Chapter 21

Problem I

1. Functional Currency Is the Local Currency Unit − Translation Into the Presentation
Currency (Current/Closing Rate Method)

Functional Currency
Is Local Currency Unit − US Dollars
Translation into the Presentation Currency (Current/Closing Rate Method)
Translation Adjusted Trial
Combined Statement of Income and Adjusted Trial Exchange Balance
Retained Earnings Balance ($) Rate (Pesos)
Sales 3,624,000 (A) 40.20 145,684,800
Cost of goods sold 2,220,000 (A) 40.20 89,244,000
Depreciation expense 120,000 (A) 40.20 4,824,000
Other expenses 786,000 (A) 40.20 31,597,200
Income tax expense 98,400 (A) 40.20 3,955,680
Net Income to Retained Earnings 399,600 16,063,920
Retained earnings, 1/1 576,000 (1) 23,040,000
Total 975,600 39,103,920
Less: Dividends declared, 9/1/20x4 360,000 (H) 40.10 14,436,000
Retained earnings, 12/31 to Balance Sheet 615,600 24,667,920

Balance Sheet
Cash………………………. 1,116,000 (C) 40.25 44,919,000
Accounts receivable (net) 729,600 (C) 40.25 29,366,400
Inventory (FIFO) 996,000 (C) 40.25 40,089,000
Land……………………………. 600,000 (C) 40.25 24,150,000
Buildings (net) 780,000 (C) 40.25 31,395,000
Equipment (net) 516,000 (C) 40.25 20,769,000
Total 4,737,600 190,688,400

Accounts payable…………… 768,000 (C) 40.25 30,912,000

Short-term notes payable 762,000 (C) 40.25 30,670,500
Bonds payable………………… 1,080,000 (C) 40.25 43,470,000
Common stock, P10 par……… 1,152,000 (H) 40.00 46,080,000
Paid-in capital in excess of par 360,000 (H) 40.00 14,400,000
Retained earnings, from above _ 615,600 24,667,920
Total 4,737,600 190,200,420
Foreign Currency Translation Reserve Gain OCI) –
credit……………………………………………………… B/A 487,980
Total…… 4,737,600 190,688,400
*lnclude as a component of other comprehensive income
(1) Retained earnings in pesos on January 2 (date of acquisition)
(A) Average exchange rate used to approximate the rate on the date these elements were recognized.
(H) Historical exchange rate
(C) Current exchange rate
(5) B/A – balancing amount

Verification of the Translation Adjustment − Current/Closing Rate Method (Functional

Currency − US Dollars)

Translation Reporting
Exchange Currency
US $ Rate (Pesos)
1/2 Exposed net asset position……………… *2,088,000 40.00 83,520,000
Adjustments for changes in net asset position
during year:
Net income for year………………. 399,600 40.20 16,063,920
 Dividends declared……………………. (360,000) 40.10 ( 14,436,000)
Net asset position translated using rate in
effect at date of each transaction……………….. 85,147,920
12/31 Exposed net asset position……………. 2,127,600 40.25 85,635,900
Change in cumulative translation adjustment
during year—net increase…………. 487,980
1/2 Cumulative translation adjustment**……………. -0-
12/31 Cumulative translation adjustment………….. 487,980

*A condensed balance sheet for S Company on January 2, 20x4 was as follows:

US $ US $
Monetary assets 1,320,000 Monetary Liabilities 2,160,000
Nonmonetary assets Common stock 1,152,000
Inventory 912,000 Paid-in capital in excess of par 360,000
Fixed assets 2,016,000 Retained earnings 576,000
Total 4,248,000 Total 4,248,000
1/1 Net assets = $4,248,000 - $2,160,000 = 2,088,000
**the beginning balance is zero since this was the first year the investment was held.

Statement of Comprehensive Income and Statement of Shareholdersˇ Equity

Functional Currency
Is Local Currency Unit – US$
Translation into the Presentation Currency (Current/Closing Rate Method)

S Company
Statement of Comprehensive Income
For the Year Ended
December 31, 20x4

Net income ………………………………………………………………………………………… P16,063,920

Other comprehensive income:
Foreign currency translation reserve gain………………………………………….. 487,980
Comprehensive Income…………………………………………………………………………. P16,055,100

S Company Statement
of Shareholdersˇ Equity
For the Year Ended
December 31, 20x4

Paid-in
capital in
Common excess of Retained
Stock par Earnings OCI* Total
Balance, 1/1/20x4 P46,080,000 P14,400,000 P23,040,000 P 0 P83,520,000
Comprehensive Income:
Net income 16,063,920 16,063,920
Other comprehensive
Income 487,980 487,980
Comprehensive Income P100,071,900
Dividends declared (14,436,000) (14,436,000)
Balance, 12/31/20x4…… P46,080,000 P14,400,000 P24,667,920 P 487,980 P85,635,900
*OCl – other comprehensive income

2. Translation into the Functional Currency (Remeasurement or Temporal Method)

Functional Currency
Is Philippine Peso -
Translation into the Functional Currency (Remeasurement or Temporal Method)
Adjusted Remeasurement Adjusted
Trial Exchange Trial Balance
Balance Sheet Balance ($) Rate (Pesos)
Cash………………………. 1,116,000 (C) 40.25 44,919,000
Accounts receivable (net) 729,600 (C) 40.25 29,366,400
Inventory (FIFO) 996,000 Schedule 40,059,120
Land……………………………. 600,000 (H) 40.00 24,000,000
Buildings (net) 780,000 (H) 40.00 31,200,000
Equipment (net) 516,000 (H) 40.00 20,640,000
Total 4,737,600 190,184,520

Accounts payable…………… 768,000 (C) 40.25 30,912,000

Short-term notes payable 762,000 (C) 40.25 30,670,500
Bonds payable………………… 1,080,000 (C) 40.25 43,470,000
Common stock, P10 par……… 1,152,000 (H) 40.00 46,080,000
Paid-in capital in excess of par 360,000 (H) 40.00 14,400,000
Retained earnings _ 615,600 (B/A) 24,652,020
Total 4,737,600 190,184,520
Combined Statement of Income and
Retained Earnings
Sales 3,624,000 (A) 40.20 145,684,800
Cost of goods sold 2,220,000 Schedule 89,041,680
Depreciation expense 120,000 (H) 40.00 4,800,000
Other expenses 786,000 (A) 40.20 31,597,200
Income tax expense 98,400 (A) 40.20 3,955,680
Net income before remeasurement loss 16,290,240
Remeasurement loss - debit 0 242,220
Net Income to Retained Earnings 399,600 16,048,020
Retained earnings, 1/1 576,000 (1) 23,040,000
Total 975,600 39,088,020
Less: Dividends declared, 9/1/20x4 360,000 (H) 40.10 14,436,000
Retained earnings, 12/31 from balance sheet 615,600 24,652,020
*lnclude as a component of other comprehensive income
(1) Retained earnings in pesos on January 2 (date of acquisition)
(A) Average exchange rate used to approximate the rate on the date these elements were recognized.
(H) Historical exchange rate
(C) Current exchange rate
B/A – balancing amount

Schedule
Translation of Cost of Goods Sold
Remeasurement
Exchange
Accounts ($) Rate Pesos
Beginning inventory (assumed)…………. 912,000 (H) 40.00 36,480,000
Purchases (assumed)…………….. 2,304,000 (A) 40.20 92,620,800
Total…………………….. 3,216,000 129,100,800
Less: Ending inventory……………. 996,000 (A) 40.22 40,059,120
Cost of goods sold…………… 2,220,000 89,041,680

