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CHAPTER 5: FOREIGN CURRENCY TRANSACTION/TRANSLATION

Part 1: Theory of Accounts

2. Under IAS 21, what is the initial measurement of foreign currency denominated transaction?
a. Both monetary and nonmonetary items are measurement initially at transaction or historical rate.
b. Monetary items are measured at closing rate while nonmonetary items are measured at transaction rate.
c. Monetary items are measured at transaction rate while nonmonetary items are measured at closing rate.
d. Both monetary and nonmonetary items are measurement initially at closing rate.

3. Under IAS 21, what is the subsequent measurement of nonmonetary items/

4. Under IAS 21, what is the subsequent measurement of monetary items?

5. Under IAS 21, what is the subsequent measurement of nonmonetary items subsequently measured at fair value?
a. Closing rate
b. Transaction rate
c. Exchange rate at the date when the fair value was determined
d. Average rate

6. IAS 21 provides that exchange differences/ gain (loss) arising on the settlement or translating foreign currency transaction shall be recognized
in
a. Profit or loss
b. Other comprehensive income
c. Share premium
d. Retained earnings

7. Which of the following items will result to foreign currency transaction gain/loss due to settlement or translation?
a. Foreign currency denominated income statement accounts such as revenue, income, expense or loss
b. Foreign currency denominated non-monetary assets such as inventory, PPE, intangible asset or prepaid asset
c. Foreign currency denominated monetary items such as accounts payable, accounts receivable, notes payable, loans receivable or
interest payable
d. Foreign currency denominated non-monetary liabilities such as unearned revenue, warranty liability, premium liability and deferred tax
liability
e. Foreign currency denominated equity accounts such as ordinary shares, preference shares, treasury shares and share premium

8. Under IAS 21, when there is a change in the entity’s functional currency, how shall the entity apply the translation procedures applicable to the
new functional currency?
a. It shall be applied prospectively from the date of change
b. It shall be applied retrospectively from the date of change
c. It shall be applied retroactively from the reasonably possible date
d. It shall be applied retrospectively as a prior period error

9. IAS 21 provides that an entity may present its financial statements in any currency even different from its functional currency. When the
company translates its financial statements from its functional currency to its selected presentation currency, how shall the exchange
differences arising from the translation be recognized?
a. It shall be recognized in profit or loss
b. It shall be recognized in other comprehensive income with reclassification adjustment to profit or loss if realized
c. It shall be recognized in other comprehensive income without reclassification adjustment and reclassification directly to retained
earnings if realized
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d. It shall be recognized directly to retained earnings

10. When translating the financial statements of an entity from its functional currency to its selected presentation currency, which of the following
translation measurement is incorrect?
a. Assets and liabilities are translated at the closing rate at the date of statement of financial position
b. Income and expenses are translated at (1) exchange rates at the date of the transaction or (2) average rate for the period for
practicality
c. Equity accounts other than retained earnings are translated at the date of the transaction resulting to that equity items
d. Retained earnings are translated using the average rate during period

11. When an entity’s functional currency is the currency of a hyperinflationary economy, how shall the elements of the Financial Statements be
translated to presentation currency?
a. All amounts (including assets, liabilities, equity, income and expenses) shall be translated at the closing rate at the date of most
recent statement of financial position
b. Assets and liabilities shall be translated at closing rate while income and expenses at average rate while equity at transaction rate
c. All amounts are translated at average rate
d. All amounts are translated at historical rate

12. Which of the following statements concerning exchange differences arising from entity’s net investment in foreign operation is correct?
a. Exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation shall be
recognized in profit or loss in the separate financial statement of the reporting entity or the individual financial statements of the
foreign operation, as appropriate
b. In the consolidated financial statements of the reporting entity which includes that of a foreign operation which is a subsidiary, the
exchange differences shall be recognized initially in other comprehensive income
c. On the disposal of foreign operation, the cumulative amount of the exchange differences relating to foreign operation, recognized in
other comprehensive income and accumulated in separate component of equity shall be reclassified from equity/cumulative OCI to
profit or loss as reclassification adjustment when the gain or loss on disposal is recognized
d. All of the above

