option contract on June 30, 2010 should be
P162,500 if the tinme value element is included in assessing the hedge
efffectiveness.
d. The intrinsic and time vale of the option on January 1, 2010 were 0 and
P16,000 respectively.

ANS: C

34. A subsidiary’s functional currency is the local currency, which has not
experienced significant inflation. The appropriate exchange rate for
translating the depreciation on plant assets in the income statement of the
foreign subsidiary is the
a. Exit exchange rate.
b. Historical exchange rate.
c. Weighted-average exchange rate over the economic life of each
plant asset.
d. Weighted-average exchange rate for the current year.

ANS: D
 Answer A is incorrect because when the functional currency is the foreign
currency, ASC Topic 830 requires the use of current rates.
Answer B is incorrect because ASC Topic 830 states that when the functional
currency is the foreign currency, the use of current rates is required.
Answer C is incorrect because, although the weighted-average exchange
rate can be used, it has to be for the period in which the expense is
recognized.
Answer D is correct because ASC Topic 830 specifies that when the functional
currency is the foreign currency, exchange rates for expenses should be those
in effect at the time transactions are recorded during the current period.
However, the statement also says that weighted-average rates can be used
for items occurring numerous times during the accounting period. Such
weighted-average rates may also be used for accounting allocations such as
depreciation.

35. The France Company owns a foreign subsidiary with 2,400,000 local currency
units (LCU) of property, plant, and equipment before accumulated
depreciation at December 31, 2009. Of this amount, 1,500,000 LCU were
acquired in 2007 when the rate of exchange was 1.5 LCU to P1, and 900,000
LCU were acquired in 2008 when the rate of exchange was 1.6 LCU to P1. The
rate of exchange in effect at December 31, 2009, was 1.9 LCU to P1. The
weighted average of exchange rates which were in effect during 2009 was 1.8
LCU to P1. Assuming that the property, plant, and equipment are depreciated
using the straight-line method over a 10-year period with no salvage value,
how much depreciation expense relating to the foreign subsidiary’s property,
plant, and equipment should be charged in France’s income statement for
2009? Assume the Philippine Peso is the functional currency.
a. P126,316 c. P150,000
b. P133,333 d. P156,250

ANS: D
Answer D is correct. The standard requires remeasurement when the Philippine
Peso is the functional currency. Remeasurement means that all assets and
liabilities on the balance sheet and revenues and expenses on the income
statement are translated at the rates in effect when the transactions originally
occurred (e.g., depreciation is translated at the exchange rate in effect at the
original transaction date) (i.e., the historical rate). Since the useful life of the
fixed assets is 10 years with no salvage value, depreciation will be 150,000 LCU
for the equipment acquired in 2007 and 90,000 LCU for the equipment
acquired in 2008. These are converted to pesos at their respective historical
rates of 1.5 and 1.6 LCU.

P1,500,000 x 10% ÷ = P100,000

1.5
P 900,000 x 10% ÷ 1.6 = 56,250
 P156,250

36. Certain balance sheet accounts in a foreign subsidiary of the Brogan

Company at December 31, 2009, have been remeasured into Philippine pesos
as follows:

Rate translated at
Current Historical
Equity securities carried at cost P100,000 110,000
Marketable equity securities carried
at current market price 120,000 125,000
Inventories carried at cost 130,000 132,000
Inventories carried at net realizable
value 80,000 84,000
P430,000 P451,000
What amount should be shown in Brogan’s balance sheet at December 31,
2009, as a result of the above information?
a. P430,000 c. P442,000
b. P436,000 d. P451,000

ANS: C
Answer C is correct. When remeasuring into Phil. pesos, the current rate will be
used for monetary items and for nonmonetary items carried at market. The
historical rate is to be used for nonmonetary items carried at cost. The
inventory carried at net realizable value should be remeasured using current
rates because net realizable value is a market concept. Per the summary
below, the items would be translated at P442,000.

