Effects of Foreign Exchange Rates

Chapter 21
The Effects of Changes in Foreign

Exchange Rates
PROBLEM 21-1: THEORY

1 D 6 C
2 A 7 A
3 D 8 C
4 A 9 A
5 D 10 A
PROBLEM 21-2: THEORY

1. D 6. A
2. C 7. C
3. D 8. D
4. A 9. B
5. D 10. C
11. D
12. D
PROBLEM 21-3: THEORY & COMPUTATIONAL

1. Solution:
Nov. 15, Inventory (¥100,000 x ₱0.4295) 42,950
20x1 Accounts payable 42,950
Dec. 31, Accounts payable 500

20x1 Foreign exchange gain 500
(₱0.4295 - ₱0.4245) x ¥100,000
Jan. 15, Accounts payable (₱42,950 - ₱500) 42,450

20x2 Foreign exchange loss (squeeze) 1,000
Cash in bank (¥100,000 x ₱.4345) 43,450
"1
2. Solution:
Nov. 1, No entry
20x1
Dec. 1, Accounts receivable 100,000

20x1 Sale 100,000
Dec. 31, Accounts receivable 3,000
20x1 Foreign exchange gain 3,000
(103,000 – 100,000)
Jan. 15, Cash in bank (¥100,000 x ₱.4345) 105,000

20x2 Accounts receivable (100K – 103,000
3K) 2,000
Foreign exchange gain
3. Solutions:
Requirement (a):
(13.75 x 100,000) = 1,375,000
Requirement (b):
(13.80 – 13.75) x 100,000 = (5,000) loss
Requirement (c):
(13.75 x 100,000) = 1,375,000
Requirement (d):
(13.80 x 100,000) = 1,380,000
Requirement (e):
(13.50 – 13.80) x 100,000 = 30,000 gain
Requirement (f):
(13.50 – 13.75) x 100,000 = 25,000 gain
4. D
5. D
6. A
7. B
"2
8. A
9. B
10. Solutions:
Step 1: Analysis of effects of intercompany transaction
There are no intercompany transactions in the problem.
Step 2: Analysis of net assets

Acquisitio Net
Consolidatio
n date change
Swim Co. (in
n date
(in
(in dollars)
dollars) dollars)
Net assets at carrying amounts $9,000 $15,000

FVA at acquisition date - -
Subsequent depreciation of FVA NIL -

Net assets at fair value $9,000 $15,000 $6,000
Step 3: Goodwill computation

Formula #1:
Consideration transferred $10,000
Non-controlling interest in the acquiree (9K x 30%) – (Step 2,700
2)
Previously held equity interest in the acquiree -

Total 12,700
Fair value of net identifiable assets acquired (Step 2) (9,000)
Goodwill at acquisition date 3,700
Accumulated impairment losses since acquisition date -
Goodwill, net – current year (in dollars) $3,700
Multiply by: Closing rate 45
Goodwill, net – current year (in pesos) ₱166,500
Step 4: Non-controlling interest in net assets
"3
Sub.'s net assets at fair value – Dec. 31, 20x1 (Step 2) $15,000
Multiply by: NCI percentage 30%
Total 4,500
Add: Goodwill to NCI net of accumulated impairment
losses -
NCI in net assets – Dec. 31, 20x1 (in dollars) $4,500
Multiply by: Closing rate ₱45
NCI in net assets – Dec. 31, 20x1 (in pesos) ₱202,500
Step 5: Consolidated retained earnings

Parent's retained earnings – Dec. 31, 20x1 ₱5,430,000
Consolidation adjustments:
Parent's share in the net change in ₱184,8
Sub.'s net assets (a) 00
Unamortized deferred gain (Downstream only) -
Gain or loss on extinguishment of bonds -

