COLLEGE OF BUSINESS AND ACCOUNTANCY

DEPARTMENT OF ACCOUNTANCY

Foreign Currency Transactions/Translation April 21, 2021

QUIZ
INSTRUCTIONS: Solve each problem in your worksheet and present your computations in GOOD
FORM. NO SOLUTIONS, NO CREDITS.

1. According to IAS21 The effects of changes in foreign exchange rates, at which rate should an entity's
non-current assets be translated when its functional currency figures are being translated into a
different presentation currency?
a. The historical exchange rate
b. The closing rate
c. The average rate
d. The spot exchange rate

2. According to IAS21 The effects of changes in foreign exchange rates , exchange differences should be
recognized either in profit or loss or in other comprehensive income. Are the following statements
about the recognition of exchange differences in respect of foreign currency transactions reported in
an entity's functional currency true or false according to IAS21?
(1) Any exchange difference on the settlement of a monetary item should be recognized in
profit or loss.
(2) Any exchange difference on the translation of a monetary item at a rate different to that
used at initial recognition should be recognised in other comprehensive income.
Statement (1) Statement (2)
a. False False
b. False True
c. True False
d. True True

3. If P26.50 can be exchanged for 1US dollar, the direct and indirect exchange rate quotations are:
a. P26.50 and 1 US dollar, respectively.
b. P26.50 and 0.038 US dollar, respectively
c. P1.00 and 26.50 US dollar, respectively.
d. P1.00 and 0.038 US dollar, respectively.

4. Kulaspiro Company buys goods from Japayuki Company of Japan, worth 2,500,000 yen. The prevailing
exchange rate is P0.118376/Yen. Kulaspiro settles the account 20 days later when the exchange rate
is going at P0.1302136/Yen. To what extent did Kulaspiro and Japayuki gain or lose by reason of the
exchange fluctuation?
a. Kulaspiro: 0 Japayuki: Yen 227,273 loss c. Kulaspiro: P29,594 gain Japayuki: 0
b. Kulaspiro: 0 Japayuki: Yen 227,273 gain d. Kulaspiro: P29,594 loss Japayuki: 0

5. K Trading buys goods from X Inc., Hongkong, payable in Hongkong dollars at a credit term of 60 days.
On June 30, 2020, the unadjusted trial balance of K reflects a payable to X representing purchase of
goods worth HK$250,000 when Hongkong dollars was going at P1/HK$. What will be K exchange
gain or loss on June 30, 2020, if the prevailing exchange rate is HK$ 0.975/P?
a. P25,000 loss c. P6,250 gain
b. P90,909 gain d. P6,410.25 loss
6. D Incorporated, a Pinoy corporation bought machine parts from K Company of U.S. on March 1, 2020
for $30,000 U.S. dollars, when the spot rate for dollars was P40.89. D’s year end was March 31, 2020
when the spot rate for U.S. dollars was P40.84. D bought 30,000 dollars and paid the invoice on April
20, 2020 when the spot rate was P40.94. How much should be shown in D’s income statement as
foreign exchange gain or loss for the years ended March 31, 2020 and 2021?
a. P0; P0 c. P1,500 gain; P3,000 loss
b. P1,500 loss; P3,000 gain d. P0; P1,500 loss

7. The ratio at which the currencies of two countries are exchanged at a particular time
a. Foreign currency c. Closing rate
b. Foreign entity d. Exchange rate

8. The currency other than the reporting currency of an enterprise is

a. Foreign currency c. Foreign currency loan
b. Foreign operation d. Closing rate

9. In foreign exchange transactions, the ratio at which the currencies of two countries are exchanged at
a particular time
a. Closing rate c. Exchange rate
b. Spot rate d. Forward rate

10. The exchange rate on a particular day for the exchange of foreign currencies on that day (which
approximates the interbank guiding rate)
a. Spot rate b. Closing rate c. Buying rate d. Fixed rate.

11. The exchange rate available in terms of an agreement for the exchange of two currencies at a future
date:
a. Spot rate b. Forward rate. c. Bank rate. d. Closing rate

12. On October 1, 2020, Stevens Company, a U.S. company, contracted to purchase foreign goods
requiring payment in francs one month after their receipt in Steven’s factory. Title to the goods
passed on December 15, 2020. The goods were still in transit on December 31, 2020. Exchange rates
were 1 dollar to 22 francs, 20 francs, and 21 francs on October 1, December 15, and December 31,
2014, respectively. Stevens should account for the exchange rate fluctuations in 2020 as
a. A loss included in net income before extraordinary items.
b. A gain included in net income before extraordinary items.
c. An extraordinary gain.
d. An extraordinary loss.