Verification of the Translation Adjustment − Remeasurement or Temporal Method

(Functional Currency − Philippine Peso)
Translation Reporting
Exchange Currency
US $ Rate (Pesos)
 1/2 Exposed net monetary liability position….. *840,000 40.00 33,600,000
Adjustments for changes in net monetary position
during year:
Less: Increase in cash and receivables from sales (3,624,000) 40.20 145,684,800
Add: Decrease in monetary assets or increase in
monetary liabilities:
Purchases 2,304,000 40.20 92,620,800
Other expenses 786,000 40.20 31,597,200
Income taxes 98,400 40.20 3,955,680
Dividends declared…………….. 360,000 40.10 14,436,000
Net monetary liability position translated using rate
in effect at date of each transaction.. 30,524,880
Less: 12/31 Exposed net monetary liability position **764,400 40.25 30,767,100
Remeasurement gain (loss) ( 242,220)

*The January 2, 20x4 condensed balance sheet is given in Figure 19-3:

US $
Monetary liabilities 2,160,000
Less: Monetary assets 1,320,000
Net monetary liability position….. 840,000

**See above:
US $
Monetary liabilities (768,000 + 762,000 + 1,080,000) 2,610,000
Less: Monetary assets (1,116,000 + 729,600) 1,845,600
Net monetary liability position….. 764,400

3. Translation Using a Trial Balance Approach

Translation into the Presentation Currency (Current/Closing Rate Method)

Functional Currency
Is Local Currency Unit − US Dollars
Translation into the Presentation Currency (Current/Closing Rate Method)
Adjusted Trial Adjusted Trial Balance
Accounts Balance ($) Exchange (Pesos)
Debit Credit Rate Debit Credit
Sales 3,624,000 (A) 40.20 145,684,800
Cost of goods sold 2,220,000 (A) 40.20 89,244,000
Depreciation expense 120,000 (A) 40,20 4,824,000
Other expenses 786,000 (A) 40.20 31,597,200
Income tax expense 98,400 (A) 40.20 3,955,680
Retained earnings, 1/1 576,000 (1) 23,040,000
Dividends declared, 9/1 360,000 (H) 40.10 14,436,000
Cash………………………. 1,116,000 (C) 40.25 44,919,000
Accounts receivable (net) 729,600 (C) 40.25 29,366,400
Inventory (FIFO), 12/31 996,000 (C) 40.25 40,089,000
Land………………………… 600,000 (C) 40.25 24,150,000
Buildings (net) 780,000 (C) 40.25 31,395,000
Equipment (net) 516,000 (C) 40.25 20,769,000
Accounts payable………… 768,000 (C) 40.25 30,912,000
Short-term notes payable 762,000 (C) 40.25 30,670,500
Bonds payable…………… 1,080,000 (C) 40.25 43,470,000
Common stock, P10 par… 1,152,000 (H) 40.00 46,080,000
Paid-in capital in excess of par 360,000 (H) 40.00 _14,400,000
Sub-totals 8,322,000 8,322,000 334,745,280 334,257,300
Foreign Currency Translation
Reserve Gain OCI) – credit 487,980
Totals 8,322,000 8,322,000 334,745,280 334,745,280
 *lnclude as a component of other comprehensive income
(1) Retained earnings in pesos on January 2 (date of acquisition)
(A) Average exchange rate used to approximate the rate on the date these elements were recognized.
(H) Historical exchange rate
(C) Current exchange rate
Note: In the pre-closing trial balance approach, the following should be observed:
1. The retained earnings should be of beginning balance.
2. In the event that there are details as to the component of cost of goods sold purchases should be
translated using average and inventory should be of a beginning balance translated at the appropriate
rate existing at the date of inventory acquired.

Translation into the Functional Currency (Remeasurement or Temporal Method)

Functional Currency
Is Philippine Peso -
Translation into the Functional Currency (Remeasurement or Temporal Method)
Adjusted Trial Adjusted Trial Balance
Accounts Balance ($) Exchange (Pesos)
Debit Credit Rate Debit Credit
Sales 3,624,000 (A) 40.20 145,684,800
Purchases 2,304,000 (A) 40.20 92,620,800
Depreciation expense 120,000 (H) 40.00 4,800,000
Other expenses 786,000 (A) 40.20 31,597,200
Income tax expense 98,400 (A) 40.20 3,955,680
Retained earnings, 1/1 576,000 (1) 23,040,000
Dividends declared, 9/1 360,000 (H) 40.10 14,436,000
Cash………………………. 1,116,000 (C) 40.25 44,919,000
Accounts receivable (net) 729,600 (C) 40.25 29,366,400
Inventory (FIFO), 1/1 (assumed) 912,000 (H) 40.00 36,480,000
Land………………………… 600,000 (C) 40.00 24,000,000
Buildings (net) 780,000 (C) 40.00 31,200,000
Equipment (net) 516,000 (C) 40.00 20,640,000
Accounts payable………… 768,000 (C) 40.25 30,912,000
Short-term notes payable 762,000 (C) 40.25 30,670,500
Bonds payable…………… 1,080,000 (C) 40.25 43,470,000
Common stock, P10 par… 1,152,000 (H) 40.00 46,080,000
Paid-in capital in excess of par 360,000 (H) 40.00 14,400,000
Sub-totals 8,322,000 8,322,000 334,015,080 334,257,300
Remeasurement loss - debit 242,220
Totals 8,322,000 8,322,000 334,257,300 334,257,300
*lnclude as a component of other comprehensive income
(1) Retained earnings in pesos on January 2 (date of acquisition)
(A) Average exchange rate used to approximate the rate on the date these elements were recognized.
(H) Historical exchange rate
(C) Current exchange rate
Note: In the pre-closing trial balance approach, the following should be observed:
1. The retained earnings should be of beginning balance.
2. In the event that there are details as to the component of cost of goods sold purchases should be
translated using average and inventory should be of a beginning balance translated at the appropriate
rate existing at the date the inventory was acquired, refer to schedule below.

Schedule
Translation of Cost of Goods Sold
Remeasurement
Exchange
Accounts ($) Rate Pesos
Beginning inventory (assumed)…………. 912,000 (H) 40.00 36,480,000
Purchases (assumed)…………….. 2,304,000 (A) 40.20 92,620,800
Total…………………….. 3,216,000 129,100,800
Less: Ending inventory……………. 996,000 (A) 40.22 40,059,120
Cost of goods sold…………… 2,220,000 89,041,680
 Alternatively, the cost of goods sold will be lump into one amount (refer to schedule below),
and the inventory ending balance will be the amount presented in the trial balance the way
it was presented under the current/closing rate method

Adjusted Trial Adjusted Trial Balance

Balance ($) Exchange (Pesos)
Accounts Debit Credit Rate Debit Credit
Sales 3,624,000 (A) 40.20 145,684,800
Cost of goods sold 2,220,000 Schedule 89,041,680
Depreciation expense 120,000 (A) 40.00 4,800,000
Other expenses 786,000 (A) 40.20 31,597,200
Income tax expense 98,400 (A) 40.20 3,955,680
Retained earnings, 1/1 576,000 (1) 23,040,000
Dividends declared, 9/1 360,000 (H) 40.10 14,436,000
Cash………………………. 1,116,000 (C) 40.25 44,919,000
Accounts receivable (net) 729,600 (C) 40.25 29,366,400
Inventory (FIFO), 1/1 (assumed) 996,000 (H) 40.00 40,059,120
Land………………………… 600,000 (C) 40.00 24,000,000
Buildings (net) 780,000 (C) 40.00 31,200,000
Equipment (net) 516,000 (C) 40.00 20,640,000
Accounts payable………… 768,000 (C) 40.25 30,912,000
Short-term notes payable 762,000 (C) 40.25 30,670,500
Bonds payable…………… 1,080,000 (C) 40.25 43,470,000
Common stock, P10 par… 1,152,000 (H) 40.00 46,080,000
Paid-in capital in excess of par 360,000 (H) 40.00 14,400,000
Sub-totals 8,322,000 8,322,000 334,015,080 334,257,300
Remeasurement loss - debit 242,220
Totals 8,322,000 8,322,000 278,547,750 278,547,750