Impairment loss on goodwill attributable to
Parent -
Net consolidation adjustments 92,400
Consolidated retained earnings – Dec. 31, ₱5,614,80
20x1 0
(a)
Parent’s share in the net change in Subsidiary’s net assets is
computed as:
Net change in Sub.’s net assets (in dollars) (Step 2) $6,000
Multiply by: Controlling interest 70%
Parent’s share in the change in Sub.’s net assets $4,200
Multiply by: Average exchange rate 44
Parent’s share in the net change in Sub.’s net assets ₱184,800
Step 5A: Translation gain (loss)
"4
The translation gain (loss) recognized in other comprehensive income
in the consolidated financial statements is computed as follows:
Share in
translation
difference
Pool Swim
Co. Co.
(70%) (30%)
1) Translation of XYZ’s opening net assets
₱387,00
Net assets, Jan. 1 - at opening rate ($9K x ₱43)
0
Net assets, Jan. 1 - at closing rate ($9K x ₱45) 405,000
Increase in opening net assets – gain 18,000 12,600 5,400
Cumulative translation difference – Jan. 1 - - -
2) Translation of changes in net assets during the period:
Profit - at average rate ($6K x ₱44) 264,000
Profit - at closing rate ($6K x ₱45) 270,000
Increase in profit - FOREX gain 6,000 4,200 1,800
3) Translation of goodwill
Goodwill, Dec. 31 - at opening rate

($3.7K x₱43)
159,100
Goodwill, Dec. 31 - at closing rate ($3.7K x ₱45) 166,500
Increase in goodwill - FOREX gain 7,400 7,400 -
₱24,20
Total translation gain – OCI ₱31,400 ₱7,200
0
Step 6: Consolidated profit or loss and comprehensive income

Parent Subsidiary Consolidated
"5
₱700,0
Profits before adjustments 00 ₱264,000(a) ₱964,000
Unrealized profits - - -
Unamortized def. loss - - -
Dividend income - N/A -
Net consolidation adjustments - - -
700,00
Profits before FVA 0 264,000 964,000
Depreciation of FVA - - -
Impairment of goodwill - - -
700,00
Consolidated profit 0 264,000 964,000
Other comprehensive income:

Translation gain - (Step 5A) - - 31,400
₱700,0
Consolidated comp. income 00 ₱264,000 ₱995,400
(a)At average rate ($6,000 x 44 = ₱264,000)
Step 7: P/L and CI attributable to owners of parent and NCI

Owners Consoli-
of parent NCI dated
P's profit before FVA - (Step 6) ₱700,000 N/A ₱700,000
Share in S’s profit before FVA (b) 184,800 79,200 264,000
Profit of loss 884,800 79,200 964,000
Share in translation gain - (Step 5A) 24,200 7,200 31,400
₱86,40
Comprehensive income ₱909,000 0 ₱995,400
"6
(b) Shares in Sub.’s profit before FVA (Step 6): (264K x 70%); (264K x 30%)
Consolidated
ASSETS (pesos)
Investment in subsidiary -
Other assets [10M + (32K x 45)] 11,440,000
Goodwill (Step 3) 166,500
TOTAL ASSETS 11,606,500
LIABILITIES AND EQUITY

Liabilities [2M + (12K x 45)] 2,765,000
Share capital (Parent only) 3,000,000
Retained earnings (Step 5) 5,614,800
Translation differences (Parent only – Step 5A) 24,200
Equity attributable to owners of the parent 8,639,000
NCI in net assets (Step 4) 202,500
Total equity 8,841,500
TOTAL LIABILITIES AND EQUITY 11,606,500
Consolidate
d
(pesos)
Revenues [1.2M + (14,000 x 44)] 1,816,000

Expenses [500K + (8,000 x 44)] (852,000)
Profit for the year 964,000

Translation gain (Step 5A) 31,400
Comprehensive income 995,400
"7
Profit attributable to owners of parent (Step 7) 884,800
Profit attributable to NCI (Step 7) 79,200
Comprehensive income attributable to owners of

parent 24,200
Comprehensive income attributable to NCI 7,200
Comprehensive income for the year 995,400
PROBLEM 21-4: MULTIPLE CHOICE: COMPUTATIONAL
1. B (13.75 x 100,000) = 1,375,000
2. D
3. A (13.80 – 13.75) x 100,000 = 5,000 gain
4. C (13.80 x 100,000) = 1,380,000
5. D (13.50 – 13.80) x 100,000 = (30,000) loss
6. D (13.50 – 13.75) x 100,000 = (25,000) loss
7. D Fixed asset: (36,000 x 23) = 828,000;

