Chapter 21 The Effects of Changes in Foreign

Exchange Rates
Multiple Choice Theory
1. D
6. C
2. A
7. A
3. D
8. C
4. A
9. A
5. D
10. A

11.
12.
13.
14.
15.

D
C
D
A
D

16.
17.
18.
19.
20.
21.

A
C
D
B
C
D

Multiple Choice Computational

Answers at a glance:
1. D
11. B
2. C
12. D
3. B
13. B
4. D
14. C
5. A
15. A
6. D
16. B
7. B
17. B
8. C
18. B
9. A
19. C
10. B
20. B

21.
22.
23.
24.
25.
26.
27.
28.
29.
30.

C
A
A
B
A
D
B
A
D
C

31.
32.
33.
34.
35.
36.
37.
38.
39.
40.

A
B
D
D
A
A
B
C
A
C

41.
42.
43.
44.
45.
46.
47.
48.
49.
50.

C
A
C
A
A
C
B
C
B
D

51.

Solution:
1. D
Solutions:
Nov. 29,
20x1
Dec. 1,
20x1

No entry
Machine (40,000 x 58)
Accounts payable

2,320,000
2,320,000

to record the purchase of machine on an

FOB shipping point term

Dec. 15,
20x1

Accounts payable
Foreign exchange gain

40,000
40,000

to recognize the exchange difference

Dec. 31,
20x1

Foreign exchange loss

Accounts payable

120,000
120,000

to recognize the exchange difference

Jan. 3,
20x2

Accounts payable (2.32M 40K +

120K)

Foreign exchange loss (squeeze)

Cash in bank (10,000 x 61)

107

2,400,000
40,000
2,440,000

to record the settlement of the purchase

transaction

2. C (See entries above)

3. B (120,000 loss 40,000 gain) = (80,000) loss (See entries
above)
4. D (See entries above)
5. A (See entries above)
6. D
7. B
Solutions:
Nov. 29,
20x1
Dec. 1,
20x1

No entry
Accounts receivable (40,000 x 68)
Sale

2,720,000
2,720,000

to record the sale of inventories on an FOB

shipping point term

Dec. 31,
20x1

Accounts receivable
Foreign exchange gain a

80,000
80,000

to recognize the exchange difference

a

Accounts receivable Dec. 1, 20x1 (40,000 x 68)

Accounts receivable Dec. 31, 20x1 (40,000 x 70)
Increase in accounts receivable FOREX gain

Jan.
3,
20x2

Cash in bank (40,000 x 71)

2,840,000
Accounts receivable (2.72M+80K)
Foreign exchange gain (squeeze)

2,720,000
2,800,000
80,000

2,800,000
40,000

to record the settlement of the sale transaction

8. C (See entries above)

9. A (Se entries above)
10. B (80,000 gain in 20x1 + 40,000 gain in 20x2) = 120,000 total
gain (See entries above)

108

11. B
Solutions:
Requirement (a): FOREX gain/loss recognized by ABC Co.
Purchase transaction with Pakistan Co.:
196,079
Accounts payable Dec. 17, 20x1 (PKR 400,000 PKR 2.04)
Accounts payable Dec. 31, 20x1 (PKR 400,000 PKR 2)
200,000
3,921
Increase in accounts payable FOREX loss in 20x1
Accounts payable Dec. 31, 20x1 (PKR 400,000 PKR 2)
Cash paid on settlement - Jan. 5, 20x2 (PKR 400,000 PKR 2.083)

Decrease in accounts payable FOREX gain in 20x2

Total net FOREX gain on the purchase transaction
Sale transaction with Sweden Co.:

200,000
192,031
7,969
4,048
479,904
400,000
79,904

Accounts receivable Dec. 20, 20x1 (SEK 80,000 SEK 0.1667)

Accounts receivable Dec. 31, 20x1 (SEK 80,000 SEK 0.20)

Decrease in accounts receivable FOREX loss in 20x1
Accounts receivable Dec. 31, 20x1 (SEK 80,000 SEK 0.20)
Cash received on settlement Jan. 5, 20x2 (SEK 80,000 SEK 0.24)
Decrease in accounts receivable FOREX loss in 20x2

400,000
333,333
66,667

Total FOREX loss on the sale transaction

146,571

12. D
13. B
Solution:
Accounts payable Dec. 1, 20x1 (BRL 40,000 x 24)
960,000
Accounts payable Dec. 31, 20x1 (squeeze)
1,040,000
Increase in accounts payable FOREX loss in 20x1 (given) 80,000
Accounts payable Dec. 31, 20x1
Divide by:
Exchange rate on December 31, 20x1

1,040,000
BRL40,000
26: BRL1

14. C
Solution:
Accounts payable Dec. 31, 20x1 (see above)
Cash paid on settlement 20x2 (squeeze)

1,040,000
1,020,000
20,000
Decrease in accounts payable FOREX gain in 20x2 (given)
Cash paid on settlement 20x2
Divide by:
Exchange rate on settlement date
15. A 1,040,000 (see squeezed amount above)
109

1,020,000
BRL40,000
25.5: BRL1

16. B 960,000 (40,000 x 24 exchange rate on initial recognition)

17. B
18. B
Solution:
2,200,000 $40,000 = 55:$1 exchange rate at the end of reporting
period.
55 110% = 50 : $1 exchange rate on initial recognition
19. C
Solution:
Carrying amounts at initial exchange rate:
Loan payable ($40,000 x 50)
Interest payable ($40,000 x 10% x 6/12 x 50)
Total payables at initial exchange rate

2,000,000
100,000
2,100,000

Carrying amounts at closing rate:

Loan payable ($40,000 x 55)
Interest payable ($40,000 x 10% x 6/12 x 55)
Total payables at closing rate

2,100,000
110,000
2,310,000

Increase in payables - FOREX loss

210,000

20. B ($100,000 x 45) = 4,500,000

21. C
Solution:
Opening balance
Sept. 30 (45:$1)

CIB in Philippine pesos

1,920,000
3,600,000
880,000 Dec. 16 (44:$1)
4,640,000 Dec. 31 (unadj. bal.)

Cash in bank unadjusted balance

Cash in bank at closing rate ($100,000 x 45)
Decrease in cash in bank Net foreign exchange loss

4,640,000
4,500,000
140,000

22. A
Solution:
Advances spent at initial exchange rate (MYR 32,000 x 14)
Advances spent at average rate (MYR 32,000 x 13.5*)
Decrease in advances receivable FOREX loss Dec. 31, 20x1

* Average rate = (14 + 13) 2 = 13.5

110

448,000
432,000
16,000

Advances unspent at initial exchange rate (MYR 8,000 x 14)

Advances unspent at closing rate (MYR 8,000 x 13)
Decrease in advances receivable FOREX loss Dec. 31, 20x1

112,000
104,000
8,000

Total FOREX loss Dec. 31, 20x1 (16,000 + 8,000)

23. A
Solution:
Advances spent at previous closing rate (MYR 6,000 x 13)
Advances spent at average rate {MYR 6,000 x [(13 + 12) 2]}

24,000

Decrease in advances receivable FOREX loss Jan. 3, 20x2

78,000
75,000
3,000

Advances unspent at previous closing rate (MYR 2,000 x 13)

26,000

Advances unspent at spot rate on Jan. 3, 20x2 (MYR 2,000 x 12) 24,000
Decrease in advances receivable FOREX loss Jan. 3, 20x2

2,000

Total FOREX loss 20x2 (3,000 + 2,000)

5,000

24. B
Solution:
Equipment at carrying amount translated at original spot rate
38,400

(40,000 x 1.2 x 4/5)

Equipment at recoverable amount translated at the spot rate

when the recoverable amount is determined,
i.e., Dec. 31, 20x1 (28,000 x 1.3)
Decrease in carrying amount Impairment loss

36,400
2,000

25. A
Solution:
Inventory at carrying amount translated at original spot rate
10,000

(4,000 x x 5)

Inventory at net realizable value translated at the spot rate

when the net realizable value is determined,
i.e., Dec. 31, 20x1 (1,200 x 6)
Decrease in carrying amount Impairment loss

7,200
2,800

26. D 40,000 x (50 selling rate 48 selling rate)] = 80,000 FOREX

loss
27. B [4,000 x (13 buying rate 10 buying rate)] = 12,000 FOREX
gain

111

28. A
Solution:
Appraised value of equipment Dec. 31, 20x1 (4.8M x 0.26)
Carrying amt. of equipment Dec. 31, 20x1 [(4M x 0.20) x ]
Revaluation surplus recognized in OCI

1,248,000
600,000
648,000

29. D
Solution:
1) Translation of opening net assets
Net assets, Jan. 1 - at opening rate
Net assets, Jan. 1 - at closing rate
Increase in opening net assets gain

1,200,000
2,000,000
800,000

(400M x 0.003)
(400M x 0.005)

Cumulative translation difference Jan. 1

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

(160M x 0.004)
Profit - at average rate
640,000
(160M x 0.005)
Profit - at closing rate
800,000
160,000
Increase in profit gain
3) Translation of goodwill
Goodwill, Dec. 31 - at opening rate
Goodwill, Dec. 31 - at closing rate
Increase in goodwill gain

Total FOREX translation gain OCI

30. C
Solutions:
Formula #1:
Consideration transferred
Non-controlling interest in the acquiree
Prev. held equity interest in the acquiree

Total
Fair value of net assets acquired
Goodwill (in shillings)
Multiply by: Opening rate/ Closing rate
Goodwill (in pesos)

960,000

Jan. 1, 20x1 Dec. 31, 20x1

40,000,000
40,000,000
40,000,000
40,000,000
(32,000,000) (32,000,000)
8,000,000
8,000,000
0.04
0.05
320,000
400,000

31. A (See solution above)

32. B (See Step 3 below)
Solutions:
Step 1: Analysis of effects of intercompany transaction

112

We can leave this out because there are no intercompany

transactions in the problem.
Step 2: Analysis of net assets
XYZ, Inc.

