The Effects of Changes in Foreign Exchange Rates1
Multiple Choice – Computational
Foreign currency transaction – Direct quotation – Purchase
Use the following information for the next six questions:
On November 29, 20x1, ABC Co. placed a non-cancellable purchase order
for the importation of a machine with a purchase price of €40,000
from a company based in France. The contract term is FOB shipping
point. The machine was shipped on December 1, 20x1 and was received
by ABC on December 15, 20x1. The purchase price was settled on
January 3, 20x2.
The following are the exchange rates:
November 29, 20x1………………………………………..₱55:€1
December 1, 20x1…………………………………………..₱58:€1
December 15, 20x1………………………………………..₱57:€1
December 31, 20x1………………………………………..₱60:€1
January 3, 20x2……………………………………………..₱61:€1
1. The entry on November 29, 20x1 includes
a. a debit to accounts payable for ₱2,320,000.
b. a credit to machinery for ₱2,320,000.
c. a debit to machinery for ₱2,320,000
d. none of these
2. The entry on December 1, 20x1 includes
a. a debit to accounts payable for ₱2,320,000.
b. a credit to machinery for ₱2,320,000.
c. a debit to machinery for ₱2,320,000
d. none of these
3. The total FOREX gain (loss) recognized in 20x1 is
a. 40,000
b. (80,000)
c. (200,000) d. (120,000)
4. The adjustment to the machinery account on December 31, 20x1 is –
increase (decrease)
a. 80,000
b. (80,000)
c. 40,000 d. 0
5. The total FOREX gain (loss) recognized in 20x2 is
a. (40,000) b. (80,000)
c. (200,000) d. (120,000)
6. The net adjustment to the machinery account on January 3, 20x2 is –
increase (decrease)
a. 80,000
b. (120,000)
c. (40,000)
d. 0
Foreign currency transaction – Direct quotation – Sale
Use the following information for the next four questions:
On November 29, 20x1, ABC Co. received a non-cancellable sale order
for the exportation of inventories from a UK-based company. The
contract price is £40,000 (pound sterling). The contract term is FOB
shipping point. The inventories were shipped on December 1, 20x1. The
sale was settled on January 3, 20x2.
The following are the exchange rates:
November 29, 20x1………………………………………..₱67:£1
December 1, 20x1…………………………………………..₱68:£1
1
Adapted from Advanced Accounting by Millan
1
December 31, 20x1………………………………………..₱70:£1
January 3, 20x2……………………………………………..₱71:£1
7. How much sale revenue is recognized in 20x1?
a. 2,680,000 b. 2,720,000
c. 2,800,000
d. 2,840,000
8. How much FOREX gain (loss) is recognized in 20x1?
a. 120,000
b. (120,000)
c. 80,000 d. (80,000)
9. How much FOREX gain (loss) is recognized in 20x2?
a. 40,000
b. (40,000)
c. 120,000
d. 160,000
10. How much is the total FOREX gain (loss) resulting from the sale
transaction?
a. 160,000 b. 120,000
c. 80,000 d. 40,000
Foreign currency transaction – Indirect quotation
Use the following information for the next two questions:
ABC Co. had the following transactions during the last month of the
current reporting period:
 Purchased raw materials from Pakistani Co., a company based in
Pakistan, for 400,000 rupees on December 17, 20x1 to be settled on
January 5, 20x2.
 Sold inventory to Swedish Co., a company based in Sweden, for
80,000 kroners on December 20, 20x1 to be settled on January 5,
20x2.
The exchange rates are as follows:
Rupee
Dec. 17, 20x1…………Php 1: PKR 2.04
Dec. 20, 20x1…………Php 1: SEK 0.1667
Dec. 31, 20x1…………Php 1: PKR 2
Jan. 5, 20x2………….Php 1: PKR 2.083
Kroner
Php 1 : SEK 0.2000
Php 1 : SEK 0.2400
11. How much are the total FOREX gains/losses recognized by ABC Co.
from the purchase and sale transactions described above?
Purchase
Sales
a. (4,048)
146,570
b. 4,048
(146,572)
c. 3,922
(66,667)
d. (3,922)
66,667
12. How much are the total FOREX gains/losses recognized by
Pakistani Co. and Swedish Co. from the purchase and sale
transactions, respectively?
a.
b.
c.
d.
Pakistani
(4,048)
3,922
(3,922)
0
Swedish
146,572
(66,667)
66,667
0
Subsequent measurement
Use the following information for the next five questions:
On December 1, 20x1, ABC Co. acquired equipment for BRL 40,000
(Brazilian reals) when the exchange rate is ₱24:BRL1. ABC Co.
reported foreign exchange loss of ₱80,000 in its 20x1 statement of
2
profit or loss and a ₱20,000 foreign exchange gain of ₱20,000 in its
20x2 statement of profit or loss.
13. What is the exchange rate on December 31, 20x1?
a. ₱24:BRL1
b. ₱26:BRL1
c. ₱25.5:BRL1
None of these
d.
14. What is the exchange rate on settlement date in 20x2?
a. ₱24:BRL1
b. ₱26:BRL1
c. ₱25.5:BRL1
None of these
d.
15. What is the carrying amount of the accounts payable in the 20x1
statement of financial position?
a. 1,040,000
b. 960,000
c. 1,020,000
d.
None of these
16. How much is the cost of the equipment in the 20x1 statement of
financial position?
a. 1,040,000
b. 960,000
c. 1,020,000
d. None
of these
17. How much is the cost of the equipment in the 20x2 statement of
financial position?
a. 1,040,000
b. 960,000
c. 1,020,000
d. None
of these
Exchange rate on initial recognition
18. ABC Co. obtained a $40,000 loan at the middle of the year. At
the end of the year, the loan payable is appropriately reported at
₱2,200,000. None of the principal on the loan has been paid during
the year. There has been a 10% increase in the exchange rate
(expressed in direct quotation) from the date the loan has been
obtained to the end of reporting period. What is the exchange rate
at the date the loan has been obtained?
a. ₱55:$1
b. ₱50:$1 c. ₱45:$1 d. ₱60:$1
Loan transaction
19. On July 1, 20x1, ABC Co. obtained a $40,000 loan that bears 10%
annual interest when the spot exchange rate is ₱50:$1. The closing
rate on December 31, 20x1 is ₱55:$1. No payments had been made on
the loan during the year. How much is the foreign exchange gain
(loss) to be recognized in the year-end statement of profit or
loss?
a. (200,000)
b. (220,000)
c. (210,000)
d. 210,000
Cash account
Use the following information for the next two questions:
ABC Co., a domestic corporation based in the Philippines, frequently
sells goods overseas through the internet. All online sales are on
cash basis. The movements in ABC’s US dollar account are shown below:
Cash in bank - U.S. dollar
Jan. 1 (₱48:$1)
$40,000
Sept. 30 (₱45:$1)
80,000
20,000 Dec. 16 (₱44:$1)
$100,000 Dec. 31 (₱45:$1)
20. How much is the balance of cash in bank to be presented in the
year-end statement of financial position?
a. 4,640,000
b. 4,500,000
c. 100,000
d. 4,650,000
3
21. What is the net foreign exchange gain (loss) to be recognized in
the year-end statement of profit or loss?
a. 100,000
b. (100,000)
c. (140,000)
d. 140,000
Average rate
Use the following information for the next two questions:
On December 15, 20x1, ABC Co. sent one of its key management
personnel to a seminar in Malaysia. ABC Co. advanced MYR 40,000
(ringgits) to the manager subject to liquidation. The exchange rate
on December 15, 20x1 is ₱14: MYR1.
The liquidation report submitted by the key manager showed the
following:
 MYR 32,000 were spent from December 15 to December 31, 20x1. The
exchange rate on December 31, 20x1 is ₱13: MYR 1.
 MYR 6,000 were spent from January 1, 20x2 to January 3, 20x2. The
manager returned the MYR 2,000 excess to the cashier on January 3,
20x2. The exchange rate on January 3, 20x2 is ₱12: MYR 1.
22. How much is the total FOREX gain (loss) on December 31, 20x1?
a. (24,000) b. (32,000)
c. 24,000
d. (38,000)
23. How much is the FOREX gain (loss) on January 3, 20x2?
a. (5,000)
b. (4,000)
c. (7,000)
d. (2,000)
Items measured at other than historical cost
Use the following information for the next two questions:
ABC Co. had the following foreign currency transactions during the
year:
 Acquired equipment on January 1, 20x1 for THB 40,000 (bahts) from a
Thailand-based company when the current exchange rate was ₱1.2: THB
1. The equipment is depreciated over 5 years using the straightline method.
 Purchased inventories on December 1, 20x1 for ZAR 4,000 (rands)
from a company based in South Africa when the current exchange rate
was ₱5: ZAR 1.
