solution to chapter 21

Chapter 21Problem I1. Functional Currency Is the Local Currency Unit Translation Into the Presentation

Currency (Current/Closing Rate Method)Functional CurrencyIs Local Currency Unit US DollarsTranslation into the Presentation Currency (Current/Closing Rate Method)

Combined Statement of Income andRetained Earnings Adjusted TrialBalance ($)

TranslationExchange

RateAdjusted Trial

Balance(Pesos)

Sales 3,624,000 (A) 40.20 145,684,800Cost of goods sold 2,220,000 (A) 40.20 89,244,000Depreciation expense 120,000 (A) 40.20 4,824,000Other expenses 786,000 (A) 40.20 31,597,200Income tax expense 98,400 (A) 40.20 3,955,680Net Income to Retained Earnings 399,600 16,063,920Retained earnings, 1/1 576,000 (1) 23,040,000

Total 975,600 39,103,920Less: Dividends declared, 9/1/20x4 360,000 (H) 40.10 14,436,000Retained earnings, 12/31 to Balance Sheet 615,600 24,667,920Balance SheetCash. 1,116,000 (C) 40.25 44,919,000Accounts receivable (net) 729,600 (C) 40.25 29,366,400Inventory (FIFO) 996,000 (C) 40.25 40,089,000Land. 600,000 (C) 40.25 24,150,000Buildings (net) 780,000 (C) 40.25 31,395,000Equipment (net) 516,000 (C) 40.25 20,769,000

Total 4,737,600 190,688,400

Accounts payable 768,000 (C) 40.25 30,912,000Short-term notes payable 762,000 (C) 40.25 30,670,500Bonds payable 1,080,000 (C) 40.25 43,470,000Common stock, P10 par 1,152,000 (H) 40.00 46,080,000Paid-in capital in excess of par 360,000 (H) 40.00 14,400,000Retained earnings, from above _ 615,600 24,667,920

Total 4,737,600 190,200,420Foreign Currency Translation Reserve Gain OCI)

credit _________ B/A 487,980Total 4,737,600 190,688,400

*Include 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 (FunctionalCurrency US Dollars)

US $TranslationExchange

RateReportingCurrency(Pesos)

1/2 Exposed net asset position *2,088,000 40.00 83,520,000Adjustments 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.. 85,147,92012/31 Exposed net asset position. 2,127,600 40.25 85,635,900Change in cumulative translation adjustment

during yearnet increase. 487,9801/2 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 2,160,000Nonmonetary assets Common stock 1,152,000

Inventory 912,000 Paid-in capital in excess of par 360,000Fixed assets 2,016,000 Retained earnings 576,000Total 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 Shareholders EquityFunctional CurrencyIs Local Currency Unit US$Translation into the Presentation Currency (Current/Closing Rate Method)

S CompanyStatement of Comprehensive Income

For the Year EndedDecember 31, 20x4

Net income P16,063,920Other comprehensive income:

Foreign currency translation reserve gain.. 487,980Comprehensive Income. P16,055,100

S CompanyStatement of Shareholders Equity

For the Year EndedDecember 31, 20x4

CommonStock

Paid-incapital inexcess of

parRetainedEarnings OCI* Total

Balance, 1/1/20x4 P46,080,000 P14,400,000 P23,040,000 P 0 P83,520,000Comprehensive Income:

Net income 16,063,920 16,063,920Other comprehensive

Income 487,980 487,980Comprehensive Income P100,071,900Dividends 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

*OCI other comprehensive income

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

Functional CurrencyIs Philippine Peso -Translation into the Functional Currency (Remeasurement or Temporal Method)

Balance SheetAdjusted

TrialBalance ($)

RemeasurementExchange

RateAdjusted

Trial Balance(Pesos)

Cash. 1,116,000 (C) 40.25 44,919,000Accounts receivable (net) 729,600 (C) 40.25 29,366,400Inventory (FIFO) 996,000 Schedule 40,059,120Land. 600,000 (H) 40.00 24,000,000Buildings (net) 780,000 (H) 40.00 31,200,000Equipment (net) 516,000 (H) 40.00 20,640,000

Total 4,737,600 190,184,520

Accounts payable 768,000 (C) 40.25 30,912,000Short-term notes payable 762,000 (C) 40.25 30,670,500Bonds payable 1,080,000 (C) 40.25 43,470,000Common stock, P10 par 1,152,000 (H) 40.00 46,080,000Paid-in capital in excess of par 360,000 (H) 40.00 14,400,000Retained earnings _ 615,600 (B/A) 24,652,020

Total 4,737,600 190,184,520Combined Statement of Income andRetained EarningsSales 3,624,000 (A) 40.20 145,684,800Cost of goods sold 2,220,000 Schedule 89,041,680Depreciation expense 120,000 (H) 40.00 4,800,000Other expenses 786,000 (A) 40.20 31,597,200Income tax expense 98,400 (A) 40.20 __3,955,680Net income before remeasurement loss 16,290,240Remeasurement loss - debit 0 ___242,220Net Income to Retained Earnings 399,600 16,048,020Retained earnings, 1/1 576,000 (1) 23,040,000

Total 975,600 39,088,020Less: Dividends declared, 9/1/20x4 360,000 (H) 40.10 14,436,000Retained earnings, 12/31 from balance sheet 615,600 24,652,020

*Include 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 rateB/A balancing amountScheduleTranslation of Cost of Goods Sold