Net
Acquisition Consolidation
date
date
change

Share capital
Retained earnings
Totals at carrying amounts
FVA at acquisition date a
Subsequent depreciation of FVA
Net assets at fair value (in wons)

800,000
3,200,000
4,000,000
1,600,000
NIL
5,600,000

(in wons)

(in wons)

(in wons)

800,000
4,160,000
4,960,000
1,600,000
6,560,000 960,000

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

Acquisition-date fair value of XYZ's net assets (in wons)

Acquisition-date carrying amount of XYZ's net assets (in wons)
FVA - attributable to undervalued land (in wons)

Multiply by: Closing rate

FVA - attributable to undervalued land (in pesos)

5,600,000
(4,000,000)
1,600,000
0.05
80,000

No subsequent depreciation of FVA is recognized because the FVA

relates to land, i.e., non-depreciable asset.
Step 3: Goodwill computation
Formula #1:
Consideration transferred (in wons)
Non-controlling interest in the acquiree (5.6M x 20%) (Step 2)
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (Step 2)
Goodwill at acquisition date
Accumulated impairment losses since acquisition date
Goodwill, net current year (in wons)
Multiply by: Closing rate
Goodwill, net current year (in pesos)

6,000,000
1,120,000
7,120,000
(5,600,000)

1,520,000
1,520,000
0.05
76,000

Step 4: Non-controlling interest in net assets

XYZ's net assets at fair value Dec. 31, 20x1 (in wons) (Step 2) 6,560,000
Multiply by: NCI percentage
20%
1,312,000
Total
Add: Goodwill to NCI net of accumulated impairment losses
1,312,000
NCI in net assets Dec. 31, 20x1 (in wons)
Multiply by: Closing rate
0.05
65,600
NCI in net assets Dec. 31, 20x1 (in pesos)
113

No goodwill is attributed to NCI because NCI is measured at proportionate share.

Step 5: Consolidated retained earnings

ABC's retained earnings Dec. 31, 20x1
Consolidation adjustments:

2,580,000

ABC's share in the net change in XYZ's net assets (a) 30,720
Unamortized deferred gain (Downstream only)

Gain or loss on extinguishment of bonds

Impairment loss on goodwill attributable to Parent
Net consolidation adjustments
Consol. retained earnings Dec. 31, 20x1

30,720
2,610,720

(a)

ABCs share in the net change in XYZs net assets is computed as:
Net change in XYZs net assets (in wons) (Step 2)
960,000
Multiply by: Controlling interest
80%
ABCs share in the change in XYZs net assets (in wons)
768,000
Multiply by: Average exchange rate
0.04
ABCs share in the net change in XYZs net assets (in pesos) 30,720
Step 5A: Translation gain (loss)
The translation gain (loss) recognized in other comprehensive income
in the consolidated financial statements is computed as follows:
Share in translation
difference
ABC Co. XYZ, Inc.
(80%)
(20%)

1) Translation of XYZs opening net assets

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

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

Profit - at average rate (960K x 0.04)
38,400
48,000
Profit - at closing rate (960K x 0.05)
7,680
Increase in profit - FOREX gain
9,600

1,920

Cumulative translation difference Jan. 1

3) Translation of goodwill
Goodwill, Dec. 31 - at opening rate (1.52M x0.03)
Goodwill, Dec. 31 - at closing rate (1.52M x 0.05)

Increase in goodwill - FOREX gain

Total translation gain OCI

45,600
76,000
30,400

30,400

152,000 127,680

114

24,320

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.
Step 6: Consolidated profit or loss and comprehensive income
Profits before adjustments
Consolidation adjustments:
Unrealized profits
Unamortized def. loss
Dividend income
Net consolidation adjustments

Profits before FVA

Depreciation of FVA
Impairment of goodwill

Consolidated profit
Other comprehensive income:
Translation gain - (Step 5A)
Consolidated comp. income
(a)

Parent Subsidiary
(a)
38,400
1,440,000

Consolidated
1,478,400

1,440,000
1,440,000

N/A
38,400
38,400

1,478,400
1,478,400

1,440,000

38,400

152,000
1,630,400

At average rate (960,000 x .04 = 38,400)

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

Owners
Consoliof parent
NCI
dated
ABC's profit before FVA - (Step 6)
1,440,000
N/A
1,440,000
(b)
30,720
7,680
38,400
Share in XYZs profit before FVA
Depreciation of FVA
Impairment of goodwill
Profit of loss
1,470,720
7,680 1,478,400
Other comprehensive income:
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 XYZs profit before FVA (Step 6): (38,400 x 80%); (38,400 x 20%)

The consolidation worksheet is prepared as follows:

115

Consolidation Worksheet
December 31, 20x1
Investment in subsidiary
Other assets
Goodwill
Total assets

ABC Co.
(in pesos)
180,000
8,000,000
8,180,000

XYZ, Inc.
XYZ, Inc.
Consolidated
Translation
Consolidation
(in wons)
(in pesos)
(in pesos)
(eliminated)
5,200,000
0.05 (CR)
260,000 (8M + 260K + 80K FVA) (Step 2)
8,340,000
76,000
(Step 3)
5,200,000
260,000
8,416,000

Liabilities

1,600,000

240,000

0.05 (CR)

12,000

Share capital
Retained earnings
Translation differences
Equity attrib. to owners of parent
Non-controlling interest
Total equity

4,000,000
2,580,000

800,000
4,160,000

(omitted)
(omitted)

(omitted)
(omitted)
-

6,580,000

4,960,000

0.05 (CR)

Total liabilities and equity

8,180,000

5,200,000

Revenue
Expenses
Profit for the year
Other comprehensive income:
Translation gain
Comprehensive income

(1,200,000 + 12,000)

1,612,000

(Parent only)
(Step 5)
(Step 5A) Parent only

248,000

4,000,000
2,610,720
127,680
6,738,400
65,600
6,804,000

260,000

8,416,000

(Step 4)

3,600,000
(2,160,000)
1,440,000

2,400,000
(1,440,000)
960,000

0.04 (AR)
0.04 (AR)

96,000
(57,600)
38,400

(3,600,000 + 96,000)
(540,000 + 14,400)
(Step 5A)

1,440,000

960,000

38,400

3,696,000
(2,217,600)
1,478,400
152,000
1,630,400

*(CR) = closing rate; (AR) = average rate. The translations of the individual components of the subsidiarys equity are omitted because
these are not needed in the preparation of the consolidated financial statements (i.e., the subsidiarys equity is eliminated in the consolidated
financial statements.

116

Optional reconciliations:
Total assets of ABC Co.
Total assets of XYZ, Inc. (5,200,000 x 0.05 closing rate)
Investment in subsidiary
Fair value adjustments - net (Step 2)
Goodwill net (Step 3)
Effect of inter-company transactions
Consolidated total assets

8,180,000
260,000
(180,000)
80,000
76,000
8,416,000

Total liabilities of ABC Co.

Total liabilities of XYZ, Inc. (240,000 x 0.05 closing rate)
Fair value adjustments - net
Effect of inter-company transactions
Consolidated total liabilities

1,600,000
12,000
1,612,000

Share capital of ABC Co.

Share premium of ABC Co.
Consolidated retained earnings (Step 5)
Translation difference (Step 5A Parent only)
Equity attributable to owners of the parent
Non-controlling interests (Step 4)
Consolidated total equity

4,000,000
2,610,720
127,680
6,738,400
65,600
6,804,000

33. D (See Step 4 above)

34. D (See Step 5 above)
35. A (See Step 5A above)
36. A (See Step 6 above)
37. B (See Step 6 above)
38. C (See Step 7 above)
39. A (See solutions above)
40. C (See solutions above)

117

41. C (See Step 3 below)

Solutions:
Step 1: Analysis of errors and intercompany transactions
(a1) Extra-ordinary items Prior period error
The separate financial statements of XYZ,
"extraordinary items."

Inc.

included

Additional information (a) above states that ADM400 million of the

extraordinary items pertain to research costs which were
previously capitalized by XYZ but were written off due to the
attempt on adapting IFRSs.
9
9

PAS 1 Presentation of Financial Statements prohibits the

presentation and disclosure of extraordinary items. PAS 38
Intangible Assets prohibits the capitalization of research costs.
PAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors requires corrections of errors to be accounted for as
adjustment to the opening balance of retained earnings and not in
profit or loss.