13. On October 2, 2020, Louis Co., a U.S. company, purchased machinery from Stroup, a German
company, with payment due on April 1, 2021. If Louis’ 2020 operating income included no foreign
exchange gain or loss, then the transaction could have
a. Resulted in an extraordinary gain.
b. Been denominated in U.S. dollars.
c. Caused a foreign currency gain to be reported as a contra account against machinery.
d. Caused a foreign currency translation gain to be reported as a separate component of
stockholders’ equity.

14. An indication that a foreign subsidiary’s functional currency is the currency of the parent company is
provided by:
a. Local financing of subsidiary operations.
b. A high volume of intercompany transactions.
c. Expenses that are primarily local costs.
 d. Sales prices set by local competition in the subsidiary’s country.

15. A U.S. parent company has a subsidiary in Germany whose functional currency is the German mark.
The U.S. dollar from the subsidiary’s viewpoint is:
a. A local currency. c. A foreign currency.
b. A recording currency. d. A common currency.

16. The functional currency of Dahl Inc.’s subsidiary is the French franc. Dahl borrowed French francs as
a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements,
Dahl’s debit balance of its cumulative translation adjustment exceeded is exchange gain on the
borrowing. How should the cumulative translation adjustment and the exchange gain be reported in
Dahl’s consolidated financial statements?
a. The cumulative translation adjustment should be netted against the exchange gain and the
excess cumulative translation adjustment should be reported in the stockholders’ equity section
of the balance sheet.
b. The cumulative translation adjustment should be netted against the exchange gain and the
excess cumulative translation adjustment should be reported in the income statement.
c. The cumulative translation adjustment should be reported separately in the stockholders’
equity section of the balance sheet and the exchange gain should reported in the income
statement.
d. The cumulative translation adjustment should be reported in the income statement and the
exchange gain should be reported separately in the stockholders’ equity section of the balance
sheet.

17. A credit balancing item resulting from the process of restating a foreign entity’s financial statement
from the local currency unit to U.S. dollars should be included as a (an):
a. Separate component of stockholders’ equity. c. Component of income from continuing
operations.
b. Deferred credit. d. Extraordinary item.

18. QRS., Inc. is the foreign subsidiaries of a Phil. Corp. STY Corporation. Which account(s) in QRS.’
subsidiary trial balance should not be translated to pesos in terms of the current rate of exchange.
a. Long-term liabilities incurred several years ago.
b. Long-term receivables obtained several years ago.
c. Sales.
d. Intercompany accounts payable incurred during the year.

19. XYZ (Phils.), Inc. is the parent company of XYZ (HK) Ltd. XYZ (Phils.), Inc. borrowed HK dollars from
a Hongkong subsidiary. In preparing consolidated financial statements, XYZ (Phils.), Inc.’s translation
loss on its investment in XYZ (HK) Ltd., exceeded its exchange gain on the borrowing. How should
the effects of the loss and gain be reported in XYZ (Phils.) Inc.’s consolidated financial statements?
a. The translation loss less the exchange gain is reported in the income statement.
b. The translation loss less the exchange gain is reported separately in the stockholders’ equity
section of the balance sheet.
c. The translation loss is reported separately 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 exchange gain is reported
separately in the stockholders’ equity section of the balance sheet.

20. When translating an amount for fixed assets shown on the statement of financial position of a foreign
subsidiary, the appropriate rate of translation is the
a. Average exchange rate for the current year.
b. Current exchange rate
 c. Average exchange rate over the life of each fixed asset.
d. Historical exchange rate.

21. In the conversion of the trial balance of a foreign branch to pesos, the historical rate of exchange
should be applied to:
a. Inventories c. Revalued property plant and equipment.
b. Sales d. Importation of capital equipment covered by forward exchange contracts.

22. If $1.5625 can be exchanged for 1 British pound, the direct and indirect exchange rate quotation are:
a. $1.5625 and 1 British pound, respectively.
b. $1.5625 and 0.64 British pounds, respectively.
c. $1.00 and 1.5625 British pounds, respectively.
d. $1.00 and 0.64 British pounds, respectively.

23. A U.S. firm purchases merchandise from a Canadian firm with payment due in 60 days and
denominated in Canadian dollars. The U.S. firm will report an exchange gain or loss on settlement if
the transaction is:
a. Recorded in U.S. dollars.
b. Measured in U.S. dollars.
c. Not hedged through a forward contract.
d. Settled after an exchange rate change has occurred.

24. Exchange gains and losses on accounts receivable and payable that are denominated in a foreign
currency are:
a. Accumulated and reported upon settlement.
b. Deferred and treated as transaction price adjustments.
c. Reported as equity adjustments from translation.
d. Recognized in the periods in which exchange rates change.

25. In April 2020, LOP, Inc., an exporter sold to a foreign buyer handicraft amounting to US$15,000,
payable in September 2020. At the time of sale in April, the exchange rate was US$1: P50; but at time
of payment in September, it was already US$1: P52. The gain should be included as a:
a. Transaction gain reported as a component of income from continuing operations.
b. Transaction gain reported as a separate component of stockholders’ equity.
c. Translation gain reported as a separate component of stockholders’ equity.
d. Translation gain reported as a component of income from continuing operations.