Part II. Problem Solving

1. Entity A owns majority of the outstanding ordinary shares of Entity B which is operating in United States of America wherein the functional
currency is the USA $. However, the presentation currency of Entity B is the Philippine Peso because that is the presentation currency of Entity
A. For the year ended December 31, 2018, Entity B presented its statement of financial position in its functional currency of USA $:
Current assets $ 10,000 Current liabilities $ 10,000
Noncurrent assets 40,000 Noncurrent liabilities 20,000
Ordinary share capital 5,000
Preference share capital 8,000
_______ Retained earnings 7,000
Total assets $ 50,000 Total liabilities and SHE $ 50,000

 The ordinary shares are issued on January 1, 2017 while the preference shares are issued on July 1, 2017.
 B reported $ 1,000 net income during 2018 and declared dividends in the amount of $200 on December 31, 2018.
 The translated amount of retained earnings on December 31, 2017 is P 300,000.
 The following direct exchange rates are provided:
January 1, 2017 P 40
July 1, 2017 42
December 31, 2017 43
December 1, 2018 41
December 31, 2018 45
Average rate 2018 44

1.1. What is the amount of net assets in US dollars on December 31, 2017?
a. 19,200
b. 20,000
c. 19,000
d. 20,200

1.2. What amount of translation gain as component of other comprehensive income for the year ended December 31, 2018?
a. 38,600
b. 39,200
c. 40,400
d. 41,800

1.3. What is the translated retained earnings balance on December 31, 2018?
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a. 300,000
b. 335,800
c. 344,000
d. 281,800

1.4. What is the cumulative translation credit that should be presented in the statement of financial position on December 31, 2018?
a. 25,400
b. 28,200
c. 26,800
d. 24,600

2. GWA Corp. of Makati paid P 1,128,750 for a 35% interest in KYJ Co. of Taiwan on January 1, 2018, when KYJ’s net asset totaled 375,000 NT
Dollar and the exchange rate for NT Dollar was P 8.60. A summary of changes in KYJ’s net assets during 2018 is as follows:
NT Dollar Exchange Rates
Net assets, January 1 375,000 P 8.60
Net income for 2018 75,000 8.55
Dividends paid for 2018 25,000 8.54

GWA Corp. anticipated a strengthening of the Philippine peso against the NT Dollar during the last half of 2018, and it borrowed 150,000 NT
Dollar from a Taiwanese bank for one year at 10% interest on July 1, 2018 to hedge its net investment in KYJ.
The loan was made when the exchange rate for NT Dollar was P 8.55. The loan was denominated in NT dollar and the current exchange rate at
December 31, 2018 was P 8.50.

What is the other comprehensive income – translation adjustment presented in equity in 2018 as a result of hedging?
a. 6,587.50
b. 14,087.50
c. 20,675.00
d. 0

3. Honda Phil. is a subsidiary of Honda Japan. The functional currency of Honda Phil. while the presentation currency of its parent, Honda Japan
is Yen. For the year ended December 31, 2018, Honda Phil. has the following foreign currency denominated assets: Accounts receivable of $
1,000 and Prepaid Asset of $100. The historical rates of Accounts receivable and Prepaid asset are $1 = P 30 and $1 = P20 and P1 = 2 Yen
and P1 = 4 Yen, respectively. The exchange rate on December 31, 2018 is 1$ = P 40 and P 1 = 3 Yen.

3.1. In the separate statement of financial position of Honda Phil. on December 31, 2018, what is the books value of accounts receivable
and prepaid asset, respectively?
a. P 30,000 and P 2,000
b. P 40,000 and P 4,000
c. P 40,000 and P 2,000
d. P 30,000 and P 4,000

3.2. Using the same data above, what is the book value of accounts receivable and prepaid asset, respectively, in the consolidated
statement of financial position of Honda Japan?
a. Y 120,000 and Y 6,000
b. Y 90,000 and Y 4,000
c. Y 120,000 and Y 8,000
d. Y 90,000 and Y 24,000

END