Acctg Solution Chapter 19

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Chapter 19 Problem I

1. Indirect Exchange Rates Philippine Viewpoint:

1 $ = P40; 1 Peso = $0.025 ($1/P40)

1 Singapore dollar = P32.00; 1 Peso = 0.03125 Singapore (1 Singapore Dollar/P32) 2. FCU = Peso = P8,000 = $200; or

Direct Exchange Rate P40.00

= P8,000 x $1/P40 = $200

3. 4,000 Singapore dollars x P32 = P128,000 Problem II

a. Exchange rates:

Arrival Date Departure Date

Direct Exchange Rate 1 Singapore dollar = P33.00 (P33,000 / 1,000 Singapore dollars) 1 Singapore Dollar = P32.50 (P3,250 / 100 Singapore dollars) Indirect Exchange Rate P1.00 = .03 Singapore dollars (1,000 Singapore dollars / P33,000) P1.00 = .03 Singapore dollars (100 Singapore dollars / P3,250))

2. The direct exchange rate has decreased. This means that the peso has strengthened during Mr. Alt's visit. For example, upon arrival, Mr. Alt had to pay P33 per each dollar. Upon departure, however, each dollar is worth just P32.50. This means that the relative value of the peso has increased or, alternatively, the value of the dollar has decreased.

3. The Philippine peso equivalent values for the 100 Singapore dollars are: Arrival date

100 dollars x P33.00 = P3,300 Departure date

100 dollars x P32.50 = 3,250 Foreign Currency Transaction Loss P 50

Mr. Alt held dollars for a time in which the dollars was weakening against the peso. Thus, Mr. Alt experienced a loss by holding the weaker currency.

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Problem III

1. If the direct exchange rate increases, the peso weakens relative to the foreign currency unit. If the indirect exchange rate increases, the peso strengthens relative to the foreign currency unit.

2.

Settlement Direct Exchange Rate Indirect Exchange Rate

Transaction Currency Increases Decreases Increases Decreases

Importing Peso NA NA NA NA Importing LCU L G G L Exporting Peso NA NA NA NA Exporting LCU G L L G Problem IV 1.

December 1, 20x4 (Transaction date):

Purchases……….. 973,200

Accounts payable ($24,000 x P40.55)……… 973,200 December 31, 20x4 (Balance sheet date):

Foreign currency transaction loss….……….. 6,000

Accounts payable [$24,000 x (P40.80 – P40.55)]……… 6,000 Accounts payable valued at 12/31 Balance Sheet

($24,000 x P40.80)……… P979,200

Accounts payable valued at 12/1 Date of Transaction

($24,000 x P40.55)……… 973,200

Adjustment to accounts payable needed……….. P 6,000 March 1, 20x5 (Settlement date):

Accounts payable……… 979,200

Foreign currency transaction gain [$24,000 x (P40.80 – P40.65)] 3,600

Cash ($24,000 x P40.65)………. 975,600

2. a.

a.1. None – transaction date (December 1, 20x4) a.2. P6,000 loss

a.3. P3,600 gain (March 1, 20x5) b.

b.1. P979,200 – spot rate on the balance sheet date or current rate on the balance sheet b.2. P973,200 – spot rate on the transaction date or historical rate on the balance sheet

date. Problem V

1. December 1, 20x4 (Transaction date):

Accounts receivable ($60,000 x P40.00)……… 2,400,000

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December 31, 20x4 (Balance sheet date):

Accounts receivable……….. 42,000

Foreign currency transaction gain [$60,000 x (P40.70 – P40.00)] 42,000 Accounts receivable valued at 12/31 Balance Sheet

($60,000 x P40.70)……… P2,442,000

Accounts receivable valued at 12/1 Date of Transaction

($60,000 x P40.00)……… 2,400,000

Adjustment to accounts receivable needed……….. P 42,000 March 1, 20x5 (Settlement date):

Cash ($60,000 x P40,60)……….. 2,436,000

Foreign currency transaction loss……… 6,000

Accounts receivable ($60,000 x P40.70)………. 2,442,000

2. a.

a.1. None – transaction date a.2. P42,000 gain

a.3. P6,000 loss (March 1, 20x5) b.

b.1. P2,442,000 – spot rate on the balance sheet date or current rate on the balance sheet b.2. P973,200 – spot rate on the transaction date or historical rate on the balance sheet

date. Problem VI

The entries to record these transactions and the effects of changes in exchange rates are

as follows:

November 1, 20x4 (Transaction date):

Equity investment (FVTPL)/Financial Asset ……… 3,840,000

Cash 3,840,000

To record the purchase of shares in Pineapple Computers at a cost of $96,000 at the exchange rate of P40.

