Chapter 6

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)

Peso P8,000
2. FCU = = = $200; or
Direct Exchange Rate P40.00

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

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

Problem II
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 III
1. December 1, 20x4 (Transaction date):
Accounts receivable ($60,000 x P40.00)……………………………… 2,400,000
Sales 2,400,000

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 IV
a. Exchange rates:
Arrival Date Departure Date

1 Singapore dollar = P33.00 1 Singapore Dollar = P32.50

Direct
Exchange Rate (P33,000 / 1,000 Singapore (P3,250 / 100 Singapore
dollars) dollars)

P1.00 = .03 Singapore dollars P1.00 = .03 Singapore dollars

Indirect
Exchange Rate (1,000 Singapore dollars / (100 Singapore dollars /
P33,000) 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.

Problem V
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 L G G L
LCU
Exporting Peso NA NA NA NA
Exporting LCU G L L G

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
Less: Foreign currency transaction gain – equity investment
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 c u r r e n t / 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
Collect receivable.

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)

Accounts Payable (FC1) 9,000

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)

Foreign Currency Units (FC2) 11,000

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 Balance Sheet Settlement

Date Date Date
Direct
Exchange P.70 P.66 P.68
Rate

2. December 1, 20x4
Inventory (or Purchases) 10,500
Accounts Payable (FC) 10,500
P10,500 = FC 15,000 x P.70

December 31, 20x4

Accounts Payable (FC) 600
Foreign Currency Transaction Gain 600
Revalue foreign currency payable to
equivalent peso value:
P 9,900 = FC 15,000 x P.66 Dec. 31 spot rate
-10,500 = FC 15,000 x P.70 Dec. 1 spot rate
P 600 = FC 15,000 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 = FC 15,000 x P.68

Accounts Payable (FC)

(FC 15,000 x P.70) 12/1/x4 10,500
AJE 12/31/x4 600
(FC 15,000 x P.66) Bal 12/31/x4 9,900
AJE 1/15/x5 300
(FC 15,000 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
Foreign Currency Transaction Gain 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

Accounts Payable (FC2) 5,200

Foreign Currency Transaction Gain 5,200
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

Foreign Currency Transaction Gain 1,900
Adjust receivable denominated in FC1
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
Foreign Currency Units (FC1) 85,500
Accounts Receivable (FC1) 85,500
Accounts Receivable (P) 164,000
Collect all accounts receivable.
 3. Accounts Payable (FC2) 6,300
Foreign Currency Transaction Gain 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

Accounts Payable (FC2) 163,800
Foreign Currency Units (FC2) 163,800
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

6. 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.

Problem X
Foreign Currency Foreign Currency
Accounts Transaction Exchange Transaction
Receivable Accounts Payable Loss 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)