Schedule
Translation of Cost of Goods Sold
Remeasurement
Exchange
Accounts ($) Rate Pesos
Beginning inventory (assumed)…………. 760,000 (H) 40.00 36,480,000
Purchases (assumed)…………….. 1,920,000 (A) 40.20 96,620,800
Total…………………….. 2,680,000 129,100,800
Less: Ending inventory……………. 830,000 (A) 40.22 _40,059,120
Cost of goods sold…………… 1,850,000 89,041,680

Correction: …Exchange rate for 1 dollar instead of 1 peso; 20x9 should be 20w9
Problem II
Translation Into the
Presentation Currency or
Translation From Functional Translation Into
Currency to the Presentation the Functional
Currency or Currency or
Current Rate Method Temporal Method
or Translation** or Remeasurement
Accounts payable P.16 C P.16 C
Accounts receivable P.16 C P.16 C
Accumulated depreciation P.16 C P.26 H
Advertising expense P.19 A P.19 A
Amortization expense P.19 A P.25 H
Buildings P.16 C P.26 H
Cash P.16 C P.16 C
 Common stock P.28 H P.28 H
Depreciation expense P.19 A P.26 H
Dividends paid (10/1) P.20 H P.20 H
Notes payable P.16 C P.16 C
Patents (net) P.16 C P.25 H
Salary expense P.19 A P.19 A
Sales P.19 A P.19 A

* C = current rate, H = historical rate, A = average rate

** Revenue and expense accounts were translated using average rate, since the historical
rate is not practicable to determine.

Problem III
Remeasurement /
Current Method Temporal Method
Accounts Receivable Current Current
Prepaid Assets Current Historical
Accounts Payable Current Current
Common Stock Historical Historical
Land Current Historical
Goodwill Current Historical
Sales Revenue Weighted Average Weighted Average
Depreciation Expense Weighted Average Historical

Problem IV
a. Prepaid Insurance Current
b. Land Current
c. Common Stock Historical
d. Bonds Payable Current
e. Sales Weighted Average
f. Goodwill Current
g. Allowance for Doubtful Accounts Current
h. Deferred Income Taxes Current

Problem V
a. Cash Current
b. Accounts Receivable Current
c. Inventory, carried at cost Historical
d. Equipment Historical
e. Accumulated Depreciation Historical
f. Bonds Payable Current
g. Common Stock Historical
h. Sales Weighted Average

Problem VI
Rock Corporation
For the Year Ended December 31, 20x7

FC Rate Dollars
lncome Statement
Net sales FC 2,000,000 .37 P740,000
Costs and expenses 800,000 .37 296,000
Net income FC 1,200,000 .37 P444,000

Statement of Retained Earnings

Retained earnings, beginning of year FC 6,500,000 P1,300,000
Net income 1,200,000 444,000
Subtotal FC 7,700,000 P1,744,000
Dividends (declared on March 31) 1,000,000 .40 _ 400,000
Retained earnings, end of year FC 6,700,000 P1,344,000

Balance Sheet
Assets:
Current assets FC 3,000,000 .50 P 1,500,000
Plant assets (net)
(purchased January 1, 20x4) 55,000,000 .50 27,500,000
Total assets FC 58,000,000 P29,000,000

Liabilities and Stockholders' Equity:

Current liabilities FC 4,000,000 .50 P 2,000,000
Long-term debt 25,000,000 .50 12,500,000
Common stock (issued January 1, 20x4) 5,000,000 .25 1,250,000
Paid-in capital in excess of par 17,300,000 .25 4,325,000
Retained earnings 6,700,000 P 1,344,000
Cumulative translation adjustments 7,581,000
Total liabilities and stockholders' equity FC 58,000,000 P29,000,000

Problem VII - Abercrombie

20x4 net loss (100,000 FCs) x P.215 P (21,500)
20x5 net income (200,000 FCs) x P.24 48,000
20x6 dividend (50,000 FCs) x P.245 (12,250)
20x6 net income 75,000 FCs x P.25 18,750
Translated balance on December 31, 20x6 P 33,000

Problem VIII − Philippine-owned Foreign Subsidiary

Beginning-of-year net assets x change in exchange rate during the year:
210,000 x (P1.15 P1.10) P10,500
Net income for 20X1 x (current rate average rate):
50,000 x (P1.15 P1.125) 1,250
Increase in net assets from stock issue x (current rate - historical rate):
30,000 x (P1.15 P1.12) 900
Decrease in assets from dividends (current rate dividend date rate):
(10,000) x (P1.15 P1.13) (200)
P12,450
Problem IX
Functional Currency
Is the Currency of a Hyperinflationary Economy
Price Restated Exchange Translated
FC Index (in FC) Rate (in Pesos)
Cash (M) . . . . . . . . . . . . . . . . . . . . . . 420,000 * 420,000 (C) 1.75 735,000
Inventory (N) . . . . . . . . . . . . . . . . . . . 3,240,000 300/270 3,600,000 (C) 1.75 6,300,000
Property, plant and equipment (N) 1,080,000 300/150 2,160,000 (C) 1.75 3,780,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 4,740,000 6,180,000 10,815,000

Current liabilities (M) . . . . . . . . . . . . 840,000 * 840,000 (C) 1.75 1,470,000

Non-current liabilities (M) . . . . . . . . 600,000 * 600,000 (C) 1.75 1,050,000
Common stock (issued 20x0) (N) . . 480,000 300/100 1,440,000 (C) 1.75 2,520,000
Retained earnings . . . . . . . . . . . . . . 2,820,000 3,300,000 (C) (B/A) 5,775,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 4,740,000 6,180,000 10,815,000

M – monetary; N – non-monetary
C – current rate
B/A – balancing amount
*monetary – no restatement

Multiple Choice Problems

1. a
The peso is the functional currency, so a remeasurement (or temporal method) is
appropriate. Cash and accounts receivable are monetary assets remeasured at current
exchange rate of P47,500 and P95,000, respectively. Inventory is a nonmonetary asset
(carried at market value) are remeasured at the current exchange rate of P76,000. Land
and equipment, both nonmonetary assets (carried at cost) are remeasured at the
historical exchange rate of P54,000 and P135,000, respectively.

2. b
Because the functional currency is the local currency, a translation (or current rate
method) is required. All assets accounts are translated at current rates.

3. a
The foreign currency is the US dollars, so a translation (or current rate method) is
appropriate. All assets are translated at the current exchange rate of P1,270,000.

4. c The peso is the functional currency, so a remeasurement (or temporal method) is

appropriate. Accounts receivable is a monetary asset remeasured at current exchange
rate of P175,000. Inventories (carried at cost) is remeasured at the historical exchange
rate of P450,000. Prepaid insurance and land, both nonmonetary assets (carried at cost)
are remeasured at the historical exchange rate of P45,000 and P100,000, respectively.

5. d
The foreign currency is the LCU, so a translation (or current rate method) is appropriate.
All assets are translated at the current exchange rate of P215,000.

The peso is the functional currency, so a remeasurement (or temporal method) is

appropriate. All accounts receivable are monetary assets remeasured at current
exchange rate of P150,000 (P100,000 + P50,000). Prepaid insurance and patents, both
 nonmonetary assets (carried at cost) are remeasured at the historical exchange rate of
P30,000 and P45,000, respectively.