Both the acquisitions described above are on cash basis. At year-end,
ABC Co. determined the following:
 The equipment was found to have a recoverable amount of THB 28,000.
The closing rate is ₱1.3: THB 1.
 Half of the inventories purchased remain unsold. ABC estimated that
the net realizable value of the unsold inventories is ZAR 1,200.
The closing rate is ₱6.
24. How much is the impairment loss on the equipment?
a. 11,600
b. 2,000 c. 9,280
d. None
25. How much is the impairment loss on the inventory?
a. 2,800
b. 800
c. 2,240
d. None
4
Buying and selling rates
Use the following information for the next two questions:
ABC Co. had the following foreign currency transactions on April 1,
20x1:
 Purchased goods worth CHF 40,000 (francs) from Swiss Company, a
company based in Switzerland.
 Sold goods with sale price of VEB 4,000 (bolivars) to Venezuelan
Company, a company based in Venezuela.
Both the transactions were settled on April 30, 20x1. The following
were the spot exchange rates:
Buying
Selling
Swiss Francs
April 1, 20x1…………………………₱44:CHF1
₱48: CHF1
April 30, 20x1……………………….₱47:CHF1
₱50: CHF1
Bolivars
April 1, 20x1…………………………₱10:CHF1
April 30, 20x1……………………….₱13:CHF1
₱12: CHF1
₱16: CHF1
26. How much is the FOREX gain (loss) on the purchase transaction?
a. (120,000) b. 120,000
c. 80,000 d. (80,000)
27. How much is the FOREX gain (loss) on the sale transaction?
a. 16,000
b. 12,000 c. (16,000)
d. (12,000)
Revaluation of asset
28. On January 1, 20x1, ABC Co. acquired equipment for MWK 4,000,000
(kwachas) from a company based in Malawi. The equipment’s estimated
useful life is 4 years. ABC Co. uses the straight line method of
depreciation and the revaluation model.
On December 31, 20x1, the equipment was determined to have a net
appraised value of MWK 4,800,000 (kwachas). The relevant rates are as
follows:
Jan. 1, 20x1…………………………………………..₱0.20 : MWK 1
Dec. 31, 20x1………………………………………..₱0.26 : MWK 1
How much is the revaluation surplus?
a. 648,000
b. 3,461,538
c. 448,000
d. None
Exchange difference recognized in OCI
29. ABC Co. has a wholly-owned subsidiary in Indonesia. The
following information is available about the subsidiary for the
year to December 31, 20x1:
(IDR Rupiahs)
Net assets, Jan. 1, 20x1
400,000,000
Profit for the year
160,000,000
Dividends
Net assets, Dec. 31, 20x1
560,000,000
No goodwill
the relevant
Jan. 1,
Average
arose from the business combination. The following are
exchange rates:
20x1………………………………………..₱0.003 : IDR 1
for the year…………………….₱0.004 : IDR 1
5
Dec. 31, 20x1…………………………….₱0.005 : IDR 1
How much is the total gain (loss) on translation for the year?
a. 1,280,000
b. (1,120,000) c. 1,120,000
d. 960,000
Goodwill
Use the following information for the next two questions:
On January 1, 20x1, a Philippine holding company acquired 100%
interest in a subsidiary based in Kenya for KES 40M (shillings). The
fair value of the net assets of the subsidiary at that date was KES
32 million (shillings).
The following are the relevant exchange rates:
Jan. 1, 20x1……………………………………….₱0.04 : KES 1
Dec. 31, 20x1………………………………………₱0.05 : KES 1
The group determined that there is no impairment in goodwill.
30. How much is the goodwill as of January 1, 20x1?
a. 100,000
b. 240,000
c. 320,000
d. 480,000
31. How much is the goodwill as of December 31, 20x1?
a. 400,000
b. 440,000
c. 480,000
d. 560,000
Translation of a subsidiary’s financial statements
Use the following information for the next nine questions:
ABC Co. owns 80% of the ordinary shares of a foreign subsidiary, XYZ,
Inc., a company based in Korea. XYZ, Inc.'s functional currency is
won.
The subsidiary was acquired at the start of the reporting
period for 6,000,000 wons, when the subsidiary's retained earnings
were 3,200,000 wons.
At the date of the acquisition the fair value of the net assets of
the subsidiary were 5,600,000 wons. This included a fair value
adjustment in respect of land.
ABC Co. elected to measure non-controlling interest at the NCI’s
proportionate share of the fair value of the subsidiary‘s net assets.
The group determined at year-end that goodwill is not impaired. There
were no changes in the share capital of the subsidiary during the
year.
The relevant exchange rates are as follows:
Date
Exchange rates
Jan. 1, 20x1………………………………….₱0.03: KRW 1
Average for the year………………₱0.04: KRW 1
Dec. 31, 20x1……………………………….₱0.05: KRW 1
A summary of the individual financial statements of the entities at
the end of reporting period are shown below:
6
Statements of financial position
As at December 31, 20x1
ABC Co.
(pesos)
180,000
8,000,000
8,180,000
ASSETS
Investment in subsidiary
Other assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Liabilities
Share capital
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
XYZ, Inc.
(wons)
5,200,000
5,200,000
1,600,000
4,000,000
2,580,000
6,580,000
8,180,000
240,000
800,000
4,160,000
4,960,000
5,200,000
ABC Co.
(pesos)
3,600,000
(2,160,000)
1,440,000
XYZ, Inc.
(wons)
2,400,000
(1,440,000)
960,000
Statements of profit or loss
For the year ended December 31, 20x1
Revenues
Expenses
Profit for the year
32. How much is the goodwill as of December 31, 20x1?
a. 45,600
b. 76,000 c. 66,500 d. 64,500
33. How much is the non-controlling interest in the net assets of
the subsidiary (NCI) as of December 31, 20x1?
a. 39,360
b. 56,600 c. 54,360 d. 65,600
34. How much is the consolidated retained earnings as of December
31, 20x1?
a. 2,618,400 b. 2,702,400
c. 2,672,340
d. 2,610,720
35. How much is the total translation gain (loss) to be recognized
in other comprehensive income in 20x1?
a. 152,000
b. 121,600
c. 161,600
d. 136,000
36. How much is the consolidated profit in 20x1?
a. 1,478,400 b. 1,488,000
c. 1,596,400
d. 1,696,000
37. How much is the consolidated total comprehensive income in 20x1?
a. 1,640,000 b. 1,630,400
c. 1,718,000
d. 1,832,000
38. How much is the comprehensive income attributable to owners of
the parent?
a. 1,592,320 b. 1,606,080
c. 1,598,400
d. 1,638,080
39. How much is the consolidated total assets as of December 31,
20x1?
a. 8,416,000 b. 9,680,000
c. 8,340,000 d. 9,860,000
40. How much is the equity attributable to owners of the parent as
of December 31, 20x1?
a. 6,676,320 b. 6,828,320
c. 6,738,400
d. 6,804,000
7
Net investment in a foreign operation
Use the following information for the next six questions:
On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc., a
company situated in a foreign country. The currency of this country
is the Armenian Dram (AMD). ABC elected to measure non-controlling
interest as its proportionate share of the fair value of the
subsidiary‘s net assets.
The year-end financial statements of the combining constituents show
the following information:
Statements of financial position
As of December 31, 20x1
Current assets
Investment in subsidiary
Property, plant and equipment
TOTAL ASSETS
Current liabilities
Noncurrent liabilities
Total liabilities
Share capital
Share premium
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
*Amounts in millions.
ABC Co.
₱m*
8,000
1,760
12,000
21,760
XYZ, Inc.
ADMm*
8,800
4,000
4,800
8,800
4,000
2,800
6,800
4,000
2,000
6,960
12,960
21,760
7,200
16,000
400
800
8,000
9,200
16,000
Statements of profit or loss
For the year ended December 31, 20x1
ABC Co.
₱m
16,000
(10,000)
6,000
(2,000)
240
(400)
160
4,000
(1,200)
2,800
Revenue
Cost of sales
Gross profit
Operating expenses
Dividends received
Interest expense
Interest income
Profit before tax
Income tax expense
Profit after tax
Extraordinary item
Profit for the year
2,800
XYZ, Inc.