December 10, 20x4 (Transaction date):

Equipment ……… 636,000

Cash 636,000

To record the purchase of equipment costing 12,000 euros at the exchange rate of P53.

December 31, 20x4 (Balance sheet date):

Equity investment (FVTPL)/Financial Asset ……… 1,020,000

Unrealized gain in fair value of equity investment (financial asset) 1,020,000 To record gain in fair value of Pineapple Computer’s share.

12/31/x4: Revalued Investment and translated at the rate on the date of revaluation (closing/current rate):

(1,200 units x $100 x P40.50)………. P4,860,000 11/1/x4: Investment, cost (1,200 units x $80 x P40.00) 3,840,000

Unrealized gain on equity investment P1,020,000

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11/1/20x4: Date of transaction (1,200 units x $80 x P40).. P3,840,000

Less: 12/31/20x4: B/S Date (1,200 units x $80 x P40.50)…. 3,888,000 48,000 Other unrealized gain in the fair value of equity investment... P 972,000 Foreign currency transaction loss….……….. 19,200

Accounts payable [$96,000 x (P53.20 – P53)]……… 19,200 To record exchange loss on accounts payable in euros.

Accounts payable valued at 12/31 Balance Sheet

(1,200 x $80 x P53.20)……… 5,107,200

Accounts payable valued at 12/1 Date of Transaction

(1,200 x $80 x P53.00)……… 5,088,000

Adjustment to accounts payable needed……….. P 19,200 February 3, 20x5 (Settlement date):

Accounts payable……… 5,107,200

Foreign currency transaction loss [$96,000 x (P53.80 – P53.20)] 57,600

Cash ($96,000 x P53.80)………. 5,164,800

To record exchange loss on accounts payable in euros and settlement of accounts payable in euros at the spot rate of P53.80.

Note the following:

 The investment in Pineapple Computers, Inc shares is a non-monetary item that is carried at fair value as it is classified as equity investment through profit or loss (or a financial asset – FVTPL refer PFRS 9). The investment is revalued and translated at the rate on the date of revaluation, that is, December 31, 20x4.

 The equipment is translated at the spot rate at the date of purchase and, being a non-monetary item, is carried at cost. It is not adjusted for the change in the exchange rate at balance sheet date. The accounts payable in euros is a monetary item and is remeasured using the current/closing rate at balance sheet date. The exchange loss is expensed off to the income statement

Problem VII

1. May 1 Inventory (or Purchases) 8,400

Accounts Payable 8,400

Foreign purchase denominated in pesos

June 20 Accounts Payable 8,400

Cash 8,400

Settle payable.

July 1 Accounts Receivable 10,000

Sales 10,000

Foreign sale denominated in pesos

August 10 Cash 10,000

Accounts Receivable 10,000

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2. May 1 Inventory (or Purchases) 8,400

Accounts Payable (FC1) 8,400

Foreign purchase denominated in yen: P8,400 / P.0070 = FC1 1,200,000

June 20 Foreign Currency Transaction Loss 600

Accounts Payable (FC1) 600

Revalue foreign currency payable to peso equivalent value:

P9,000 = FC1 1,200,000 x P.0075 June 20 spot rate - 8,400 = FC1 1,200,000 x P.0070 May 1 spot rate P 600 = FC1 1,200,000 x (P.0075 - P.0070)

Foreign Currency Units (FC1) 9,000

Settle payable denominated in FC1.

July 1 Accounts Receivable (FC2) 10,000

Sales 10,000

Foreign sale denominated in foreign currency 2 (FC 2)

FC3: P10,000 / P.20 = FC2 50,000

August 10 Accounts Receivable (FC2) 1,000

Foreign Currency Transaction Gain 1,000

Revalue foreign currency receivable to U.S. dollar equivalent value:

P 11,000 = FC2 50,000 x P.22 Aug. 10 spot rate - 10,000 = FC2 50,000 x P.20 July 1 spot rate P 1,000 = FC2 50,000 x (P.22 - P.20)

Accounts Receivable (FC2 11,000

Receive FC 2 in settlement of receivable Problem VIII

1. Denominated in FC

RR Imports reports in Philippine pesos:

12/1/x4 12/31/x4 1/15/x5

Transaction

Date Balance Sheet Date Settlement Date

Direct Exchange

Rate P.70 P.66 P.68

2. December 1, 20x4

Inventory (or Purchases) 10,500

Accounts Payable (FC) 10,500

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December 31, 20x4

Accounts Payable (FC) 600

Foreign Currency Transaction Gain 600

Revalue foreign currency payable to equivalent peso value:

