Illustrative Accounting for Foreign Currency Transactions
To illustrate the accounting for foreign currency transactions at initial recognition and subsequent reporting date,
consider the following transactions for AB Corporation of the Philippines.
a. On December 1, 2017, AB Corporation sold merchandise to CD Corporation of the United States for
$15,000 when the rate of exchange between peso and dollar was $1 = P50.
b. On December 10, 2017, AB Corporation purchased $25,000 worth of merchandise from EF Corporation
when the rate of exchange was $1 = P52.
c. On December 11, 2017, AB Corporation acquired equipment from GH Corporation of China for 100,000
Chinese yuan when the exchange rate was CNY1 P7.737.
d. On December 15, 2017, AB Corporation acquired 1,000 shares of HK Company in Hong Kong for 20
Hong Kong dollars per share when the exchange rate was HKD1 P6.565. The shares are classified as
financial asset as at fair value through profit or loss.
e. On December 31, 2017 (balance sheet date), the closing rates are the following:
$1
= P51
CNY1 = P7.651
HKD1 = P6.590
The fair value per share of HK Company on December 31, 2017 was HKD20.52 per share.
f. Payment of the CD Corporation account was received on January 15, 2018 when the exchange rate was
$1 = P52.
g. Payment was made to EF Corporation on January 25, 2018 when the rate of exchange was $1 = P53.
h. The account payable to GH Corporation was paid on January 30, 2018 when the spot rate was CNY1
P7.70.
Entries to record the foregoing transactions are as follows:
For the sale of merchandise:
December 1, 2017 (transaction date)
Accounts receivable
Sales
$15,000 x P50 = P750,000
December 31, 2017 (balance sheet date)
P750,000
P750,000
Accounts receivable
15,000
Exchange gain
15,000
December 31 accounts receivable (P51 x $15,000)
P765,000
December 1 accounts receivable
750,000
Exchange gain
P 15,000
January 15, 2018 (settlement date)
Cash
780,000
Accounts receivable
765,000
Exchange gain
15,000
Cash received (P52 x $15,000)
P780,000
Accounts receivable (December 31, 2017)
765,000
Exchange gain
P 15,000
For the purchase of merchandise assuming periodic system:
December 10, 2017 (transaction date)
Purchases
P1,300,000
Accounts payable
P1,300,000
$25,000 × P52 = P1,300,000
December 31, 2017 (balance sheet date)
Accounts payable
25,000
Exchange gain
25,000
Accounts payable, Dec. 31, 2017 ($25,000 × P51)
P1,275,000
Accounts payable, Dec. 10, 2017
1,300,000
Exchange gain
P
25,000
January 25, 2018 (settlement date)
Accounts payable
1,275,000
Exchange loss
50,000
Cash
Cash payment ($25,000 × P53)
1,325,000
P1,325,000
Accounts payable, December 31, 2017
1,275,000
Exchange loss
P 50,000
The entries illustrated are the entries under the two-transaction perspective in accounting for sales and
purchases (on account) denominated in foreign currency. Proponents of the two-transaction perspective argue that
the decision to assume the risk on open receivable or payable is separable from the sale or purchase transaction,
and, thus, any exchange gains or losses should be disclosed separately in income statement as “financial” items.
But because of the decision to sell on credit or purchase on credit which is a financing decision, it has to assume
the risk of exchange rate changes. Observe that in the entries illustrated, the sales and purchases account are
recorded and measured using the spot rate on transaction date and are not remeasured for the changes in exchange
rate.
For the purchase of equipment:
December 11, 2017 (transaction date)
Equipment
P773,700
Accounts payable
P773,700
CNY100,000 x P7.737
December 31, 2017 (balance sheet date)
Accounts payable
8,600
Exchange gain
8,600
Accounts payable, Dec. 31, 2017
(CNY100,000 × P7.651)
P765,100
Accounts payable, Dec. 10, 2017
773,700
Exchange gain
P
8,600
January 30, 2018 (settlement date)
Accounts payable
765,100
Exchange loss
4,900
Cash
770,000
Cash payment (CNY100,000 x P7.70)
P 770,000
Accounts payable, December 31, 2017
765,100
Exchange loss
P
4,900
For the purchase of 1,000 shares of HK company:
December 15, 2017 (transaction date)
Investment in HK Company-FVPL
P131,300
Cash
P131,300
1,000 shares × HKD20 × P6.565 = P131,300
December 31, 2017 (balance sheet date)
Investment in HK Company-FVPL
Unrealized gain on investment at FVPL
3,929
3,929
Fair value of investment, Dec. 31, 2017
(1,000 × HKD20.52 × P6.59)
P135,229
Acquisition cost of investment
131,300
Unrealized gain on investment at FVPL
P
3,929
Investment in equity instruments and other financial assets are non-monetary items which may be
classified as at fair value through profit or loss, at fair value through other comprehensive income, or at amortized
cost. For non-monetary items carried at fair value such as the investment in HK Company, the exchange difference
is recognized in the same manner as the fair value adjustment is accounted.