26. Exchange differences arising from short-term foreign currency items should be:
a. Part of additional paid-in capital.
b. Deferred and amortized over the life of the obligation.
c. Separately shown in the equity section of the balance sheet “as accumulated translation
adjustment.”
d. Charged against income of the current year.

27. Which among the following statements is not valid with respect to accounting for changes in the
foreign exchange rates?
a. Current practice is the same with respect to the accounting treatment of gains or losses arising
from foreign currency transactions not settled at the balance sheet date.
b. At each balance sheet, foreign currency monetary items that results from transactions should be
reported at the closing rate except when a forward exchange contract is entered into.
c. Any exchange differences arising on other charges to stockholders’ equity in the foreign entity
are recognized in stockholders’ equity.
 d. A foreign currency transaction is recorded as of the occurrence of the transaction normally using
the exchange rate on that date.

28. RST Exports, Inc. exported baskets to the U.S.A. valued at US$5,000. The export thus resulted in a
receivable fixed in terms of the US dollars that would be received. The peso-dollar exchange rate
deteriorated so that RST incurred a loss. This loss should be included as a:
a. Translation loss reported as component of income from continuing operations.
b. Transaction loss reported as a component of income from continuing operations.
c. Translation loss reported as a separate component of stockholders’ equity.
d. Transaction loss reported as a separate component of stockholders’ equity.

*** Items 29 and 30 are based on the following information:

SM Corporation imports merchandise from some Japanese companies and exports its own products
to other Japanese companies. The unadjusted accounts denominated in Japanese Yen at December
31, 2020, are as follows:
Accounts receivable from the sale of merchandise on December 16 to Narita Company.
Billings is for 150,000 Japanese Yen and due January 15, 2021. P 103,500
Accounts payable to Akito Company for merchandise received on December 2 and
Payable on January 30, 2021, billing is for 275,000 Japanese Yen. P 195,250
Exchange rates on selected dates are as follows:
December 31, 2020 P 0.68
January 15, 2021 P 0.675
January 30, 2021 P 0.685

29. What is the net forex gain or loss from the two transactions to be reported in SM’s statement of
comprehensive income for 2020?
a. P 1,500 loss b. P 8,250 gain c. P 6,750 gain d. P 6,750 loss
30. What is the net forex gain or loss from the settlement of the two transactions to be reported in SM’s
2020 statement of comprehensive income?
a. P 2,125 loss b. P 2,125 gain c. P 2,075 gain d. P 2,075 loss

*** Items 31 and 32 are based on the following information:

A Philippine firm entering into speculative purposes in anticipation for a gain, enters into a contract
on March 1, 2020 to acquire US$10,000 on March 1, 2021, a currency in which the company has no
receivable, payables or commitments.
Spot Rate Forward Rate (for 3/1/2021)
March 1, 2020 P55.00 P 56.00
December 31, 2020 55.60 P 56.50
March 1, 2021 55.10
❖ Interest was not considered noteworthy, assume that the effects of discounting are insignificantly
thus, ignore effects of discounting or present value.

31. The December 31, 2020 profit and loss statement, foreign exchange gain or loss due to hedging
instrument (forward contract) amounted to
a. P14,000 loss b. P5,000 gain c. P5,000 loss d. P14,000 gain

32. On March 1, 2021, foreign exchange gains or loss on forward contract amounted to:
a. P14,000 loss b. P5,000 gain c. P5,000 loss d. P14,000 gain

*** Items 33 through 35 are based on the following information:

On October 12, 2020, DEF Corp. obtained a noncancelable sales order from a Thailand firm for a
custom-made machine. The contract price was 100,000 baht. On October 12, 2020, DEF Corp.
 entered into a foreign exchanged forward to sell 100,000 baht in 100 days at the forward rate of
P3.15. The machine was delivered on December 11, 2020 and collection on January 20, 2021.
10/12/20 12/11/20 12/31/20 1/20/21
Spot rate (baht) P 3.20 P 3.00 P 3.09 P 2.97
Forward rate (baht) 3.15 2.98 3.08

33. The December 11, 2020 profit and loss statement, foreign exchange gain or loss on the hedging
item/commitment amounted to
a. P17,000 loss c. P20,000 loss
b. P17,000 gain d. P20,000 gain
34. The December 11, 2020 profit and loss statement, foreign exchange gain or loss on the hedging
instrument (forward contract) amounted to
a. P17,000 loss c. P20,000 loss
b. P17,000 gain d. P20,000 gain

35. The December 31, 2020 Accounts receivable amounted to

a. P298,000 b. P300,000 c. P309,000 d. P320,000