Historical rate:

Securities at cost P110,000

Inventories at cost 132,000

Current rate:
Securities at
P120,000
market
Inventory at
80,000
market
P442,000
37. The functional currency of Nash, Inc.’s subsidiary is the Swiss franc. Nash
borrowed Swiss francs as a partial hedge of its investment in the subsidiary. In
preparing consolidated financial statements, Nash’s translation loss on its
investment in the subsidiary exceeded its exchange gain on the borrowing.
How should the effects of the loss and gain be reported in Nash’s consolidated
financial statements?
a. The translation loss less the exchange gain is reported as "other
comprehensive income" under one of three alternatives and
"accumulated other comprehensive income" in the stockholders’
equity section of the balance sheet.
b. The translation loss less the exchange gain is reported in the income
statement.
c. The translation loss is reported separately as "other comprehensive
income" and in the stockholders’ equity section of the balance sheet
and the exchange gain is reported in the income statement.
d. The translation loss is reported in the income statement and the
exchange gain is reported as "other comprehensive income" and in
the stockholders’ equity section of the balance sheet.
ANS: A
Answer A is correct. According to the standards, translation adjustments
resulting from the translation of foreign currency statements should be
reported separately as a component of “other comprehensive income” under
one of three alternatives and in “accumulated other comprehensive income”
in stockholders' equity. Additionally, gains and losses on certain foreign
currency transactions should be reported in the same manner. Those gains
and losses which should be excluded from net income and instead reported in
“other comprehensive income” and as a component of stockholders' equity
include foreign currency transactions designated as economic hedges of a
net investment in a foreign entity. Thus, both the translation loss and the
exchange gain are to be reported as “other comprehensive income” and in
the stockholders' equity section of the balance sheet

38. Post, Inc. had a credit translation adjustment of P30,000 for the year ended
December 31, 2009. The functional currency of Post’s subsidiary is the currency
of the country in which it is located. Additionally, Post had a receivable from a
foreign customer payable in the local currency of the customer. On
December 31, 2009, this receivable for 200,000 local currency units (LCU) was
correctly included in Post’s balance sheet at P110,000. When the receivable
was collected on February 15, 2010, the Phil. peso equivalent was P120,000. In
Post’s 2010 consolidated income statement, how much should be reported as
foreign exchange transaction gain?
a. P0 b. P10,000 c. P30,000 d. P40,000

ANS: B
 Answer B is correct. Per ASC Topic 830, translation adjustments result from
translating an entity's financial statements into the reporting currency. Such
adjustments, which result when the entity's functional currency is the foreign
currency, should not be included in the determination of net income. Rather,
such adjustments should be reported as components of “other comprehensive
income” and stockholders' equity. Note that if the functional currency was the
reporting currency, a remeasurement process would have been used, with the
resulting gain (loss) reported on the income statement. Conversely, gains and
losses which result from foreign exchange transactions are reported on the
income statement. At 12/31/09, the receivable was translated at P110,000
(representing 200,000 LCU). When the 200,000 LCU were collected, they were
worth P120,000. Therefore, a foreign exchange transaction gain of P10,000
(P120,000 - P110,000) should be reported on the income statement.

39. The balance in Bart Corp.’s foreign exchange loss account was P13,000 at
December 31, 2009, before any necessary year-end adjustment relating to the
following:
• Bart had a P20,000 loss resulting from the translation of the accounts of its
wholly owned foreign subsidiary for the year ended December 31, 2009.
• Bart had an account payable due to an unrelated foreign supplier
payable in the local currency of the foreign supplier on January 27, 2010.
The Phil. peso equivalent of the payable was P100,000 on the November
28, 2009 invoice date, and it was P106,000 on December 31, 2009.
In Bart’s 2009 consolidated income statement, what amount should be
included as foreign exchange loss?
a. P33,000 b. P27,000 c. P19,000 d. P13,000