ADMm
32,000
(16,000)
16,000
(4,000)
(1,200)
400
11,200
(4,000)
7,200
(800)
6,400
The movements in retained earnings during 20x1 are shown below:
Retained earnings – Jan. 1, 20x1
4,560
4,800
Dividends paid
(400)
(3,200)
Profit for the year
2,800
6,400
Retained earnings – Dec. 31, 20x1
6,960
8,000
8
Additional information:
a) XYZ, Inc. has applied local GAAP, but has made some attempt to
adapt to IFRSs (to which PFRSs are consistent). As a result, XYZ,
Inc. has written off research previously capitalized as an
extraordinary item prior period adjustment in the sum of ADM400
million. The remainder of the extraordinary item is the recognition
of a fall in value of some plant that was damaged during the year.
b) The fair value of the net assets of XYZ, Inc. at acquisition was
ADM8,000 million after taking into account the removal of
capitalized research discussed above. Goodwill is unimpaired.
c) The increase in the fair value of XYZ, Inc. over carrying value is
attributable to machines which are depreciated over five years on
the straight line basis.
d) During the year, ABC Co. sold ₱120 million in goods to XYZ, Inc. at
a margin of 20%. All of the goods had been utilized in production
by year-end, but only one half of the relevant finished goods have
been sold. XYZ, Inc. received the goods on September 1 and paid on
September 21. The foreign exchange difference remains in current
liabilities.
e) ABC Co. made a loan of ₱200 million to XYZ, Inc. immediately after
the acquisition on January 1. This is still outstanding at yearend. ABC Co. has recorded the asset in current assets. The
subsidiary has recorded the liability in noncurrent liabilities at
the rate ruling at year-start.
f) The dividends were declared by XYZ, Inc. at year-end and received
by ABC Co. on that day.
The following exchange rates are relevant:
ADM to ₱1.00
January 1…………………………………………………….5
September 1…………………………………………………6
September 21……………………………………………….6.5
December 31………………………………………………..8
Weighted average for year……………………………….. 7
41. How much is the goodwill as of December 31, 20x1?
a. 4,000
b. 620
c. 500
d. 1,400
42. How much is the NCI in net assets as of December 31, 20x1?
a. 523
b. 553
c. 624
d. 829.50
43. How much is the consolidated retained earnings as of December
31, 20x1?
a. 7,176
b. 7,214 c. 7,245 d. 7,385
44. How much is the total translation gain (loss) to be recognized
in other comprehensive income in 20x1?
a. (1,087)
b. (1,792)
c. (1,903)
d. (1,093)
45. How much is the consolidated profit in 20x1?
a. 3,442
b. 3,483 c. 3,647 d. 3,328
46. How much is the comprehensive income attributable to NCI?
a. 36
b. 38
c. 43
d. 41
9
Disposal of a foreign operation
47. ABC Co. held 100% ownership interest of XYZ, Inc. but sold the
entire investment on August 1, 20x1 for ₱500,000.
The following information was determined as of this date:
Carrying amount of XYZ’s net identifiable assets
Carrying amount of NCI (including accumulated OCI
attributable to NCI)
Goodwill
412,000
82,400
12,000
ABC Co. had previously recognized translation gains of ₱3,200 in
other comprehensive income on its investment in XYZ, Inc. How much is
the total gain to be recognized in profit or loss on disposal date?
a. 158,400
b. 161,600
c. 155,200
d. 164,800
Translation of a foreign operation – Hyperinflationary economy
Use the following information for the next four questions:
ABC Co., a corporation based in the Philippines, has a foreign branch
that is operating in a hyperinflationary economy. The financial
statements of the branch prior to restatement and translation are
shown below:
Statement of financial position
As of December 31, 20x1
Amounts in Angolan Kwanza (AOA)
Cash
Accounts receivable
Inventory
Building
Accumulated depreciation
Total assets
184,000
296,000
160,000
400,000
(80,000)
960,000
Loan payable
120,000
Share capital
Retained earnings
Total equity
Total liabilities and equity
400,000
440,000
840,000
960,000
Statement of profit or loss
For the year ended December 31, 20x1
Amounts in Angolan Kwanza (AOA)
Sales
Cost of sales:
Inventory - Jan. 1
240,000
Purchases
120,000
Total goods available for sale
360,000
Inventory - Dec. 31
(160,000)
Gross profit
Depreciation expense
Other operating expenses
Profit for the year
10
480,000
(200,000)
280,000
(40,000)
(160,000)
80,000
Additional information:
 The building was acquired on January 1, 20x0.
 The share capital was issued on January 1, 20x0.
 Revenues were earned and expenses were incurred evenly during the
year.
 Selected values of general price indices (CPI) are shown below:
January 1, 20x0
100
Average for 20x0
110
January 1, 20x1
120
Average for 20x1
125
December 31, 20x1
140


The net monetary assets as of January 1,
The exchange rates are as follows:
January 1, 20x1
1.00 AOA : 0.45
Average for 20x1
1.00 AOA : 0.47
December 31, 20x1
1.00 AOA : 0.50
20x1 is ₱160,000.
PHP
PHP
PHP
48. How much is the gain (loss) on net monetary position?
a. (53,224) b. (51,887)
c. (50,667)
d. (48,333)
49. How much is the translated total assets as of December 31, 20x1?
a. 552,400
b. 553,600
c. 554,800
d. 556,300
50. How much is the translated total equity as of December 31, 20x1?
a. 553,600
b. 489,600
c. 495,600
d. 493,600
51. How much is the translated profit (loss) for 20x1?
a. (4,461)
b. 4,240 c. (4,561)
d. (4,362)
Theory of Accounts Reviewer
1. The accounting for the effects of foreign currencies on financial
statements is prescribed under which standard?
a. PAS 12
b. PFRS 21
c. PFRS 9
d. PAS 21
2. Which of the following statements is correct regarding the
preparation of financial statements in accordance with PFRSs?
a. A reporting entity is encouraged under the PFRSs to identify its
functional currency when preparing financial statements.
b. A reporting entity is required under the PFRSs to identify its
functional currency when preparing financial statements only
when the entity engages in foreign activities.
c. The functional currency must be the currency of the country in
which the entity operates or is based.
d. A reporting entity must identify its functional currency when
preparing its financial statements.
3. Which of these considerations would not be relevant in determining
the entity’s functional currency?
a. The currency that influences the costs of the entity.
b. The currency in which finance is generated.
c. The currency in which receipts from operating activities are
retained.
d. The currency that is the most internationally acceptable for
trading.
(Adapted)
11
4. When translating foreign currency transactions in accordance with
PAS 21, if exchange rates fluctuate significantly,
a. the use of the average rate for a period is appropriate for as
long as it remains relevant all throughout the period.
b. the use of the average rate for a period is required under PAS
21 only if it can be determined without undue cost and effort.
c. the use of average rate is always appropriate
d. the use of the average rate for a period is inappropriate.
5. In preparing consolidated financial statements of a U.S. parent
company with a foreign subsidiary, the foreign subsidiary's
functional currency is the currency:
a. In which the subsidiary maintains its accounting records.
b. Of the country in which the subsidiary is located.
c. Of the country in which the parent is located.
d. Of the environment in which the subsidiary primarily generates
and
expends
cash.
6. A foreign subsidiary's functional currency is its local currency,
which has not experienced significant inflation. The weighted
average exchange rate for the current year would be the appropriate
exchange rate for translating:
(Item #1) Sales to customers; (Item #2) Wages expense
a. No, no
b. Yes, yes
c. No, yes
d. Yes, no
7. Monetary items are
a. Cash only.
b. Cash and bank balances.
c. Cash, short-term receivables, and marketable securities
d. Money held, assets receivable, and liabilities payable, in fixed
or determinable amount of cash or cash equivalents.
8. According to PAS 21, a foreign operation is:
a. an undertaking with foreigners
b. a branch, associate, joint venture or subsidiary, where the
activities are conducted in a different country to that of the
parent undertaking.
c. a foreign representative where the activities are not an
integral part of the parent.
d. a parent operating in foreign shores
9. The functional currency is:
a. the currency which is functioning in the country where the
parent operates.
b. the currency of the country where an entity’s operations are
based.
c. the currency of the primary economic environment in which the
undertaking operates.
d. the currency used in the group’s consolidated financial
statements.
10. The presentation currency is:
a. the local currency of a foreign operation in which it reports.
b. used in the parent’s and in the group’s consolidated financial
statements.
c. the currency which results to largest exchange gains.
d. the currency of the country where an entity’s operations are
based.
12
11.
a.
b.
c.
Exchange difference is
the difference between two different currencies.
the difference between the cost and fair value of monetary item
the difference calculated from reporting the same number of
units of a foreign currency, in the presentation currency, at
different exchange rates.
d. the average difference between the exchange rate at the
beginning and end of a period.
12. The closing rate is:
a. The exchange rate at which all assets and liabilities are
stated.
b. The average rate used in the year an entity closes its books.
c. The spot exchange rate at the end of reporting period.
d. The rate that is closed to the financial statements.
13. The net investment in a foreign operation is:
a. The parent’s share of the net assets of the undertaking.
b. The non-controlling interest’s share of the net assets of the
undertaking.
c. The amount invested in the undertaking stated at cost.
d. Investments less liabilities and other costs.
14. An entity has a subsidiary that operates in a foreign country.
The subsidiary issued a legal notice of a dividend to the parent of
€2.4 million, and this was recorded in the parent entity’s
financial statements. The exchange rate at that date was €2 = $1.