6. a
LCU – it is assumed that historical rate is not practicable (despite the presence of it), then
PAS 21 requires the use of average rate [(2,600,000 - 0)/10 years x 1.8LCU per peso =
P144,444]

Peso - expense related to nonmonetary asset such as depreciation should be

remeasured using the historical exchange rate (exchange rate when the equipment was
acquired), i.e., :
20x2: (1,700,000 LCU – 0)/10 years = 170,000 LCU /1.5 LCU per peso..P113,333
20x3: (900,000 LCU – 0)/10 years = 90,000 LCU /1.6 LCU per peso…… 56,250
Total……………………………………………………………………………….P169,583

7. a
LCU – the current rate method is used since the term “translated” was used, a translation
(or current rate method) is required. Inventory account is translated at current rate
(25,000 LCU / 2 LCU per peso = P12,500)

Peso – the peso is the functional currency, so a remeasurement (or temporal method) is
appropriate. Inventory is a nonmonetary asset (carried at cost) is remeasured at the
historical exchange rate of 2.2 LCU per peso (25,000 LCU / 2.2 LCU per peso = P11,364)

8. b The foreign currency is the functional currency, so a translation (or current rate method)
is appropriate. All assets (including inventory) are translated at the current exchange
rate [100,000 x P.17].

9. c There is no indication that the historical rate is not practicable or any indication that the
revenue and expenses account were incurred evenly throughout the year and at the
same time the historical rate is given, therefore, cost of goods sold is translated at the
exchange rate in effect at the date of accounting recognition, which is the date the
goods were sold [100,000 x P.18].

10. d The foreign currency is the functional currency, so a translation (or current rate method)
is appropriate. All assets are translated at the current exchange rate of P.19.

11. c The peso is the functional currency, so a remeasurement (or temporal method) is
appropriate. Inventory is a nonmonetary asset (carried at cost) is remeasured at the
historical exchange rate of P.16. Marketable equity securities is a nonmonetary asset
(carried at market value) are remeasured at the current exchange rate of P.19.

12. a
LCU Peso
is Functional Currency is Functional Currency
P120,000 = 2/15/x4 Peso value P10,000 = Foreign currency
(110,000) = 12/31/x3 Peso value transaction gain
P 10,000 = Foreign currency 30,000 = Remeasurement gain
transaction gain P40,000 = Foreign exchange
Gain
 Note: The term “restating” used by foreign subsidiary is an indication that the
temporal or remeasurement method is used.

13. a
LCU Peso
is Functional Currency is Functional Currency
P15,000 = Preadjusted foreign P15,000 = Preadjusted foreign
exchange loss exchange loss
6,000 = Foreign currency 6,000 = Foreign currency
transaction loss transaction loss
($100,000 - $106,000) 20,000 = Remeasurement gain
P21,000 = Foreign exchange P41,000 = Net foreign
loss exchange loss

Note: The term “restatement” used by foreign subsidiary is an indication that

the temporal or remeasurement method is used.

14. b
Consideration transferred P160,000
Less:
Book and fair values of sub's net assets
680,000 FC x P.21 x .90 = 128,520
Positive excess: Goodwill (partial) P 31,480

Based on the choices given, the question is leaning on the partial goodwill approach. Since,
there is no choice available for full-goodwill approach.

15. c
Pesos FC
Goodwill P10,500 FC 50,000(P10,500 / P.21)
Impairment 1,100 (FC 5,000 x P.22) 5,000 (FC 50,000 / 10)

16. a - Impairment loss = P10,500 / 10 = P1,050

17. a - The foreign currency is the functional currency, so a translation (or current rate method) is
appropriate. All assets (including inventory) are translated at the current exchange rate
[48,000 FC x P1.53 = P73,440].

18. a - The peso is the functional currency, so a remeasurement (or temporal method) is
appropriate. Inventory is a nonmonetary asset (carried at cost) is remeasured at the
historical exchange rate, but since the historical exchange rate cannot be specifically
identified and purchases happens evenly throughout the period, therefore 20x4 historical
(average – which is unusual for a remeasurement method but allowed on exceptional cases
such as No. 33) rate of P1.45 is used. Thus:

Cost: 50,000 FC x P1.45 per FC (lower)………………………………………P 72,500

Market: 48,000 FC x P.153 per FC…………………………………………….P 73,440

Under the temporal method, since the valuation of inventory is at historical

exchange rate which leads to valuation at cost (average in this case), so the LCM
rule is applied, in contrast to the current rate method (in No. 32), wherein the
valuation of inventory is outright current exchange rate.
19. a - the current rate method is used since the term “translate” was used, a translation (or
current rate method) is required. Dividend declared and paid is translated at historical
exchange rate at the date of declaration. i.e. 121 FC to P1.

20. a – [1,500,000 baht / .630 baht, the average rate (historical rate is not practicable because
the data of sales per transaction were not given) = P2,380,952]

21. b – (280,000 / .620 baht, the current rate = P451,613)

22. c
Foreign Exchange
Currencies Rate Pesos
Net Assets (SHE), beginning…………… 20,000 .15 (HR) 3,000
Add: Net Income: (30,000 – 20,000)…. 10,000 .19 (HR) 1,900
Net Assets (SHE), ending……………….. 4,900
Net Assets (SHE), ending……………….. 30,000 .21 (CR) 6,300
Translation adjustment
(positive – credit) – gain……………… 1,400

SHE – stockholders’ equity.

HR (historical rate) was used for Net lncome (Sales and Costs of Sales since the details of
transaction were given.)

CR (current rate) was used for Net Assets (Assets and Liabilities account) to determine
the ending balance, so that the translation gain should be properly determined.

23. a
FC Exchange Rate Pesos
Beginning net monetary assets, 1/1…………… 100,000 x P.16 = P16,000
Increases in net monetary assets:
Sale of inventory .................................... 50,000 x P.20 = 10,000
Decreases in net monetary assets:
Purchase of equipment ........................ (60,000) x P.16 = (9,600)
Purchase of inventory ........................... (30,000) x P.18 = (5,400)
Transfer to parent................................... (10,000) x P.21 = (2,100)
Ending net monetary assets, 12/31 .................. 50,000 P 8,900
Ending net monetary assets at
the current exchange rate .................. 50,000 x P.22 = (11,000)
Remeasurement gain ......................................... P(2,100)

24. b – the term “translation adjustments” was used indicating that the current rate method is in
effect (in contrast to the term “remeasurement adjustments” used by the temporal method),
therefore any translation debit (which is a loss) will be classified as other comprehensive
income.

25. a - the foreign currency is the functional currency, so a translation (or current rate method) is
appropriate. All assets (including inventory) are translated at the current exchange rate
[120,000 FC x P.20 = P24,000].
26. e – Current Rate Method. The same situation with No. 9 except that the that the historical
rate is not practicable since the rate on January 17, 20x5 (date of sale) were not given,
therefore, cost of goods sold is translated at the average exchange rate for 20x5 which is
P.24 (120,000 FC x P.24 = P28,800).

27. d
Remeasurement
Exchange
Accounts (FC) Rate Pesos
Beginning inventory 500,000 (H)* P.00148 P 740
Purchases 1,000,000 (A) .00160 1,600
Total 1,500,000 P2,340
Less: Ending inventory 400,000 (A) .00162 648
Cost of goods sold 1,100,000 P1,692
*not specifically identified unlike No. 46, may also be termed as average (historical) rate

28. b – If the functional currency is the currency of a third country, remeasure (temporal
method) from LCU into the functional currency; then translate ( c u r r e n t r a t e
me t h o d ) into peso by using the average exchange rate since historical rate is not
practicable (no data available on the specific date the items that were purchased) , i.e.,
1,100,000 FC x P0.00160 = P1,760. It should be noted that the requirement is “translation” of
cost of goods sold which means that the value of cost of goods sold should be under the
current rate method.