ANS: C
Answer C is correct. Translation adjustments result from translating an entity's
financial statements into the reporting currency. Such adjustments, which
result when the entity's functional currency is the foreign currency, should not
be included in net income. Instead, such adjustments should be reported as
components of “other comprehensive income” and accumulated other
comprehensive income in stockholders' equity. (Note that if the functional
currency was the reporting currency, a remeasurement process would have
been used instead of translation, with the resulting gain or loss included in
income.) The P20,000 translation loss is not reported on the income statement.
In contrast, gains and losses which result from foreign exchange transactions
(purchases/sales) are reported on the income statement. Therefore, Bart
should report the P13,000 foreign exchange loss, plus the P6,000 foreign
exchange loss (P106,000 year-end liability less P100,000 original liability), for a
total loss of P19,000.
40. Sun, Inc. is a wholly owned subsidiary of Patton, Inc. On June 1, 2010, Patton declared
and paid a P1 per share cash dividend to stockholders of record on May 15, 2010. On
May 1, 2010, Sun bought 10,000 shares of Patton's common stock for P700,000 on the
open market, when the book value per share was P30. What amount of gain should
Patton report from this transaction in its consolidated income statement for the year
ended December 31,2010?
a. P0 b. P390,000 c. P400,000 d. P410,000

ANS: A
Choice "a" is correct, P0 gain from the purchase of Patton's (parent) stock by Sun (subsidiary).
The purchase by the member of a consolidated group of stock of another member of the
consolidated group is treated as a treasury stock transaction. This follows the theory of
consolidated financial statements presenting one economic entity. (You cannot make money
selling stock to yourself.)

41. Port, Inc. owns 100% of Salem Inc. On January 1, 2009, Port sold Salem delivery
equipment at a gain. Port had owned the equipment for two years and used a
five-year straight-line depreciation rate with no residual value. Salem is using a
three-year straight-line depreciation rate with no residual value for the equipment. In
the consolidated income statement, Salem's recorded depreciation expense on the
equipment for 2009 will be decreased by:
a. 20% of the gain on sale. c. 50% of the gain on sale.
b. 33 1/3% of the gain on sale. d. 100% of the gain on sale.

ANS: B
Choice "b" is correct; depreciation expense will be decreased by 33 1/3% of the gain on sale,
the amount that depreciation expense has been overstated.
Example:
Original purchase price by Port P 100
Two years' depreciation (P100 5 = P20 per year 2)
(40)
Net book value at date of sale P
60
Sale price to Salem
75
Gain on sale P
15

Depreciation expense recorded by Salem (P75 3 year P 25

life)
Consolidated depreciation expense (P100 5 year life) 20
Elimination of excess depreciation (P15 gain x 1/3) P 5

42. On September 22, 2009, Yumi Corp. purchased merchandise from an

unaffiliated foreign company for 10,000 units of the foreign company's local
currency. On that date, the spot rate was P.55. Yumi paid the bill in full on
March 20, 2010, when the spot rate was P.65. The spot rate was P.70 on
December 31, 2009. What amount should Yumi report as a foreign currency
transaction loss in its income statement for the year ended December 31,
2009?
a. P0 c. P1,000
b. P 500 d. P1,500
 ANS: D
Answer D is correct. A transaction has occurred for which settlement will be
made in a foreign currency. A foreign exchange transaction gain (loss) will
result if the spot rate on the settlement date is different than the rate on the
transaction date. A gain (loss) must be recognized at any intervening year-end
date if there has been a rate change. Thus, in 2009, Yumi would recognize a
P1,500 foreign exchange transaction loss [10,000 × (P.70 - P.55)]. Yumi would
recognize a foreign exchange transaction gain of P500 in 2010 [10,000 × (P.65 -
P.70)].

43. Gains and losses of the effective portion of a hedging instrument will be
recognized in current earnings in each reporting period for which of the
following?

Fair value hedge Cash flow

hedge
A. Yes No
B. Yes Yes
C. No No
D. No Yes

a. A c. C
b. B d. D

ANS: A
Answer A is correct. Fair value hedges will recognize gains and losses for the
effective portion of the hedging instrument in current earnings for each
reporting period. Cash flow hedges will recognize gains and losses for the
effective portion of the hedging instrument in other comprehensive income.

44. Rachel Co. entered into a forward exchange contract on October 3, 2009, to
purchase 100,000 Swiss francs in 90 days. The forward contract was entered
into to hedge a purchase of inventory in September 2009, payable in January
2010. The relevant exchange rates are as follows:

Spot rate Forward rate (for January 3,

2010)
September 30, 2009 P.77 P.79
October 3, 2009 .85 .87
December 31, 2009 .92 .93

At December 31, 2009, what amount of foreign currency transaction gain from
this forward contract should Rachel include in net income?
a. P1,000 c. P6,000
b. P2,000 d. P8.000

ANS: C
 Answer C is correct. ASC Topic 815 requires fair market valuation for forward
exchange contracts. Each period this is accomplished by marking the forward
exchange contract to market using the forward rate at the financial statement
date. At 12/31/09 the forward rate is P .93. The difference between P .93 and
P.87, the forward rate on the date the contract was entered into, times 100,000
Swiss francs is P6,000, the forward exchange gain. The journal entry would be
as follows:

Forward contract receivable 6,000

Forward contract gain 6,000

The P6,000 forward exchange contract gain would be included in 2009 net
income.

45. Certain balance sheet accounts of a foreign subsidiary of Post, Inc. at

December 31, 2009, have been translated into Philippine Pesos as follows:

Translated at

Current Historical
rates rates

Accounts receivable, P120,000 P100,000

long-term

Prepaid insurance 55,000 50,000

Copyright 75,000 85,000

P250,000 P235,000

The subsidiary’s functional currency is the currency of the country in which it is

located. What total amount should be included in Post’s December 31, 2009
consolidated balance sheet for the above accounts?
a. P225,000 b. P235,000 c. P240,000 d. P250,000

ANS: D
Answer D is correct. When the functional currency of a foreign subsidiary is the
local foreign currency, balance sheet accounts are translated using the
current exchange rate (the rate in effect at the balance sheet date).
Therefore, these accounts should be included in the balance sheet at
P250,000. Note that if the functional currency was the Philippine peso, balance
sheet accounts would be remeasured using a combination of historical and
current rates.

46. AB Inc., CD Inc. and EF Inc. are to combine. The stockholders’ equity on their
respective balance sheets immediately prior to combination show:
AB Inc. CD Inc. EF Inc.
 P P
Common stock 300,000 200,000 P 400,000
Additional paid in
capital 70,000 100,000 -

Retained earnings (40,000) 60,000 90,000

As per appraisal, book values of CD’s assets and liabilities approximate their
fair values except for the Land and Non-current liabilities, which is undervalued
by P50,000 and P10,000 respectively. EF’s Equipment and long-term debt is
overvalued by P80,000 and P130,000 respectively. All other EF’s assets and
liabilities equal to their fair values. It was agreed that AB shall issue its own
shares of stocks to CD and EF. Twenty five percent of the total stocks issued
shall be received by CD and the remaining, will be given to EF. AB paid P20,000
and P90,000 indirect costs with CD’s and EF’s business; respectively.
Immediately after the combination, AB has common stock balance of
P1,100,000. AB P100 par common stock has a market value of P150. How much
retained earnings is to be reported in the combined balance sheet?
a. P50,000 c. P (50,000)
b. P60,000 d. P (60,000)

ANS: C

47. On January 2, 2010, Polo Corporation purchase 80% of Son Co.’s common stock for
P324,000. P15,000 of the excess is attributable to goodwill and the balance to a
depreciable asset with an economic life of 10 years. Non-controlling interest is
measured at its fair value on the date of the acquisition. On the date of acquisition,
stockholder’s equity of the two companies are as follows:

Polo Son Company

Corporation

Common Stock P525,000 P120,000

Retained Earnings 780,000 210,000

On December 31, 2010, Son Co. reported net income of P52,500 and paid dividends
of P18,000 to Polo. Polo reported earnings from its separate operations of P142,500
and paid dividends of P69,000. Goodwill had been impaired and should be reported
at P3,000 on December 31, 2010.

What is the consolidated net income on December 31, 2010?

a. P178,175 c. P189,375
b. P177,000 d. P180,000

ANS: B

48. What is the NCI in net income of Son Company on December 31, 2010?

a. P9,375 c. P9,300
 b. P10,500 d. P6,900
ANS: D

49. Gordon Ltd., a 100% owned British subsidiary of a Philippine parent company,
reports its financial statements in local currency, the British pound. A local
newspaper published the following Philippine exchange rates from the British
pound to peso at year-end:

Current Rate Php67.50

Historical rate
67.70
(acquisition)
Average rate 67.55
Inventory (FIFO) 67.60

Which currency ratio should Gordon use to convert its income statement to
Philippine peso at year-end?
a. 67.50 b. 67.55 c. 67.60 d. 67.70

ANS: B
Answer B is correct. The requirement is to determine the currency rate to use to
convert the income statement. If the functional currency equals the local
currency, the current rate method is used. Answer B is correct because the
current rate method requires income statement items (revenues and
expenses) to be translated using the weighted-average rate, Php67.55.

50. A sale of goods, denominated in a currency other than the entity’s functional
currency, resulted in a receivable that was fixed in terms of the amount of
foreign currency that would be received. Exchange rates between the
functional currency and the currency in which the transaction was
denominated changed. The resulting gain should be included as a
a. Translation gain reported as "other comprehensive income" and a
separate component of stockholders’ equity.
b. Translation gain reported as a component of income from continuing
operations.
c. Transaction gain reported as "other comprehensive income" and a
separate component of stockholders’ equity.
d. Transaction gain reported as a component of income from
continuing operations.
ANS: D
Answer A is incorrect because a translation gain results from the process of
translating an entity's financial statements into the reporting currency.
Answer B is incorrect because a translation adjustment results from the process
of translating an entity's financial statements into the reporting currency.
 Answer D is correct because the standards states that the increase (decrease)
in expected functional currency cash flows is a foreign currency transaction
gain (loss) that shall be included in determining net income for the period in
which the exchange rate changes. The gain (loss) is shown on the income
statement under other income as part of income from continuing operations.

PROBLEM

1. On January 1, 2010, XYZ Coprporation organized Avenue Co. as a subsidiary in

Hongkong with an initial investment cost of HK$90,000. Avenue’s December 31, 2010
trial balance in HK$ is as follows:

Debit Credit
Cash HK$10,500
Accounts 30,000
Receivable(net)
Receivable from XYZ 7,500
Inventory 37,500
Plant and Equipment 150,000
Accum. Depreciation HK$15,000
Accounts Payable 18,000
Bonds Payable 75,000
Common stock 90,000
Sales 225,000
Cost of goods sold 105,000
Depreciation expense 15,000
Operating expense 45,000
Dividend paid 22,500
Total HK$423,000 HK$423,000

Addtional Information:
1. Purchases of inventory goods are made evenly during the year. Items in the ending
inventory were perchased November 1.
2. Equipment is depreciated by the straight line method with a 10-year life and no
residual value. A full year’s depreciation is taken in the year of acquisition. The
equipment was acquired on March 1.
3. The dividends were declared and paid on November 1.
4. Exchange rates were as follows:
January 1 HK$1= P3.30
March 1 HK$1= 3.40
November 1 HK$1= 3.70
December 1 HK$1= 3.00
2010 Average HK$1= 3.50

Required:
Prepare a schedule translating the December 31, 2010, trial balance from HK$ to
Philippine peso in accordance with PAS 21.

ANS:
Net assets, beginning HK$ x 3.30 P 297,000
90,000
Net Income 60,000 x 3.50 210,000
Dividends (22,500) x 3.70 (83,250)
Net assets, ending P423,750
Translation gain (loss) ________ (42,250)
HK$127,500 x 3.00 P382,500