Accountancy Department

ADVANCED FINANCIAL ACCOUNTING II

5 QUIZZER

Notes

Objective
10 The objective of PAS 21 is to prescribe how to include foreign currency
transactions and foreign operations in the financial statements of an
entity and how to translate financial statements into a presentation
currency. The principal issues are which exchange rate(s) to use and
how to report the effects of changes in exchange rates in the financial
15 statements.

Key definitions

Functional currency: the currency of the primary economic

20 environment in which the entity operates. (The term 'functional
currency' was used in the 2003 revision of PAS 21 in place of
'measurement currency' but with essentially the same meaning.)

Presentation currency: the currency in which financial statements

25 are presented.

Exchange difference: the difference resulting from translating a

given number of units of one currency into another currency at
different exchange rates.
30
Foreign operation: a subsidiary, associate, joint venture, or branch
whose activities are based in a country or currency other than that of
the reporting entity.

35 Basic steps for translating foreign currency amounts into the

functional currency
Steps apply to a stand-alone entity, an entity with foreign operations
(such as a parent with foreign subsidiaries), or a foreign operation
(such as a foreign subsidiary or branch).
40 1. the reporting entity determines its functional currency
2. the entity translates all foreign currency items into its functional
currency
3. the entity reports the effects of such translation in accordance
with paragraphs 20-37 [reporting foreign currency transactions in the
45 functional currency] andPage
50 [reporting
1 of 9
the tax effects of exchange
differences].

Foreign currency transactions

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 A foreign currency transaction should be recorded initially at the rate of
exchange at the date of the transaction (use of averages is permitted if
they are a reasonable approximation of actual).

5 At each subsequent balance sheet date:

foreign currency monetary amounts should be reported using the
closing rate
non-monetary items carried at historical cost should be reported
using the exchange rate at the date of the transaction
10 non-monetary items carried at fair value should be reported at the
rate that existed when the fair values were determined

Exchange differences arising when monetary items are settled or when

monetary items are translated at rates different from those at which
15 they were translated when initially recognised or in previous financial
statements are reported in profit or loss in the period, with one
exception. The exception is that exchange differences arising on
monetary items that form part of the reporting entity's net investment
in a foreign operation are recognised, in the consolidated financial
20 statements that include the foreign operation, in other comprehensive
income; they will be recognised in profit or loss on disposal of the net
investment.

As regards a monetary item that forms part of an entity's investment in

25 a foreign operation, the accounting treatment in consolidated financial
statements should not be dependent on the currency of the monetary
item. Also, the accounting should not depend on which entity within
the group conducts a transaction with the foreign operation. If a gain or
loss on a non-monetary item is recognised in other comprehensive
30 income (for example, a property revaluation under PAS 16), any foreign
exchange component of that gain or loss is also recognised in other
comprehensive income.

Translation from the functional currency to the presentation

35 currency
The results and financial position of an entity whose functional
currency is not the currency of a hyperinflationary economy are
translated into a different presentation currency using the following
procedures:
40 assets and liabilities for each balance sheet presented (including
comparatives) are translated at the closing rate at the date of that
balance sheet. This would include any goodwill arising on the
acquisition of a foreign operation and any fair value adjustments to
the carrying amounts of assets and liabilities arising on the
45 Page 2operation
acquisition of that foreign of 9 are treated as part of the assets
and liabilities of the foreign operation;

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 income and expenses for each income statement (including
comparatives) are translated at exchange rates at the dates of the
transactions; and
all resulting exchange differences are recognised in other
5 comprehensive income.

Special rules apply for translating the results and financial position of
an entity whose functional currency is the currency of a
hyperinflationary economy into a different presentation currency.
10
Where the foreign entity reports in the currency of a hyperinflationary
economy, the financial statements of the foreign entity should be
restated as required by PAS 29 Financial Reporting in Hyperinflationary
Economies, before translation into the reporting currency.
15
The requirements of PAS 21 regarding transactions and translation of
financial statements should be strictly applied in the changeover of the
national currencies of participating Member States of the European
Union to the Euro monetary assets and liabilities should continue to
20 be translated the closing rate, cumulative exchange differences should
remain in equity and exchange differences resulting from the
translation of liabilities denominated in participating currencies should
not be included in the carrying amount of related assets.