Problem 17-1
Export/Import Trading, Inc. had the following transactions with a foreign firm in the US.
July 1, Export/Import Trading purchased merchandise for $100,000 when the spot rate was $1 = P54.
(Periodic system is used in recording.)
August 30 – It paid the import account when the spot rate was $1 = P56.
December 1-It purchased merchandise for $130,000 when the spot rate was $1 = P53.
This account was not settled on December 31 and was paid on January 15 of the following year. Spot rate
on January 15 was $1 = P55 and on December 31, it was $1=P52.
Required:
Prepare the journal entries to record the transactions including the necessary adjustment on December 31.
Periodic: July 1
Purchases
5,400,000
Accounts Payable
Aug. 30
Accounts Payable
5,400,000
5.4M
200,000
Cash
Purchases
Accounts Payable
5,400,000
Exchange loss
Dec. 31
Merchandise Inventory 5.4M
5,600,000
6,890,000
Accounts Payable
Accounts Payable
6,890,000
Exchange Gain
130,000
130,000
Problem 17-2
Lako Co. sold merchandise with a cost of P800,000 to Packy Co. (US firm) for $25,000 on December 3,
2017. Lako had a December 31st year end and used the perpetual system of recording. Payment was received on
January 12, 2018.
The following exchange rates were in effect:
Date
USS
Peso
December 3
1
50
December 31
1
55
January 12
1
53
Required:
Make the journal entries to record: (a) the sale; (b) the year-end adjustment; and (c) the receipt of payment.
Problem 17-3
The transactions of ABC Company during 2017 are as follows.
a.
ABC Co. purchased equipment from XYZ Co. of the US for $60,000 account on April 21, 2017 on
account. The spot rate on March 21 was $1 = P51. The accounts was paid on August 6, 2017 when the
spot rate was $1 = P53. On December 31, 2017, the spot rate was $1 = P52.
b. It purchased 1,000 shares of Arenn Corporation of Hong Kong for HKD60 per share on October 24, 2017
when the spot exchange rate was HKD1 = P6.50. This investment was classified as financial asset as at
fair value through profit or loss. On December 31, 2017, the fair value of Arenn Corporation shares was
HKD62 while the spot exchange rate was HKD1 = P6.45.
Required:
Prepare the journal entries to record the transactions of ABC Company.
Problem 17-4
In 2017, Reanne Company ordered and received inventory costing 50,000 pounds from a British firm
(FOB destination). Full payment using a bank wire transfer was made in 2018. Direct spot exchange rate
information for the pound follows:
Dates
Spot Rate
November 5, 2017 (order date)
P68.42
December 11, 2017 (delivery date)
P68.40
December 31, 2017 (year-end)
P68.45
January 10, 2018 (settlement date)
P68.44
Required:
Prepare all the appropriate journal entries to be recorded in the books of Reanne Company.
Problem 17-5
International Corporation had the following foreign currency transactions during 2017. The corporation
has its fiscal year ending December 31.
June 5- International Corporation sold merchandise to Harakiri Co. of Japan for
120,000 yen. Spot rate on this date was P.452 a yen.
June 26- International Corporation purchased merchandise from Gold Co. of the US amounting to 20,000
dollars. Spot rate on this date was P52 a dollar.
September 27-It then bought equipment from Silver Co. of China for 10,000 Chinese yuan. Spot rate on
this date was P7.646. The account was supported by a note payable after
December 5-It collected the account receivable from Harakiri. Spot rate in effect was P456 a yen.
December 31-Its account payable to Gold remains open and unpaid. The following rates of exchange on
this date were given to update the books.
Foreign Currency
FCU
Peso
Yen
1
46
US$
1
51.00
Yuan
1
7.50
Required:
a. Prepare the journal entries including the adjustments on December 31. (Use the periodic system of recording
inventory purchases.)
b. On December 31, 2017 statement of financial position, what is the total foreign currency liability of
International Corporation?
c. Determine the realized and unrealized exchange difference recognized in the year 2017. What is the net effect
in 2017 income of the foreign currency transactions?
Problem 17-6
In 2017, Trannee Corporation sold inventory for 100,000 Australian dollars to an Australian firm (FOB
destination). Full payment was received in 2018 by means of a bank wire transfer. Direct spot exchange rate
information for the pound follows:
Dates
Spot Rate
October 17, 2017 (order date)
P39.60
November 28, 2017 (delivery date)
P39.64
December 31, 2017 (year-end)
P39.68
January 14, 2018 (settlement date)
P39.67
Required:
Prepare all the appropriate journal entries to be recorded in the books of the domestic exporter.