Accounts ($)


Rate PesosBeginning inventory (assumed). 912,000 (H) 40.00 36,480,000Purchases (assumed).. 2,304,000 (A) 40.20 92,620,800

Total.. 3,216,000 129,100,800Less: Ending inventory. 996,000 (A) 40.22 40,059,120Cost of goods sold 2,220,000 89,041,680

Verification of the Translation Adjustment Remeasurement or Temporal Method(Functional Currency Philippine Peso)

US $TranslationExchange

RateReportingCurrency(Pesos)

1/2 Exposed net monetary liability position.. *840,000 40.00 33,600,000Adjustments for changes in net monetary position

during year:Less: Increase in cash and receivables from sales (3,624,000) 40.20 145,684,800Add: Decrease in monetary assets or increase in

monetary liabilities:Purchases 2,304,000 40.20 92,620,800Other expenses 786,000 40.20 31,597,200Income taxes 98,400 40.20 3,955,680Dividends declared.. 360,000 40.10 14,436,000

Net monetary liability position translated using ratein effect at date of each transaction.. 30,524,880

Less: 12/31 Exposed net monetary liability position **764,400 40.25 30,767,100Remeasurement gain (loss) ( 242,220)

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

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

**See above:US $

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

3. Translation Using a Trial Balance ApproachTranslation into the Presentation Currency (Current/Closing Rate Method)Functional CurrencyIs Local Currency Unit US DollarsTranslation into the Presentation Currency (Current/Closing Rate Method)

AccountsAdjusted TrialBalance ($) Exchange

Adjusted Trial Balance(Pesos)

Debit Credit Rate Debit CreditSales 3,624,000 (A) 40.20 145,684,800Cost of goods sold 2,220,000 (A) 40.20 89,244,000Depreciation expense 120,000 (A) 40,20 4,824,000Other expenses 786,000 (A) 40.20 31,597,200Income tax expense 98,400 (A) 40.20 3,955,680Retained earnings, 1/1 576,000 (1) 23,040,000Dividends declared, 9/1 360,000 (H) 40.10 14,436,000Cash. 1,116,000 (C) 40.25 44,919,000Accounts receivable (net) 729,600 (C) 40.25 29,366,400Inventory (FIFO), 12/31 996,000 (C) 40.25 40,089,000Land 600,000 (C) 40.25 24,150,000Buildings (net) 780,000 (C) 40.25 31,395,000Equipment (net) 516,000 (C) 40.25 20,769,000Accounts payable 768,000 (C) 40.25 30,912,000Short-term notes payable 762,000 (C) 40.25 30,670,500Bonds payable 1,080,000 (C) 40.25 43,470,000Common stock, P10 par 1,152,000 (H) 40.00 46,080,000Paid-in capital in excess of par _________ __360,000 (H) 40.00 ___________ _14,400,000

Sub-totals 8,322,000 8,322,000 334,745,280 334,257,300Foreign Currency TranslationReserve Gain OCI) credit _________ _________ ___________ 487,980Totals 8,322,000 8,322,000 334,745,280 334,745,280

*Include 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 rateNote: 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 theappropriate rate existing at the date of inventory acquired.

Translation into the Functional Currency (Remeasurement or Temporal Method)Functional CurrencyIs Philippine Peso -Translation into the Functional Currency (Remeasurement or Temporal Method)

AccountsAdjusted TrialBalance ($) Exchange


Debit Credit Rate Debit CreditSales 3,624,000 (A) 40.20 145,684,800Purchases 2,304,000 (A) 40.20 92,620,800Depreciation expense 120,000 (H) 40.00 4,800,000Other expenses 786,000 (A) 40.20 31,597,200Income tax expense 98,400 (A) 40.20 3,955,680Retained earnings, 1/1 576,000 (1) 23,040,000Dividends declared, 9/1 360,000 (H) 40.10 14,436,000Cash. 1,116,000 (C) 40.25 44,919,000Accounts receivable (net) 729,600 (C) 40.25 29,366,400Inventory (FIFO), 1/1 (assumed) 912,000 (H) 40.00 36,480,000Land 600,000 (C) 40.00 24,000,000Buildings (net) 780,000 (C) 40.00 31,200,000Equipment (net) 516,000 (C) 40.00 20,640,000Accounts payable 768,000 (C) 40.25 30,912,000Short-term notes payable 762,000 (C) 40.25 30,670,500Bonds payable 1,080,000 (C) 40.25 43,470,000Common stock, P10 par 1,152,000 (H) 40.00 46,080,000Paid-in capital in excess of par _________ __360,000 (H) 40.00 ___________ 14,400,000

Sub-totals 8,322,000 8,322,000 334,015,080 334,257,300Remeasurement loss - debit _________ _________ ____242,220 ___________

Totals 8,322,000 8,322,000 334,257,300 334,257,300*Include 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 rateNote: 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 theappropriate rate existing at the date the inventory was acquired, refer to schedule below.