The correcting entry is as follows:

Correcting entry #1
Dec. 31 Retained earnings XYZ, Inc.
Extraordinary items

400
400

to adjust the opening balance of

retained earnings for prior period error

(a2) Extraordinary items Impairment loss

Additional information (a) above states that the remainder of the
extraordinary items pertains to the decline in value of a plant that
was damaged during the year.
9

This amount should be recognized as impairment loss and not as

extraordinary item.

Entry made (EM) erroneous entry

Extraordinary items
20x1
Accumulated impairment losses

400

Should be entry (SBE) correct entry

Impairment loss
20x1
Accumulated impairment losses

400

118

400

400

Correcting entry #2
Dec. 31 Impairment loss
Extraordinary items

400
400

to reclassify the erroneous debit to

extraordinary items

(b & c) Fair value adjustments

Fair value of net assets after research costs (given)
Adjusted carrying amount of net assets, Jan. 1 a
Fair value adjustment (in drams)
Divide by: Useful life
Annual depreciation of FVA (in drams)

8,000
(5,600)
2,400
5
480

The adjusted carrying amount of net assets is computed as follows:

Share capital
400
Share premium
800
Retained earnings - adjusted (4,800 - 400) (Step 1.a1)
4,400
5,600
Adjusted carrying amount of net assets, Jan. 1
(d) Intercompany inventory transaction
The intercompany sale of inventory is downstream.
Sale price of intercompany sale (in pesos)
Cost of intercompany sale (120M x 80%)
Gross profit
Multiply by: Unsold portion in ending inventory
Unrealized gross profit (in pesos)

120
(96)
24
50%
12

Additional information (d) above states that a foreign exchange

difference remains in current liabilities. This is analyzed as follows:
XYZ's books
Sept. 1 Raw materials inventory (120M x AMD6)
720
Accounts payable
720
to record the purchase of inventory from parent

Entry made (EM) erroneous entry

Sept.
Accounts payable
21
Cash in bank (120M x AMD6.5)

780
780

to record the payment of accounts payable

Should be entry (SBE) correct entry

Sept.
Accounts payable
21
FOREX loss
Cash in bank (120M x AMD6.5)
to record the payment of accounts payable

119

720
60
780

Correcting entry #3
Dec.
FOREX loss
31
Accounts payable

60
60

(e) Inter-company loan transaction

The loan payable was recorded at the exchange rate on January 1
and no adjustment has yet been made as of year-end for the change
in exchange rate.
The year-end adjustment is determined as follows:
Loan payable at opening rate (200M x AMD5)
Loan payable at closing rate (200M x AMD8)
Increase in loan payable - FOREX loss (in drams)
Correcting entry (Adjusting entry) #4
Dec. 31 FOREX loss
Loan payable

1,000
1,600
(600)

600
600

Additional information (e) above states that ABC Co. has recorded
the loan receivable in current assets while XYZ, Inc. has recorded the
loan payable in noncurrent liabilities. This provides evidence that the
settlement of the loan is neither planned nor likely to occur in the
foreseeable future. Therefore, the loan shall form part of ABC's net
investment in XYZ.
Accordingly, the FOREX loss of AMD600 shall be recognized in profit
or loss in XYZ's separate financial statements but recognized in other
comprehensive income in the consolidated financial statements.
(f) Inter-company dividends
Since the dividends were declared and settled on the same date, no
foreign exchange difference shall arise from the transaction.
The dividends paid by XYZ, Inc. are allocated to the owners of the
parent and to NCI as follows:
(in pesos)
(in drams) AMD8:1
Dividends declared by XYZ, Inc. (in drams)
3,200
400
Allocation:
Dividends to ABC Co. (60%)
1,920
240
Dividends to NCI (40%)
1,280
160

120

Step 2: Analysis of net assets

XYZ, Inc.

Acquisition Consolidation Net

date
change
date

Share capital
Share premium
Retained earnings adjusted (Step 1.a1)
Totals at carrying amounts (in drams)
Fair value adjustments (Step 1.b&c)
Depreciation of FVA (Step 1.b&c)
Unrealized profits (Upstream only)
FOREX loss on trade payable (Step 1.d)
Net assets at fair value (in drams)

400
800
4,400
5,600
2,400
NIL
NIL
NIL
8,000

Forex loss on loan payable (Step 1.e)

8,000

Net assets at fair value (in drams)

400
800
8,000
9,200
2,400
(480)
(60)
11,060
(600)
10,460

3,060
(600)
2,460

The FOREX loss on the loan payable is segregated from the other
adjustments because this item is presented in the consolidated
financial statements as part of other comprehensive income and
therefore should not affect consolidated retained earnings. When
computing for the consolidated retained earnings, the net change of
3,060 will be used (see Step 5).
Step 3: Goodwill computation
Formula #1:
Non-controlling interest in the acquiree (8,000 x 40%) (Step 2)
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (Step 2)
Goodwill at acquisition date
Accumulated impairment losses since acquisition date
Goodwill, net current year (in drams)
Divide by: Closing rate
Goodwill, net current year (in pesos)

8,800
3,200
12,000
(8,000)
4,000
4,000
8
500

Step 4: Non-controlling interest in net assets

XYZ's net assets at fair value Dec. 31, 20x1 (Step 2)
Multiply by: NCI percentage
Total
Add: Goodwill to NCI net of accumulated impairment losses
NCI in net assets Dec. 31, 20x1 (in drams)
Divide by: Closing rate
NCI in net assets Dec. 31, 20x1 (in pesos)

10,460
40%
4,184
4,184
8
523

Consideration transferred (1,760 investment in subsidiary x AMD5)

121

Step 5: Consolidated retained earnings

ABC's retained earnings Dec. 31, 20x1
Consolidation adjustments:

6,960

ABC's share in the net change in XYZ's net assets (a)

297

Unrealized profit (Downstream only) (Step 1.d)

Gain or loss on extinguishment of bonds
Impairment loss on goodwill attributable to Parent
Net consolidation adjustments
Consolidated retained earnings

(12)

285
7,245

(a)

ABCs share in the net change in XYZs net assets is computed as:
Net change in XYZs net assets (in wons) (Step 2)
3,060
Add back: Prior period adjustment of subsidiary (b)
400
3,460
Adjusted net change in XYZs net assets (in wons)
Multiply by: Controlling interest
60%
ABCs share in the change in XYZs net assets (in wons)
2,076
Divide by: Average exchange rate
7
ABCs share in the net change in XYZs net assets (in pesos)
297
(b)

The prior period adjustment of 400M research costs (Step 1.a1) is

added back because the parent shall share only in the net change in
the subsidiarys net assets after the acquisition date. The parent shall
not share in the changes in the subsidiarys net assets prior to the
acquisition date.
Step 5A: Translation gain (loss)
The translation gain (loss) recognized in other comprehensive income
is computed as follows:
Share in translation
difference
ABC Co. XYZ, Inc.
(60%)
(40%)

1) Translation of XYZ's opening net assets

Net assets, Jan. 1 - at opening rate (8,000 5)
Net assets, Jan. 1 - at closing rate (8,000 8)
Decrease in net assets - loss
Cumulative translation difference Jan. 1

1,600
1,000
(600)

(360)

(240)

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

(a)
(6,260 7)
894
Profit - at average rate
(a)
(6,260 8)
Profit - at closing rate
783
(111)
(67)
Increase in profit gain
3) Translation of goodwill
Goodwill, Dec. 31 - at opening rate
Goodwill, Dec. 31 - at closing rate

(4,000 5)
(4,000 8)

122

800
500

(44)

(300)

(300)

(600 7)

(86)

(52)

(34)

5) Translation of FOREX on loan payable

(600 7)
FOREX loss at average rate
(600 8)
FOREX loss at closing rate
Decrease in loss gain

(86)
(75)
11

Increase in goodwill - gain

4) FOREX loss on loan payable

(Step 1.e)

Total translation loss OCI

(1,086)

(772)

(314)

The profit is computed as follows:

Profit for the year before adjustments (in drams)
Research costs (Correcting entry #1) (Step 1.a1)
FOREX loss on trade payable (Correcting entry #3) (Step 1.d)
Adjusted profit before FVA (in drams)
Depreciation of FVA, in total (Step b & c)
Adjusted profit after FVA (in drams)

6,400
400
(60)
6,740
(480)
6,260

Correcting entry #2 does not affect the reported profit because it is

just a reclassification entry (i.e., from extraordinary item to impairment
loss).
The FOREX loss on the loan payable is not included in the
computation of profit above because it will be presented in OCI.
Additional notes:
) 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.
) The translation differences on the loan payable are included in
the computations above because the loan payable forms part of
ABC's net investment in XYZ. (See discussion in Step 1.e)
Step 6: Consolidated profit or loss and comprehensive income
Profits before adjustments
Consolidation adjustments:
Unrealized profits (Step 1.d)
Dividend income (Step 1.f)
Net consolidation adjustments