Problem 17-7
On July 1, 2017, RJ Corporation borrowed 100,000 Singapore dollars from a firm in Singapore. The note
payable to the creditor is due one year from July 1, 2017 and interest rate for the note is 10% per annum.
The following are the exchange rates on July 1 and December 31, 2017 and July 1, 2018.
July 1, 2017
P37.452
December 31, 2017
P37.640
July 1, 2018
P37.340
Required:
Prepare the journal entries from July 1, 2017 to July 1, 2018 in connection with the note payable.
Problem 17-8
On July 1, 2017, JR Corporation lent P2,000,000 to a firm in Thailand payable in baht. The note receivable
is due one year from July 1, 2017, and interest rate for the note is 10% per annum.
The following are the exchange rates on July 1 and December 31, 2017 and July 1,
2018.
July 1, 2017
P1.555
December 31, 2017
P1.512
July 1, 2018
P1.561
Required:
Prepare the journal entries from July 1, 2017 to July 1, 2018 in connection with the note receivable.
Problem 17-9
Renan Corporation, a local importer, purchased merchandise from Arenn Company of France for 10,000
euros on March 1, 2018 when the spot rate for euro was P63. The account payable denominated in euro was not
due until May 30, 2018, so Renan immediately entered into a 90-day forward contract to hedge the transactions
against exchange rate changes. The contract was made at a forward exchange rate of P65. Renan settled the
forward contract and the account payable on May 30 when the spot rate for euro was P60.s
Required:
Prepare the journal entries needed for the renan to account for the purchase and forward contract on
March 1, 2018 and the subsequent settlement on May 30, 2018
Problem 17-10
Kendy Corporation purchased merchandise from Benny of California for $10,000. The merchandise was
received on December 1, 2017, with payment due in 60 days on January 30, 2018. Also on December 1, 2017,
Kendy entered into a 60-day forward contract with the exchange broker to purchase $10,000 necessary for
delivery on January 30, 2018 to hedge the transaction. Exchange rates for US dollars in selected dates are as
follows:
12/1/2017
12/31/2017
1/30/2018
Spot rate
P55
P56
P55
60-day forward
P56
P57
P57
30-day forward
P57
P58
P58
Required:
a. What is the net exchange gain or loss from this transaction and hedge that will be reported in Kendy's 2017
income statement?
b. What effect will the transaction and hedge have in 2018?
c. Prepare the journal entries.
Problem 17-11
On April 1, 2005, Bal Corporation, a local firm, delivered merchandise to Arenn Corporation of Hong
Kong for 200,000 Hong Kong dollars when the spot rate was P6.49. The receivable from Arenn was due on May
30; also on April 1, Bal hedged its foreign currency asset and entered into a 60-day forward contract to sell
200,000 Hong Kong dollars at a forward rate of P6.19. The spot rate on May 30 was P5.92.
Required:
a. Prepare the journal entries to record the receivables from the sales transactions and the forward contract.
b. Prepare the journal entries to record collection of the receivable and the settlement of the forward contract on
May 30.
Problem 17-12
Martin Corporation, a local import-export firm, entered into a forward contract on October 2, 2017 to
speculate in euros. The contract requires Martin to deliver 10,000 euros to the exchange broker on March 31,
2018. Quoted exchange rates are as follows:
10/2/2017
12/31/2018
3/31/2017
Spot rate
P65.90
P65.00
P65.50
30-day forward
P65.80
P64.50
P65.00
90-day forward
P65.60
P64.10
P64.60
180-day forward
P65.30
P63.60
P64.00
Required:
Prepare the journal entries to account for the speculation throughout the life of the contract.
Problem 17-13
On November 2, 2017, Phils International entered into a 90-day forward contract to purchase 10,000 US
dollars when the current quotation for 90-day futures in dollars was P54.00. The spot rate on November 2 was
P54.40. Exchange rates on December 31, 2017 and January 30, 2018 are as follows:
December 31, 2017
January 30, 2018
30-day futures
P54.50
P54.80
Spot rate
P55.00
P55.30
Required:
Prepare the journal entries to account for the speculation throughout the life of the contract.
Problem 17-14
On November 1, 2017, EXCEL Co. contracted to purchase merchandise from England for 20,000 pounds.
The merchandise is to be delivered and paid on January 30, 2018. On November 1, 2017, EXCEL Co. entered
into a 90-day forward contract to buy 20,000 pounds at a forward rate of P82.00. The forward contract was
acquired to hedge the foreign currency commitment. The following rates are given:
December 31, 2017
January 30, 2018
60-day futures
P85.00
P83.00
Spot rate
P86.00
P84.00
Required:
Prepare the journal entries from November 1 to January 30, 2018.
Problem 17-15
Use the information in Problem 17-14. Assume that EXCEL Co. has no firm commitment but has a highly
probable forecast transaction.
Required:
Prepare the journal entries from November 1 to January 30, 2018 when the forecast transaction actually occurred.