The functional currency of the entity is the dollar. At the date of
receipt of the dividend, the exchange rate had moved to €3 = $1.
The exchange difference arising on the dividend would be treated in
which way in the financial statements?
a. No exchange difference will arise as it will be eliminated on
consolidation.
b. An exchange difference of $400,000 will be taken to equity.
c. An exchange difference of $400,000 will be taken to the parent
entity’s income statement and the group income statement.
d. An exchange difference of $400,000 will be taken to the parent
entity’s income statement only.
(Adapted)
15. Transactions and investments in foreign currencies:
I.
Decrease business risk.
II.
Increase business risk.
a. True, true
b. True, false
c. False, true
False, false
d.
16. The foreign operation may trade profitably, but the investment
may be adversely hit by:
a. Rise in the foreign currency against that of the parent.
b. Fall in the foreign currency against that of the parent.
c. Exchange rates remaining the same.
d. a or b
(Adapted)
17. An entity started trading in country A, whose currency was the
dollar. After several years the entity expanded and exported its
product to country B, whose currency was the euro, and conducted
13
business through a branch. The functional currency of the group was
deemed to be the dollar but by the end of 20X7, 80% of the business
was conducted in country B using the euro. At the end of 20X6, 30%
of the business was conducted in the euro. The functional currency
should
a. Remain the dollar.
b. Change to the euro at the beginning of 20X7.
c. Change to the euro at the end of 20X7.
d. Change to the euro at the end of 20X7 if it is considered that
the underlying transactions, events, and conditions of business
have changed.
(Adapted)
18. Opportunities for performance improvement will more likely come
from:
a. A review of the realized gains and losses.
c. a or b
b. A review of the unrealized gains and losses.
d. neither a
nor b
19. The exchange rate on the day of the transaction is called:
a. The spot rate.
c. The average rate.
b. The closing rate.
d. A rate sometime in the future.
20.
a.
b.
c.
d.
The date of the transaction is:
The date cash is transferred.
The date when the transaction is contracted or recognized.
When the transaction is entered into the books of account.
The date when the rights or obligations on the contract are
settled or discharged.
(Adapted)
21. If the $ (dollar) strengthens:
a. Less pesos would be received from an account receivable in $.
b. More pesos would be received from an account receivable in $.
c. Less pesos would be paid to settle an account payable in $.
d. a and c
(Adapted)
22. An entity started trading in country A, whose currency was the
dollar. After several years the entity expanded and exported its
product to country B, whose currency was the euro. The business was
conducted through a subsidiary in country B. The subsidiary is
essentially an extension of the entity’s own business, and the
directors of the two entities are common. The functional currency
of the subsidiary is
a. The dollar.
b. The euro.
c. a or b
d.
Difficult to determine.
(Adapted)
23. An entity has a subsidiary that operates in a country where the
exchange rate fluctuates wildly and there are seasonal variations
in the income and expenditure patterns. Which of the following
rates of exchange would probably be used to translate the foreign
subsidiary’s income statement?
a. Year-end spot rate.
b. Average for the year.
14
c. Average of the quarter-end rates.
d. Average rates for each individual month of the year.
(Adapted)
24. If the $ falls in value against the peso, and you have net $
liabilities:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
25. If the $ rises in value against the peso, and you have net $
assets:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
26. If the $ falls in value against the peso, and you have net $
assets:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
27. If the $ rises in value against the peso, and you have net $
liabilities:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
28.
a.
b.
c.
d.
Monetary items will be reported:
at the closing rate on the balance sheet date.
at the exchange rate of the transaction.
at the average rate for the year.
any of these
29.
a.
b.
c.
d.
Non-monetary items should be reported:
at the closing rate on the balance sheet date.
at the exchange rate of the transaction.
at the average rate for the year.
any of these
30. Exchange differences on monetary items should be:
a. Recorded in equity, until the disposal of the net investment.
c. a or b
b. Recognized in the period’s income statement.
d.
Ignored.
(Adapted)
31. Where a monetary item forms part of the parent’s net investment
in a foreign operation, the exchange difference should be:
15
a. Recorded in equity, until the disposal of the net investment.
c. a or b
b. Recognized in the period’s income statement.
d.
Ignored.
(Adapted)
32. For a Dependent Foreign Operation, each transaction is entered
at:
a. The exchange rate that would have been used in the parent’s
books – the parent’s functional currency.
b. Closing rate.
c. Average rate.
d. None of these
(Adapted)
33. For foreign operations, closing rate should be used for:
a. Income and expenses.
c. Each transaction.
b. Assets and liabilities.
d. all of these
(Adapted)
34. For foreign operations, the rate of the day of transactions
should be used for:
a. Income and expenses.
c. Each transaction.
b. Assets and liabilities.
d. all of these
(Adapted)
35. The opening net investment of the period needs to be restated at
the:
a. Closing exchange rate.
c. Previous year’s opening rate.
b. Average exchange rate.
d. Previous year’s closing rate.
36. Exchange differences arising from changes to equity, such as
capital increases or dividends, should:
a. Be recognized in the period’s income statement.
c. a or b
b. Be transferred to equity.
d. Ignored.
(Adapted)
37. Where
there
are
minority
interests
relating
to
foreign
undertakings, their share of exchange gains (and losses) should be:
a. Included with the parent’s share of exchange gains.
b. Added to the non-controlling interests in the consolidated
balance sheet.
c. a or b
d. Ignored.
(Adapted)
38. Inter-company balances should be:
a. Transferred to the Holding Company.
b. Eliminated in the separate financial statements
c. Ignored.
d. Agreed by each party.
(Adapted)
39. Exchange differences on most inter-company trading transactions
should be:
a. ignored.
c. recognized in equity.
b. recognized in profit or loss
d. a or c
16
40. On disposal of a foreign operation, all exchange differences
accumulated in a separate component of equity should be:
a. Added to the gain, or loss, on disposal in the income statement.
b. Recognized directly in equity
c. Ignored.
d. b or c
41. In the case of a partial disposal, how much exchange difference
should be included in the income statement?
a. All.
c. None.
b. Proportionate share.
d. Any of these
42. An entity, whose functional currency is the dollar, has a
foreign subsidiary .The subsidiary declared a dividend to the
parent of 9 million euros which was recorded in the parent’s
financial statements. The exchange rate at that date was 1.5 euros
= 1 dollar. At the date of receipt of the dividend, the exchange
rate had moved to 1.6 euros = 1 dollar. The exchange difference
arising on the dividend would be treated as follows in the
financial statements:
a. an exchange difference of $375,000 will be taken to the parent
entity’s and the group’s statement of profit or loss and other
comprehensive income
b. an exchange difference of $375,000 will be taken to equity
c. no exchange difference will arise as it will be eliminated on
consolidation
d. an exchange difference of $5.6 million will be taken to the
parent entity’s income statement
(ACCA)
43. An entity, whose functional currency is the dollar, purchases
machinery from a foreign supplier for 8 million euros on 31 October
2008 when the exchange rate was 1.5 euros = 1 dollar. At the
entity’s year-end of 31 December 2008, the amount has not been
paid. The closing exchange rate was 1.25 euros = 1 dollar. Which of
the following statements are correct?
a. Cost of plant $5.33million dollars, exchange loss $1.07 million,
trade payable $6.4 million
b. Cost of plant $5.33 million dollars, no exchange loss, trade
payable $5.33 million
c. Cost of plant $6.4 million dollars, no exchange gain, trade
payable $6.4 million
d. Cost of plant $6.4 million dollars, exchange gain $1.07 million,
trade payable $5.33
(ACCA)
44. When conversions due to exchange rates leads to disagreement on
the trial balance then, which account should be opened?
a. Foreign exchange account c. No account should be opened
b. Suspense account
d. Difference on exchange account
(Adapted)
45. According to the relevant accounting standard, when assets are
bought by foreign branches on different dates how should we account
for changes in the exchange rates on those dates?
a. The rates on the dates of purchase should be used for each asset
bought
b. A weighted average should be used for the exchange rate
17
c. An average exchange rate should be used to convert
d. The exchange rate on the earliest date of purchase should be
used
(Adapted)
46. How should monetary asset and liabilities of foreign branches be
valued?
a. Using the exchange rate at the date they were incurred
b. Using an average rate for the exchange rate
c. Using the exchange rate at the date of the trial balance
d. No attempt should be made to convert liquid resources as they
will change quickly anyway
(Adapted)
47. A change in the exchange rate of two currencies may not be known
as:
a. devaluation
c. depreciation.
b. amortization.
d. appreciation.
(Adapted)
48. An entity will primarily generate and expend cash in one primary
economic environment. According to PAS 21 The Effects of Changes in
Foreign Exchange Rates, the correct term for the currency of this
primary economic environment is the
a. presentation currency
c. reporting currency
b. functional currency
d. foreign currency
(Adapted)
49. According to PAS 21 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
c. The average rate
b. The closing rate
d. The spot exchange rate
(Adapted)
50. According to PAS 21 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 PAS 21?
I.