29. c
Remeasurement
Exchange
Accounts (FC) Rate Pesos
Beginning inventory 10,000 (H) P1.60 P 16,000
Purchases 80,000 (A) 1.50 120,000
Total 90,000 P136,000
Less: Ending inventory 15,000 (A) 1.45 21,750
Cost of goods sold 75,000 P114,250

30. b – If the functional currency is the foreign currency, then cost of goods sold will be
translated using the average exchange rate since historical rate is not practicable (no
data available on the specific date the items that were purchased) , i.e., 75,000 FC x P1.50
= P112.500.

31. b
Remeasurement
Exchange
Accounts (FC) Rate Pesos
Beginning inventory 20,000 (H) P.93 P 18,600
Purchases 400,000 (A) .96 384,000
Total 420,000 P402,6 00
Less: Ending inventory _15,000 (A) .99 14,850
Cost of goods sold 405,000 P 387,750
*not specifically identified unlike No. 46, may also be termed as average (historical) rate
32. c - historical rate is not practicable since the rate on date of acquisition is not given unlike
No. 9, therefore, cost of goods sold is translated at the average exchange rate for 20x5
which is P.96 [405,000 FC (refer to No. 48) x P.96 = P388,800).

33. d – refer to No. 31

34. e – under the current rate method, all assets are translated at the current exchange rate,
therefore the inventory should be translated at P1.01 (FC 15,000 x P1.01 = P15,150).

35. a – under the temporal method, inventory being a nonmonetary asset (carried at cost) is
remeasured at the historical exchange rate, but since the historical exchange rate cannot
be specifically identified and purchases happens evenly throughout the period, therefore
20x4 historical (average – which is unusual for a remeasurement method but allowed on
exceptional cases such as No. 33) rate of P1.43 is used. Thus:

Cost: 300,000 LCU x P1.43 per LCU (lower)………………………………………P 429,000

Market (NRV at replacement cost) : 320,000 LCU x P.142 per LCU…………P 454,400

Under the temporal method, since the valuation of inventory is at historical exchange rate
which leads to valuation at cost (average in this case), so the LCM rule is applied, in contrast
to the current rate method (in No. 53), wherein the valuation of inventory is outright current
exchange rate.

36. a - under the current rate method, all assets are translated at the current
exchange rate, therefore the inventory should be translated at P1.42 (FC 320,000 x
P1.42 = P454,400).

37. a CNI, P3,100,000 and Cons. CI, P3,220,000

Consolidated Net Income for 20x4
Net income from own/separate operations:
P Company P2,000,000
S Company 1,100,000
Total P3,100,000
Less: Non-controlling Interest in Net Income* P220,000
Amortization of allocated excess 0
Goodwill impairment 0 220,000
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent………….. P2,880,000
Add: Non-controlling Interest in Net Income (NCINI) 220,000
Consolidated Net Income for 20x4 P3,100,000
Add: Comprehensive Income 120,000
Consolidated Comprehensive Income P3,220,000

*Non-controlling Interest in Net Income (NCINI) for 20x4

Net income of S Company P 1,100,000
Less: Amortization of allocated excess (refer to amortization table above) 0
P 1,100,000
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 220,000
Add: NCI on Comprehensive Income (translation gain)
(P120,000 x 20%) 24,000
Non-controlling Interest in Comprehensive Income P 244,000

38. a – regardless of the method used (whether current rate or temporal method, the rate to be
used should be the historical rate on the date of declaration, i.e. P.23 (20,000 LCU x P.23 x
75% = P3,450).
39. c - Translation adjustment loss (debit): P8,000 x 75% = P6,000

40. c - under the current/closing rate method (the functional currency of Transport
Corporation is the LCU), the translation adjustments on the goodwill, if any and the fair
value differential relating to the patent as they are considered net assets of Transport
and are translated at the current or closing rate.

The translation adjustments are as follows:

On the fair value differential:
Undervalued patent on 1/1/20x4: P25,000 / P.20 = FC 125,000……. P 25,000
Less: Amortization expense [125,000/ 5 years = FC 25,000 x P.22]…. ( 5,500)
Undervalued patent, net on 12/31/20x4……………………................ P 19,500
Undervalued building, net on 12/31/20x4 [(125,000 FC – 25,000 FC
= 100,000 FC x P.24………………………………………………………. 24,000
Translation adjustment gain on undervalued patent (OCI)…….. P 4,500

41. b - Amortization expense [125,000/ 5 years = FC 25,000 x P.22] = P5,500. Under the current
rate method, the historical rate is not given therefore, historical rate is not practicable to be
use, and then PAS 21 requires the use of average rate.

42. a – Current rate method, (50,000 FC x P.90, current = P45,000)

Number of Foreign Currencies (FCs)
Sales: P40,000 / P.80 = 50,000 FC
Cost: P30,000 / P.80 = 37,500 FC

43. c – Current rate method:

Unrealized intercompany profit: (50,000 FC – 37,500 FC) x P.80, historical rate = P10,000.

44. d – (P45,000 – P10,000, unrealized profit = P35,000)

45. No answer available – P250,000

FC Pesos
Exchange
Debit Credit rate Debit Credit
Common stock 5,000,000 .20 1,000,000
Purchases 8,000,000 .18 1,440,000
Sales 12,000,000 .18 2,160,000
Cash* 8,000,000 .16 1,280,000
Equipment 1,000,000 .16 _160,000
17,000,000 17,000,000 2,880,000 3,160,000
Translation loss _250,000
3,160,000 3,160,000
*5,000,000 – 8,000,000 + 12,000,000 – 1,000,000
Apply to rules under the current method.

48. b – under the current rate method, revenues and expenses will be translated using the
average rate since historical rates are not practicable (with revenues and expenses are not
identified as to the date of acquisition)

49. b –
FC Exchange rate Pesos
 Net assets, 1/1/20x4 0 P 0
Changes in net assets, 20x4
Issued common stock 1,000,000 1 FC / P.48 2,083,333
Net income 80,000 1 FC / P.44 181,818
Dividends paid ( 20,000) 1 FC / P.46 ( 43,478)
Net assets, 12/31/20x4 1,060,000 P2,221,673
Net assets, 12/31/20x4 at current rate 1,060,000 1 FC / P.42 _2,523,810
Translation adjustment – increase (gain) P 302,137
Apply to rules under the current method.

50. a

51. b

52. b
On November 29, 20x4, the following amounts should be recorded by Manilow, ignoring
interest payable on the loan. The cash advance from the bank is translated at the rate
on the date that it was received (1,520,000 yen x P1 / 1.52 yen = P1,000,000) and a
liability recorded for the same amount.

53. b
As the loan was still outstanding at the end of the period and it is a monetary item, it
should be retranslated at the exchange rate at the end of the reporting period (1,520,000
yens x P1 / 1.66 yens = P915,663 ). The exchange difference should be recognized as a
gain in profit or loss for the period. (P1,000,000 less P915,663 = P84,337).

PAS 21 par. 28 states that “Exchange differences arising on the settlement of monetary
items (i.e. bank loan payable in this case) or on translating monetary items at rates
different from those at which they were translated on initial recognition during the period
or in previous financial statements shall be recognized in profit or loss in the period in
which they arise.

54. b
The goodwill at the date of acquisition is P100,000 (400,000 baht x P1 / 4 baht). At the year-
end it is retranslated to P80,000 (400,000 baht x P1/5 baht). The difference of P20,000 is
recorded as an exchange loss and reported in other comprehensive income.

55. c – Nt Dollar 175,000 / Nt Dollar 1.298 = P134,823

Goodwill arising from acquisition…………………………………………… Nt Dollar 175,000
Divided by: Closing/Current rate (Nt dollar : peso)………………………Nt Dollar 1.298
Goodwill in the consolidated balance sheet……………………………. P134,823

ln the consolidated financial statements, any goodwill arising on the acquisition of a

foreign operation should be treated as an asset of the foreign operation. The goodwill
should therefore be expressed in the functional currency of the foreign operation and
translated at the closing rate at the date of each statement of financial position. The same
treatment is required of any fair value adjustments to the carrying amounts of assets and
liabilities arising on the acquisition of a foreign operation. ln both cases exchange
differences are recognized in other comprehensive income, rather than as part of the
profit or loss for the period.