P 9,900 = FC15,000 x P.66 Dec. 31 spot rate -10,500 = FC 15,000 x P.70 Dec. 1 spot rate P 600 = FC15,000 x (P.66 - P.70)

January 15, 20x5

Foreign Currency Transaction Loss 300

Accounts Payable (FC) 300

Revalue payable to current peso equivalent P10,200 = FC 15,000 x P.68 Jan. 15, 20x5, value - 9,900 = FC 15,000 x P.66 Dec. 31, 20x4, value P 300 = FC 15,000 x (P.68 - P.66)

Accounts Payable (FC) 10,200

Foreign Currency Units (FC) 10,200

P10,200 = FC15,000 x P.68 Accounts Payable (FC) (FC15,000 x P.70) 12/1/x4 10,500 AJE 12/31/x4 600 (FC15,000 x P.66) Bal 12/31/x4 9,900 AJE 1/15/x5 300 (FC15,000 x P.68) Bal 1/15/ x5 10,200 1/15/x5 Settlement 10,200 Bal 1/16/x5 -0- Problem IX 1. December 31, 20x6 Accounts Receivable (FC1) 10,000

Adjust receivable denominated in FC1 to current peso equivalent

and recognize exchange gain:

P83,600 = FC475,000 x P.176 Dec. 31 spot rate - 73,600 = Preadjusted Dec. 31, 20x6, value P10,000

Adjust payable denominated in foreign currency to current peso equivalent and recognize exchange gain:

P175,300 = Preadjusted Dec. 31, 20x6, value

- 170,100 = FC2 21,000,000 x P.0081, Dec. 31 spot rate P 5,200

2. Accounts Receivable (FC1) 1,900

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to equivalent peso value on settlement date:

P85,500 = FC1 475,000 x P.180 20x7 collection date value - 83,600 = FC1 475,000 x P.176 Dec. 31, 20x6, spot rate P 1,900 = FC1 475,000 x (P.180 - P.176)

Cash 164,000

Accounts Receivable (FC1) 85,500

Accounts Receivable (P) 164,000

Collect all accounts receivable.

3. Accounts Payable (FC2) 6,300

Adjust payable to equivalent peso value on settlement date:

P163,800 = FC2 21,000,000 x P.0078 20x7 payment date value - 170,100 = FC2 21,000,000 x P.0081 Dec. 31, 20x6, spot rate P 6,300 = FC2 21,000,000 x (P.0078 - P.0081)

Accounts Payable (P) 86,000

Cash 86,000

Payment of all accounts payable. 4. Transaction gain on FC: December 31, 20x6 P10,000 gain December 31, 20x7 1,900 gain Overall P11,900 gain 5. Transaction gain on FC2: December 31, 20x6 P 5,200 gain December 31, 20x7 6,300 gain Overall P11,500 gain

5. Overall foreign currency transactions gain:

Gain on FC1 transaction P11,900

Gain on FC2 transaction 11,500

P23,400

CDL could have hedged its exposed position. The exposed positions are only those denominated in foreign currency units. The accounts receivable denominated in FC1 could be hedged by selling FC1 in the forward market, thereby locking in the value of the FC1. The accounts payable denominated in FC2 could be hedged by buying FC2 in the forward market, thereby locking in the value of the FC2.

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Problem X

Accounts

Receivable Payable Accounts

Foreign Currency Transaction Exchange Loss Foreign Currency Transaction Exchange Gain Case 1 NA P16,000(a) NA P2,000(b) Case 2 P38,000(c) NA NA P2,000(d) Case 3 NA P27,000(e) P3,000(f) NA Case 4 P6,250(g) NA P1,250(h) NA (a) LCU 40,000 x P.40 (b) LCU 40,000 x (P.40 - P.45) (c) LCU 20,000 x P1.90 (d) LCU 20,000 x (P1.90 - P1.80) (e) LCU 30,000 x P.90 (f) LCU 30,000 x (P.90 - P.80) (g) LCU 2,500,000 x P.0025 (h) LCU 2,500,000 x (P.0025 - P.003)

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Multiple Choice Problems 1. c C$1 / P.90 (C$1.11 = P1.00) 2. d 20x4 20x5 P.4895 x FC30,000 P14,685 P.4845 x FC30,000 P14,535 P.4845 x FC30,000 14,535 P.4945 x FC30,000 14,835 Gain P 150 Loss P (300) 3. b January 15