Any exchange difference on the settlement of a monetary item
should be recognized in profit or loss.
II.
Any exchange difference on the translation of a monetary item at
a rate different to that used at initial recognition should be
recognized in other comprehensive income.
a. False, False
b. False, True
c.
True,
False
d. True, True
(Adapted)
51. The central bank of Country X buys and sells its own currency to
ensure that the currency is always exchanged in a ratio of 2:1 with
the currency of Country Y. What can we conclude about these two
currencies?
a. Country X is using the euro.
b. Country X has pegged its currency to the currency of Country Y.
c. Country X has an undesirable currency.
18
d. Country X allows its currency to float relative to the currency
of Country Y.
(Adapted)
52. What is the proper treatment of unrealized foreign
gains?
a. They should be deferred on the statement of financial
until cash is received.
b. The principle of conservatism requires that they should
recognized.
c. They should not be recorded until cash is received
exchange transaction is completed.
d. They should be recognized in profit or loss on the
exchange rate changes.
(Adapted)
exchange
position
never be
and
the
date the
53. RIGHTEOUS Co., a foreign subsidiary of MORAL Co., has written
down its inventory to net realizable value under the “lower of cost
and NRV” rule. When consolidating RIGHTEOUS Co’s statement of
financial position into the group’s financial statements, what
exchange rate should be used for the inventory?
a. historical rate
c. closing rate
b. average rate
d. cannot be determined
(Adapted)
54. Foreign operations that are an integral part of the operations
of the entity would have the same functional currency as the
entity. Where a foreign operation functions independently from the
parent, the functional currency will be
a. That of the parent.
b. Determined using the guidance for determining an entity’s
functional currency.
c. That of the country of incorporation.
d. The same as the presentation currency.
(Adapted)
Suggested answers to review theory questions
1. D
11. C
21. B
31. A
41.
2. D
12. C
22. A
32. A
42.
3. D
13. A
23. D
33. B
43.
4. D
14. C
24. B
34. A
44.
5. D
15. C
25. B
35. A
45.
6. B
16. B
26. A
36. B
46.
7. D
17. D
27. A
37. B
47.
8. B
18. B
28. A
38. D
48.
9. C
19. A
29. B
39. B
49.
10. B
20. B
30. B
40. A
50.
19
B
A
A
D
A
C
B
B
B
C
51.
52.
53.
54.
B
D
C
B
The Effects of Changes in Foreign Exchange Rates
Multiple Choice – Computational
Answers at a glance:
1. D
11. B
2. C
12. D
3. B
13. B
4. D
14. C
5. A
15. A
6. D
16. B
7. B
17. B
8. C
18. B
9. A
19. C
10. B
20. B
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
C
A
A
B
A
D
B
A
D
C
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
A
B
D
D
A
A
B
C
A
C
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
C 51. A
A
C
A
A
C
B
C
B
D
Solution:
1. D
Solutions:
Nov. 29,
20x1
Dec. 1,
20x1
No entry
Machine (€40,000 x ₱58)
Accounts payable
2,320,000
2,320,000
to record the purchase of machine on an
FOB shipping point term
Dec. 15,
20x1
Accounts payable
Foreign exchange gain
40,000
40,000
to recognize the exchange difference
Dec. 31,
20x1
Foreign exchange loss
Accounts payable
120,000
120,000
to recognize the exchange difference
Jan. 3,
20x2
Accounts payable (₱2.32M – ₱40K +
₱120K)
Foreign exchange loss (squeeze)
Cash in bank (€10,000 x ₱61)
to record the settlement of the purchase
transaction
2,400,000
40,000
2,440,000
2. C (See entries above)
3. B (120,000 loss – 40,000 gain) = (80,000) loss (See entries
above)
4. D (See entries above)
5. A (See entries above)
6. D
7. B
Solutions:
Nov. 29,
20x1
Dec. 1,
20x1
No entry
Accounts receivable (£40,000 x ₱68)
Sale
2,720,000
2,720,000
to record the sale of inventories on an FOB
shipping point term
Dec. 31,
20x1
Accounts receivable
a
Foreign exchange gain
80,000
80,000
to recognize the exchange difference
a
Accounts receivable – Dec. 1, 20x1 (£40,000 x ₱68)
Accounts receivable – Dec. 31, 20x1 (£40,000 x ₱70)
Increase in accounts receivable – FOREX gain
Jan.
3,
20x2
Cash in bank (£40,000 x ₱71)
2,840,000
Accounts receivable (₱2.72M+₱80K)
Foreign exchange gain (squeeze)
₱2,720,000
2,800,000
₱ 80,000
2,800,000
40,000
to record the settlement of the sale transaction
8. C (See entries above)
9. A (Se entries above)
10. B (80,000 gain in 20x1 + 40,000 gain in 20x2) = 120,000 total
gain (See entries above)
11. B
Solutions:
Requirement (a): FOREX gain/loss recognized by ABC
Co. Purchase transaction with Pakistan Co.:
Accounts payable – Dec. 17, 20x1 (PKR 400,000 ÷ PKR 2.04)
Accounts payable – Dec. 31, 20x1 (PKR 400,000 ÷ PKR 2)
Increase in accounts payable – FOREX loss in 20x1
₱196,079
200,000
₱3,921
Accounts payable – Dec. 31, 20x1 (PKR 400,000 ÷ PKR 2)
Cash paid on settlement - Jan. 5, 20x2 (PKR 400,000 ÷ PKR 2.083)
Decrease in accounts payable – FOREX gain in 20x2
₱200,000
192,031
₱7,969
₱4,048
Total net FOREX gain on the purchase transaction
Sale transaction with Sweden Co.:
Accounts receivable – Dec. 20, 20x1 (SEK 80,000 ÷ SEK 0.1667)
Accounts receivable – Dec. 31, 20x1 (SEK 80,000 ÷ SEK 0.20)
Decrease in accounts receivable – FOREX loss in 20x1
₱479,904
400,000
₱79,904
Accounts receivable – Dec. 31, 20x1 (SEK 80,000 ÷ SEK 0.20)
Cash received on settlement – Jan. 5, 20x2 (SEK 80,000 ÷ SEK 0.24)
Decrease in accounts receivable – FOREX loss in 20x2
₱400,000
333,333
₱66,667
Total FOREX loss on the sale transaction
₱146,571
12. D
13. B
Solution:
Accounts payable – Dec. 1, 20x1 (BRL 40,000 x ₱24)
Accounts payable – Dec. 31, 20x1 (squeeze)
Increase in accounts payable – FOREX loss in 20x1 (given)
Accounts payable – Dec. 31, 20x1
Divide by:
Exchange rate on December 31, 20x1
₱960,000
1,040,000
₱80,000
₱1,040,000
BRL40,000
₱26: BRL1
14. C
Solution:
Accounts payable – Dec. 31, 20x1 (see above)
₱1,040,000
Cash paid on settlement – 20x2 (squeeze)
1,020,000
₱20,000
Decrease in accounts payable – FOREX gain in 20x2 (given)
Cash paid on settlement – 20x2
Divide by:
Exchange rate on settlement date
15. A ₱1,040,000 (see squeezed amount above)
₱1,020,000
BRL40,000
₱25.5: BRL1
16. B ₱960,000 (40,000 x ₱24 exchange rate on initial recognition)
17. B
18. B
Solution:
₱2,200,000 ÷ $40,000 = ₱55:$1 exchange rate at the end of
reporting period.
₱55 ÷ 110% = ₱50 : $1 exchange rate on initial recognition
19. C
Solution:
Carrying amounts at initial exchange rate:
Loan payable ($40,000 x ₱50)
Interest payable ($40,000 x 10% x 6/12 x ₱50)
Total payables at initial exchange rate
2,000,000
100,000
2,100,000
Carrying amounts at closing rate:
Loan payable ($40,000 x ₱55)
Interest payable ($40,000 x 10% x 6/12 x ₱55)
Total payables at closing rate
2,100,000
110,000
2,310,000
Increase in payables - FOREX loss
210,000
20. B ($100,000 x ₱45) = ₱4,500,000
21. C
Solution:
Opening balance
Sept. 30 (₱45:$1)
CIB –in Philippine pesos
₱1,920,000
3,600,000
880,000 Dec. 16 (₱44:$1)
₱4,640,000 Dec. 31 (unadj. bal.)