56. b
 Fair value adjustments (undervaluation of land)……………… …………….Nt 50,000
Divided by: CLOSING / CURRENT RATE on the balance sheet
(Nt dollar per peso)………………………………………………… 1.56
Fair value adjustments…………………………………………………………... P 32,051

PAS21 par. 47 requires fair value adjustments to the carrying amounts of assets and
liabilities arising on the acquisition of a foreign operation to be treated as assets and
liabilities of the foreign operation. Therefore they are translated at the closing rate of
exchange.

57. c – 160,000 yens x P1 / 2.40 yens = P66,667

PAS 21 par. 23 (a) requires the foreign currency monetary items, such as trade payables, of
an entity to be retranslated at the closing rate at the end of a reporting period.

58. c
Consideration Transferred…………………………………………………………. 9.0 million
Less: Fair value of net assets acquired………………………………………….. 6.0 million
Goodwill………………………………………………………………………………. 3.0 million
Divided by: Current/Closing rate on the balance sheet……………………. 2.0 baht per peso
Goodwill in the Consolidated Balance Sheet………………………………….P1.5 million

Examinees or students may be misled that since the functional currency is peso, the
temporal method (applied only in case of subsequent to date of acquisition) should then be
applied wherein goodwill or any fair value adjustments is considered as a non-monetary
asset carried at historical cost be remeasured (or translated) using historical rate (which in
this problem is 1.5 baht = P1). But the problem do not fall under this category – the temporal
method, instead it is an example of a goodwill and fair value adjustments arising from
acquisition of subsidiaries.

Goodwill arising from the Acquisition of Subsidiaries (Date of Acquisition)

When a company acquires a controlling interest in another company, the excess of the
purchase price over the acquirer’s interest in the fair value of the identifiable net assets of
the acquired company is recognized as goodwill on consolidation. ln the context of a
foreign company, the issue arises as to whether goodwill is an asset of the acquired
company or an asset in the acquirer’s books. lf it is an asset of the acquired subsidiary, the
goodwill is a foreign asset which should be translated in the same manner as any other asset
of the acquired subsidiary, which may give rise to a translation difference. However, if it is
treated as an asset in the acquirer’s books, there is no need for translation.

Pas 21 par. 47 states that:

“Any goodwill arising on the acquisition of a foreign operation and any fair
value adjustments to the carrying amount of assets and liabilities arising on
the acquisition of that foreign operation shall be treated as assets and
liabilities of the foreign operations. Thus they shall be expressed in the
functional currency of the foreign operation and shall be translated at the
closing rate…”

Subsequent to date of acquisition, accordingly goodwill has to be measured in the

functional currency of the foreign operation. lf the functional currency of the foreign
operation is the local currency, the goodwill on acquisition is to be translated at the closing
rate. On the other hand, if the functional currency of the foreign operation is the parent’s
 currency (or the presentation currency), goodwill on acquisition is treated as a non-
monetary asset and remeasured at the exchange rate of the acquisition of the foreign
operation,

59. b - refer to No. 58 for further discussion.

The goodwill at the date of acquisition is P100,000 (400,000 baht x P1 / 4 baht). At the
year-end it is retranslated to P80,000 (400,000 baht x P1/5 baht). The difference of P20,000
is recorded as an exchange loss and reported in other comprehensive income.

ln the consolidated financial statements, any goodwill arising on the acquisition of a

foreign operation should be treated as an asset of the foreign operation. The goodwill
should therefore be expressed in the functional currency of the foreign operation and
translated at the closing rate at the date of each statement of financial position. The same
treatment is required of any fair value adjustments to the carrying amounts of assets and
liabilities arising on the acquisition of a foreign operation. ln both cases exchange
differences are recognized in other comprehensive income, rather than as part of the
profit or loss for the period.
60. a

Allocated Excess arising from consolidation………………………………………P1,200,000 baht

Divided by: CLOSING / CURRENT RATE on the balance sheet
(baht per peso) _ 2.0
Allocated Excess (over/under valuation)………………………………………... P 600,000
Refer to Nos. 55 and 58 for further discussion of using closing/current rate. Again, the same
with No. 58, the functional currency of peso is somewhat misleading; it does not refer to the
use of temporal method on the date of acquisition.

61. b = 60,000 LCUs x (P100,000 – P50,000)/P100,000 = 30,000 LCUs x P1/4 LCUs = P7,500
Note: The deferred profit included in the inventory should be translated based on the historical rate
(average rate if historical rate is not practicable) since it will eventually be treated as a revenue.
62. b – the P8,000 downward adjustment in liability indicates a gain on transaction presented in
statement of comprehensive income (income statement). The 60,000 occurred in translation since
the functional currency is the foreign currency, then current rate method is used and any
cumulative translation gain or loss (AOCI) will be in the stockholdersˇ equity.

63. c
Net income: 100,000 LCUs x P.70 (average rate since evenly)………………P 70,000
Less: Dividend paid: 20,000 LCUs x P.75 (historical rate)…………………….... 15,000
Effect on retained earnings – increase…………………………………………...P 55,000

64. d
Correction: LCU should be Pesos
Total assets P500,000
Total Liabilities and SHE
Liabilities P 300,000
SHE
Common stock 40,000
Retained earnings,1/1/x6 P 80,000
Add: Net income (P200,000- P150,000) 50,000
Less: Dividends -0- 130,000
AOCI (loss) ( 20,000) 450,000
Effect on the 20x6 exchange rate P 50,000
65. c
Correction: LCU should be Pesos
Retained earnings,1/1/x6 P 80,000
Add: Net income (P200,000- P150,000) 50,000
Less: Dividends -0-
Retained earnings,1/1/x6 P130,000

66. c
Hedging Instrument:
12 month -Forward rate date of hedging, 1/1/x6 P .60
Spot rate, date of expiration, 12/31/20x6 .56
P .04
x: No. of foreign currencies: LCUs 100,000
Forward Contract gain – Cash flow hedge (AOCI) P 4,000
Translation Loss (AOCI)
Net Assets (Assets – Liabilities): (700,000 – 600,000) x P.56,
current rate P 56,000
Stockholdersˇ equity: 100,000 LCU x P.60, historical rate 60,000 _4,000
Net AOCI P -0-

67. b
Selling price of subsidiary P 5,000,000
Less: Carrying/book value of subsidiary 4,000,000
Gain on sale of subsidiary P 1,000,000
AOCI – translation adjustment loss 300,000
Net gain on sale of subsidiary P 700,000

68. d
PAS No. 29 does not establish an absolute rate at which hyperinflation is deemed to arise -
but allows judgment as to when restatement of financial statements becomes necessary.
One of the characteristics of the economic environment of a country which indicate the
existence of hyperinflation includes:

“the cumulative inflation rate over three years approaches, or exceeds, 100%”

The computation of cumulative inflation rate over three years is as follows: (210 –
90)/90 = 133.33%.