ScheduleTranslation of Cost of Goods Sold

Accounts ($)



Total.. 3,216,000 129,100,800Less: Ending inventory. 996,000 (A) 40.22 40,059,120Cost 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 wayit was presented under the current/closing rate method

Adjusted TrialBalance ($) Exchange


Accounts Debit Credit Rate Debit CreditSales 3,624,000 (A) 40.20 145,684,800Cost of goods sold 2,220,000 Schedule 89,041,680Depreciation expense 120,000 (A) 40.00 4,800,000Other expenses 786,000 (A) 40.20 31,597,200Income tax expense 98,400 (A) 40.20 3,955,680Retained earnings, 1/1 576,000 (1) 23,040,000Dividends declared, 9/1 360,000 (H) 40.10 14,436,000Cash. 1,116,000 (C) 40.25 44,919,000Accounts receivable (net) 729,600 (C) 40.25 29,366,400Inventory (FIFO), 1/1 (assumed) 996,000 (H) 40.00 40,059,120Land 600,000 (C) 40.00 24,000,000Buildings (net) 780,000 (C) 40.00 31,200,000Equipment (net) 516,000 (C) 40.00 20,640,000Accounts payable 768,000 (C) 40.25 30,912,000Short-term notes payable 762,000 (C) 40.25 30,670,500Bonds payable 1,080,000 (C) 40.25 43,470,000Common stock, P10 par 1,152,000 (H) 40.00 46,080,000Paid-in capital in excess of par _________ __360,000 (H) 40.00 ___________ 14,400,000

Sub-totals 8,322,000 8,322,000 334,015,080 334,257,300Remeasurement loss - debit _________ _________ ____242,220 ___________

Totals 8,322,000 8,322,000 278,547,750 278,547,750

ScheduleTranslation of Cost of Goods Sold

Accounts ($)



Total.. 2,680,000 129,100,800Less: Ending inventory. 830,000 (A) 40.22 _40,059,120Cost of goods sold 1,850,000 89,041,680

Correction: Exchange rate for 1 dollar instead of 1 peso; 20x9 should be 20w9Problem II

Translation Into thePresentation Currency or

Translation From Functional Translation IntoCurrency to the Presentation the Functional

Currency or Currency orCurrent Rate Method Temporal Method

or Translation** or RemeasurementAccounts payable P.16 C P.16 CAccounts receivable P.16 C P.16 CAccumulated depreciation P.16 C P.26 HAdvertising expense P.19 A P.19 AAmortization expense P.19 A P.25 HBuildings P.16 C P.26 HCash P.16 C P.16 C

Common stock P.28 H P.28 HDepreciation expense P.19 A P.26 HDividends paid (10/1) P.20 H P.20 HNotes payable P.16 C P.16 CPatents (net) P.16 C P.25 HSalary expense P.19 A P.19 ASales 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 historicalrate is not practicable to determine.

Problem IIICurrent Method

Remeasurement /Temporal Method

Accounts Receivable Current CurrentPrepaid Assets Current HistoricalAccounts Payable Current CurrentCommon Stock Historical HistoricalLand Current HistoricalGoodwill Current HistoricalSales Revenue Weighted Average Weighted AverageDepreciation Expense Weighted Average Historical

Problem IVa. Prepaid Insurance Currentb. Land Currentc. Common Stock Historicald. Bonds Payable Currente. Sales Weighted Averagef. Goodwill Currentg. Allowance for Doubtful Accounts Currenth. Deferred Income Taxes Current

Problem Va. Cash Currentb. Accounts Receivable Currentc. Inventory, carried at cost Historicald. Equipment Historicale. Accumulated Depreciation Historicalf. Bonds Payable Currentg. Common Stock Historicalh. Sales Weighted Average

Problem VIRock Corporation

For the Year Ended December 31, 20x7FC Rate Dollars

Income StatementNet sales FC 2,000,000 .37 P740,000

Costs and expenses 800,000 .37 296,000Net income FC 1,200,000 .37 P444,000

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

Balance SheetAssets:Current assets FC 3,000,000 .50 P 1,500,000Plant assets (net)

(purchased January 1, 20x4) 55,000,000 .50 27,500,000Total assets FC 58,000,000 P29,000,000

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

Problem VII - Abercrombie20x4 net loss (100,000 FCs) x P.215 P (21,500)20x5 net income (200,000 FCs) x P.24 48,00020x6 dividend (50,000 FCs) x P.245 (12,250)20x6 net income 75,000 FCs x P.25 18,750Translated balance on December 31, 20x6 P 33,000

Problem VIII Philippine-owned Foreign SubsidiaryBeginning-of-year net assets x change in exchange rate during the year:

210,000 x (P1.15 P1.10) P10,500Net income for 20X1 x (current rate average rate):

50,000 x (P1.15 P1.125) 1,250Increase in net assets from stock issue x (current rate - historical rate):

30,000 x (P1.15 P1.12) 900Decrease in assets from dividends (current rate dividend date rate):

(10,000) x (P1.15 P1.13) (200)P12,450

Problem IXFunctional CurrencyIs the Currency of a Hyperinflationary Economy

FCPriceIndex

Restated(in FC)

ExchangeRate

Translated(in Pesos)

Cash (M) . . . . . . . . . . . . . . . . . . . . . . 420,000 * 420,000 (C) 1.75 735,000Inventory (N) . . . . . . . . . . . . . . . . . . . 3,240,000 300/270 3,600,000 (C) 1.75 6,300,000Property, plant and equipment (N) 1,080,000 300/150 2,160,000 (C) 1.75 3,780,000Total . . . . . . . . . . . . . . . . . . . . . . . . . . 4,740,000 6,180,000 10,815,000

Current liabilities (M) . . . . . . . . . . . . 840,000 * 840,000 (C) 1.75 1,470,000Non-current liabilities (M) . . . . . . . . 600,000 * 600,000 (C) 1.75 1,050,000Common stock (issued 20x0) (N) . . 480,000 300/100 1,440,000 (C) 1.75 2,520,000Retained earnings . . . . . . . . . . . . . . 2,820,000 3,300,000 (C) (B/A) 5,775,000Total . . . . . . . . . . . . . . . . . . . . . . . . . . 4,740,000 6,180,000 10,815,000

M monetary; N non-monetaryC current rateB/A balancing amount*monetary no restatement

Multiple Choice Problems1. a

The peso is the functional currency, so a remeasurement (or temporal method) isappropriate. Cash and accounts receivable are monetary assets remeasured at currentexchange 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. Landand equipment, both nonmonetary assets (carried at cost) are remeasured at thehistorical exchange rate of P54,000 and P135,000, respectively.

2. bBecause the functional currency is the local currency, a translation (or current ratemethod) is required. All assets accounts are translated at current rates.

3. aThe foreign currency is the US dollars, so a translation (or current rate method) isappropriate. 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) isappropriate. Accounts receivable is a monetary asset remeasured at current exchangerate of P175,000. Inventories (carried at cost) is remeasured at the historical exchangerate 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. dThe 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) isappropriate. All accounts receivable are monetary assets remeasured at currentexchange 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 ofP30,000 and P45,000, respectively.

6. aLCU it is assumed that historical rate is not practicable (despite the presence of it), thenPAS 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 beremeasured using the historical exchange rate (exchange rate when the equipment wasacquired), i.e., :

20x2: (1,700,000 LCU 0)/10 years = 170,000 LCU /1.5 LCU per peso..P113,33320x3: (900,000 LCU 0)/10 years = 90,000 LCU /1.6 LCU per peso 56,250Total.P169,583

7. aLCU 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) isappropriate. Inventory is a nonmonetary asset (carried at cost) is remeasured at thehistorical 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 exchangerate [100,000 x P.17].

9. c There is no indication that the historical rate is not practicable or any indication that therevenue and expenses account were incurred evenly throughout the year and at thesame time the historical rate is given, therefore, cost of goods sold is translated at theexchange rate in effect at the date of accounting recognition, which is the date thegoods 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) isappropriate. Inventory is a nonmonetary asset (carried at cost) is remeasured at thehistorical 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. aLCU Peso

is Functional Currency is Functional CurrencyP120,000 = 2/15/x4 Peso value P10,000 = Foreign currency(110,000) = 12/31/x3 Peso value transaction gainP 10,000 = Foreign currency 30,000 = Remeasurement gain

transaction gain P40,000 = Foreign exchangeGain

Note: The term restating used by foreign subsidiary is an indication that thetemporal or remeasurement method is used.

13. aLCU Peso

is Functional Currency is Functional CurrencyP15,000 = Preadjusted foreign P15,000 = Preadjusted foreign

exchange loss exchange loss6,000 = 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 foreignloss exchange loss

Note: The term restatement used by foreign subsidiary is an indication thatthe temporal or remeasurement method is used.

14. bConsideration transferred P160,000Less:

Book and fair values of sub's net assets680,000 FC x P.21 x .90 = 128,520

Positive excess: Goodwill (partial) P 31,480Based on the choices given, the question is leaning on the partial goodwill approach. Since,there is no choice available for full-goodwill approach.

15. cPesos FC

Goodwill P10,500 FC 50,000 (P10,500 / P.21)Impairment 1,100 (FC5,000 x P.22) 5,000 (FC 50,000 / 10)

16. a - Impairment loss = P10,500 / 10 = P1,05017. 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) isappropriate. Inventory is a nonmonetary asset (carried at cost) is remeasured at thehistorical exchange rate, but since the historical exchange rate cannot be specificallyidentified and purchases happens evenly throughout the period, therefore 20x4 historical(average which is unusual for a remeasurement method but allowed on exceptional casessuch as No. 33) rate of P1.45 is used. Thus:

Cost: 50,000 FC x P1.45 per FC (lower)P 72,500Market: 48,000 FC x P.153 per FC.P 73,440

Under the temporal method, since the valuation of inventory is at historicalexchange rate which leads to valuation at cost (average in this case), so the LCMrule is applied, in contrast to the current rate method (in No. 32), wherein thevaluation of inventory is outright current exchange rate.

19. a - the current rate method is used since the term translate was used, a translation (orcurrent rate method) is required. Dividend declared and paid is translated at historicalexchange 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 becausethe 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 ExchangeCurrencies Rate Pesos

Net Assets (SHE), beginning 20,000 .15 (HR) 3,000Add: Net Income: (30,000 20,000). 10,000 .19 (HR) 1,900Net Assets (SHE), ending.. 4,900Net Assets (SHE), ending.. 30,000 .21 (CR) 6,300Translation adjustment(positive credit) gain 1,400

SHE stockholders equity.HR (historical rate) was used for Net Income (Sales and Costs of Sales since the details oftransaction were given.)CR (current rate) was used for Net Assets (Assets and Liabilities account) to determinethe ending balance, so that the translation gain should be properly determined.

23. aFC Exchange Rate Pesos

Beginning net monetary assets, 1/1 100,000 x P.16 = P16,000Increases in net monetary assets:

Sale of inventory .................................... 50,000 x P.20 = 10,000Decreases 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 8,900Ending 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 ineffect (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 comprehensiveincome.

25. a - the foreign currency is the functional currency, so a translation (or current rate method) isappropriate. 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 historicalrate 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 isP.24 (120,000 FC x P.24 = P28,800).

27. d

Accounts (FC)Remeasurement

ExchangeRate Pesos

Beginning inventory 500,000 (H)* P.00148 P 740Purchases 1,000,000 (A) .00160 1,600

Total 1,500,000 P2,340Less: Ending inventory 400,000 (A) .00162 __648Cost 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 (temporalmethod) from LCU into the functional currency; then translate (c u r r e n t r a t eme t h od ) into peso by using the average exchange rate since historical rate is notpracticable (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 ofcost of goods sold which means that the value of cost of goods sold should be under thecurrent rate method.

29. c


ExchangeRate Pesos

Beginning inventory 10,000 (H) P1.60 P 16,000Purchases 80,000 (A) 1.50 120,000

Total 90,000 P136,000Less: Ending inventory 15,000 (A) 1.45 __21,750Cost of goods sold 75,000 P114,250

30. b If the functional currency is the foreign currency, then cost of goods sold will betranslated using the average exchange rate since historical rate is not practicable (nodata available on the specific date the items that were purchased) , i.e., 75,000 FC x P1.50= P112.500.

31. b


ExchangeRate Pesos

Beginning inventory 20,000 (H) P.93 P 18,600Purchases 400,000 (A) .96 384,000

Total 420,000 P402,6 00Less: Ending inventory _15,000 (A) .99 __14,850Cost 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 unlikeNo. 9, therefore, cost of goods sold is translated at the average exchange rate for 20x5which is P.96 [405,000 FC (refer to No. 48) x P.96 = P388,800).

33. d refer to No. 3134. 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 cannotbe specifically identified and purchases happens evenly throughout the period, therefore20x4 historical (average which is unusual for a remeasurement method but allowed onexceptional cases such as No. 33) rate of P1.43 is used. Thus:

Cost: 300,000 LCU x P1.43 per LCU (lower)P 429,000Market (NRV at replacement cost) : 320,000 LCU x P.142 per LCUP 454,400

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

36. a - under the current rate method, all assets are translated at the currentexchange rate, therefore the inventory should be translated at P1.42 (FC 320,000 xP1.42 = P454,400).

37. a CNI, P3,100,000 and Cons. CI, P3,220,000Consolidated Net Income for 20x4

Net income from own/separate operations:P Company P2,000,000S Company 1,100,000

Total P3,100,000Less: Non-controlling Interest in Net Income* P220,000

Amortization of allocated excess 0Goodwill impairment _____ 0 220,000

Controlling Interest in Consolidated Net Income or Profit attributable toequity holders of parent.. P2,880,000

Add: Non-controlling Interest in Net Income (NCINI) 220,000Consolidated Net Income for 20x4 P3,100,000Add: Comprehensive Income 120,000Consolidated Comprehensive Income P3,220,000

*Non-controlling Interest in Net Income (NCINI) for 20x4Net income of S Company P 1,100,000Less: Amortization of allocated excess (refer to amortization table above) 0

P 1,100,000Multiplied by: Non-controlling interest %.......... 20%Non-controlling Interest in Net Income (NCINI) P 220,000Add: NCI on Comprehensive Income (translation gain)

(P120,000 x 20%) 24,000Non-controlling Interest in Comprehensive Income P 244,000

38. a regardless of the method used (whether current rate or temporal method, the rate to beused should be the historical rate on the date of declaration, i.e. P.23 (20,000 LCU x P.23 x75% = P3,450).

39. c - Translation adjustment loss (debit): P8,000 x 75% = P6,00040. 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 fairvalue differential relating to the patent as they are considered net assets of Transportand 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 25,000Less: Amortization expense [125,000/ 5 years = FC 25,000 x P.22]. ( 5,500)Undervalued patent, net on 12/31/20x4................ P 19,500Undervalued building, net on 12/31/20x4 [(125,000 FC 25,000 FC

= 100,000 FC x P.24. 24,000Translation 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 currentrate method, the historical rate is not given therefore, historical rate is not practicable to beuse, 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 FCCost: 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 PesosDebit Credit

Exchangerate Debit Credit

Common stock 5,000,000 .20 1,000,000Purchases 8,000,000 .18 1,440,000Sales 12,000,000 .18 2,160,000Cash* 8,000,000 .16 1,280,000Equipment 1,000,000 _________ .16 _160,000 _________

17,000,000 17,000,000 2,880,000 3,160,000Translation 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 notidentified as to the date of acquisition)

49. b FC Exchange rate Pesos

Net assets, 1/1/20x4 0 P 0Changes in net assets, 20x4

Issued common stock 1,000,000 1 FC / P.48 2,083,333Net income 80,000 1 FC / P.44 181,818Dividends paid ( 20,000) 1 FC / P.46 ( 43,478)

Net assets, 12/31/20x4 1,060,000 P2,221,673Net assets, 12/31/20x4 at current rate 1,060,000 1 FC / P.42 _2,523,810Translation adjustment increase (gain) P 302,137

Apply to rules under the current method.50. a51. b52. b

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

53. bAs the loan was still outstanding at the end of the period and it is a monetary item, itshould be retranslated at the exchange rate at the end of the reporting period (1,520,000yens x P1 / 1.66 yens = P915,663 ). The exchange difference should be recognized as again 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 monetaryitems (i.e. bank loan payable in this case) or on translating monetary items at ratesdifferent from those at which they were translated on initial recognition during the periodor in previous financial statements shall be recognized in profit or loss in the period inwhich they arise.