Creditor (Accounts payable): (36,000 x 25) = 900,000
8. C (0.45 – 0.55) x 10,000 = 1,000
9. D 26.75 – The exchange rate when title to the goods passed to the
buyer.
10. D 1st transaction: (96,000 – 90,000) = (6,000) loss

2nd transaction: 500,000 + (500,000 x 10% x 6/12) = 525,000 – (520,000 +
26,000) = (21,000) loss
(6,000) + (21,000) = 27,000 total loss
11. D (26 – 20) x 100,000 = (600,000) FOREX loss recognized in profit or

loss.
12. C (50,000 x 10% x 27.89) = 139,450
"8
13. B (See Step 3 below)
Solutions:
We can leave this out because there are no intercompany
transactions in the problem.

Net
Acquisition Consolidati
change
XYZ, Inc. date on date
(in
(in wons) (in wons)
wons)
Share capital 800,000 800,000
Retained earnings 3,200,000 4,160,000

Totals at carrying amounts 4,000,000 4,960,000
FVA at acquisition date a 1,600,000 1,600,000

Net assets at fair value (in 960,00
wons) 5,600,000 6,560,000 0
a The fair value adjustment at acquisition date is determined as follows:
Acquisition-date fair value of XYZ's net assets (in wons) 5,600,000

Acquisition-date carrying amount of XYZ's net assets (in (4,000,00
wons) 0)
FVA - attributable to undervalued land (in wons) 1,600,000
Multiply by: Closing rate ₱0.05
FVA - attributable to undervalued land (in pesos) ₱80,000
No subsequent depreciation of FVA is recognized because the FVA

relates to land, i.e., non-depreciable asset.

Formula #1:
6,000,00
Consideration transferred (in wons) 0
"9
Non-controlling interest in the acquiree (5.6M x 20%) – (Step 1,120,00
2) 0
7,120,00
Total 0
(5,600,00
Fair value of net identifiable assets acquired (Step 2) 0)
1,520,00
Goodwill at acquisition date 0
Accumulated impairment losses since acquisition date -
1,520,00
Goodwill, net – current year (in wons) 0
XYZ's net assets at fair value – Dec. 31, 20x1 (in wons) (Step
2) 6,560,000
Total 1,312,000
losses -
NCI in net assets – Dec. 31, 20x1 (in wons) 1,312,000
No goodwill is attributed to NCI because NCI is measured at proportionate share.

ABC's retained earnings – Dec. 31, 20x1 ₱2,580,000
ABC's share in the net change in XYZ's net ₱30,7
assets (a) 20
"10
Parent -
₱2,610,72
Consol. retained earnings – Dec. 31, 20x1 0
(a) ABC’s share in the net change in XYZ’s net assets is computed as:
960,00
Net change in XYZ’s net assets (in wons) (Step 2) 0
768,00
ABC’s share in the change in XYZ’s net assets (in wons)
0
Multiply by: Average exchange rate 0.04
ABC’s share in the net change in XYZ’s net assets (in ₱30,72
pesos) 0

Share in
translation
difference
ABC XYZ,
Co. Inc.
(80%) (20%)
Net assets, Jan. 1 - at opening rate (5.6M x

₱0.03)
168,000
Net assets, Jan. 1 - at closing rate (5.6M x ₱0.05) 280,000
Increase in opening net assets – gain 112,000 89,600 22,400
"11
Profit - at average rate (960K x ₱0.04) 38,400
Profit - at closing rate (960K x ₱0.05) 48,000
Increase in profit - FOREX gain 9,600 7,680 1,920
Goodwill, Dec. 31 - at opening rate (1.52M x

₱0.03)
45,600
Goodwill, Dec. 31 - at closing rate (1.52M x

₱0.05)
76,000
Increase in goodwill - FOREX gain 30,400 30,400 -
127,68 ₱24,32
Total translation gain – OCI 152,000
0 0
The total translation adjustment to goodwill is attributed only to ABC

because goodwill is measured at proportionate share and therefore
no goodwill is attributed to NCI.