Foreign Currency Units (LCU) 300,000

Exchange Loss 15,000

Accounts Receivable (LCU) 315,000

Collect foreign currency receivable and recognize foreign currency transaction loss for changes in exchange rates:

P300,000 = (LCU 900,000 / LCU 3) Jan. 15 value - 315,000 = Dec. 31 Peso equivalent

P 15,000 Foreign currency transaction loss 4. d P120,000 = July 1, 20x4, Peso equivalent value

P140,000 = December 31, 20x4, Peso equivalent value (LCU 840,000 / P140,000) = LCU 6 / P1 -105,000 = July 1, 20x5, Peso equivalent value

(LCU 840,000 / 8) = P105,000 P(35,000) Foreign currency transaction loss 5. d P280,000 = July 1, 20x5, Peso equivalent value

-240,000 = December 31, 20x4, Peso equivalent value P 40,000 Foreign currency transaction loss

6. c P4,000

Accounts Payable (FCU)

(200,000 x P.4875) 12/10/x4 97,500 AJE 4,000

(200,000 x P.4675) 12/31/x4 93,500

Accounts Payable (FCU) 4,000

Foreign Exchange Gain 4,000

7. d P27,000 = P6,000 + P20,000 + P1,000

1/20/x4 90,000

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3/20/x4 96,000

Foreign Exchange Loss 6,000

Accounts Payable (FCU) 6,000

Notes Payable (FCU)

7/01/x4 500,000

AJE 20,000

12/31/x4 520,000

Notes Payable (FCU) 20,000

Interest Payable (FCU)

(FCU500,000 x .10 x 1/2 year) 25,000

AJE 1,000

12/3/x4 26,000

Interest expense 25,000

Interest Payable (FCU) 25,000

Interest Payable (FCU) 1,000

8. c P5,000

Accounts Receivable (FCU) 10/15/x4 100,000

AJE 5,000

11/16/x4 105,000 Settlement 11/16/x4 105,000

Accounts Receivable (FCU) 5,000

Note: The receivable is recorded on October 15, 20x4, when the goods were shipped, not on September 1, 20x4, when the order was received.

9. b P1,000

(10,000 x P.60) 4/08/x4 6,000 x4 AJE 500 (10,000 x P.55) 12/31/x4 5,500 X5 AJE 1,000 (10,000 x P.45) 3/01/x5 4,500 Settlement 4,500 Bal. -0-

X5 AJE Accounts Payable (FCU) 1,000

10. b P9,000 = 300,000 FCUs x (P1.65 - P1.62). The foreign currency transaction gain is computed using spot rates on the transaction date (November 30, 20x4) and the balance sheet date (December 31, 20x4). The forward exchange rates are not

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used because the transaction was not hedged. 11. b

Cash collected (spot rate date of settlement): 900,000 LCU x P.3333 = P300,000 12. d

20x4: (P.5395 – P.5445) loss x 70,000 FCU = P350 loss 20x5: (P.5445 - .P5495) loss x 70,000 FCU = P350 loss 13. c –

Date of transaction (7/7) P 2.08

Balance sheet date (8/31) 2.05

Foreign exchange currency gain per FCU P .03

Multiplied by: No. of FCU 350,000

Foreign exchange currency gain P 10,500

14. b

15. b – The value of the asset acquired should be the spot rate on the date of transaction, i.e. P-80. Therefore, the final recorded value of the electric generator should be P40,000 (P.80 x 50,000 FCs)

16. a

Date of transaction P .75

Date of settlement .80

17. d

Date of transaction (12/15) P .60

Balance sheet date (12/31) .65

18. b

Date of transaction (11/30) P 1 .65

19. b

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20. a

Date of arrival (P1,000 / 480,000 FC) P .00208

Date of departure (P100/50,000 FC) .00200

Foreign exchange currency loss per FCU P .00008

Foreign exchange currency loss P 4

21. b

Foreign exchange currency gain per LCU P .10

Multiplied by: No. of LCU 5,000

Foreign exchange currency gain P 500

22. d

Date of transaction (11/2) P 1. 08

Foreign exchange currency gain per LCU P .02

Multiplied by: No. of LCU 23,000

23. a

Date of transaction (9/3) : P17,000 / P.85 = 20,000 FC P . 85

Date of settlement (10/10) .90

Foreign exchange currency loss per FC P .05

Multiplied by: No. of FC 20,000

Foreign exchange currency loss P 1,000

24. b

Date of transaction (3/1) : P31,000 / P.31 = 100,000 FC P . 31

Foreign exchange currency gain per FC P .03

25. a

Balance sheet date (12/31) .262

26. d

Balance sheet date (12/31) P .262

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27. c

Foreign exchange currency gain (No. 25) P 300

Foreign exchange currency loss (No. 26) _ 200

Overall gain , net P 100

or,

28. c

9/5: Original forward rate or 90-day forward rate P .1850 12/2: Date of expiration of the contract (assumed) since the