54. bThe 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 isrecorded as an exchange loss and reported in other comprehensive income.

55. c Nt Dollar 175,000 / Nt Dollar 1.298 = P134,823Goodwill arising from acquisition Nt Dollar 175,000Divided by: Closing/Current rate (Nt dollar : peso)Nt Dollar 1.298Goodwill in the consolidated balance sheet. P134,823In the consolidated financial statements, any goodwill arising on the acquisition of aforeign operation should be treated as an asset of the foreign operation. The goodwillshould therefore be expressed in the functional currency of the foreign operation andtranslated at the closing rate at the date of each statement of financial position. The sametreatment is required of any fair value adjustments to the carrying amounts of assets andliabilities arising on the acquisition of a foreign operation. In both cases exchangedifferences are recognized in other comprehensive income, rather than as part of theprofit or loss for the period.

56. b

Fair value adjustments (undervaluation of land) .Nt 50,000Divided by: CLOSING / CURRENT RATE on the balance sheet

(Nt dollar per peso) 1.56Fair value adjustments... P 32,051PAS21 par. 47 requires fair value adjustments to the carrying amounts of assets andliabilities arising on the acquisition of a foreign operation to be treated as assets andliabilities of the foreign operation. Therefore they are translated at the closing rate ofexchange.

57. c 160,000 yens x P1 / 2.40 yens = P66,667PAS 21 par. 23 (a) requires the foreign currency monetary items, such as trade payables, ofan entity to be retranslated at the closing rate at the end of a reporting period.

58. cConsideration Transferred. 9.0 millionLess: Fair value of net assets acquired.. 6.0 millionGoodwill. 3.0 millionDivided by: Current/Closing rate on the balance sheet. 2.0 baht per pesoGoodwill in the Consolidated Balance Sheet.P1.5 millionExaminees or students may be misled that since the functional currency is peso, thetemporal method (applied only in case of subsequent to date of acquisition) should then beapplied wherein goodwill or any fair value adjustments is considered as a non-monetaryasset carried at historical cost be remeasured (or translated) using historical rate (which inthis problem is 1.5 baht = P1). But the problem do not fall under this category the temporalmethod, instead it is an example of a goodwill and fair value adjustments arising fromacquisition 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 thepurchase price over the acquirers interest in the fair value of the identifiable net assets ofthe acquired company is recognized as goodwill on consolidation. In the context of aforeign company, the issue arises as to whether goodwill is an asset of the acquiredcompany or an asset in the acquirers books. If it is an asset of the acquired subsidiary, thegoodwill is a foreign asset which should be translated in the same manner as any other assetof the acquired subsidiary, which may give rise to a translation difference. However, if it istreated as an asset in the acquirers 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 fairvalue adjustments to the carrying amount of assets and liabilities arising onthe acquisition of that foreign operation shall be treated as assets andliabilities of the foreign operations. Thus they shall be expressed in thefunctional currency of the foreign operation and shall be translated at theclosing rate

Subsequent to date of acquisition, accordingly goodwill has to be measured in thefunctional currency of the foreign operation. If the functional currency of the foreignoperation is the local currency, the goodwill on acquisition is to be translated at the closingrate. On the other hand, if the functional currency of the foreign operation is the parents

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 foreignoperation,

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 theyear-end it is retranslated to P80,000 (400,000 baht x P1/5 baht). The difference of P20,000is recorded as an exchange loss and reported in other comprehensive income.In the consolidated financial statements, any goodwill arising on the acquisition of aforeign operation should be treated as an asset of the foreign operation. The goodwillshould therefore be expressed in the functional currency of the foreign operation andtranslated at the closing rate at the date of each statement of financial position. The sametreatment is required of any fair value adjustments to the carrying amounts of assets andliabilities arising on the acquisition of a foreign operation. In both cases exchangedifferences are recognized in other comprehensive income, rather than as part of theprofit or loss for the period.

60. aAllocated Excess arising from consolidationP1,200,000 bahtDivided by: CLOSING / CURRENT RATE on the balance sheet

(baht per peso) _ 2.0Allocated Excess (over/under valuation)... P 600,000Refer to Nos. 55 and 58 for further discussion of using closing/current rate. Again, the samewith No. 58, the functional currency of peso is somewhat misleading; it does not refer to theuse 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 = P7,500Note: 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 instatement of comprehensive income (income statement). The 60,000 occurred in translation sincethe functional currency is the foreign currency, then current rate method is used and anycumulative translation gain or loss (AOCI) will be in the stockholders equity.63. c

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

64. dCorrection: LCU should be Pesos

Total assets P500,000Total Liabilities and SHELiabilities P 300,000SHE

Common stock 40,000Retained earnings,1/1/x6 P 80,000Add: Net income (P200,000- P150,000) 50,000Less: Dividends _____-0- 130,000AOCI (loss) ( 20,000) __450,000

Effect on the 20x6 exchange rate P 50,000

65. cCorrection: LCU should be Pesos

Retained earnings,1/1/x6 P 80,000Add: Net income (P200,000- P150,000) 50,000Less: Dividends _____-0-Retained earnings,1/1/x6 P130,000

66. cHedging Instrument:

12 month -Forward rate date of hedging, 1/1/x6 P .60Spot rate, date of expiration, 12/31/20x6 ____.56

P .04x: No. of foreign currencies: LCUs 100,000Forward 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 56,000Stockholders equity: 100,000 LCU x P.60, historical rate __60,000 _4,000

Net AOCI P -0-67. b

Selling price of subsidiary P 5,000,000Less: Carrying/book value of subsidiary __4,000,000Gain on sale of subsidiary P 1,000,000AOCI translation adjustment loss ___300,000Net gain on sale of subsidiary P 700,000

68. dPAS 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 theexistence 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 = P544,00070. a - 875,000 x P1.62 = P1,417,50071. d - 4,300,000 x P.57 = P2,451,00072. b (930,000 - 600,000) P1.03 = P339,900 debit73. c - 675,000,000 x P.0086 + 60,000,000 x P.0088 = P6,333,00074. a - [(675,000,000 - 135,000,000)/8] P.0086 + (60,000,000/10) (8/12) P.0088 = P615,70075. b -

Beginning balance 135,000,000 x P.0086 P1,161,000Current period depreciation expense 615,700[(675,000,000 - 135,000,000)/8] P.0086 +

(60,000,000/10) (8/12) P.0088Ending balance P1,776,700

76. d - P1,529,000 + P52,000 - P490,000 - P253,000 - P352,000 = P486,00077. b - (P692,000 + P18,000 - P185,000 - P72,000 - P126,000) .6 = P196,20078. a - {[(198,000 - 138,000) + (720,000 - (650,000 - 230,000))/10] P.095} .9 = P7,69579. c - (P690,000 - P351,000 - P103,000 - P125,000 - P12,000) .2 = P19,80080. a - [P458,000 - P175,000 - P52,000 + P15,000 - (140,000 + 450,000/10) P.68] .2 = P24,04081. d - [P760,000 - P260,000 - P80,000 - P20,000 - (100,000 + 260,000/10) P1.06] .4 = P114,57681. a - (800,000,000 + 75,000,000) P.0084 = P7,350,00082. b - [(800,000,000 - 300,000,000)/5] P.0088 + [(75,000,000/10) (3/12)] P.0086 = P896,12583. c

Beginning balance 300,000,000Current period depreciation expense [(800,000,000 - 101,875,000

300,000,000)/5] + [(75,000,000/10) (3/12)]Ending balance (LCU) 401,875,000Ending balance (pesos) 401,875,000 x P.0084 = P 3,375,750

84. b - P600,000 - P327,000 - P57,000 = P216,00085. b - P370,000 + P760,000 + P374,000 + P36,000 + P30,000 - P572,000 - P472,000 - P550,000 =

P24,000 debit86. a - P1,478,000 - P530,000 - P268,000 - P247,000 = P433,00087. b - (P1,783,000 - P741,000 - P358,000 - P416,000) .7 = P187,60088. b - {[(180,000 - 137,000) + (830,000 - 650,000)/10] P1.53} .8 = P74,66489. b - (47,000 x P1.18 + 78,000 x P1.16) .8 = P116,75290. a - (52,000 x P.66 + 76,000 x P.69) .9 = P47,19691. 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 = P34,50093. d - [P735,000 - P322,000 - P258,000 - (160,000 + 360,000/10) P.66] .3 = P7,69294. c - [P1,200,000 - P420,000 - P190,000 - (110,000 + 180,000/10) P1.20] .2 = P87,28095. 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.. P31,000Less: Amortization of allocated excess 0Income from subsidiary.P 31,000

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

97. cConsideration transferred P402,000Less:

Book and fair values of sub's net assets300,000 FC x P1.20x 100% = 360,000

Positive excess: Goodwill (partial) P 42,000Dollars Euros

Goodwill P42,000 FC 35,000 (P 42,000 / P1.20)Impairment 4,340 (FC3,500 x P1.24) 3,500 (FC35,000 / 10)Balance P37,660 FC 31,500Translatedbalance P41,580 (FC31,500 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 crTranslation adjustments from translating goodwill 3,920 crTotal translation adjustment P15,920cr

Quiz - XXI1. 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 athistorical cost, such as prepaid insurance and goodwill which are nonmonetary assets, areremeasured 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, atranslation (or current rate method) is required. All assets accounts are translated at currentrates.

5. aThe current rate method is used since the term translated was used, a translation (orcurrent rate method) is required. All assets accounts are translated at current rates.

6. P687,500LCU since the problem indicates that expense accounts occurred approximately evenlyduring the year is an indication that historical rate is not practicable, then PAS 21 requires theuse 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 nonmonetaryasset 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 ratemethod. The inflation rate of 20% is not a basis to conclude that the country where thesubsidiary is located is experiencing a hyperinflationary economy because the requirementshould 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 expensewere incurred evenly during the year.Net income: 300,000 LCUs x P.55..P 165,000Less: Dividend paid: 100,000 LCUs x P.52 (historical rate).. 52,000Effect 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 .82Spot rate, date of expiration, 12/31/20x6 ____.75

P .07x: No. of foreign currencies: LCUs 300,000

Forward Contract loss Cash flow hedge (AOCI) P 21,000Translation Loss (AOCI)

Net Assets (Assets Liabilities): (800,000 500,000) x P.75,current rate P 225,000

Stockholders equity: 300,000 LCU x P.80, historical rate _240,000 _15,000AOCI balance - loss P36,000

11. P4,307,000 = 7,300,000 LCUs x P.5912. P736,000 = 800,000 LCUs x P.9213. P972,000 = 900,000 LCUs x P1.0814. P164,900 debit = (400,000 - 230,000) P.9715. P112,000 debit = (900,000 - 700,000) P.5616. P21,000 credit = P440,000 + P670,000 + P329,000 + P27,000 + P20,000 - P327,000 - P728,000 -

P410,000 = P21,000 credit17. a

LCU since historical rate (rate on date of transaction) were not given for provision ofdoubtful accounts and rent expense, therefore, historical rate is not practicable, then PAS 21requires 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 remeasuredusing the historical exchange rate (exchange rate when the equipment wasacquired), i.e., 120,000 x P.50 = P60,000

Expenses related to monetary asset such as uncollectible accounts and rent expenseshould be remeasured using average exchange rate [(80,000 + 200,000) x P.44 =P123,200]

18. aLCU Peso



transaction loss transaction loss(P60,000 - P64,000) (7,000) = Remeasurement gain


Note: The term restatement used by foreign subsidiary is an indication that thetemporal or remeasurement method is used.

19.LCU (No. 39) Peso (No. 40)



transaction loss transaction loss(P50,000 P53,000) 15,000 = Remeasurement loss


Note: The term restatement used by foreign subsidiary is an indication that thetemporal or remeasurement method is used.

20. refer to No. 1921.

if analysis is in pesos:Fair value of Subsidiary (100%)

Consideration transferred:Cash P350,000

Less: Book value of stockholders equity of Hastie:(P450,000 FC x P.70, current rate x 100%) 315,000

Allocated excess (excess of cost over book value).. P 35,000Less: Over/under valuation of assets and liabilities:

Increase in patent due to undervaluation __35,000P 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 stockholders equity of Hastie:(P450,000 FC x 100%) 450,000

Allocated excess (excess of cost over book value).. 50,000Less: Over/under valuation of assets and liabilities:

Increase in patent due to undervaluation __50,0000

PAS 21 paragraph 47 states: Any goodwill arising on the acquisition of a foreignoperation and any fair value adjustments to the carrying amounts of assets and liabilitiesarising on the acquisition of that foreign operation shall be treated as assets and liabilities ofthe foreign operation. Thus, they shall be expressed in the functional currency of the foreignoperation (meaning their functional currency is the LCU), and shall be translated at thecurrent/closing rate.Thus, since patent is a fair value adjustments it should be translated at the current rate (onthe 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 togetherwith 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 fordepreciation since the historical rate for patent is not practical to be determined.

23.The subsequent accounting treatments for goodwill and fair value adjustments togetherdepend on the method being used, since the functional currency of Hastie is the FC, thenthe 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 oftransaction) is not practicable to determine , then PAS 21 requires the use of average rate:

Share in net income (given).... P25,000Less: Amortization of allocated excess (No.55).. 6,800Income 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, 20x4P1,600,000Add: Share in net income: 800,000 FC x 70% x P.57... 319,200Less: Amortization of allocated excess ....

Dividends; 50,000 FC x 70% x P.59, historical rateon date of declaration. 20,650

Translation adjustment loss (debit): P25,000 x 70%........... 17,500Investment balance, December 31, 20x4P1,881,050

26. d 30% x P25,000 = P7,500.27. P451,600

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

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

29. P1,975,000Beginning inventory 400,000Purchases 1,700,000Ending 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) = P629,200Multiple Choice Theories1. D 9. a 17. c 25. d 33. a 41. d 49. c 57. c 65. b 73. a2. C 10. c 18. c 26. c 34. a 42. c 50. c 58. d 66. d 74. a3. C 11. a 19. d 27. b 35. b 43. c 51. b 59. a 67. b 75. c4. D 12. b 20. b 28. a 36. c 44. a 52. a 60. a 68. e 76. a5. C 13. b 21. c 29. d 37. c 45. b 53. c 61. a 69. e 77. a6. B 14. c 22. d 30. b 38. a 46. c 54. c 62. b 70. d 78. b7. A 15. c 23. c 31. b 39. a 47. d 55. b 63. a 71. d8. D 16. a 24. a 32. d 40. c 48. c 56. b 64. e 72. aNote 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. In fact all assets, liabilities and equity accounts are translated using current rates. In US, thetemporal 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 shouldbe letter D.

51. Because the peso is the functional currency, the financial statements must be translated using the current ratemethod. Therefore, answers (a) and (d) can be eliminated. Because the subsidiary has a net asset position and thepeso 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. In this question, bonds payable and accrued liabilities areboth monetary accounts and would be restated using the balance sheet exchange rate. Trading securitiesrepresent a nonmonetary account. Trading securities would be restated using the balance sheet rate because theaccount balance is stated at the market values at the balance sheet date. Inventories are also a nonmonetaryasset. 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 andexpenses that occur throughout the year. Since both sales and wages expense occurs throughout the year, aweighted 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 isrecorded to other comprehensive income that then becomes part of the accumulated other comprehensiveincome. The change in the translation adjustment during the period is reported as a component of othercomprehensive income and then carried forward to be accumulated in the stockholders equity section of thebalance sheet with the other components of other comprehensive income. Therefore, in this case in which a hedgeof a net investment in a foreign entity is used, the exchange gain on the hedge is reported along with the change inthe translation adjustment.

solution to chapter 21

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