1,440,00
Profits before adjustments 0 38,400(a) 1,478,400
1,440,00
Profits before FVA 0 38,400 1,478,400
"12
1,440,00
Consolidated profit 0 38,400 1,478,400
Other comprehensive
income:
1,440,00
Consolidated comp. income 0 38,400 1,630,400
(a)At average rate (960,000 x .04 = ₱38,400)

Owners Consoli-
of parent NCI dated
ABC's profit before FVA - (Step 6) 1,440,000 N/A 1,440,000
Share in XYZ’s profit before FVA (b) 30,720 7,680 38,400
Profit of loss 1,470,720 7,680 1,478,400
Share in translation gain - (Step 5A) 127,680 24,320 152,000
Comprehensive income 1,598,400 32,000 1,630,400
(b) Shares in XYZ’s profit before FVA (Step 6): (38,400 x 80%); (38,400 x 20%)
The consolidation worksheet is prepared as follows:
"13
Consolidation Worksheet
December 31, 20x1
XYZ Cons
ABC XYZ,
, olidat
Co. Inc. Tran
Inc. ed
(in (in slati Consolidation
(in (in
peso won on
pes pesos
s) s)
os) )
Investment in 180,0
- (eliminated) -
subsidiary 00
(8M + 260K +
8,000 5,200 0.05 260, 8,340,
Other assets 80K FVA) (Step
,000 ,000 (CR) 000 2)
000
76,00
Goodwill - (Step 3)
0
8,180 5,200 260, 8,416,

Total assets
,000 ,000 000 000
1,600 240,0 0.05 12,0 (1,200,000 + 1,612,

Liabilities ,000 00 (CR) 00 12,000) 000
4,000 800,0 (omitt (omi 4,000,

Share capital ,000 00 ed) tted) (Parent only) 000
2,580 4,160 (omitt (omi 2,610,
Retained earnings (Step 5)
,000 ,000 ed) tted) 720
Translation (Step 5A) – 127,6
-
differences Parent only 80
Equity attrib. to 6,738,

owners of parent 400
Non-controlling 65,60
(Step 4)
interest 0
6,580 4,960 0.05 248, 6,804,

Total equity
,000 ,000 (CR) 000 000
Total liabilities 8,180 5,200 260, 8,416,

and equity ,000 ,000 000 000
3,600 2,400 0.04 96,0 (3,600,000 + 3,696,

Revenue ,000 ,000 (AR) 00 96,000) 000
(2,16 (1,44
0.04 (57, (540,000 + (2,217
Expenses 0,000 0,000 (AR) 600) 14,400) ,600)
) )
"14
Profit for the 1,440 960,0 38,4 1,478,
year ,000 00 00 400
Other
comprehensive
income:
152,0
Translation gain (Step 5A)
00
Comprehensive 1,440 960,0 38,4 1,630,

income ,000 00 00 400
*(CR) = closing rate; (AR) = average rate. The translations of the individual
components of the subsidiary’s equity are omitted because these are not needed
in the preparation of the consolidated financial statements (i.e., the subsidiary’s
equity is eliminated in the consolidated financial statements.
"15
Optional reconciliations:
Total assets of ABC Co. 8,180,000
Total assets of XYZ, Inc. (5,200,000 x 0.05 closing rate) 260,000
Investment in subsidiary (180,000)
Fair value adjustments - net (Step 2) 80,000
Goodwill – net (Step 3) 76,000
Effect of inter-company transactions -
Consolidated total assets 8,416,000
Total liabilities of ABC Co. 1,600,000

Total liabilities of XYZ, Inc. (240,000 x 0.05 closing rate) 12,000
Fair value adjustments - net -
Effect of inter-company transactions -
Consolidated total liabilities 1,612,000
Share capital of ABC Co. 4,000,000

Share premium of ABC Co. -
Consolidated retained earnings (Step 5) 2,610,720
Translation difference (Step 5A – Parent only) 127,680
Non-controlling interests (Step 4) 65,600
Consolidated total equity 6,804,000
14. D (See Step 4 above)
15. D (See Step 5 above)
16. A (See Step 5A above)
17. A (See Step 6 above)
18. B (See Step 6 above)
"16
19. C (See Step 7 above)
20. A (See solutions above)
21. C (See solutions above)
PROBLEM 21-5: EXERCISES: COMPUTATIONAL
1. Solution:
Nov. 15, No entry