Cash in bank – unadjusted balance
Cash in bank at closing rate ($100,000 x ₱45)
Decrease in cash in bank – Net foreign exchange loss
₱4,640,000
4,500,000
₱ 140,000
22. A
Solution:
Advances spent at initial exchange rate (MYR 32,000 x ₱14)
Advances spent at average rate (MYR 32,000 x ₱13.5*)
Decrease in advances receivable – FOREX loss – Dec. 31, 20x1
* Average rate = (₱14 + ₱13) ÷ 2 = ₱13.5
448,000
432,000
16,000
Advances unspent at initial exchange rate (MYR 8,000 x ₱14)
Advances unspent at closing rate (MYR 8,000 x ₱13)
Decrease in advances receivable – FOREX loss – Dec. 31, 20x1
Total FOREX loss – Dec. 31, 20x1 (16,000 + 8,000)
23. A
Solution:
Advances spent at previous closing rate (MYR 6,000 x ₱13)
Advances spent at average rate {MYR 6,000 x [(₱13 + ₱12) ÷ 2]}
Decrease in advances receivable – FOREX loss – Jan. 3, 20x2
Advances unspent at previous closing rate (MYR 2,000 x ₱13)
Advances unspent at spot rate on Jan. 3, 20x2 (MYR 2,000 x ₱12)
Decrease in advances receivable – FOREX loss – Jan. 3, 20x2
Total FOREX loss – 20x2 (3,000 + 2,000)
112,000
104,000
8,000
24,000
78,000
75,000
3,000
26,000
24,000
2,000
5,000
24. B
Solution:
Equipment at carrying amount translated at original spot rate
(40,000 x ₱1.2 x 4/5)
Equipment at recoverable amount translated at the spot rate
when the recoverable amount is determined,
i.e., Dec. 31, 20x1 (28,000 x ₱1.3)
Decrease in carrying amount – Impairment loss
38,400
36,400
2,000
25. A
Solution:
Inventory at carrying amount translated at original spot rate
(4,000 x ½ x ₱5)
Inventory at net realizable value translated at the spot rate
when the net realizable value is determined,
i.e., Dec. 31, 20x1 (1,200 x ₱6)
Decrease in carrying amount – Impairment loss
10,000
7,200
2,800
26. D 40,000 x (₱50 selling rate – ₱48 selling rate)] = ₱80,000 FOREX
loss
27. B [4,000 x (₱13 buying rate – ₱10 buying rate)] = ₱12,000 FOREX
gain
28. A
Solution:
Appraised value of equipment – Dec. 31, 20x1 (4.8M x ₱0.26)
Carrying amt. of equipment – Dec. 31, 20x1 [(4M x ₱0.20) x ¾]
Revaluation surplus – recognized in OCI
1,248,000
600,000
648,000
29. D
Solution:
1) Translation of opening net assets
Net assets, Jan. 1 - at opening rate
Net assets, Jan. 1 - at closing rate
Increase in opening net assets – gain
1,200,000
2,000,000
800,000
(400M x ₱0.003)
(400M x ₱0.005)
Cumulative translation difference – Jan. 1
-
2) Translation of changes in net assets during the period:
Profit - at average rate
640,000
(160M x ₱0.004)
Profit - at closing rate
800,000
(160M x ₱0.005)
Increase in profit – gain
160,000
3) Translation of goodwill
Goodwill, Dec. 31 - at opening rate
Goodwill, Dec. 31 - at closing rate
Increase in goodwill – gain
-
Total FOREX translation gain – OCI
30. C
Solutions:
Formula #1:
Consideration transferred
Non-controlling interest in the acquiree
Prev. held equity interest in the acquiree
Total
Fair value of net assets acquired
Goodwill (in shillings)
Multiply by: Opening rate/ Closing rate
Goodwill (in pesos)
960,000
Jan. 1, 20x1 Dec. 31, 20x1
40,000,000
40,000,000
40,000,000
40,000,000
(32,000,000) (32,000,000)
8,000,000
8,000,000
0.04
0.05
320,000
400,000
31. A (See solution above)
32. B (See Step 3 below)
Solutions:
Step 1: Analysis of effects of intercompany transaction
We can leave this out because there are no intercompany
transactions in the problem.
Step 2: Analysis of net assets
XYZ, Inc.
Share capital
Retained earnings
Totals at carrying amounts
a
FVA at acquisition date
Subsequent depreciation of FVA
Net assets at fair value (in wons)
a
Acquisition
date
Consolidation
date
Net
change
(in wons)
(in wons)
(in wons)
800,000
3,200,000
4,000,000
1,600,000
NIL
5,600,000
800,000
4,160,000
4,960,000
1,600,000
6,560,000 960,000
The fair value adjustment at acquisition date is determined as follows:
Acquisition-date fair value of XYZ's net assets (in wons)
Acquisition-date carrying amount of XYZ's net assets (in wons)
FVA - attributable to undervalued land (in wons)
Multiply by: Closing rate
FVA - attributable to undervalued land (in pesos)
5,600,000
(4,000,000)
1,600,000
₱0.05
₱80,000
No subsequent depreciation of FVA is recognized because the FVA
relates to land, i.e., non-depreciable asset.
Step 3: Goodwill computation
Formula #1:
Consideration transferred (in wons)
6,000,000
Non-controlling interest in the acquiree (5.6M x 20%) – (Step 2) 1,120,000
Previously held equity interest in the acquiree
Total
7,120,000
Fair value of net identifiable assets acquired (Step 2)
(5,600,000)
Goodwill at acquisition date
1,520,000
Accumulated impairment losses since acquisition date
Goodwill, net – current year (in wons)
1,520,000
Multiply by: Closing rate
₱0.05
Goodwill, net – current year (in pesos)
₱76,000
Step 4: Non-controlling interest in net assets
XYZ's net assets at fair value – Dec. 31, 20x1 (in wons) (Step 2)
Multiply by: NCI percentage
Total
Add: Goodwill to NCI net of accumulated impairment losses
NCI in net assets – Dec. 31, 20x1 (in wons)
Multiply by: Closing rate
NCI in net assets – Dec. 31, 20x1 (in pesos)
6,560,000
20%
1,312,000
1,312,000
₱0.05
₱65,600
No goodwill is attributed to NCI because NCI is measured at proportionate share.
Step 5: Consolidated retained earnings
ABC's retained earnings – Dec. 31, 20x1
₱2,580,000
Consolidation adjustments:
(a)
ABC's share in the net change in XYZ's net assets
₱30,720
Unamortized deferred gain (Downstream only)
Gain or loss on extinguishment of bonds
Impairment loss on goodwill attributable to Parent
Net consolidation adjustments
30,720
Consol. retained earnings – Dec. 31, 20x1
₱2,610,720
(a)
ABC’s share in the net change in XYZ’s net assets is computed as:
Net change in XYZ’s net assets (in wons) (Step 2)
Multiply by: Controlling interest
ABC’s share in the change in XYZ’s net assets (in wons)
Multiply by: Average exchange rate
960,000
80%
768,000
0.04
₱30,720
ABC’s share in the net change in XYZ’s net assets (in pesos)
Step 5A: Translation gain (loss)
The translation gain (loss) recognized in other comprehensive income
in the consolidated financial statements is computed as follows:
Share in translation
difference
ABC Co. XYZ, Inc.
(80%)
(20%)
1) Translation of XYZ’s opening net assets
Net assets, Jan. 1 - at opening rate (5.6M x ₱0.03)
Net assets, Jan. 1 - at closing rate (5.6M x ₱0.05)
168,000
280,000
112,000
89,600
22,400
-
-
-
2) Translation of changes in net assets during the period:
Profit - at average rate (960K x ₱0.04)
38,400
Profit - at closing rate (960K x ₱0.05)
48,000
Increase in profit - FOREX gain
9,600
7,680
1,920
Increase in opening net assets – gain
Cumulative translation difference – Jan. 1
3) Translation of goodwill
Goodwill, Dec. 31 - at opening rate (1.52M x₱0.03)
Goodwill, Dec. 31 - at closing rate (1.52M x ₱0.05)
Increase in goodwill - FOREX gain
Total translation gain – OCI
45,600
76,000
30,400
30,400
-
152,000 127,680 ₱24,320
The total translation adjustment to goodwill is attributed only to ABC
because goodwill is measured at proportionate share and therefore
no goodwill is attributed to NCI.
Step 6: Consolidated profit or loss and comprehensive income
Parent
Profits before adjustments
1,440,000
Consolidation adjustments:
Unrealized profits
Unamortized def. loss
Dividend income
Net consolidation adjustments
Profits before FVA
1,440,000
Depreciation of FVA
Impairment of goodwill
Consolidated profit
1,440,000
Other comprehensive income:
Translation gain - (Step 5A)
Consolidated comp. income
1,440,000
Subsidiary
(a)
38,400
N/A
38,400
38,400
Consolidated
1,478,400
1,478,400
1,478,400
152,000
38,400
1,630,400
(a)
At average rate (960,000 x .04 = ₱38,400)
Step 7: P/L and CI attributable to owners of parent and NCI
Owners
Consoliof parent
NCI
dated
ABC's profit before FVA - (Step 6)
1,440,000 N/A
1,440,000
(b)
Share in XYZ’s profit before FVA
30,720
7,680
38,400
Depreciation of FVA
Impairment of goodwill
Profit of loss
1,470,720
7,680 1,478,400
Other comprehensive income:
Share in translation gain - (Step 5A)
127,680 24,320
152,000
Comprehensive income
1,598,400 32,000 1,630,400
(b)
Shares in XYZ’s profit before FVA (Step 6): (38,400 x 80%); (38,400 x 20%)
The consolidation worksheet is prepared as follows:
Consolidation Worksheet
December 31, 20x1
ABC Co.