69. b - 64,000,000 x P.0085 = P544,000

70. a - 875,000 x P1.62 = P1,417,500
71. d - 4,300,000 x P.57 = P2,451,000
72. b – (930,000 - 600,000) P1.03 = P339,900 debit
73. c - 675,000,000 x P.0086 + 60,000,000 x P.0088 = P6,333,000
74. a - [(675,000,000 - 135,000,000)/8] P.0086 + (60,000,000/10) (8/12) P.0088 = P615,700
75. b -
Beginning balance 135,000,000 x P.0086 P1,161,000
Current period depreciation expense 615,700
[(675,000,000 - 135,000,000)/8] P.0086 +
(60,000,000/10) (8/12) P.0088
Ending balance P1,776,700
76. d - P1,529,000 + P52,000 - P490,000 - P253,000 - P352,000 = P486,000
77. b - (P692,000 + P18,000 - P185,000 - P72,000 - P126,000) .6 = P196,200
78. a - {[(198,000 - 138,000) + (720,000 - (650,000 - 230,000))/10] P.095} .9 = P7,695
79. c - (P690,000 - P351,000 - P103,000 - P125,000 - P12,000) .2 = P19,800
80. a - [P458,000 - P175,000 - P52,000 + P15,000 - (140,000 + 450,000/10) P.68] .2 = P24,040
81. d - [P760,000 - P260,000 - P80,000 - P20,000 - (100,000 + 260,000/10) P1.06] .4 = P114,576
81. a - (800,000,000 + 75,000,000) P.0084 = P7,350,000
82. b - [(800,000,000 - 300,000,000)/5] P.0088 + [(75,000,000/10) (3/12)] P.0086 = P896,125
83. c
Beginning balance 300,000,000
Current period depreciation expense [(800,000,000 - 101,875,000
300,000,000)/5] + [(75,000,000/10) (3/12)]
Ending balance (LCU) 401,875,000
Ending balance (pesos) 401,875,000 x P.0084 = P 3,375,750
84. b - P600,000 - P327,000 - P57,000 = P216,000
85. b - P370,000 + P760,000 + P374,000 + P36,000 + P30,000 - P572,000 - P472,000 - P550,000 =
P24,000 debit
86. a - P1,478,000 - P530,000 - P268,000 - P247,000 = P433,000
87. b - (P1,783,000 - P741,000 - P358,000 - P416,000) .7 = P187,600
88. b - {[(180,000 - 137,000) + (830,000 - 650,000)/10] P1.53} .8 = P74,664
89. b - (47,000 x P1.18 + 78,000 x P1.16) .8 = P116,752
90. a - (52,000 x P.66 + 76,000 x P.69) .9 = P47,196
91. c
Correction: 200x − should 20x5
(P120,000 - P86,000) .8 = P27,200 credit
92. b - (P1,623,000 - P847,000 - P179,000 - P252,000) .1 = P34,500
93. d - [P735,000 - P322,000 - P258,000 - (160,000 + 360,000/10) P.66] .3 = P7,692
94. c - [P1,200,000 - P420,000 - P190,000 - (110,000 + 180,000/10) P1.20] .2 = P87,280
95. a – the foreign currency is the functional currency, since historical rate (rate on date of
transaction) is not practicable to determine , then PAS 21 requires the use of average rate:
Share in net income: FC 25,000 x 100% x P.124……………….. P31,000
Less: Amortization of allocated excess………………………… 0
Income from subsidiary…………………………………………….P 31,000

96. d – regardless of what method used to translate the F/S of a foreign entity (subsidiary), the
rate use to translate dividends declared or paid would always be the historical rate on the
date of declaration, i.e., P1.30 x FC 5,000 = P6,500.

97. c
Consideration transferred P402,000
Less:
Book and fair values of sub's net assets
300,000 FC x P1.20x 100% = 360,000
Positive excess: Goodwill (partial) P 42,000

Dollars
Euros Goodwill P42,000 FC 35,000 (P 42,000 / P1.20)
Impairment 4,340 (FC3,500 x P1.24) 3,500 (FC 35,000 / 10)
Balance P37,660 FC 31,500

Translated
balance P41,580 (FC 31,500 x P1.32)
 Translation adjustment: P41,580 minus P37,660 = P3,920 – use for No. 28.
98. b
Translation adjustment from translating the trial balance P 12,000 cr
Translation adjustments from translating goodwill 3,920 cr
Total translation adjustment P15,920cr

Quiz - XXI
1. P430,000 - Because the foreign currency is the functional currency, a translation (or current
rate method) is required. All assets accounts are translated at current rates.

2. P440,000, because the peso is the functional currency, a remeasurement is required. All
receivables which are monetary assets are remeasured at current rates. Assets carried at
historical cost, such as prepaid insurance and goodwill which are nonmonetary assets, are
remeasured at historical rates.

3. P755,000 - The current rate method is used since the term “translated” was used, a translation
(or current rate method) is required. All assets accounts are translated at current rates.

4. P1,270,000 - The current rate method is used since the term “translated” was used, a
translation (or current rate method) is required. All assets accounts are translated at current
rates.
5. a
The current rate method is used since the term “translated” was used, a translation (or
current rate method) is required. All assets accounts are translated at current rates.
6. P687,500
LCU – since the problem indicates that expense accounts occurred approximately evenly
during the year is an indication that historical rate is not practicable, then PAS 21 requires the
use of average rate [(375,000 + 250,000 + 625,000) x P.55 = P687,500].
7. The temporal method is used since the term “remeasure” was used. Patent is a nonmonetary
asset carried at cost is remeasured at the historical exchange rate of P1.50
8. P52,000 = 100,000 LCUs x P.52, current rate (or balance sheet rate, since it is a current rate
method. The inflation rate of 20% is not a basis to conclude that the country where the
subsidiary is located is experiencing a hyperinflationary economy because the requirement
should be a cumulative inflation of 100% or more over a three year period).

9. Assume the use of current rate method - P113,000 increase – assume revenue and expense
were incurred evenly during the year.
Net income: 300,000 LCUs x P.55…………………………………………………..P 165,000
Less: Dividend paid: 100,000 LCUs x P.52 (historical rate)…………………….. 52,000
Effect on retained earnings – increase………………………………………….P 113,000

10. Answers: P15,000 decrease or loss from the translation process;

P21,000 loss from hedging instrument;
P36,000 AOCI balance - loss

Hedging Instrument:
12 month -Forward rate date of hedging, 1/1/x6 P .82
Spot rate, date of expiration, 12/31/20x6 .75
P .07
x: No. of foreign currencies: LCUs 300,000
 Forward Contract loss – Cash flow hedge (AOCI) P 21,000
Translation Loss (AOCI)
Net Assets (Assets – Liabilities): (800,000 – 500,000) x P.75,
current rate P 225,000
Stockholdersˇ equity: 300,000 LCU x P.80, historical rate _240,000 _15,000
AOCI balance - loss P36,000

11. P4,307,000 = 7,300,000 LCUs x P.59

12. P736,000 = 800,000 LCUs x P.92
13. P972,000 = 900,000 LCUs x P1.08
14. P164,900 debit = (400,000 - 230,000) P.97
15. P112,000 debit = (900,000 - 700,000) P.56
16. P21,000 credit = P440,000 + P670,000 + P329,000 + P27,000 + P20,000 - P327,000 - P728,000 -
P410,000 = P21,000 credit
17. a
LCU – since historical rate (rate on date of transaction) were not given for provision of
doubtful accounts and rent expense, therefore, historical rate is not practicable, then PAS 21
requires the use of average rate [(120,000 + 80,000 + 200,000) x P.44 = P176,000].

Peso –
Expense related to nonmonetary asset such as depreciation should be remeasured
using the historical exchange rate (exchange rate when the equipment was
acquired), i.e., 120,000 x P.50 = P60,000
Expenses related to monetary asset such as uncollectible accounts and rent expense
should be remeasured using average exchange rate [(80,000 + 200,000) x P.44 =
P123,200]

18. a
LCU Peso
is Functional Currency is Functional Currency
P13,000 = Preadjusted foreign P13,000 = Preadjusted foreign
exchange loss exchange loss
4,000 = Foreign currency 4,000 = Foreign currency
transaction loss transaction loss
(P60,000 - P64,000) (7,000) = Remeasurement gain
P17,000 = Foreign exchange P10,000 = Net foreign
loss exchange loss

Note: The term “restatement” used by foreign subsidiary is an indication that the
temporal or remeasurement method is used.

