FOREIGN CURRENCY TRANSACTIONS

FOREIGN CURRENCY TRANSACTIONS

DEFINITIONS OF TERMS

Conversion. The exchange of one currency for another.

Current exchange rate. The rate at which one unit of a currency can be exchanged for (converted into) another currency. For purposes of translation of financial statements, the current exchange rate is the rate at the end of the period covered by the financial statements or at the dates of recognition in those statements with respect to revenues, expenses, gains, and losses.

Foreign currency. A currency other than the functional currency of the reporting entity being referred to (for example, the Philipine peso could be a foreign currency for a foreign entity).

Foreign currency transactions. Transactions whose terms are denominated in a currency other than the reporting entity’s functional currency. Foreign currency transactions arise when an enterprise (1) buys or sells goods or services on credit whose prices are denominated in foreign currency, (2) borrows or lends funds and the amounts payable or receivable are denominated in foreign currency, (3) is a party to an unperformed forward exchange contract, or (4) for other reasons, acquires or disposes of assets or incurs or settles liabilities denominated in foreign currency.

Functional currency. The currency of the primary economic environment in which the entity operates; normally, the currency of the environment in which the entity primarily generates and expends cash.

Local currency. The currency of a particular country being referred to.

Monetary items. Cash, claims to receive a fixed amount of cash, and obligations to pay a fixed amount of cash.

Non-monetary items. All statement of financial position items other than cash, claims to cash, and cash obligations.

Reporting currency. The currency used by the entity to prepare its financial statements.

Spot rate. The exchange rate for immediate delivery of currencies exchanged.

Transaction date. The date on which a transaction (for example, a sale or purchase of merchandise or services) is recognized in accounting records in conformity with generally accepted accounting principles. A long-term commitment may have more than one transaction date (for example, the due date of each progress payment under a construction contract is an anticipated transaction date).

Transaction gain or loss. Transaction gains or losses result from a change in exchange rates between the functional currency and the currency in which a foreign currency transaction is denominated. They represent an increase or decrease in (1) the actual functional currency cash flows realized upon settlement of foreign currency transactions and (2) the expected functional currency cash flows on unsettled foreign currency transactions.

Rules for translating FOREIGN CURRENCY TRANSACTIONS (FCT) into the entity’s FUNCTIONAL CURRENCY:

a.       A FCT shall be recorded, on initial recognition the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

b.      At each balance sheet date the foreign currency monetary item shall be adjusted to conform with the closing rate (the spot rate at the balance sheet date), which same adjustment is recognized as foreign exchange gain or foreign exchange loss, as the case maybe, and carried to current income determination even though such gain or loss is unrealized.

c.       At the date of settlement, any difference between the book carrying value of the foreign currency monetary item (established at the most recent balance sheet date) and the functional currency amount is recognized either as a foreign exchange gain or loss, as the case maybe, and carried to current income determination. The functional currency amount is calculated by applying to the foreign currency amount the spot exchange rate at the date of the settlement.        

Problem 1 (Importing transaction)

                Bacoor Corporation is a Philippine company in the Cavite area. Its functional currency is the Philippine peso.

 On December 10, 2019, Bacoor purchased equipment from an European Company invoiced at Euro50,000, to be settled on  February 28, 2020. The exchange rates between the euro currency and the peso at various dates follow:

      December 10, 2019                                        P         60.00

      December 31, 2019 (year-end)                            60.10

      February 28, 2020                                                      60.15

Required:

(a)    Prepare all pertinent entries for the above financial information.

(b)   At what amounts will the (1) Equipment? P_____  and (2) the Accounts payable? P_____

be shown on the 2019 balance sheets?

Answer:

(a)    Journal Entries:

Dec 10       Equipment                          P 3,000,000

                                     Accounts Payable            P 3,000,000

                     (Euro50,000 x 60)

Dec 31       Forex Loss                           P 5,000

                                     Accounts Payable            P 5,000

                     (Euro50,000 x (60.10 – 60))

Feb 28       Forex Loss                           P2,500

                     Accounts Payable            3,005,000

                                     Cash                                      P3,007,500

                     (Loss: Euro50,000 x (60.15 – 60.10))

                     (Cash: Euro50,000 x 60.15)

(b1) Equipment                     P3,000,000

(b2) Accounts Payable        P3,005,000         

 Problem 2 (Exporting transaction)

Tagaytay Enterprises, a Philippine exporter sells rattan baskets to an Australian importer that will pay AUD15,000. Tagaytay does not require immediate payment and allows its foreign buyer 90 days to pay for its purchases. Tagaytay shipped the goods on December 1, 2019, with payment to be received on March 1, 2020.

The following are the exchange rates between the Australian Dollar and the Philippine peso at pertinent dates:

      December 1, 2019                                                      AUD1: P46.30

      December 31, 2019 ( year-end)                           AUD1: P46.34

      March 1, 2020                                                              AUD1: P46.28

Required:

(a)    Prepare all pertinent journal entries for the above information in the books of Tagaytay Enterprises.

(b)   At what amounts will any foreign exchange gain/ (loss) be shown on the (1) 2019 income, statement P_______________ and on the (2) 2020 income statement P__________________.?

Answer:

(a)    Journal Entries:

Dec 1          Accounts Receivable                      P 694,500

                                     Sales                                                      P 694,500

                     (AUD15,000 x 46.30)

Dec 31       Accounts Receivable                      P 600

                                     Forex Gain                                          P 600

                     (AUD15,000 x (46.34 – 46.30))

Mar 1         Forex Loss                           P 900

                     Cash                                      694,200

                                     Accounts Receivable                                      P695,100

                     (Loss: AUD15,000 x (46.28 – 46.34))

                     (Cash: AUD15,000 x 46.28)

(b1) 2019 Forex Gain                           P 600

(b2) 2020 Forex Loss                           P 900

Problem 3 (Investment in Foreign Trading Securities)

Naic Company is a Philippine corporation doing in business in the Bacolod City area. On October 1, 2019 Naic purchased 1,500 shares of Nigger, Inc. (a listed company in the United states of America) at a price of USD80 per share. Naic classified the investment as trading securities. The PHL peso/ US dollar exchange rates on October 1, 2019 and December 31, 2019 were P50.20 and P50.25, respectively. The price of Nigger, Inc. shares at December 31, 2019 was USD100 each.

Required: Prepare all pertinent entries for the above financial information.

Answer:

Journal Entries:

Oct 1          Investment in Nigger Shares                       P 6,024,000

                                     Cash                                                                      P 6,024,000

                     (1,500 shares x USD80 x 50.20)

Dec 31       Investment in Nigger Shares                       P 1,513,500

                                     FV Gain                                                                                P1,507,500

                                     Forex Gain                                                          6,000

                     (AUD15,000 x (46.34 – 46.30))

Shares: (1,500 shares x USD100 x P50.25) – 6,024,000

FV Gain (1,500 shares x USD20 x P50.25)

Forex Gain [(1,500 shares x USD80) x .05]