(in pesos)
XYZ, Inc.
(in wons)
Translation
XYZ, Inc.
(in pesos)
Consolidation
Consolidated
(in pesos)
Investment in subsidiary
Other assets
Goodwill
Total assets
180,000
8,000,000
5,200,000
8,180,000
5,200,000
Liabilities
Share capital
Retained earnings
Translation differences
Equity attrib. to owners of parent
Non-controlling interest
Total equity
1,600,000
4,000,000
2,580,000
240,000
800,000
4,160,000
0.05 (CR)
(omitted)
(omitted)
12,000
(omitted)
(omitted)
-
6,580,000
4,960,000
0.05 (CR)
248,000
1,612,000
4,000,000
2,610,720
127,680
6,738,400
65,600
6,804,000
Total liabilities and equity
8,180,000
5,200,000
260,000
8,416,000
Revenue
Expenses
Profit for the year
Other comprehensive income:
Translation gain
Comprehensive income
(eliminated)
0.05 (CR)
260,000 (8M + 260K + 80K FVA) (Step 2)
(Step 3)
260,000
(1,200,000 + 12,000)
(Parent only)
(Step 5)
(Step 5A) – Parent only
(Step 4)
3,600,000
2,400,000
(2,160,000) (1,440,000)
1,440,000
960,000
0.04 (AR)
0.04 (AR)
96,000
(57,600)
38,400
(3,600,000 + 96,000)
(540,000 + 14,400)
(Step 5A)
1,440,000
960,000
38,400
8,340,000
76,000
8,416,000
3,696,000
(2,217,600)
1,478,400
152,000
1,630,400
*(CR) = closing rate; (AR) = average rate. The translations of the individual components of the subsidiary’s equity are omitted because
these are not needed in the preparation of the consolidated financial statements (i.e., the subsidiary’s equity is eliminated in the consolidated
financial statements.
Optional reconciliations:
Total assets of ABC Co.
Total assets of XYZ, Inc. (5,200,000 x 0.05 closing rate)
Investment in subsidiary
Fair value adjustments - net (Step 2)
Goodwill – net (Step 3)
Effect of inter-company transactions
Consolidated total assets
8,180,000
260,000
(180,000)
80,000
76,000
8,416,000
Total liabilities of ABC Co.
Total liabilities of XYZ, Inc. (240,000 x 0.05 closing rate)
Fair value adjustments - net
Effect of inter-company transactions
Consolidated total liabilities
1,600,000
12,000
1,612,000
Share capital of ABC Co.
Share premium of ABC Co.
Consolidated retained earnings (Step 5)
Translation difference (Step 5A – Parent only)
Equity attributable to owners of the parent
Non-controlling interests (Step 4)
Consolidated total equity
4,000,000
2,610,720
127,680
6,738,400
65,600
6,804,000
33. D (See Step 4 above)
34. D (See Step 5 above)
35. A (See Step 5A above)
36. A (See Step 6 above)
37. B (See Step 6 above)
38. C (See Step 7 above)
39. A (See solutions above)
40. C (See solutions above)
41. C (See Step 3
below) Solutions:
Step 1: Analysis of errors and intercompany transactions
(a1) Extra-ordinary items – Prior period error
The separate financial statements of XYZ, Inc. included "extraordinary
items."
฀ Additional information (a) above states that ADM400 million of the
extraordinary items pertain to research costs which were
previously capitalized by XYZ but were written off due to the
attempt on adapting IFRSs.
9
PAS 1 Presentation of Financial Statements prohibits the
presentation and disclosure of extraordinary items. PAS 38
Intangible Assets prohibits the capitalization of research costs.
9
PAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors requires corrections of errors to be accounted for as
adjustment to the opening balance of retained earnings and not in
profit or loss.
The correcting entry is as follows:
Correcting entry #1
Dec. 31 Retained earnings – XYZ, Inc.
Extraordinary items
400
400
to adjust the opening balance of
retained earnings for prior period error
(a2) Extraordinary items – Impairment loss
฀ Additional information (a) above states that the remainder of the
extraordinary items pertains to the decline in value of a plant that
was damaged during the year.
9
This amount should be recognized as impairment loss and not as
extraordinary item.
Entry made (EM) – erroneous entry
20x1
Extraordinary items
Accumulated impairment losses
400
‘Should be’ entry (SBE) – correct entry
20x1
Impairment loss
Accumulated impairment losses
400
400
400
Correcting entry #2
Dec. 31 Impairment loss
Extraordinary items
400
400
to reclassify the erroneous debit to
extraordinary items
(b & c) Fair value adjustments
Fair value of net assets after research costs (given)
a
Adjusted carrying amount of net assets, Jan. 1
Fair value adjustment (in drams)
Divide by: Useful life
Annual depreciation of FVA (in drams)
8,000
(5,600)
2,400
5
480
a
The adjusted carrying amount of net assets is computed as follows:
Share capital
400
Share premium
800
Retained earnings - adjusted (4,800 - 400) (Step 1.a1)
4,400
Adjusted carrying amount of net assets, Jan. 1
5,600
(d) Intercompany inventory transaction
The intercompany sale of inventory is downstream.
Sale price of intercompany sale (in pesos)
Cost of intercompany sale (₱120M x 80%)
Gross profit
Multiply by: Unsold portion in ending inventory
Unrealized gross profit (in pesos)
₱120
(96)
24
50%
₱12
Additional information (d) above states that a “foreign exchange
difference remains in current liabilities.” This is analyzed as follows:
XYZ's books
720
Sept. 1 Raw materials inventory (₱120M x AMD6)
Accounts payable
720
to record the purchase of inventory from parent
Entry made (EM) – erroneous entry
Sept. Accounts payable
Cash in bank (₱120M x AMD6.5)
21
780
780
to record the payment of accounts payable
‘Should be’ entry (SBE) – correct entry
Sept. Accounts payable
FOREX loss
21
Cash in bank (₱120M x AMD6.5)
to record the payment of accounts payable
720
60
780
Correcting entry #3
Dec.
FOREX loss
Accounts payable
31
60
60
(e) Inter-company loan transaction
The loan payable was recorded at the exchange rate on January 1
and no adjustment has yet been made as of year-end for the change
in exchange rate.
The year-end adjustment is determined as follows:
Loan payable at opening rate (₱200M x AMD5)
Loan payable at closing rate (₱200M x AMD8)
Increase in loan payable - FOREX loss (in drams)
Correcting entry (Adjusting entry) #4
Dec. 31 FOREX loss
Loan payable
1,000
1,600
(600)
600
600
Additional information (e) above states that ABC Co. has recorded the
loan receivable in current assets while XYZ, Inc. has recorded the
loan payable in noncurrent liabilities. This provides evidence that the
settlement of the loan is neither planned nor likely to occur in the
foreseeable future. Therefore, the loan shall form part of ABC's net
investment in XYZ.
Accordingly, the FOREX loss of AMD600 shall be recognized in profit
or loss in XYZ's separate financial statements but recognized in other
comprehensive income in the consolidated financial statements.
(f) Inter-company dividends
Since the dividends were declared and settled on the same date, no
foreign exchange difference shall arise from the transaction.
The dividends paid by XYZ, Inc. are allocated to the owners of the
parent and to NCI as follows:
(in pesos)
(in drams)
AMD8:₱1
Dividends declared by XYZ, Inc. (in drams)
3,200
400
Allocation:
Dividends to ABC Co. (60%)
1,920
240
Dividends to NCI (40%)
1,280
160
Step 2: Analysis of net assets
Acquisition Consolidation
Net
date
date
change
XYZ, Inc.
Share capital
Share premium
Retained earnings – adjusted (Step 1.a1)
Totals at carrying amounts (in drams)
Fair value adjustments (Step 1.b&c)
Depreciation of FVA (Step 1.b&c)
Unrealized profits (Upstream only)
FOREX loss on trade payable (Step 1.d)
Net assets at fair value (in drams)
400
800
4,400
5,600
2,400
NIL
NIL
NIL
8,000
Forex loss on loan payable (Step 1.e)
Net assets at fair value (in drams)
8,000
400
800
8,000
9,200
2,400
(480)
(60)
11,060
(600)
10,460
3,060
(600)
2,460
The FOREX loss on the loan payable is segregated from the other
adjustments because this item is presented in the consolidated
financial statements as part of other comprehensive income and
therefore should not affect consolidated retained earnings. When
computing for the consolidated retained earnings, the net change of
“₱3,060” will be used (see Step 5).