Profits before FVA

Depreciation of FVA (b)
Impairment of goodwill

Consolidated profit
Other comprehensive income:

Parent
2,800

Subsidiary
(a)
963

(12)
(240)
(252)
2,548
(41)
2,507

N/A
963
(27)
937

123

Consolidated
3,763
(12)
(240)
(252)
3,511
(68)
3,443

Translation loss - (Step 5A)

Consolidated comp. income

2,507

937

(1,086)
2,357

(a)

The profit is computed as follows:

Adjusted profit before FVA (in drams) (see computation above)
Divide by: Average rate
Adjusted profit before FVA (in pesos)

6,740
7
963

(b)

The shares in the depreciation of FVA are computed as follows:

Annual depreciation of FVA (in drams) (Step 1.b&c)
480
Divide by: Average rate
7
68
Annual depreciation of FVA (in pesos)
Allocation:
Share of ABC (68 x 60%)
41
Share of NCI (68 x 40%)
27
As allocated
68
Step 7: P/L and CI attributable to owners of parent and NCI
Owners
Consoliof parent
NCI
dated
ABC's profit before FVA - (Step 6)
2,548
N/A
2,548
(c)
578
385
963
Share in XYZs profit before FVA
Depreciation of FVA
(41)
(27)
(68)
Impairment of goodwill
3,443
Profit of loss
3,085
358
Other comprehensive income:
Share in translation gain - (Step 5A)
(772)
(314)
(1,086)
2,357
Comprehensive income
2,313
44
(c)

Shares in XYZs profit before FVA (Step 6): (963 x 60%); (963 x 40%)

42. A (See Step 4)

43. C (See Step 5)
44. A (See Step 5A)
45. A (See Step 6)
46. C (See Step 7)

124

47. B
Solution:
Aug. Cash (Consideration received)
1,
Investment account (Investment retained)
20x1
NCI

500,000
82,400
412,000
12,000
158,400

Net identifiable assets of former subsidiary

Goodwill
Gain on disposal

(squeeze)

48. C
Solution:
Net monetary items, end.Historical (184K + 296K - 120K)
Less: Net monetary items, end. Restated:
Net monetary assets - Jan. 1 (restated)

360,000

186,667

(160,000 given x 140/120)

Changes in net monetary items during the year:

537,600
Sales (restated) see worksheet above
(134,400)
Purchases (restated) see worksheet above
(179,200)
Other operating expenses (restated)
Purchasing power loss
49. B
Solutions:

125

410,668
(50,668)

Cash
Accounts receivable
Inventory
Building
Accumulated depreciation
TOTAL ASSETS

Historical
184,000
296,000
160,000
400,000
(80,000)
960,000

Loan payable

120,000

Share capital
Retained earnings
Total equity
TOTAL LIABILITIES & EQUITY

400,000
440,000
840,000
960,000

Sales
Inventory, Jan. 1
Purchases
Total goods avail. for sale
Inventory, Dec. 31
Cost of sales
Gross profit
Depreciation
Other operating expenses
Purchasing power loss a
PROFIT FOR THE YEAR

480,000
240,000
120,000
360,000
(160,000)
200,000
280,000
(40,000)
(160,000)

Fraction
N/A
N/A
140/125
140/100
140/100

Restated (in current AOA)

184,000
296,000
179,200
560,000
(112,000)
1,107,200

N/A
140/100
(squeeze)

140/125
140/110
140/125
140/125
140/100
140/125

80,000

126

Closing rate
0.5
0.5
0.5
0.5
0.5

Translated (in Pesos)

92,000
148,000
89,600
280,000
(56,000)
553,600

120,000

0.5

60,000

560,000
427,200
987,200
1,107,200

0.5
0.5

280,000
213,600
493,600
553,600

537,600
305,455
134,400
439,855
(179,200)
260,655
276,945
(56,000)
(179,200)
(50,668)
(8,923)

0.5

268,800

0.5
0.5
0.5
0.5
0.5

130,328
138,472
(28,000)
(89,600)
(25,334)
(4,462)

50. D (See worksheet above)

51. A (See worksheet above)
Exercises
1. Answers:
a. ABCs presentation currency is Canadian dollars. This is a
requirement of the Canadian financial markets regulator for listed
companies in Canada.
b. ABCs functional currency is likely to be Philippine pesos, even
though the company is based in Canada. This is because its
operating activities take place in the Philippines and so the
company will be economically dependent on the pesos if most of
its sales and operating expenses are in pesos.
c. The Japanese yen is deemed a foreign currency for the purpose
of preparing ABCs accounts.
2. Answers:
a. Since ABC Philippines Co. is essentially an extension of the U.S.
main office, ABC Philippines Co.s functional currency is the U.S.
dollar, i.e., the same with the main offices functional currency.
Using the primary factors listed earlier, the U.S. dollar is the
currency that mainly influences ABC Philippines Co.s sales
prices and costs of goods sold.
b. ABC Philippines Co.s presentation currency is the Philippine
pesos. ABC Philippines Co.s annual financial statements to be
filed with the Philippine SEC and the BIR shall be presented in
Philippine pesos.
3. Answer:
The functional currency should be changed to Philippine pesos at the
end of 20x1 if it is considered that the underlying transactions,
events, and conditions of business have changed.
4. Solution:
Nov.
No entry
29,
20x1
Dec. 1, Machine (20,000 x P58)
Accounts payable
20x1
to record the purchase of
machine on an FOB shipping point term

127

1,160,000
1,160,000

Dec.
15,
20x1

Accounts payable
Foreign exchange gain*

20,000
20,000

to recognize FOREX gain on

the exchange difference

*Accounts payable Dec. 15, 20x1 (20,000 x P57)

Accounts payable Dec. 1, 20x1 (20,000 x P58)
Decrease in accounts payable FOREX gain
Dec.
31,
20x1

Foreign exchange loss*

Accounts payable

P1,140,000
1,160,000
P 20,000
60,000
60,000

to recognize FOREX loss on the

exchange difference

* Accounts payable Dec. 31, 20x1 (20,000 x P60)

Accounts payable Dec. 15, 20x1 (20,000 x P57)
Increase in accounts payable FOREX loss

P1,200,000
1,140,000
P 60,000

Total net foreign exchange loss recognized in 20x1 is P40,000

(60,000 loss 20,000 gain).
Jan. 3,
20x2

Accounts payable
Foreign exchange loss (squeeze)
Cash in bank (20,000 x P61)

1,200,000
20,000
1,220,000

to record the settlement of the

purchase transaction

The foreign exchange loss of P20,000 is recognized in profit or loss in

20x2.
5. Solution:
Nov.
No entry
29,
20x1
Dec. 1, Accounts receivable (20,000 x P68)
Sale
20x1

1,160,000
1,160,000

to record the sale of inventories

on an FOB shipping point term

Dec.
31,
20x1

Accounts receivable
Foreign exchange gain*

40,000
40,000

to recognize FOREX gain on

the exchange difference

*Accounts receivable Dec. 1, 20x1 (20,000 x P68)

Accounts receivable Dec. 31, 20x1 (20,000 x P70)
Increase in accounts receivable FOREX gain
128

P1,160,000
1,140,000
P 40,000

Jan. 3,
20x2

Cash in bank (20,000 x P71)

Accounts receivable
Foreign exchange gain
(squeeze)

1,420,000
1,400,000
20,000

to record the settlement of the

sale transaction

6. Solutions:
Requirement (a): FOREX gain/loss recognized by ABC Co.
Purchase transaction:
Accounts payable Dec. 17, 20x1 (PKR 200,000 PKR 2.04)
98,040
Accounts payable Dec. 31, 20x1 (PKR 200,000 PKR 2)
100,000
Increase in accounts payable FOREX loss in 20x1
1,960
Accounts payable Dec. 31, 20x1 (PKR 200,000 PKR 2)
100,000
Cash paid on settlement - Jan. 5, 20x2 (PKR 200,000 PKR 2.083)
96,016
Decrease in accounts payable FOREX gain in 20x2
3,984
Total net FOREX gain on the purchase transaction
2,024
Sale transaction:
Accounts receivable Dec. 20, 20x1 (SEK 40,000 SEK 0.1667)

Accounts receivable Dec. 31, 20x1 (SEK 40,000 SEK 0.20)

Decrease in accounts receivable FOREX loss in 20x1
Accounts receivable Dec. 31, 20x1 (SEK 40,000 SEK 0.20)
Cash received on settlement Jan. 5, 20x2 (SEK 40,000 SEK
0.24)

Decrease in accounts receivable FOREX loss in 20x2

Total FOREX loss on the sale transaction

239,952
200,000
39,952
200,000
166,666
33,334
73,286

Requirement (b): FOREX gain/loss recognized by Pakistani Co.

and Swedish Co.
Answer: Zero. Pakistani Co. and Swedish Co. will not recognize any
FOREX gain/loss on the transactions because the transactions are
settled in their respective functional currencies, not foreign currencies.
7. Solutions:
Analysis:
For a FOREX gain to be recognized on the receivable, more dollars
should have been received. For that to happen, the indirect quotation
should decrease.

129

Let us assume the following information:

Exchange rate at initial recognition = $.020:P1
Exchange rate at settlement = $.018:P1 (decrease)
Receivable at initial recognition: ($2,000 $.020) = P100,000
Receivable at settlement: ($2,000 $.018)
= 111,110
FOREX gain
P 11,110
For a FOREX loss to be recognized on the payable, more yens
should have been paid. For that to happen, the indirect quotation
should also decrease.
Let us assume the following information:
Exchange rate at initial recognition = 1.70:P1
Exchange rate at settlement = 1.50:P1 (decrease)
Payable at initial recognition: (200,000 1.70) = P117,648
Payable at settlement: (200,000 1.50)
= 133,334
FOREX loss
(P 15,686)
Answer: The movements in the dollar-to-P1 and yen-to-P1 exchange
rates are decrease and decrease, respectively.
8. Solutions:
Requirement (a): Exchange rates
Accounts payable Dec. 1, 20x1 (BRL 20,000 x P24)
Accounts payable Dec. 31, 20x1 (squeeze)
Increase in accounts payable FOREX loss in 20x1
Accounts payable Dec. 31, 20x1
Divide by:
Exchange rate on December 31, 20x1

Php 520,000
BRL 20,000
P26: BRL1

Accounts payable Dec. 31, 20x1 (see above)

Cash paid on settlement 20x2 (squeeze)
Decrease in accounts payable FOREX gain in 20x2
Cash paid on settlement 20x2
Divide by:
Exchange rate on settlement date

130

480,000
520,000
40,000

520,000
510,000
10,000

Php 510,000
BRL 20,000
P25.5: BRL1

Requirement (b): Carrying amount of accounts payable Dec.

31, 20x2
Accounts payable Dec. 31, 20x1 (see squeezed amount above)
Php 520,000
Requirement (c): Cost of equipment in 20x1 and 20x2 financial
statements
Cost of equipment (20,000 x P24 exchange rate on initial recognition)
Php 480,000
9. Solution:
P2,200,000 $40,000 = P55:$1 exchange rate at the end of reporting
period.
P55 110% = P50 : $1 exchange rate on initial recognition
10. Solution:
Carrying amounts at initial exchange rate:
Loan payable ($20,000 x P50)
Interest payable ($20,000 x 10% x 6/12 x P50)
Total payables at initial exchange rate

1,000,000
50,000
1,050,000

Carrying amounts at closing rate:

Loan payable ($20,000 x P55)
Interest payable ($20,000 x 10% x 6/12 x P55)
Total payables at closing rate

1,100,000
55,000
1,155,000

Increase in payables - FOREX loss

105,000

11. Solutions:
Requirement (a): Cash in bank at year-end
($50,000 x P45) = P2,250,000
Requirement (b): Net foreign exchange gain or loss
The unadjusted balance of the cash in bank account translated to
Philippine pesos using spot exchange rates on transaction dates is
determined as follows:

131

Opening balance
Sept. 30 (P45:$1)

CIB in Philippine pesos

P960,000
1,800,000

440,000
P2,320,000

Dec. 16 (P44:$1)
Dec. 31
(unadjusted bal.)

Cash in bank unadjusted balance

Cash in bank at closing rate ($50,000 x P45)

P2,320,000
2,250,000
P 70,000

Decrease in cash in bank Net foreign exchange loss

The net FOREX loss is analyzed as follows:

Cash in bank ($40,000 x P45)
Sept.
Sales
30

1,800,000
1,800,000

to record sale in foreign currency

Expenses (10,000 x P44) a

440,000
FOREX loss
40,000
Cash in bank (10,000 x P48) b
480,000
c
30,000
Dec. 31 FOREX loss
Cash in bank
30,000
a
The withdrawal is assumed to have been made to defray expenses.
b
It is assumed that FIFO is used, i.e., the amount withdrawn is from
the opening balance.
c
Cash in bank at spot exchange rates at dates of transaction:
Opening balance ($20,000 - $10,000) x P48
P480,000
Cash sale ($40,000 x P45)
1,800,000
Total
2,280,000
Cash in bank adjusted year-end balance ($50,000 x P45) 2,250,000
FOREX loss year-end adjustment
P 30,000
Dec. 16

Total FOREX loss (P40,000 + P30,000)

P 70,000

12. Solutions:
Requirement (a): FOREX gain or loss on December 31, 20x1
Advances spent at initial exchange rate (MYR 16,000 x P14)
224,000
Advances spent at average rate (MYR 16,000 x P13.5*)
216,000
Decrease in advances receivable
FOREX loss Dec. 31, 20x1
8,000
* Average rate = (P14 + P13) 2 = P13.5
Advances unspent at initial exchange rate (MYR 4,000 x P14)
Advances unspent at closing rate (MYR 4,000 x P13)
Decrease in advances receivable FOREX loss Dec. 31, 20x1

Total FOREX loss Dec. 31, 20x1 (8,000 + 4,000)

132

56,000
52,000
4,000
12,000

The pertinent entries are:

Dec. 15, Advances to officer (20,000 x P14)
20x1
Cash in bank
Dec. 31, Expenses {16,000 x [(P14 + P13) 2]}
20x1
FOREX loss
Advances to officer (16,000 x

280,000
280,000
216,000
8,000
224,000

P14)

Dec. 31,
20x1

FOREX loss [4,000 x (P14 P13)]

Advances to officer

4,000
4,000

Requirement (b): FOREX gain or loss on December 31, 20x2

Advances spent at previous closing rate (MYR 3,000 x P13)
39,000
Advances spent at average rate {MYR 3,000 x [(P13 + P12) 2]}
37,500
Decrease in advances receivable FOREX loss Dec. 31, 20x2
1,500
Advances unspent at previous closing rate (MYR 1,000 x P13)
Advances spent at spot exchange rate on Jan. 5, 20x2
(MYR 1,000 x P12)

13,000

Decrease in advances receivable FOREX loss Dec. 31, 20x2

12,000
1,000

Total FOREX loss 20x2 (1,500 + 1,000)

2,500

The pertinent entries are:

Jan.
Expenses
3,
FOREX loss
20x2
Advances to officer
Jan.
Cash on hand
3,
FOREX loss
20x2
Advances to officer

37,500
1,500
39,000
12,000
1,000
13,000

13. Solutions:
Equipment at carrying amount translated at original spot rate
19,200

(20,000 x P1.2 x 4/5)

Equipment at recoverable amount translated at the spot rate

when the recoverable amount is determined,
i.e., Dec. 31, 20x1 (14,000 x P1.3)
Decrease in carrying amount Impairment loss

18,200
1,000

Inventory at carrying amount translated at original spot rate

5,000

(2,000 x x P5)

Inventory at net realizable value translated at the spot rate

when the net realizable value is determined,
i.e., Dec. 31, 20x1 (600 x P6)
Decrease in carrying amount Impairment loss
133

3,600
1,400

The year-end adjusting entries are as follows:

Dec. 31 Impairment loss
Accumulated impairment
losses

1,000
1,000

to recognize impairment in
equipment

Dec. 31

Impairment loss
Inventory
to recognize inventory writedown

1,400
1,400

14. Solutions:
Purchase transaction:
[20,000 x (P50 selling rate P48 selling rate)] = P40,000 FOREX loss

Sale transaction:
[2,000 x (P13 buying rate P10 buying rate)] = P6,000 FOREX gain

15. Solution:
Appraised value of equipment Dec. 31, 20x1
624,000

(2.4M x P0.26)

Carrying amount of equipment Dec. 31, 20x1

(300,000)

[(2M x P0.20) x ]

Revaluation surplus recognized in other

comprehensive income

324,000

The pertinent entry is:

Dec. 31 Equipment
Revaluation surplus

162,000
162,000

to recognize revaluation surplus

16. Solution:
Net assets of sub., Jan. 1 - at
opening rate
Net assets of sub., Jan. 1 - at
closing rate
Increase in net assets FOREX gain

(200M x P0.003)

600,000

(200M x P0.005)

1,000,000
400,000

ABC's share in FOREX gain

Profit of subsidiary at average
rate

100%
(80M x P0.004)

134

320,000

400,000

Profit of sub at closing rate

Increase in profit - FOREX
translation gain

400,000

(80M x P0.005)

80,000

Parent's share in FOREX gain

Total FOREX translation
gain OCI

100%

80,000
480,000

17. Solutions:

Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the
acquiree
Total
Fair value of net identifiable assets
acquired
Goodwill (in shillings)
Multiply by: Opening rate/ Closing rate
Goodwill (in pesos)

Jan. 1,
20x1
20,000,000
-

Dec. 31,
20x1
20,000,000
-

20,000,000
(16,000,00
0)

20,000,000
(16,000,000
)

4,000,000
0.04

4,000,000
0.05

160,000

200,000

18. Solutions:
1. Analysis of net assets
Table 1: XYZ, Inc.s net assets
Share capital
Retained earnings
Total at carrying amounts
a
FVA at acquisition date
Subsequent depreciation/amortization of
FVA
Subsidiary's net assets at fair value (in
wons)

135

Acquisition date
(wons)
400,000
1,600,000
2,000,000
800,000

Consolida
-tion date
(wons)
400,000
2,080,000
2,480,000
800,000

NIL

2,800,000

3,280,000

Net
change

480,000

Table 1.A
a

The fair value adjustment at acquisition date is determined as

follows:
Acquisition-date fair value of XYZ's net assets
Acquisition-date carrying amount of XYZ's net assets
Excess of fair value attributable to undervalued land
(in wons)
Multiply by: Closing rate
Fair value adjustment on Land - Dec. 31, 20x1 (in
pesos)

2,800,000
(2,000,000)
800,000
0.05
40,000

2. Computation of goodwill
Consideration transferred
Non-controlling interest in the acquiree
[1.4M (see table 1) x 20%]

Previously held equity interest in the acquiree

Total
Fair value of net identifiable assets acquired
(see table 1)

Goodwill in wons
Multiply by: Closing rate
Goodwill in pesos

(wons)
3,000,000
560,000
3,560,000
(2,800,000)
760,000
P0.05
38,000

3. NCI in net assets

Net assets of XYZ fair value at Dec. 31, 20x1
(see Table 1)

Multiply by: NCI percentage

3,280,000
20%

Total
Add: Goodwill to NCI net of accumulated impairment
losses

656,000

NCI in net assets Dec. 31, 20x1 (in wons)

656,000

Multiply by: Closing rate

P0.05

NCI in net assets Dec. 31, 20x1 (in pesos)

32,800

There is no goodwill attributable to NCI because NCI is measured at

its proportionate share in the subsidiarys net assets.
4. Consolidated retained earnings
Parent's retained earnings in current year136

end

1,290,000

Consolidation adjustments:
Parent's share in the net change in
subsidiary's net assets
Unrealized profits (Downstream only)
Gain or loss on extinguishment of bonds
Impairment loss on goodwill attributable to
Parent

15,360 a

15,360

Net consolidation adjustments

Consolidated retained earnings
a

1,305,360

Change in XYZs net assets (see Table 1)

480,000
Multiply by: Controlling interest
80%
ABCs share in the change in XYZs net assets (in wons) 384,000
Multiply by: Average exchange rate
0.04
ABCs share in the change in XYZs net assets (in pesos)
15,360

5. Translation gain (loss)

The translation gain (loss) to be recognized in other comprehensive
income is computed as follows:
Share in translation
difference
XYZ,
ABC Co.
Inc.
(80%)
(20%)

Table 2

1) Translation of XYZ's net assets

Net assets of sub., Jan. 1 at opening rate
(2.8M x P0.03)
Net assets of sub., Jan. 1 at closing rate
Increase in net assets FOREX gain
2) Translation of goodwill
Goodwill, Dec. 31 - at
opening rate
Goodwill, Dec. 31 - at
closing rate
Increase in goodwill FOREX gain

(2.8M x P0.05)

84,000
140,000
56,000

(760K x P0.03)

22,800

(760K x P0.05)

38,000
15,200

3) Translation of XYZ's
profit
Profit of subsidiary at

(480K x P0.04)

137

19,200

44,800

11,200

15,200

average rate
Profit of sub at closing rate
Increase in profit - FOREX
gain
Total FOREX translation
gain OCI

(480K x P0.05)

24,000
4,800

3,840

960

76,000

63,840

12,160

Notice that the total translation adjustment to goodwill is attributed

only to ABC. This is because goodwill is measured at proportionate
share, and therefore there is no goodwill to NCI.
6. Consolidated profit or loss and Consolidated comprehensive
income
Profit before adjustment
Consolidation
adjustments:
Unrealized profits
(Downstream only)
Dividend received from
subsidiary
Gain or loss on
extinguishment of bonds
Net consolidation
adjustments
Profits before fair value
adjustments

Consolidated
comprehensive income

XYZ, Inc.

Consolidated

720,000

19,200*

739,200

- )

- )

- )

- )

720,000

Depreciation/amortization
of FVA
Consolidated profit
Other comprehensive
income:
Gain or loss on translation
of foreign operation
(see Table 2)

ABC Co.

- )

720,000

720,000

*At average rate (480,000 x .04 = 19,200)

138

- )

N/A

- )

- )

19,200

739,200

- )

- )

19,200

739,200

76,000

76,000

95,200

815,200

7. Comprehensive income attributable to owners of parent and

to NCI
Owners of
parent

NCI

Consolidated

Parent's profit before FVA

Share in the subsidiary's
profit before FVA a
Depreciation/ amortization
of fair values
Share in impairment loss
on goodwill
Consolidated profit for
the year
Other comprehensive
income:
Share in translation gain

720,000

N/A

720,000

15,360

3,840

19,200

735,360

3,840

739,200

(see Table 2)

63,840

12,160

76,000

Consolidated
comprehensive income

799,200

16,000

815,200

- )

- )

- )

- )

- )

- )

(19,200 x 80% = 15,360); (19,200 x 20% = 3,840)

The consolidation working papers are prepared as follows:

Statement of financial position
As at December 31, 20x1
ABC Co.

XYZ, Inc.

Consolidated

(in pesos)

(in wons)

(in pesos)

Investment in
subsidiary

90,000

(90,000)

Other assets

4,000,000

2,600,000

[P4M + (2.6M x P.05)]

4,130,000

(see Table 1.A)

40,000

Land
Goodwill
Total assets

Liabilities
Share capital
Retained
earnings
Translation

(see Step 2)

38,000

4,090,000

2,600,000

4,208,000

800,000

120,000

[P800K + (120K x
P.05)]

806,000

2,000,000

400,000

(400,000)

2,000,000

1,290,000

2,080,000

(see Step 4)

1,305,360

(see Step 5)

63,840

139

differences
on foreign
operation
Equity
attributable
to owners of
the parent

3,369,200

Noncontrolling
interest
Total equity
Total
liabilities
and equity

3,290,000

2,480,000

3,402,000

32,800

4,090,000

2,600,000

4,208,000

(see Step 3)

Statement of profit or loss and other comprehensive income

For the year ended December 31, 20x1
ABC Co.
(in pesos)
Revenue
Expenses
Profit for the year
Other
comprehensive
income:
Gain on translation
of foreign operation
Total
comprehensive
income for the
year

XYZ, Inc.

Average

(in wons)

rate

1,800,000

1,200,000

0.040

(1,080,000)

(720,000)

720,000

480,000

720,000

480,000

XYZ, Inc.
(in
pesos)

0.040

(see
Step 5)

Consolidated
(in pesos)

48,000

1,848,000

(28,800)

(1,108,800)

19,200

739,200

76,000

19,200

815,200

Owners of
parent

NCI

Consolidated

ABC's profit (see statement above)

720,000

N/A

720,000

Share in XYZs profit (90%; 10%)

15,360

3,840

19,200

Total profit

735,360

3,840

739,200

Share in translation gain (see Step 5)

63,840

12,160

76,000

Total comprehensive income

799,200

16,000

815,200

140

Optional reconciliations:
1) Consolidated total assets
Total assets of ABC Co.
Total assets of XYZ, Inc. (2.6M x 0.05)
Investment in subsidiary
Fair value adjustments - net (see Table 1.A)
Goodwill net (see Step 2)
Effect of inter-company transactions
Consolidated total assets

4,090,000
130,000
(90,000)
40,000
38,000
4,208,000

2) Consolidated total liabilities

Total liabilities of ABC Co.
Total liabilities of XYZ, Inc. (120,000 x 0.05)
Fair value adjustments - net
Effect of inter-company transactions
Consolidated total liabilities

800,000
6,000
806,000

3) Consolidated total equity

Share capital of ABC Co.
Share premium of ABC Co.
Consolidated retained earnings (see Step 4)
Exchange differences on translation of foreign
operation (see Step 5)

2,000,000
1,305,360
63,840
3,369,200
32,800
3,402,000

Equity attributable to owners of the parent

Non-controlling interests (see Step 3)

Consolidated total equity

19. Solutions:
1. Errors, adjustments and inter-company transactions
a.1: Extra-ordinary items Prior period error
The separate financial statements of XYZ,
"extraordinary items."

Inc.

included

Additional information (a) above states that ADM200 million of the

extraordinary items pertain to research costs which were previously
capitalized by XYZ but were written off due to the attempt on adapting
IFRSs.

141

PAS 1 Presentation of Financial Statements prohibits the

presentation and disclosure of extraordinary items. PAS 38 Intangible
Assets prohibits the capitalization of research costs.
PAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors requires corrections of errors to be accounted for as
adjustment to the opening balance of retained earnings and not in
profit or loss.
Thus, the correcting entry is:
Correcting entry #1
Dec. 31 Retained earnings XYZ, Inc.
Extraordinary items

200
200

to adjust the opening balance

of retained earnings for prior period
error

a.2: Extraordinary items Impairment loss

Additional information (a) above states that the remainder of the
extraordinary items pertains to the decline in value of a plant that was
damaged during the year. This amount should be recognized as
impairment loss and not as extraordinary item.
Entry made (EM) erroneous entry
Extraordinary items
20x1
Accumulated impairment
losses
Should be entry (SBE) correct entry
Impairment loss
20x1
Accumulated impairment
losses
Correcting entry #2
Dec. 31 Impairment loss
Extraordinary items

200
200

200
200

200
200

to reclassify the erroneous

debit to extraordinary items

b. & c.: Fair value adjustments

Fair value of net assets (after adjustment for research cost)
Carrying amount of net assets (after adjustment for
research cost):
Share capital
200
Share premium
400
142

4,000

Retained earnings unadjusted

2,400
Prior period adjustment
(200)
Retained earnings adjusted
Fair value adjustment (in drams)
Divide by:
Annual depreciation of FVA (in drams)

(2,800)
1,200
5
240

2,200

d. Inter-company inventory transaction

Sale price (in pesos)
Cost of sales (P60M x 80%)
Gross profit
Ending inventory
Unrealized gross profit (in pesos)

Downstream
60
(48)
12
50%
6

Additional information (d) above states that a foreign exchange

difference remains in current liabilities. This is analyzed as follows:
XYZ's books
360
Sept. Raw materials inventory (P60M x AMD6)
Accounts payable
360
1
to record purchase of inventory from
parent

Entry made (EM) erroneous entry

Accounts payable
Sept.
Cash in bank (P60M x AMD6.5)
21

390
390

to record payment of accounts

payable to parent

Should be entry (SBE) correct entry

Accounts payable
Sept.
FOREX loss
21
Cash in bank (P60M x AMD6.5)

360
30
390

to record payment of accounts

payable to parent

Correcting entry #3
Dec. 31 FOREX loss
Accounts payable

30
30

143

e. Inter-company loan transaction

The loan payable was recorded at the exchange rate as of January 1
and no adjustment has yet been made as of year-end for the change
in exchange rate.
The year-end adjustment is determined as follows:
Loan payable at opening rate (P100M x AMD5)
Loan payable at closing rate (P100M x AMD8)
Increase in loan payable - FOREX loss
Adjusting entry #4
Dec. 31 FOREX loss
Loan payable

500
800
(300)

300
300

Additional information (e) above states that ABC Co. has recorded
the loan receivable in current assets while XYZ, Inc. has recorded the
loan payable in noncurrent liabilities. This provides evidence that the
settlement of the loan is neither planned nor likely to occur in the
foreseeable future. Therefore, the loan shall form part of ABC's net
investment in XYZ.
Accordingly, the FOREX loss of AMD300 shall be recognized in profit
or loss in XYZ's separate financial statements but recognized in other
comprehensive income in the consolidated financial statements.
f. Inter-company dividends
Since the dividends were declared and settled on the same date, no
foreign exchange difference shall arise from the transaction.
The dividends paid by XYZ, Inc. are allocated to the owners of the
parent and to NCI as follows:
(in
pesos)
(in drams) AMD8:P1
Dividends declared by XYZ, Inc. (in drams)
1,600
200
Allocation:
Dividends to ABC Co. (60%)
960
120
Dividends to NCI (40%)
640
80
2. Analysis of net assets
Table 1
XYZ, Inc.
Share capital
144

Acquisition
date

Consolidation
date

200

200

Net
change

Share premium
Retained earnings (net of prior
period error)
Total at carrying amounts
Fair value adjustments at acquisition
date
Subsequent depreciation/
amortization of fair
value adjustments
Unrealized profits (Upstream only)
FOREX loss on trade payable
Subsidiary's net assets at fair
value
FOREX loss on loan payable
Subsidiary's net assets at fair
value

400

400

2,200

4,000

2,800

4,600

1,200

1,200

NIL
NIL
-

(240)
(30)

4,000

5,530

1,530

(300)

(300)

5,230

1,230

4,000

The FOREX loss on the loan payable is segregated from the other
adjustments because this item is presented in the consolidated
financial statements as part of other comprehensive income and
therefore should not affect consolidated retained earnings. When
computing for the consolidated retained earnings, the net change of
P1,530 will be used (see Step 5).
3. Computation of goodwill
Consideration transferred (P880 x 5)
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (see Table 1)
Goodwill (in drams)
Divide by: Closing rate
Goodwill (in pesos) - Dec. 31

4,400
1,600
6,000
(4,000)
2,000
8
250

4. NCI in net assets

Subsidiary's net assets at fair value Dec. 31 (see Table 1)

Multiply by: NCI percentage

Total
Add: Goodwill to NCI net of accumulated impairment losses
Non-controlling interest in net assets (in drams)
Divide by: Closing rate
NCI in net assets (in pesos) - Dec. 31
145

5,230
40%
2,092
2,092
8
262

5. Consolidated retained earnings

Parent's retained earnings in current year-end (in
pesos)
Consolidation adjustments:
Parent's share in the net change in
subsidiary's net assets a
132
Unrealized profits (Downstream only)
(6)
Gain or loss on extinguishment of bonds
Impairment loss on goodwill attributable to
Parent
Net consolidation adjustments

126
3,606
18
3,622

Total
Prior period adjustment of subsidiary b
Consolidated retained earnings
a

Change in XYZs net assets (see Table 1)

Multiply by: Controlling interest
ABCs share in the change in XYZs net assets
(in drams)
Divide by: Average exchange rate
ABCs share in the change in XYZs net assets
(in pesos)
b

3,480

1,530
60%
918
7
132

(200M research costs 7 average rate) x 60% = 18 (rounded-off) see

discussion in Step 1 a.1

The prior period adjustment is added back because the parent shall
only share in the net change in subsidiarys net assets starting on the
date of acquisition. The parent shall not share in the changes in the
subsidiarys net assets prior to the date of acquisition.
6. Translation gain (loss)
Share in
translation
difference
ABC
XYZ,
Co.
Inc.
(60%)
(40%)
1) Translation of XYZ's net assets
Net assets of sub., Jan. 1
- at opening rate
(4M 5)
Net assets of sub., Jan. 1
- at closing rate
Decrease in net assets FOREX loss

(4M 8)

800
500
(300)

146

(180)

(120)

2) Translation of goodwill
Goodwill, Dec. 31
- at opening rate
Goodwill, Dec. 31 - at closing
rate
Decrease in goodwill FOREX loss
3) Translation of XYZ's
profit
Profit of subsidiary at average
a
rate
a
Profit of sub at closing rate
Decrease in profit - FOREX
loss
4) FOREX on loan payable
5) Translation of FOREX on
loan payable

(2,000 5)

400

(2,000 8)

250
(150)

(56)

(34)

(22)

(300M 7)

(41)

(26)

(18)

(300M 7)
(300M 8)

(43)
(38)
6

(544)

(386)

(158)

(150)

(3,130 7)
(3,130 8)

Total FOREX translation

loss OCI

448
392

Notice that the total translation adjustment to goodwill is attributed

only to ABC. This is because goodwill is measured at proportionate
share, and therefore there is no goodwill to NCI.
The FOREX on loan payable is re-translated (see 5) from average
rate to closing rate because the FOREX was not included in profit but
rather in OCI.
a

Profit for consolidation is computed as follows:

Profit for the year before adjustments (in drams)
Research costs (Correcting entry #1)
FOREX loss on trade payable (Correcting entry #3)
Total depreciation of FVA
Profit for consolidation (in drams)

147

3,200
200
(30)
(240)
3,130

Correcting entry #2 does not affect the reported profit because it is

just a reclassification entry (i.e., from extraordinary item to impairment
loss).
The FOREX loss on the loan payable is not included in the
computation of profit above because it will be presented in other
comprehensive income in the consolidated financial statements.
7. Consolidated profit
Profit before
adjustment
Adjustments and
corrections:
Research costs
FOREX loss on
trade payable
Adjusted profit
Consolidation
adjustments:
Unrealized profits
Dividend income
Net consolidation
adjustments
Profits before
FVA
Depreciation of
fair values
Impairment loss
on goodwill
Consolidated
profit or loss
Other
comprehensive
income:
Gain or loss on
translation of
foreign operation
(see Step 6)
Consolidated
comprehensive
income

ABC
Co.

(in drams)

Rate

(in pesos)

1,400

32600

458

1,858

200

28

28

(30)
3,370

7
7

(4)
482

(4)
1,882

1,400

XYZ, Inc.

XYZ, Inc.

Consolidated

(6)

(6)

(120)

N/A

N/A

(120)

(126)

(126)

1,274

3,370

482

1,756

(20)

(96)

(14)

(34)

1,254

3,274

468

1,722

(544)
1,254

3,274

148

468

1,178

8. Profit or loss and Comprehensive income attributable to

owners of parent and to NCI
Parent's profit before FVA
Share in the subsidiary's profit
before FVA
Depreciation/amortization of
fair values
Share in impairment loss on
goodwill
Profit attributable to
Share in translation loss (see
Step 6)
Comprehensive income
attributable to

Owners
of parent

NCI

Consolidated

1,274

N/A

1,274

288

192

482

(20)

(14)

(34)

1,542

180

1,722

(386)

(158)

(544)

1,156

22

1,178

The consolidation working papers are prepared as follows:

149

Consolidated statement of financial position

As of December 31, 20x1
Corrections &
adjustments

XYZ,
(adjusted)
ADMm

Closing
rate

XYZ,
Inc.
(translated)
Pm

4,400

550

(106)
e
(880)

3,600

450

120

ABC Co. Pm

XYZ, INc. ADMm

Current assets
Investment in subsidiary
Property, plant
and equipment
Goodwill

4,000
880

4,400

6,000

3,600

TOTAL ASSETS

10,880

8,000

Current liabilities

2,000

2,000

Noncurrent liabilities

2,400

1,400

Total liabilities

4,400

3,400

3,730

Share capital

2,000

200

200

Share premium

1,000

400

400

Retained earnings

3,480

4,000

3,670

Translation loss on foreign

Consolidation
adjustments
d

250
8,000
30

300

2,030

(330)

1,700

250
11,264

254
212

4,444
6,570

1,000
8

Consolidated

2,254
h

(100)

2,512

466

4,766

26

2,000

50

1,000

458

3,622

operation

(386)

NCI

262

(386)
262

Total equity

6,480

4,600

4,270

534

6,498

TOTAL LIABILITIES AND EQUITY

10,880

8,000

8,000

1,000

11,264

150

Corrections and Adjustments

FOREX translation on accounts payable (see Step 1.d Correcting entry #3)
b
FOREX translation on loan payable (see Step 1.e Adjusting entry #4)
c
Sum of corrections (a) and (b).
a

Consolidation adjustments
d
100 inter-company loan receivable plus 6 unrealized profit in ending inventory.
e
Elimination of investment in subsidiary.
f
Fair value adjustment, net of depreciation [(1,200 240) 8 closing rate] = 120 (see Step 1.b&c)
g
Recognition of goodwill (see Step 3)
h
Elimination of inter-company loan payable (see Step 1.e)
I
Recognition of translation difference (see Step 6)
j
Recognition of NCI in net assets (see Step 4)

151

Consolidated statement of profit or loss and other comprehensive income

For the year ended December 31, 20x1
ABC
Co. Pm
Revenue
Cost of sales
Gross profit
Operating expenses
Dividends received
Interest expense
Interest income

XYZ,
Inc.
ADMm

XYZ, Inc.
(adjusted)
ADMm

Average
rate

Consolidation
adjustments

16,000

2,286

(60)

(5,000)

(8,000)

(8,000)

(1,142)

(54)

3,000

8,000

8,000

(1,000)

(2,000)

(2,000)

80

200
(200)
b
(30)

(286)

(286)

200

28

108

(200)
(30)

7
7

(28)
(4)

(28)
(4)

768

2,606

(286)

(886)

3,370

482

1,722

3,370

482

1,722

Income tax expense

(600)

(2,000)

(2,000)

Profit after tax

1,400

3,600
(400)

(300)
1,400

3,200

3,200

(86)

5,370

400

(1,320)

5,600

1,400

(34)

(600)

2,000

Extraordinary item

(6,088)
4,136

(120)
(600)

10,226

1,142

120
(200)

Consolidated

16,000

FOREX loss

Profit for the year

Translation loss on
foreign operation
Comprehensive income
for the year

XYZ, Inc.
(translated)
Pm

8,000

Impairment loss
Profit before tax

Corrections
&
adjustments

(300)
3,070

152

(42)
438

(502)

(544)
1,178

Corrections and Adjustments

a
(Correcting entry #2 see Step 1.a2)
b
(Correcting entry #3 see Step 1.d)
c
(Correcting entries #1 and #2 see Steps 1.a1 and .a2)
d
(Adjusting entry #4 see Step 1.e)
Consolidation adjustments
e
Elimination of inter-company sale (see Step 1.d)
f
Inter-company sale of 60 minus Unrealized profit in ending inventory
of 6 (see Step 1.d)
g
Depreciation of FVA (240 7 average rate = 34 rounded-off) (see
Step 1.b&c)
h
Elimination of inter-company dividends (see Step 1.f)
I
Total translation loss of 544 (see Step 6) minus FOREX loss on
loan payable of 42 already recognized in Adjusting entry #4(d).
Optional reconciliations:
Reconciliation for consolidated retained earnings

Dividends declared by
Parent
Dec. 31, 20x1

Consolidated retained earnings

2,280
Jan. 1, 20x1
P/L to owners of
200
1,542
parent
3,622

Reconciliation for NCI in net assets

NCI in net assets
320
NCI in dividends
(see Step 1.f)

Dec. 31, 20x1

80
262

22

Consolidated total assets

Total assets of ABC Co.
Total assets of XYZ, Inc. (8,000 8)
Investment in subsidiary
Fair value adjustments net*
Goodwill net (see Step 3)
Effect of inter-company transactions:
Unrealized profit in ending inventory (see Step 1.d)

Inter-company loan receivable (see Step 1.e)

Consolidated total assets
153

Jan. 1, 20x1
Comprehensive
income to NCI

10,880
1,000
(880)
120
250
(6)
(100)
11,264

*1,200 FVA minus 240 depreciation of FVA = 960 8 closing rate =

120
(see Step 1.b&c)

Consolidated total liabilities

Total liabilities of ABC Co.
Total liabilities of XYZ, Inc. (3,400 8)
Fair value adjustments - net
Effect of inter-company transactions:

4,400
426
-

FOREX loss included accounts payable (see Step 1.d)

a

Inter-company loan payable

Consolidated total liabilities

4
(62)
4,766

(500M amount recorded, unadjusted 8 closing rate = 62)

Consolidated total equity

Share capital of ABC Co.
Share premium of ABC Co.
Consolidated retained earnings (see Step 5)
Exchange differences on translation of
foreign operation (see Step 6)

2,000
1,000
3,622
(386)
6,238
262
6,498

Equity attributable to owners of the parent

Non-controlling interests (see Step 4)

Consolidated total equity
20. Solution:
Fair value of consideration received
Carrying amount of NCI
Total
Less: Carrying amount of former subsidiarys net
identifiable assets at derecognition date
Carrying amount of goodwill at derecognition
date
Gain or loss on disposal of controlling interest
Reclassification adjustment for cumulative translation
gain
Total gain recognized in profit or loss
Alternative solution using pro-forma entries:
Jan. 1, Cash ABC Co. (FV of consideration
154

250,000

250,000
41,200
291,200
(206,000)
(6,000)
79,200
1,600
80,800

20x2

received)

Non-controlling interest
Net identifiable assets
Goodwill
Gain on disposal of
controlling interest (squeeze)

41,200
206,000
6,000
79,200

to record the disposal of

investment in XYZ, Inc.
Jan. 1,
20x2

Cumulative exchange difference

Gain on translation (to profit or

1,600
1,600

loss)
to record the reclassification
adjustment for translation difference

Total gain recognized in profit or loss is P80,800 (79,200 + 1,600).

21. Solution:
The financial statements of XYZ, Inc. are restated under PAS 29 as
follows:

155

Statement of financial position

As of December 31, 20x1
Cash
Accounts receivable
Inventory
Building
Accumulated
depreciation

Historical
92,000
148,000
80,000
200,000

Fraction
N/A
N/A
140/125
140/100

(40,000)

140/100

Total assets

480,000

Loan payable

60,000

Restated (in current AOA)

92,000
148,000
89,600
280,000
(56,000)

Closing rate
0.50
0.50
0.50
0.50
0.50

553,600

200,000
220,000
420,000

Total liabilities and equity

480,000

(28,000)
276,800

Share capital
Retained earnings
Total equity

Translated (in Pesos)

46,000
74,000
44,800
140,000

N/A
140/100
(squeeze)

60,000

0.50

30,000

280,000
213,600
493,600

0.50
0.50

140,000
106,800
246,800

553,600

156

276,800

Statement of profit or loss

For the year ended December 31, 20x1
Historical
240,000

Sales
Cost of sales:
Invty. - Jan. 1
Purchases
TGAS
Invty. - Dec. 31

120,000
60,000
180,000
(80,000)

Fraction
140/125
140/110
140/125

Restated
(in current AOA)
268,800
152,728
67,200
219,928
(89,600)

Closing rate
0.50

Translated (in Pesos)

134,400

(130,328)
138,472

0.50
0.50

(65,164)
69,236

(100,000)
140,000

140/125

Gross profit
Depreciation

(20,000)

140/100

(28,000)

0.50

(14,000)

Other optg. exp.

Loss on net
monetary
position*

(80,000)

140/125

(89,600)

0.50

(44,800)

(25,334)

0.50

(12,666)

Profit (loss) for the year

40,000

(4,460)

157

(2,230)

*Loss on net monetary position is computed as follows:

Net monetary items (monetary assets less
monetary liabilities), end. Historical
(92K + 148K - 60K)
Less: Net monetary items, end. Restated:
Net monetary assets - Jan. 1 (restated)
(80,000 given x 140/120)
93,334

180,000

Changes in net monetary items during the year:

Sales (restated)
Purchases (restated)
Other operating expenses (restated)
Loss on net monetary position

158

268,800
(67,200)
(89,600)

205,334
(25,334)