term “spot rate” was used .1865

It should be noted that since, the forward contract was not designated as a hedge, offsetting of gain or loss on the hedged item and hedging instrument is not allowed. Therefore, the foreign exchange gain due to revaluation of receivable from foreign currency receivable arising from forward contract will be reported separately, instead of being netted against the exchanges loss of P300 [(P.1865 – P.1835) x 100,000 FCs.]

29. c – the question is related to purchase transaction or exposed liability, therefore the payment of the liability is equivalent to the spot rate on the date of settlement.

30. b 20x4

Date of transaction (12/1/20x4) P .0095

Balance sheet date (12/31/20x4) .0096

Multiplied by: No. of FC 1,000,000

Foreign exchange currency loss P 100

20x5

Balance sheet date (12/31/20x4) P .0096

Date of settlement (1/10/20x5) .0094

31. c

Balance sheet date (12/31/20x4) P125,000

Date of settlement (7/1/20x5) 140,000

32. b – any gain or loss on foreign currency should be considered ordinary. 33. d

1/1: Original forward rate or 60-day forward rate P .940 3/1: Date of expiration of the contract .930

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It should be noted that since, the forward contract was not designated as a hedge, offsetting of gain or loss on the hedged item and hedging instrument is not allowed. Therefore, the foreign exchange gain due to revaluation of payable to foreign exchange dealer arising from forward contract will be reported separately, instead of being netted against the exchanges loss of P1,500 [(P.945 – P.93) x 100,000 FCs.]

34. c

It was assumed that the forward contract was designated as a hedging instrument. Hedged Item: Exposed Asset (Receivable)

1/1: Date of transaction – spot rate P .945

12/31: Balance sheet date .930

Foreign exchange currency loss P 1,500 P 1,500 Forward Contract/Hedging Instrument:

1/1: Original forward rate or 60-day forward rate P .940 3/1: Date of expiration of the contract .930 Foreign exchange currency gain per FC P .010

Foreign exchange currency gain P 1,000 1,000

Net loss P 500

35. d

It was stated in the requirement that the forward contract will not be used, therefore, only the loss on hedged item will be recognized.

Hedged Item: Exposed Asset (Receivable)

1/1: Date of transaction – spot rate P .945

12/31: Balance sheet date .930

36. d

Date of transaction (4/8) : P1 / .65 FC (direct quote) P 1.54 Date of settlement (5/8): P1/ .70 FC (direct quote) 1.43

37. d – the amount of sales should be the spot rate on the date of transaction (or the balance sheet date - historical rate). I.e., P1.7241 x 10,000 FCs = P17,241.

38. e

1/1: Date of transaction – spot rate P 1.7241

12/31: Balance sheet date 1.8182

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39. b

Balance sheet date (12/31/20x4) P 1.8182

Date of settlement (1/30/20x5) 1.6666

40. a – since accounts payable is an exposed account meaning their value will fluctuate based on the spot exchange rates, the value of the accounts payable should be the value on May 8, i.e., the spot rate of P1.25 (P.15 x 2,000,000 FCs = P2,500,000).

41. c

5/8: Date of transaction – spot rate P 1.25

5/31: Balance sheet date 1.26

Foreign exchange currency loss per FC P 0.01

42. e – in a two-transaction approach, the recognition of foreign exchange gain or loss is separate from the settlement, therefore, the amount of accounts payable to be settled should be the spot rate on the settlement date, i.e., P1.20 (P1.20 x 2,000,000 FCs = P2,400,000) 43. a

44. d

4/8/20x3: Date of transaction P 97,000

12/31/20x3: Balance sheet date 103,000

45. d

Theories

1. False 6. True 11. True 16. d 21. c 26. d 31. c 36 b

2. False 7. False 12. D 17. d 22. b 27. b 32. d 37. d

3. True 8. True 13. C 18. c 23. a 28. d 33. d 38. c

4. False 9. False 14. C 19. b 24. d 29. - 34. b 39. a

5. True 10, True 15. B 20. a 25. b 30. a 35. b

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