20x1
Dec. 10, Inventory (200,000 x 22.4875) 4,497,500

20x1 Accounts payable 4,497,500
Dec. 31, Accounts payable 4,000
20x1 Foreign exchange gain 4,000
(₱22.4875 - ₱22.4675) x 200,000
Jan. 10, Accounts payable (4,497,500 – 4,493,500

20x2 4,000) 4,489,500
Cash in bank (200K x ₱22.4475) 4,000
(squeeze)
2. Solution:
Sept. 1, Accounts receivable (250K x 1.20) 300,000
20x1 Sale 300,000
Dec. 31, Foreign exchange loss 2,500
20x1 Accounts receivable 2,500
(1.19 – 1.20) x 250,000
Jan. 15, Cash in bank (250,000 x ₱1.22) 305,000

20x2 Accounts receivable (300K – 297,500
2.5K) 7,500
"17
3. Solutions:
There are no intercompany transactions in the problem.

Acquisitio Consolidatio Net
Swim Co. n date n date change
(in yens) (in yens) (in yens)
Net assets at carrying amounts ¥90,000 ¥120,000

FVA at acquisition date - -

Net assets at fair value ¥90,000 ¥120,000 ¥30,000

Formula #1:
Consideration transferred ¥100,000
NCI in the acquiree (90K x 10%) – (Step 2) 9,000
Total 109,000
Fair value of net identifiable assets acquired (Step 2) (90,000)
Goodwill at acquisition date 19,000
Accumulated impairment losses since acquisition
-
date
Goodwill, net – current year (in yens) ¥19,000
Multiply by: Closing rate 0.54

Sub.'s net assets at fair value – Dec. 31, 20x1 (Step 2) ¥120,000
"18
Total 12,000
losses -
NCI in net assets – Dec. 31, 20x1 (in dollars) ¥12,000

Parent's retained earnings – Dec. 31, 20x1 ₱500,000
Parent's share in the net change in ₱14,04
Sub.'s net assets (a) 0

Parent -
Consolidated retained earnings – Dec. 31,
20x1 ₱514,040
(a)
Parent’s share in the net change in Subsidiary’s net assets is
computed as:
Net change in Sub.’s net assets (in yens) (Step 2) ¥30,000
Parent’s share in the change in Sub.’s net assets ¥27,000
Multiply by: Average exchange rate 0.52
Parent’s share in the net change in Sub.’s net assets ₱14,040

"19
Share in
translation
difference
Subsidi
Parent ary
(90%)
(10%)
Net assets, Jan. 1 - at opening rate (¥90K x ₱.

50)
₱45,000
Net assets, Jan. 1 - at closing rate (¥90K x ₱.54) 48,600
Increase in opening net assets – gain 3,600 3,240 360
Profit - at average rate (¥30K x ₱.52) 15,600
Profit - at closing rate (¥30K x ₱.54) 16,200
Increase in profit - FOREX gain 600 540 60
Goodwill, Dec. 31 - at opening rate

(¥19K x₱.50)
9,500
Goodwill, Dec. 31 - at closing rate (¥19K x ₱.54) 10,260
Increase in goodwill - FOREX gain 760 760 -
Total translation gain – OCI ₱4,960 ₱4,540 ₱420

₱700,0
Profits before adjustments 00 ₱15,600(a) ₱715,600
"20
700,00
Profits before FVA 0 15,600 715,600
700,00
Consolidated profit 0 15,600 715,600

₱700,0
Consolidated comp. income 00 ₱15,600 ₱720,560
(a)At average rate (¥30,000 x 0.52 = ₱15,600)

Owners Consoli-
of parent NCI dated
P's profit before FVA - (Step 6) ₱700,000 N/A ₱700,000
Share in S’s profit before FVA (b) 14,040 1,560 15,600
Profit of loss 714,040 1,560 715,600
Share in translation gain - (Step 5A) 4,540 420 4,960
Comprehensive income ₱718,580 ₱1,980 ₱720,560
(b) Shares in Sub.’s profit before FVA (Step 6): (15.6K x 90%); (15.6K x 10%)
Consolidated
ASSETS (pesos)
"21
Investment in subsidiary -
Other assets [1.5M + (140K x 0.54)] 1,575,600
Goodwill (Step 3) 10,260
TOTAL ASSETS 1,585,860
LIABILITIES AND EQUITY