19.
LCU (No. 39) Peso (No. 40)
is Functional Currency is Functional Currency
P10,000 = Preadjusted foreign P10,000 = Preadjusted foreign
exchange loss exchange loss
3,000 = Foreign currency 3,000 = Foreign currency
transaction loss transaction loss
(P50,000 – P53,000) 15,000 = Remeasurement loss
P13,000 = Foreign exchange P10,000 = Net foreign
loss exchange loss
 Note: The term “restatement” used by foreign subsidiary is an indication that the
temporal or remeasurement method is used.

20. refer to No. 19

21.
if analysis is in pesos:
Fair value of Subsidiary (100%)
Consideration transferred:
Cash P350,000
Less: Book value of stockholdersˇ equity of Hastie:
(P450,000 FC x P.70, current rate x 100%) 315,000
Allocated excess (excess of cost over book value)….. P 35,000
Less: Over/under valuation of assets and liabilities:
Increase in patent due to undervaluation 35,000
P 0

or, if analysis is in foreign currency:

Fair value of Subsidiary (100%) FC
Consideration transferred:
Cash P350,000 / P.70 500,000
Less: Book value of stockholdersˇ equity of Hastie:
(P450,000 FC x 100%) 450,000
Allocated excess (excess of cost over book value)….. 50,000
Less: Over/under valuation of assets and liabilities:
Increase in patent due to undervaluation 50,000
0

PAS 21 paragraph 47 states: “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 acquisition of that foreign operation shall be treated as assets and liabilities of
the foreign operation”. Thus, they shall be expressed in the functional currency of the foreign
operation (meaning their functional currency is the LCU), and shall be translated at the
current/closing rate.”

Thus, since patent is a fair value adjustments it should be translated at the current rate (on
the date of acquisition), i. e. P.70 (P.70 x 50,000 FC = P35,000).

22.
The subsequent accounting treatments for goodwill and fair value adjustments together
with their impairment and depreciation/amortization depend on the method being used,
since the functional currency of Hastie is the FC, then the current rate method is used.
Therefore, the average rate of P.68 [P.68 x (50,000 FC / 5 years) = P6,800] is used for
depreciation since the historical rate for patent is not practical to be determined.

23.
The subsequent accounting treatments for goodwill and fair value adjustments together
depend on the method being used, since the functional currency of Hastie is the FC, then
the current rate method is used. Therefore, the current rate on balance sheet date of P.65
[P.65 x (50,000 FC – 10,000 FC, depreciation) = P26,000] is used.

24. the foreign currency is the functional currency, since historical rate (rate on date of
transaction) is not practicable to determine , then PAS 21 requires the use of average rate:
 Share in net income (given)..…………………………………….. P25,000
Less: Amortization of allocated excess (No.55)…..…………… 6,800
Income from subsidiary……………………………………………. P18,200

Note: The equity method of accounting is used, the manner the choices were presented.
25. a – under the current rate method since historical rate (rate on date of transaction) is not
practicable to determine , then PAS 21 requires the use of average rates:

Investment balance, January 1, 20x4……………………………P1,600,000

Add: Share in net income: 800,000 FC x 70% x P.57…………... 319,200
Less: Amortization of allocated excess ………..…..……………
Dividends; 50,000 FC x 70% x P.59, historical rate
on date of declaration…………………………………. 20,650
Translation adjustment loss (debit): P25,000 x 70%........... 17,500
Investment balance, December 31, 20x4………………………P1,881,050

26. d – 30% x P25,000 = P7,500.

27. P451,600
Beginning inventory (230,000 x P.68) P156,400
Purchases (720,000 x P.71) 511,200
Ending inventory (300,000 x P.72) (216,000)
Cost of Goods Sold P451,600
28. P216,000
Beginning inventory (230,000 x P.68) P156,400
Purchases (720,000 x P.71) 511,200
Ending inventory (300,000 x P.72) (216,000)
Cost of Goods Sold P451,600

29. P1,975,000
Beginning inventory 400,000
Purchases 1,700,000
Ending inventory (520,000)
Cost of Goods Sold 1,580,000 x P1.25 = P1,975,000

30. P629,200 - Ending inventory (520,000 x P1.21) = P629,200

Multiple Choice Theories

1. D 9. a 17. c 25. d 33. a 41. d 49. c 57. c 65. b 73. a
2. C 10. c 18. c 26. c 34. a 42. c 50. c 58. d 66. d 74. a
3. C 11. a 19. d 27. b 35. b 43. c 51. b 59. a 67. b 75. c
4. D 12. b 20. b 28. a 36. c 44. a 52. a 60. a 68. e 76. a
5. C 13. b 21. c 29. d 37. c 45. b 53. c 61. a 69. e 77. a
6. B 14. c 22. d 30. b 38. a 46. c 54. c 62. b 70. d 78. b
7. A 15. c 23. c 31. b 39. a 47. d 55. b 63. a 71. d
8. D 16. a 24. a 32. d 40. c 48. c 56. b 64. e 72. a

Note for:
17. Note: Answer – d – under PAS 29 in relation to PAS 21, it requires restatement first before translation and neither of the
two methods is use. ln fact all assets, liabilities and equity accounts are translated using current rates. ln US, the
temporal method is used in cases of highly inflationary economy.
39. The unadjusted trial balance is remeasured regardless of the functional currency. For US GAAP, the answer should
be letter “D.
51. Because the peso is the functional currency, the financial statements must be translated using the current rate
method. Therefore, answers (a) and (d) can be eliminated. Because the subsidiary has a net asset position and the
peso has appreciated from P.16 to P.19, a positive translation adjustment will result.
52. All asset accounts are translated at current rates.
56. By translating items carried at historical cost by the historical exchange rate, the temporal method maintains the
underlying valuation method used by the foreign subsidiary.
54. Marketable equity securities are carried at market value and therefore translated at the current exchange rate
under the temporal method.
55. When the U.S. dollar is the functional currency, SFAS 52 requires remeasurement using the temporal method with
remeasurement gains and losses reported in income.
56. Wages payable is translated at the current exchange rate.
57. Gains and losses on hedges of net investments (whether through a forward contract, borrowing, or other technique)
are offset against the translation adjustment being hedged.
58. Remeasurement gains are reported in the income statement as a part of income from continuing operations.
64. When the remeasurement method is used, monetary accounts are restated at the exchange rate at the balance
sheet date, while nonmonetary accounts are restated using the exchange rate(s) at the date(s) the transaction(s)
occurred which are reflected in the account balance. ln this question, bonds payable and accrued liabilities are
both monetary accounts and would be restated using the balance sheet exchange rate. Trading securities
represent a nonmonetary account. Trading securities would be restated using the balance sheet rate because the
account balance is stated at the market values at the balance sheet date. lnventories are also a nonmonetary
asset. Since they are stated at cost, a historical exchange rate would be used to restate inventories.
62. The current rate method of translation allows the use of a weighted average exchange rate for revenues and
expenses that occur throughout the year. Since both sales and wages expense occurs throughout the year, a
weighted average exchange rate can be used for translation.
63. For hedges of net investments in a foreign entity, the amount of the change in fair value of the hedging instrument is
recorded to other comprehensive income that then becomes part of the accumulated other comprehensive
income. The change in the translation adjustment during the period is reported as a component of other
comprehensive income and then carried forward to be accumulated in the stockholders’ equity section of the
balance sheet with the other components of other comprehensive income. Therefore, in this case in which a hedge
of a net investment in a foreign entity is used, the exchange gain on the hedge is reported along with the change in
the translation adjustment.