Step 3: Goodwill computation
Formula #1:
Consideration transferred (₱1,760 investment in subsidiary x
AMD5) Non-controlling interest in the acquiree (8,000 x 40%)
(Step 2) Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (Step
2) Goodwill at acquisition date
Accumulated impairment losses since acquisition date
Goodwill, net – current year (in drams)
Divide by: Closing rate
Goodwill, net – current year (in pesos)
Step 4: Non-controlling interest in net assets
XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2)
Multiply by: NCI percentage
Total
Add: Goodwill to NCI net of accumulated impairment losses
NCI in net assets – Dec. 31, 20x1 (in drams)
Divide by: Closing rate
NCI in net assets – Dec. 31, 20x1 (in pesos)
8,800
3,200
12,000
(8,000)
4,000
4,000
8
₱500
10,460
40%
4,184
4,184
8
₱523
Step 5: Consolidated retained earnings
ABC's retained earnings – Dec. 31, 20x1
Consolidation adjustments:
₱6,960
ABC's share in the net change in XYZ's net assets
(a)
297
Unrealized profit (Downstream only) (Step 1.d)
Gain or loss on extinguishment of bonds
Impairment loss on goodwill attributable to Parent
Net consolidation adjustments
Consolidated retained earnings
(12)
285
₱7,245
(a)
ABC’s share in the net change in XYZ’s net assets is computed as:
Net change in XYZ’s net assets (in wons) (Step 2)
(b)
Add back: Prior period adjustment of subsidiary
Adjusted net change in XYZ’s net assets (in wons)
Multiply by: Controlling interest
ABC’s share in the change in XYZ’s net assets (in wons)
Divide by: Average exchange rate
ABC’s share in the net change in XYZ’s net assets (in pesos)
3,060
400
3,460
60%
2,076
7
₱297
(b)
The prior period adjustment of 400M research costs (Step 1.a1) is
added back because the parent shall share only in the net change in
the subsidiary’s net assets after the acquisition date. The parent shall
not share in the changes in the subsidiary’s net assets prior to the
acquisition date.
Step 5A: Translation gain (loss)
The translation gain (loss) recognized in other comprehensive income
is computed as follows:
Share in translation
difference
ABC Co. XYZ, Inc.
(60%)
(40%)
1) Translation of XYZ's opening net assets
Net assets, Jan. 1 - at opening rate
(8,000 ÷ 5)
Net assets, Jan. 1 - at closing rate
(8,000 ÷ 8)
Decrease in net assets - loss
Cumulative translation difference – Jan. 1
1,600
1,000
(600)
(360)
(240)
-
-
-
2) Translation of changes in XYZ’s net assets during the period
(a)
Profit - at average rate
894
(6,260 ÷ 7)
(a)
Profit - at closing rate
783
(6,260 ÷ 8)
Increase in profit – gain
(111)
(67)
3) Translation of goodwill
Goodwill, Dec. 31 - at opening rate
Goodwill, Dec. 31 - at closing rate
(4,000 ÷ 5)
(4,000 ÷ 8)
800
500
(44)
(300)
(300)
(600 ÷ 7)
(86)
(52)
5) Translation of FOREX on loan payable
FOREX loss at average rate
(600 ÷ 7)
FOREX loss at closing rate
(600 ÷ 8)
Decrease in loss – gain
(86)
(75)
11
7
Increase in goodwill - gain
4) FOREX loss on loan payable
(Step 1.e)
Total translation loss – OCI
(1,086)
a
(772)
The profit is computed as follows:
Profit for the year before adjustments (in drams)
Research costs (Correcting entry #1) (Step 1.a1)
FOREX loss on trade payable (Correcting entry #3) (Step 1.d)
Adjusted profit before FVA (in drams)
Depreciation of FVA, in total (Step b & c)
Adjusted profit after FVA (in drams)
-
(34)
4
(314)
6,400
400
(60)
6,740
(480)
6,260
Correcting entry #2 does not affect the reported profit because it is
just a reclassification entry (i.e., from extraordinary item to impairment
loss).
The FOREX loss on the loan payable is not included in the
computation of profit above because it will be presented in OCI.
Additional notes:
 The total translation adjustment to goodwill is attributed only to
ABC because goodwill is measured at proportionate share and
therefore no goodwill is attributed to NCI.
 The translation differences on the loan payable are included in
the computations above because the loan payable forms part of
ABC's net investment in XYZ. (See discussion in Step 1.e)
Step 6: Consolidated profit or loss and comprehensive income
Profits before adjustments
Consolidation adjustments:
Unrealized profits (Step 1.d)
Dividend income (Step 1.f)
Net consolidation adjustments
Profits before FVA
(b)
Depreciation of FVA
Impairment of goodwill
Consolidated profit
Other comprehensive income:
Parent
2,800
(12)
(240)
(252)
2,548
(41)
2,507
Subsidiary
(a)
963
N/A
963
(27)
937
Consolidated
3,763
(12)
(240)
(252)
3,511
(68)
3,443
Translation loss - (Step 5A)
Consolidated comp. income
2,507
937
(1,086)
2,357
(a)
The profit is computed as follows:
Adjusted profit before FVA (in drams) (see computation above)
Divide by: Average rate
Adjusted profit before FVA (in pesos)
(b)
6,740
7
963
The shares in the depreciation of FVA are computed as follows:
Annual depreciation of FVA (in drams) (Step 1.b&c)
Divide by: Average rate
Annual depreciation of FVA (in pesos)
Allocation:
Share of ABC (68 x 60%)
Share of NCI (68 x 40%)
As allocated
480
7
68
₱41
27
₱68
Step 7: P/L and CI attributable to owners of parent and NCI
Owners
Consoliof parent
NCI
dated
ABC's profit before FVA - (Step 6)
2,548
N/A
2,548
(c)
Share in XYZ’s profit before FVA
578
385
963
Depreciation of FVA
(41)
(27)
(68)
Impairment of goodwill
Profit of loss
3,085
358
3,443
Other comprehensive income:
Share in translation gain - (Step 5A)
(772)
(314)
(1,086)
Comprehensive income
2,313
44
2,357
(c)
Shares in XYZ’s profit before FVA (Step 6): (₱963 x 60%); (₱963 x 40%)
42. A (See Step 4)
43. C (See Step 5)
44. A (See Step 5A)
45. A (See Step 6)
46. C (See Step 7)
47. B
Solution:
Aug. Cash (Consideration received)
1 , Investment account (Investment retained)
20x1 NCI
Net identifiable assets of former subsidiary
Goodwill
Gain on disposal (squeeze)
500,000
82,400
412,000
12,000
158,400
48. C
Solution:
Net monetary items, end.–Historical (184K + 296K - 120K)
Less: Net monetary items, end. – Restated:
Net monetary assets - Jan. 1 (restated)
(160,000 given x 140/120)
186,667
Changes in net monetary items during the year:
Sales (restated) – see worksheet above
537,600
Purchases (restated) – see worksheet above
(134,400)
Other operating expenses (restated)
(179,200)
Purchasing power loss
49. B
Solutions:
360,000
410,668
(50,668)
Cash
Accounts receivable
Inventory
Building
Accumulated depreciation
TOTAL ASSETS
Loan payable
Share capital
Retained earnings
Total equity
TOTAL LIABILITIES & EQUITY
Sales
Inventory, Jan. 1
Purchases
Total goods avail. for sale
Inventory, Dec. 31
Cost of sales
Gross profit
Depreciation
Other operating expenses
a
Purchasing power loss
PROFIT FOR THE YEAR
Historical
184,000
296,000
160,000
400,000
(80,000)
960,000
Fraction
N/A
N/A
140/125
140/100
140/100
120,000
N/A
400,000 140/100
440,000 (squeeze)
840,000
960,000
480,000
240,000
120,000
360,000
(160,000)
200,000
280,000
(40,000)
(160,000)
80,000
140/125
140/110
140/125
140/125
140/100
140/125
Restated (in current AOA) Closing rate
184,000
0.5
296,000
0.5
179,200
0.5
560,000
0.5
(112,000)
0.5
1,107,200
Translated (in Pesos)
92,000
148,000
89,600
280,000
(56,000)
553,600
120,000
560,000
427,200
987,200
1,107,200
0.5
0.5
0.5
60,000
280,000
213,600
493,600
553,600
537,600
305,455
134,400
439,855
(179,200)
260,655
276,945
(56,000)
(179,200)
(50,668)
(8,923)
0.5
268,800
0.5
0.5
0.5
0.5
0.5
130,328
138,472
(28,000)
(89,600)
(25,334)
(4,462)
50. D (See worksheet above)
51. A (See worksheet above)