Liabilities [250K + (20K x .54)] 260,800
Share capital (Parent only) 800,000
Retained earnings (Step 5) 514,040
Translation differences (Parent only) - Step 5A 4,540
NCI in net assets (Step 4) 6,480
Total equity 1,325,060
TOTAL LIABILITIES AND EQUITY 1,585,860
Consolidate
d
(pesos)
Revenues [1.2M + (150,000 x .52)] 1,278,000

Expenses [500K + (120,000 x .52)] (562,400)

Translation gain (Step 5A) 4,960
Comprehensive income 720,560
Profit attributable to owners of parent (Step 7) 714,040
Profit attributable to NCI (Step 7) 1,560
"22
Comprehensive income attributable to owners of

parent 4,540
Comprehensive income attributable to NCI 420
Comprehensive income for the year 720,560
"23

Effects of Foreign Exchange Rates

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Effects of Foreign Exchange Rates

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Chapter 21

The Effects of Changes in Foreign

PROBLEM 21-1: THEORY

PROBLEM 21-2: THEORY

PROBLEM 21-3: THEORY & COMPUTATIONAL

Dec. 31, Accounts payable 500

Jan. 15, Accounts payable (₱42,950 - ₱500) 42,450

Dec. 1, Accounts receivable 100,000

Jan. 15, Cash in bank (¥100,000 x ₱.4345) 105,000

Step 2: Analysis of net assets

Net assets at carrying amounts $9,000 $15,000

Subsequent depreciation of FVA NIL -

Step 3: Goodwill computation

Previously held equity interest in the acquiree -

Goodwill, net – current year (in pesos) ₱166,500

Step 4: Non-controlling interest in net assets

Step 5: Consolidated retained earnings

Unamortized deferred gain (Downstream only) -

Gain or loss on extinguishment of bonds -

Step 5A: Translation gain (loss)

1) Translation of XYZ’s opening net assets

Net assets, Jan. 1 - at closing rate ($9K x ₱45) 405,000

Increase in opening net assets – gain 18,000 12,600 5,400

Cumulative translation difference – Jan. 1 - - -

2) Translation of changes in net assets during the period:

Profit - at average rate ($6K x ₱44) 264,000

Profit - at closing rate ($6K x ₱45) 270,000

Increase in profit - FOREX gain 6,000 4,200 1,800

Goodwill, Dec. 31 - at opening rate

Goodwill, Dec. 31 - at closing rate ($3.7K x ₱45) 166,500

Increase in goodwill - FOREX gain 7,400 7,400 -

Step 6: Consolidated profit or loss and comprehensive income

Unamortized def. loss - - -

Dividend income - N/A -

Net consolidation adjustments - - -

Other comprehensive income:

Step 7: P/L and CI attributable to owners of parent and NCI

LIABILITIES AND EQUITY

Revenues [1.2M + (14,000 x 44)] 1,816,000

Profit for the year 964,000

Translation gain (Step 5A) 31,400

Comprehensive income 995,400

Profit attributable to NCI (Step 7) 79,200

Profit for the year 964,000

Comprehensive income attributable to owners of

Comprehensive income attributable to NCI 7,200

Comprehensive income for the year 995,400

PROBLEM 21-4: MULTIPLE CHOICE: COMPUTATIONAL

1. B (13.75 x 100,000) = 1,375,000

3. A (13.80 – 13.75) x 100,000 = 5,000 gain

4. C (13.80 x 100,000) = 1,380,000

5. D (13.50 – 13.80) x 100,000 = (30,000) loss

6. D (13.50 – 13.75) x 100,000 = (25,000) loss

7. D Fixed asset: (36,000 x 23) = 828,000;

8. C (0.45 – 0.55) x 10,000 = 1,000

10. D 1st transaction: (96,000 – 90,000) = (6,000) loss

11. D (26 – 20) x 100,000 = (600,000) FOREX loss recognized in profit or

12. C (50,000 x 10% x 27.89) = 139,450

Step 2: Analysis of net assets

Share capital 800,000 800,000

Retained earnings 3,200,000 4,160,000

Subsequent depreciation of FVA NIL -

a The fair value adjustment at acquisition date is determined as follows: