INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC Advanced FAR, Part 2

COLLEGE OF BUSINESS EDUCATION Midterms Quiz 1

DEPARTMENT OF ACCOUNTANCY ForEx Transactions and Translations

General Instructions: This quiz is to be answered by three (3) persons on one (1) answer sheet. Kindly solve
and answer the different questions given here in good form on a separate sheet of yellow paper. Should you
wish to use more than 1 yellow paper, use only one side of the yellow paper and always put your names on
every paper that you will be using. Also, kindly use a stapler to bind your answer sheets if you will use more
than 1 paper. I WILL EXPECT UTMOST HONESTY in answering this take home quiz.
GOD BLESS FUTURE CPAs!

DEADLINE OF PASSING: NOVEMBER 6, 2018, 1700H

Part 1: Essay – Answer the following questions in 10 sentences or less.

Rubrics scoring for the answers: Content – 4, Coherence of ideas – 4, Grammar – 2

1. Explain how the risks differ for holders and writers of foreign exchange options. Additionally, describe the
difference between American and European options.

2. Discuss the factors that may be considered in determining if a Thai subsidiary of a Philippine firm has the
peso or the baht as its functional currency. The subsidiary only manufactures component parts that are
shipped to the Philippines firm's final production plant in Makati.

Part 2: Cases – Solve the following task-based simulations in good form on your answer sheets.

Case 1: (10 points) Below is the TRIAL BALANCE of FUJIMA CORPORATION, a Japanese subsidiary of the
Philippine Firm HALIK CORPORATION in Japanese yen on December 31, 2017:

TRIAL BALANCE
Debit Credit
Cash 58,400
Marketable securities 32,500
Accounts receivable (net) 51,370
Inventories 108,000
Surrender value of life insurance 7,200
Intangible assets 123,900
Property, plant, and equipment 636,000
Accumulated depreciation 93,850
Accounts payable 74,000
Accrued interest payable 7,120
Notes payable 52,000
Bonds payable 80,000
Capital stock 83,000
Paid-in capital in excess of par 190,300
Retained earnings 390,400
Sales 936,300
Cost of goods sold 762,000
Interest expense 7,120
Depreciation expense 39,350
Amortization expense--intangibles 3,100
Other expenses 84,230
Gain on sale of equipment 2,400
Interest income 3,800
Total 1,913,170 1,913,170

The following additional information is available:

a. FUJIMA uses the FIFO inventory method to account for its inventory. Purchases took place uniformly
throughout 2017.
b. During 2017, FUJIMA declared and paid a dividend of 7,000 yens at the end of each calendar quarter.
c. The balances in the contributed capital accounts result from the following transactions:

Paid-in Capital
Date Capital Stock in Excess of Par
January 1, 2013, issuance 40,000 yens 80,000 yens
June 30, 2015, issuance 40,000 104,300
 January 1, 2016, issuance 10,000 20,000
August 1, 2016, retirement (7,000) (14,000)
83,000 yens 190,300 yens

The August 1, 2016, retirement of stock involves stock originally issued on January 1, 2013.

d. The December 31, 2016, retained earnings balance of 418,400 yens, translated into pesos, is P179,460.

e. Selected translation rates are as follows:

Date 1 yen equal to
January 1, 2013 P0.30
2013 average 0.32
2014 average 0.38
February 1, 2015 0.42
June 30, 2015 0.45
2015 average 0.45
January 1, 2016 0.50
February 1, 2016 0.52
August 1, 2016 0.60
December 31, 2016 0.61
2016 average 0.56
March 31, 2017 0.63
June 30, 2017 0.66
September 30, 2017 0.70
December 31, 2017 0.75
2017 average 0.70

Required: Prepare a schedule to translate the December 31, 2017, trial balance of FUJIMA Company from local
currency units to PESOS. The schedule should show the trial balance in yens, the exchange rates, and the trial
balance. (Do not extend the trial balance to statement columns. Supporting schedules should be in good
form.)

Case 2: (5 points) CONG TV Imports purchased automotive parts from a German firm on July 1, 2011. The
parts cost 150,000 Euros to be paid for on August 15. To pay for the parts, CONG TV Imports borrowed
150,000 euros from a German bank on July 16. The loan bears an 11% interest rate to be repaid on August 15
in euros. Another option would have been for CONG TV to have hedged the purchase with a forward exchange
contract on July 1 to buy 150,000 euros at a forward rate of P0.67. Exchange rates were as follows:
Date Spot Rate
July 1, 2011 1 EURO = P0.65
July 16, 2011 1 EURO = P0.60
August 15, 2011 1 EURO = P0.62

Required: Compute the effect on net income assuming (ignore present values and discount rates):
(1) CONG TV did not borrow to pay for the transaction or hedge the transaction on July 1.
(2) CONG TV borrowed from the German bank on July 16.
(3) CONG TV hedged the full purchase on July 1.
Determine also which of these three alternatives would have been the best for CONG TV.

Case 3: (5 points) STUDIO 7 Corporation, a Philippine firm with a calendar accounting year, agreed to buy a
specially made truck from a Japanese firm for delivery on January 31, 2012 with payment due on 2/28/12. On
the same date the agreement was signed, November 1, 2011, a forward contract due on February 28, 2012,
was also signed to purchase 1,000,000 yen, the contract price of the truck. Exchange rates were as follows:
Date Spot Rate Forward Rate
11/1/11 P0.0076 P0.0078
12/31/11 P0.0081 P0.0080
1/31/12 P0.0084 P0.0083
2/28/12 P0.0085 P0.0085

Required: Prepare the journal entries needed to properly reflect the purchase and forward contract through
the end of the fiscal year.

***********end of midterms quiz 1**********