Chapter 8

True-False Statements
1. Multinational operations result from activities conducted outside of the country
where an entity is headquartered.

2. Unless a company both purchases and sells outside the country where it is
headquartered, it is not involved in multinational operations.

3. Multinational operations do not have to result in the creation of a foreign currency

transaction.

4. The criteria used to determine whether a Philippine entity has to be included in

the consolidated financial statements are the same criteria used to determine
whether a foreign entity has to be included in the consolidated financial
statements.

5. The functional currency is always the parent currency.

6. One objective of accounting standard is that the financial results should be

converted in a manner that they will always appear as if the accounting records
had been maintained in the Philippine peso.

7. The financial records of a foreign entity must be modified to conform to IFRS for
the foreign entity to be included in the consolidated financial statements.

8. A foreign entity’s local currency is the currency of the country where the entity is
located.

9. Most companies will use the currency of the country where the headquarters is
located to maintain the financial records.

10. A foreign entity’s functional currency must either be the local currency of foreign
entity or the parent’s reporting currency.

11. The parent’s reporting currency is the currency in which the parent company
prepares the consolidated financial statements.

12. A foreign currency is any currency other than the functional currency.

13. One criteria indicating the that the foreign entity’s local currency is the functional
currency is when the foreign entity generally purchases goods and services in
the local market and pays for these purchases with the local currency.
14. One criteria indicating that the foreign entity’s local currency is the functional
currency is when the foreign entity engages in a large number of intercompany
transactions with the parent.

15. One criteria indicating that the parent’s reporting currency is the functional
currency is when the parent provides financing for the subsidiary and local
operations do not generate sufficient cash flows to service the debt.

16. One criteria indicating that the parent’s reporting currency is the functional
currency is when there is an active local sales market for the foreign entity.

17. A foreign entity located in a country with a highly inflationary economy must use
the parent currency as the functional currency because the foreign currency is
too unstable a measuring unit to be the functional currency.

18. The primary reason that a foreign entity located in a country with a highly
inflationary economy must use the Philippine peso as the functional currency is
that the use of the foreign currency as the functional currency could result in
distorted asset and liability values.

19. Remeasurement of a foreign entity’s financial information is always required.

20. A foreign entity’s financial information must be modified so as to conform to IFRS

prior to applying either the temporal or current rate methods.

Conceptual Multiple Choice Questions

1. Which of the following is the currency in which the foreign entity maintains it
financial records?
a. Parent reporting currency
b. Local currency
c. Foreign currency
d. Functional currency

2. Which of the following is the currency of the country where a foreign entity is
headquartered?
a. Parent reporting currency
b. Local currency
c. Foreign currency
d. Functional currency

3. Which of the following is the currency in which the consolidated financial

statements are prepared?
a. Parent reporting currency
b. Local currency
c. Foreign currency
d. Functional currency
4. Which of the following does not indicate that the local currency is the functional
currency?
a. Foreign operations are relatively self-contained withing a particular
economic environment
b. The foreign operation primary generates and expends foreign currency
c. The foreign entity’s day-to-day operations of the foreign entity are not
dependent on the economic environment of the parent’s home country
d. Changes in the foreign entity’s assets and liabilities directly impact the
parent’s cash flow in the parent’s currency

5. Which of the following does not indicate that the parent’s reporting currency is
the functional currency?
a. Changes in the foreign entity’s assets and liabilities directly impact the
parent’s cash flow in the parent’s currency
b. Foreign currency net cash flows may be reinvested or converted and
distributed to the parent
c. The foreign operations are primarily a direct and integral component of the
parent company’s operations
d. The foreign entity’s day-to-day operations are dependent on the parent’s
economic environment

6. Which of the following statements is not correct with regard to a foreign

subsidiary located in a country where there is an increasing inflation rate with a
cumulative inflation rate in excess of 100 percent in three years.
a. The country where the foreign subsidiary is located has a highly
inflationary economy
b. The Philippine peso is the functional currency
c. The temporal method will be applied to convert the foreign financial
information into Philippine peso
d. All of the above statements are correct

7. Which of the following is used to convert a foreign entity’s trial balance into the
functional currency?
a. Temporal method
b. Current rate method
c. Translation
d. Historical cost method

8. Which of the following is used to convert a foreign entity’s trial balance from the
functional currency to the investor’s reporting currency?
a. Historical cost method
b. Remeasurement
c. Current rate method
d. Temporal method
9. The conversion of a foreign entity’s financial information into the investor’s
reporting currency is performed to permit which of the following to occur?
a. Preparation of equity method journal entries
b. Preparation of consolidated financial statements
c. Preparation of both equity method journal entries and consolidated
financial statements
d. The conversion of a foreign entity’s financial information into the investor’s
reporting currency is not performed to allow the preparation of either of the
above tasks
10. Which of the following statements are not correct with regard to an investment in
a foreign entity’s at the acquisition date.
a. The investment account created on the investor’s financial records is
recorded at the U.S. dollar equivalent of the number of foreign currency
units given up for the investment
b. The purchase differentials will be the same amount regardless of whether
the investor is going to apply the current rate or temporal method
c. The investor cannot acquire a foreign subsidiary for an amount that would
result in negative goodwill
d. The worksheet elimination required to prepare consolidated financial
statements at the acquisition date are identical in appearance to the
worksheet elimination required to consolidate a domestic subsidiary

Straight Problems
Use the following information for questions 1 and 2:
Certain balance sheet accounts of a foreign subsidiary of RR Company have been
stated in pesos as follows:
Stated at
Current Rates Historical Rates
Accounts receivable, current . . . . . . P200,000 P220,000
Accounts receivable, long term . . . . 100,000 110,000
Prepaid Insurance . . . . . . . . . . . . . . . . 50,000 55,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . 80,000 85,000
P430,000 P470,000
1. This subsidiary’s functional currency is a foreign currency. What total should RR’s
balance sheet include for the preceding items?
2. This subsidiary’s functional currency is the peso. What total should RR’s balance
sheet include for the preceding items?
3. A foreign subsidiary of the BB Corporation has certain balance sheet accounts on
December 31,20x4. Information relating to these accounts in pesos is as follows:

Translated
Current Historical
Rates Rates
Marketable Securities . . . . . . . . . . . . . . . . P 75,000 P 85,000
Inventories, carried at average cost . . . . 600,000 700,000
Refundable Deposits . . . . . . . . . . . . . . . . 25,000 30,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 70,000
P755,000 P885,000
 What total should be included in BB’s balance sheet on December 31, 20x4, as a
result of the preceding information?

4. The following balance sheet accounts of a foreign subsidiary at December 31, 20x4,
have been translated into peso as follows:
Translated at
Current Rates Historical Rates
Accounts receivable, current . . . . . . P 600,000 P 660,000
Accounts receivable, long-term . . . . 300,000 324,000
Inventories carried at market . . . . . . 180,000 198,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . 190,000 220,000
P1,270,000 P1,402,000
What total should be included in the translated balance sheet at December 31,
20x4, for the above items? Assume the peso is the functional currency.

5. A foreign subsidiary of the BB Corporation has certain balance sheet accounts on

December 31,20x4. Information relating to these accounts in pesos is as follows:
Restated at
Current Historical
Rates Rates
Marketable Securities . . . . . . . . . . . . . . . . . . P 75,000 P 85,000
Inventories, carried at average cost . . . . 600,000 700,000
Refundable Deposits . . . . . . . . . . . . . . . . . . . . 25,000 30,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 70,000
P755,000 P885,000

What total should be included in BB’s balance sheet on December 31, 20x4, as a
result of the preceding information?
Functional Currency – LCU Functional Currency is Peso
a. P755,000 P880,000
b. P755,000 P755,000
c. P880,000 P755,000
d. P880,000 P880,000

6. A wholly owned subsidiary of a Philippine parent company has certain expense

accounts for the year ended December 31, 20x4, stated in local currency units
(LCU) as follows:
LCU
Depreciation of equipment (related assets
were purchased January 1, 20x2)……………….. 375,000
Provision for doubtful accounts……………………… 250,000
Rent……………………………………………………….. 625,000

The exchange rates at various dates are as follows:

Peso equivalent
of 1 LCU
December 31, 20x4…………………………………… P0.50
Average for year ended December 31, 20x4…… 0.55
January 1, 20x2………………………………………… 0.40
Assume that the LCU is the subsidiary's functional currency and that the charges to
the expense accounts occurred approximately evenly during the year. What total
peso amount should be included in the translated income statement to reflect these
expenses?
7. Patents are on the books of a foreign subsidiary of a Philippine firm at a value of
50,000 foreign currencies (FCs). The patents were acquired in 20x3 when the
exchange rate was 1 FC = P1.50. The foreign subsidiary was acquired by the
Philippine firm in 20X0 when the exchange rate was 1 FC = P1.40. The exchange
rate on December 31, 20x4, the date of the most current balance sheet, is 1 FC =
P1.55. The average rate of exchange for 20x4 is P1.53. What exchange rate will be
used to remeasure patents for the consolidated statements dated December 31,
20X4?

8. On 1/1/x6, a foreign unit of a domestic company acquired a parcel of land at a cost

of 100,000 LCUs. During 20x6, the inflation rate in the foreign country was 20%. The
direct exchange rate was P.60 on 1/1/x6 and P.52 on 12/31/x6. At what amount
would the land be expressed in pesos in the 12/31/x6 translated balance sheet using
the current rate - foreign currency unit of measure approach?

9. Pamex’s 100%-owned foreign subsidiary, Samex, had stockholders’ equity of

900,000 LCUs (local currency units) on 1/1/x6. For 20x6, Samex reported net
income of 300,000 LCUs. On 10/1/x6, Samex declared and paid a cash dividend of
100,000 LCUs. The LCU is the functional currency. Direct exchange rate information
follows:
1/1/x6 P.60 10/1/x6 P.52
Average rate during 20x6 P.55 12/31/x6 P.50
What is the effect of the 20x6 retained earnings?

10. Paxco has a foreign subsidiary, Saxco. On 1/1/x6, Paxco concluded that the local
currency unit (LCU) would strengthen during the remainder of 20x6. On this date,
Saxco’s balance sheet in LCUs was as follows:
Monetary assets 200,000 Monetary liabilities 500,000
Nonmonetary assets 600,000 Stockholders’ equity 300,000
800,000 800,000
Saxco’s functional currency is the LCU. On 1/1/x6, Paxco entered into a 12-month
FX forward to buy 300,000 LCUs at the forward rate of P.82 (the spot rate at the
time was P.80). On 12/31/x6, Paxco settled the FX forward when the direct spot
exchange rate was P.75. What is the change in Paxco’s AOCI—Cumulative Transla-
tion Adjustment and hedging transaction account for 20x6?

Multiple Choice Problem

Question 1 to 3

BL Inc., a Philippine company, acquired 90 percent of the common stock of a foreign country January 1,
20x5, for P160,000. The net assets of the foreign subsidiary amounted to 680,000 foreign currencies
(FCs) on the date of acquisition. On January 1, 20x5, the book values of the Malaysian subsidiary’s
identifiable assets and liabilities approximated their fair values. Exchange rates at various dates during
20x5 follow:

January 1 . . . . . . . . . . . FC 1 = P.21
December 31 . . . . . . . . FC 1 = P.24
 Average for 20x5 . . . . . FC 1 = P.22
1. On January 1, 20x5, how much goodwill was acquired by BL?

a. P17,200
b. P31,480
c. P11,400
d. P25,360

2. Assume that BL acquired P10,500 of goodwill on January 1, 20x5, and the goodwill suffered
a 10 percent impairment loss in 20x5. If the functional currency is the foreign currency, how
much goodwill impairment loss should be reported on BL’s consolidated statement of income for
20x5?

a. P1,050
b. P1,200
c. P1,100
d. P1,175

3. Assume that the peso is the functional currency. How much goodwill impairment loss should
he reported on BL’s consolidated statement of income in this situation?

a. P1,050
b. P1,200
c. P1,100
d. P1,175

Question 4 – 5

Rhante is a foreign company wholly by a Philippine firm. Its inventory is valued at the lower of
cost or market, with cost being measured by the average cost method. Purchases of inventory
occur evenly throughout the period. In 20x4 Rhante’s ending inventory was 50,000 foreign
currencies (FCs) at cost and 48,000 FCs at market. Assume the following exchange rates:
January 1, 20x4 . . . . . . . . . . 1 FC = P1.40
December 31, 20x4 . . . . . . . 1 FC = P1.53
20x4 average . . . . . . . . . . . 1 FC = P1.45

4. Determine the translated value of Rhante’s inventory to be included in the consolidated balance sheet
for the Philippine parent given Rhante’s functional currency is the foreign currency.

a. P73,440
b. P76,500
c. P69,600
d. P72,500

5. Determine the remeasured value of Rhante’s inventory to be included in the consolidated balance
sheet for the Philippine parent given Rhante’s functional currency is the peso.

a. P72,500
b. P73,440
c. P69,600
d. P76,500
6. Sharp Company owns a foreign subsidiary. On October 15, 20x4, when the rate of exchange was 121
foreign currencies (FC) to P1, the foreign subsidiary declared and paid a dividend to Sharp of 24,000,000
FC. The dividend represented the net income for the foreign subsidiary for the six months ended June 30,
20x4, during which time the weighted average of exchange rate was 125 FC to P1. The rate of exchange
in effect at December 31, 20x4, was 135 FC to P1. What rate of exchange should be used to translate the
dividend for the December 31, 20x4 financial statements?

a. 121 FC to P1
b. 125 FC to P1
c. 135 FC to P1
d. 128 FC to P1

Question 7 – 8

Westmore, Ltd. is a foreign subsidiary of a Philippine company. Westmore’s functional currency is the
foreign currency. The following exchange rates were in effect during 20x4:

January 1 . . . . . . . . . . . P1 = .635 FC
June 30 . . . . . . . . . . . . . P1 = .610 FC
December 31 . . . . . . . . P1 = .620 FC
Weighted average rate for the year. . . P1 = .630 FC

7. Westmore reported sales of 1,500,000 FC during 20x4. What amount (rounded) would have been
included for this subsidiary in calculating consolidated sales?

a. P2,380,952
b. P2,400,000
c. P2,429,150
d. P2,419,355
e. P2,425,876

8. On December 31, Westmore had accounts receivable of 280,000 FC. What amount (rounded) would
have been included for this subsidiary in calculating consolidated accounts receivable?

a. P444,444
b. P451,613
c. P142,600
d. P176,400
e. P452,330

Question 9 – 10

A subsidiary of Porter Inc., a Philippine company, was located in a foreign country. The functional
currency of this subsidiary was the foreign currency (FC). The subsidiary acquired inventory on credit on
November 1, 20x4, for 120,000 foreign currency (FC) that was sold on January 17, 20x5 for 156,000 FC.
The subsidiary paid for the inventory on January 31, 20x5. Currency exchange rates between the peso
and the foreign currency were as follows:

November 1, 20x4 . . . . . . . . . . . . P.19 = 1 FC

December 31, 20x4 . . . . . . . . . . . P.20 = 1 FC
 January 1, 20x5 . . . . . . . . . . . . . . P.22 = 1 FC
January 31, 20x5 . . . . . . . . . . . . . P.23 = 1 FC
Average for 20x5 . . . . . . . . . . . . . P.24 = 1 FC

9. What figure would have been reported for this inventory on Porter’s consolidated balance sheet at
December 31, 20x4?

a. P24,000
b. P26,400
c. P22,800
d. P27,600
e. P28,800

10. What figure would have reported for cost of goods sold on Porter’s consolidated income statement at
December 31, 20x5?

a. P24,000
b. P26,400
c. P22,800
d. P27,600
e. P28,800

Question 11 – 14

The following account balances are available for Esposito, a foreign Philippine subsidiary for 20x5: ( FC –
foreign currency)

Beginning inventory FC 20,000

Purchases 400,000
Ending inventory 15,000
Relevant exchange rates follow:
4th quarter average, 20x4 P.93 = 1 FC
December 31, 20x4 .94 = 1 FC
Average 20x5 .96 = 1 FC
4th quarter average, 20x5 .99 = 1 FC
December 31, 20x5 1.01 = 1 FC

11. Compute the cost of goods sold for 20x5 in pesos using the temporal method.

a. P376,650
b. P387,750
c. P409,050
d. P388,800
e. P400,950

12. Compute the cost of goods sold for 20x5 in pesos using the current rate method.

a. P376,650
b. P387,750
c. P409,050
 d. P388,800
e. P400,950

13. Compute ending inventory for 20x5 under the temporal method.

a. P13,950
b. P14,100
c. P15,150
d. P14,400
e. P15,150

14. Compute ending inventory for 20x5 under the current rate method.

a. P13,950
b. P14,100
c. P15,150
d. P14,400
e. P15,150

Question 15 – 18

On January 1 , 20x4, Transport Corporation acquired 75 percent interest in Steamship Company for
P300,000. Steamship is a foreign company. The acquisition resulted in an excess of cost-over-book
value of P25,000 due solely to a patent having a remaining life of 5 years. Transport uses the equity
method to account for its investment. Steamship’s December 31, 20x4, trial balance has been translated
into pesos., requiring a translation adjustment debit of P8,000. Steamship’s net income translated into
pesos is P35,000. It declared and paid a 20,000 LCU dividend on June 1, 20x4. Relevant exchange rates
are as follows:

January 1, 20x4 . . . . . . . . . . . . . . 1 LCU = P0.20

Average for 20x4 . . . . . . . . . . . . . 1 LCU = P0.22
June 1, 20x4 . . . . . . . . . . . . . . . . 1 LCU = P0.23
December 31, 20x4 . . . . . . . . . . 1 LCU = P0.24
Assume the LCU is the functional currency.

15. In the journal entry to record the receipt of dividend from Steamship.

a. Investment in Steamship Company will be credited for P3,450

b. Cash will be debited for P3,300
c. Investment in Steamship Company will be credited for P4,000
d. Cash will be debited for P3,600

16. In the journal entry to record parent’s share of subsidiary’s translation adjustment:

a. Other Comprehensive Income – Translation Adjustment will be debited for P8,000.

b. Other Comprehensive Income - Translation Adjustment will be debited for P6,000.
c. Investment in Steamship Company will be credited for P6,000
d. Investment in Steamship Company will be credited for P8,000

17. What amount of translation adjustment is required for increase in differential?

 a. P3,000
b. P5,500
c. P4,500
d. P5,000

18. In the journal entry to record the amortization of the parent for 20x4 on the parent’s book, Investment
in Steamship Company will be debited for :

a. P5,000
b. P5,500
c. P4,500
d. P3,000

Question 19 – 21

McAfee (Philippine company) acquires 90 percent ownership of Choi (Foreign company) on January 1.
At the acquisition date, Choi, plant assets have a historical cost, accumulated depreciation, and
remaining life of 800,000,000 LCUs, 300,000,000 LCUs, and five years, respectively. On October 1 Choi
acquired plant assets for 75,000,000 LCUs. All assets are depreciated straight- line with a ten year life
and no salvage value. Below are relevant exchange rates for the year.

January 1 P.0092
October 1 P.0087
December 31 P.0084
Average January 1 – October 1 P.0090
Average October 1 – December 31 P.0086
Average January 1 – December 31 P.0088

19. What is the peso amount of plant assets on the Philippine trial balance if the current rate method is
applied?

a. P7,350,000
b. P8,050,000
c. P7,452,500
d. P8,012,500

20. What is the peso amount of depreciation expense on the Philippine trial balance if the current rate
method is applied?

a. P937,250
b. P896,125
c. P916,125
d. P896,500

21. What is the peso amount of accumulated depreciation on the Philippine trail balance if the current rate
method is applied?

a. P3,656,500
b. P3,656,125
c. P3,375,750
d. P3,536,125