25 Disposal of a foreign operation

When a foreign operation is disposed of, the cumulative amount of the
exchange differences recognised in other comprehensive income and
accumulated in the separate component of equity relating to that
foreign operation shall be recognised in profit or loss when the gain or
30 loss on disposal is recognised.

Convenience translations
Sometimes, an entity displays its financial statements or other
financial information in a currency that is different from either its
35 functional currency or its presentation currency simply by translating
all amounts at end-of-period exchange rates. This is sometimes called
a convenience translation. A result of making a convenience
translation is that the resulting financial information does not comply
with all IFRS, particularly PAS 21. In this case, the following disclosures
40 are required: [PAS 21.57]
Clearly identify the information as supplementary information to
distinguish it from the information that complies with IFRS
Disclose the currency in which the supplementary information is
displayed
45 Disclose the entity's functional
Page 3 of currency
9 and the method of translation
used to determine the supplementary information.

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 End
5

10

15

20
Problems

Problem 1. On November 10, 2015, DBM Company, a Philippine

Company ordered merchandise from UK Company for 79,500 pounds.
25 The merchandise was delivered on December 20, 2015. The invoice
was dated December 6, 2015, the shipping date (FOB shipping point).
DBM Company paid the invoice on January 30, 2016.

The spot rates for a pound on the respective dates were:

30
November 10, 2015 P66.90
December 6, 2015 P66.15
December 20, 2015 P65.75
December 31, 2015 P62.35
35 January 30, 2016 P63.15

What amount will affect profit or loss in 2015?

A. P302,100 gain
B. P63,600 loss
40 C. P270,300 gain
D. P361,725 gain

Problem 2. On October 9, 2015, GBC Company sold goods on account

45 to Britain Corporation for 125,800 pounds. The date of invoice is
October 29, 2015 and payment is due on January 30, 2016.

Exchange rates were as follows:

Buying rate Selling rate
50 October 09, 2015 P67.50 P69.20
October 29,2015 P68.70 P66.80
December 31, 2015 P64.10 P63.40
January 30, 2016 P62.40 P65.50

55
What amount will affect
Pageprofit
4 of 9 or loss in 2016?
A. P427,720 loss
B. P578,680 loss
C. P213,860 loss
60 D. P264,180 gain

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 Problem 3. X Trading purchase goods from Y, a company based in US
for 1,200,000 dollar ($). The exchange rate at this time is P1 = $12.5.
5 X pays 30 days later when the Prevailing exchange rate is P1 = $16.

How much is the foreign currency gain/loss on the books of X

and Y respective?
A. P21,000 gain; P21,000 loss
10 B. P21,000 gain; 0
C. P4,2000,000 loss; 0
D. P4,200,000 loss; P4,200,000 gain

15 Problem 4. Manila company purchased merchandise for 300,000

pounds from a vendor in London on November 30, 2022. Payment in
British pounds was due on January 30, 2023. The exchange rates for
the British pounds were as follows:

20 November 30, 2022 December 31, 2022

Sports rate $1.65 $1.62
30-day rate 1.64 1.59
60-day rate 1.63 1.56

25 In its December 31, 2022 income statement, what is the amount to be

reported by Manila Company as foreign exchange difference?
A. P9,000 gain
B. P3,367 loss
C. P3,367 gain
30 D. P9,000 loss

Problem 5. Given the following information for Australian dollars,

compute for the following independent cases below: The agreement is
to exchange currencies of different countries on a specified future date
35 at the specified rate. Option price is P20.60. The following direct
exchange rates were as follows:
10/02/15 10/25/15 11/02/15 12/01/15 12/31/15 1/30/16 2/28/16
3/31/16
Buy 20.70 20.85 20.70 20.50 20.40 20.30 20.15 20.10
40 Sell 20.95 21.10 22.40 20.30 25.25 29.35 29.50 29.70

150-day 120-day 90-day 60-day 30-days

Futures futures futures futures futures

45 March 31, 2016 23.40 22.70 25.85 26.50 29.40

Feb. 28, 2016 23.15 22.40 25.20 26.25 29.25
Jan.30, 2016 22.10 21.75 20.55 23.75 25.50
Dec. 31, 2015 21.30 Page 5 of22.80
9 20.20 21.40 25.30
Dec. 1, 2015 20.25 23.15 21.40 23.50 24.10
50 Nov. 2, 2015 20.40 24.10 22.85 24.15 23.30

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 Transaction 1. On October 25, 2015 compact company ordered
merchandise worth $975,000 From a company in Sydney, payable on
February 28, 2016 in Australian $. It was shipped on November 2, 2015
to hedge this foreign currency exposure, compact company bought
5 $975,000 on December 1, 2015 for delivery on January 30, 2016 under
a forward contact with BDO.
What amount will affect profit or loss regarding the derivative
asset on its settlement date in 2016?
A. P 3,948,750 C. 1,755,000
10 B. P 97,500 D. 5,958,750

As a result of all foregoing transactions, what amount will

affect current earnings on the financial statement date in
2015?
15 A. P(2,778.750) C. P1,775.000
B. P1,023,750 D. P292,500

Transaction 2. On October 2, 2015, flash company received an order

of merchandise from a company in Brisbane. It was invoiced and
20 shipped on October 25, 2015 to the customer. The price of $370,000 is
to be collected in Australian dollars on February 28, 2016. To hedge
this foreign currency expose, Flash Company sold $370,000 for
delivery on march 31, 2016 under a forward contract with BPI, which
was entered into by flash company on November 2, 2015.
25 What amount will be affect profit or loss regarding the hedging
instrument on the financial statement date in 2015?
A. P(166,500) C. P(55,500)
B. P92,500 D. P74,000
As a result of all foregoing transactions, what amount will
30 affect current earnings in 2016?
A. P(92,500) C. P(55,500)
B. P(166,500) D. P(37,000)

Problem 6. On October 1, 2015, Davao Philippines too delivery from

35 Ohio, USA firm of inventory costing $1,425,000. Payment is due on
January 30, 2016. Consequently, Davao Philippines paid an amount of
cash to acquire an at-the-money call option option.
Premium P19,625
Spot price at inception date is P44.40
40 Spot price at the balance sheet date is P44.423
The effective portionPage
of the
6 ofcontract
9 on January 30, 2016 amount to
P38, 475
The gain on the derivative instrument on January 30, 2016 using
the non-split accounting amount to P3,225

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 The Gain or loss on hedging instrument due to change in the
ineffective portion on 12/31/15; the gain or loss on hedging instrument
due to change in the effective portion on 12/31/16:
A. P17,150 ; P5,700
5 B. P17,150 ; P(5,700)
C. P(17,150) ; P5,700
D. P(17,150) ; P3,225

Problem 7. On December 1, 2022, Caloocan Corporation acquired

10 6,900 shares of Eastwood Company at a cost of P42 per share.
Caloocan classifies them as available-for-sale securities. On this same
date, Caloocan decides to hedge against a possible decline in the value
of the securities by purchasing, at a cost of P17,850, an at-the-money
put option to sell the 6,900 shares. The option expires on April 1, 2023.
15 The fair values of the investment and the options follow:
12/1/12 12/31/22 4/1/23

Eastwood Company shares: Per share P42 P39.75 P35.25

Put Option (6,900 shares)
20 Market value P23, 100 P46, 575

The gain/loss on option contract due to change in time value

on December 31, 2022 if split accounting is used in the
assessment of hedge effectiveness should be:
25 A. P15,525 gain
B. P10,275 gain
C. P10,275 loss
D. P15,525 loss

30 The 2023 net gain/loss in the hedging activity amounted to:

A. P7,575 loss
B. P23,475 gain
C. P7,575 gain
D. P23,475 loss
35

Problem 8. On May 1, 2015, GYM Co. anticipated the purchase of

245,000 units of merchandise from a foreign vendor. The purchase
would probably occur on September 25, 2015 and require the payment
40 of 4,375,000 foreign currencies (FC). On May 1, 2015, the company
purchased a call option to buy 4,375,000 FC at a strike price of 1FC =
P0.77. An option premium of P49,000 was paid. Changes in the value
will be excluded from the assessment of hedge effectiveness. For the
year ended 2015, the following rates are as follows:
45
May 1 May 31 June 30 September
25
Spot rate P0.75 P0.79 P0.81 P0.82
FV of call ? P103,25 P182,00 ?
option 0 7 of 9 0
Page
The gain (loss) on option contract that would affect/change (1)
equity and (2) earnings on June 30:
A. P175,000 ; (8,750)
B. P(175,000) ; (42,000)

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 C. P87,500 ; 8,750
D. P87,500 ; (8,750)

5 Problem 9. On October 1, 2015, HPT Philippines took delivery from

Thailand firm of inventory costing 2,850,000 baht. Payment is due on
January 30, 2016. Concurrently, Hunt Philippines paid P39,250 cash to
acquire an at-the-money call option for 2,850,000 baht. Strike price is
P15.40.
10
10-1-2015 12-31-2015 1-30-2016
Market price ? P15.423 P15.427
Fair value of call option ? P70,500 P76,950

15 The foreign exchange gain or loss on hedging instrument due

to change in the ineffective portion on December 31, 2015:
A. P31,250 gain C. P65,550 loss
B. P65,550 gain D. P34,300 loss

20 The foreign exchange gain or loss on hedging instrument due

to change in the effective portion on December 31, 2016:
A. P11,400 loss C. P11,400 gain
B. P6,450 gain D. P4,950 loss

25 The December 31, 2015 net foreign exchange gain or loss in

the hedging activity amounted to:
A. P34,300 loss C. P33,300 gain
B. P96,800 gain D. P96,800 loss

30 The foreign exchange gain or loss on hedging instrument in

2016 if changes in the time value will be included from the
assessment of hedge effectiveness:
A. P11,400 gain C. P4,950 loss
B. P4,950 gain D. P6,450 gain
35

Problem 10. On December 1, 2015, KRS Corporation acquired 11,500

shares of QCA Company at a cost of P48 per share. KRS classifies them
as available-for-sale securities. On this same date, KRS decides to
40 hedge against a possible decline in the value of the securities by
purchasing, at a cost of P29,750, an at-the-money put option to sell the
11,500 shares. The option expires on April 1, 2016. The fair value of
the investment and the option follow:

45 12-1-15 12-31-15 4-1-16

QCA Company shares:
Per share P48 P46.50 P43.50
Put Option (11,500 shares)
Market value P38,500 P51,750
50
The gain or loss on option contract due to change in time value
on December 31, 2015:
A. P8,500 gain C. P17,250 loss
B. P8,500 loss D. P17,250
Page 8 of 9gain
55
The gain or loss on option contract due to change in intrinsic
value in 2016:
A. P13,250 gain C. P13,250 loss

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 B. P34,500 loss D. P34,500 gain

The 2016 net gain or loss in the hedging activity amounted to:
A. P34,500 loss C. P34,500 gain
5 B. P21,250 loss D. P21,250 gain

The gain or loss on option contract on December 31, 2015:

A. P8,500 loss C. P8,750 gain
B. P17,250 gain D. P17,250 loss
10

15

End of Handouts

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