11 CHAPTER INTERNATIONAL ACCOUNTING STANDARDS; ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS
The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers. Pr. 111 Caribbean Company (25 minutes, medium) Journal entries for 60-day forward contract under two different assumptions as to purpose of contract. U.S. Company and Spheric Company (30 minutes, medium) Two unrelated parts: Journal entries for purchase of merchandise from a foreign supplier and sale of the merchandise to a foreign customer; journal entries for forward contract not designated as a hedge. Zonal Corporation and Iberia Company (30 minutes, medium) Two unrelated parts: Journal entries for sale of merchandise to a foreign customer; entries for promissory note received for sale to foreign customer. Imex Company (30 minutes, medium) Journal entries for imports and exports and related translation of foreign currencies. Computation of foreign currency transaction gains and losses from settlement of foreign trade transactions and from end-of-period adjustments of trade accounts payable to foreign suppliers. Impo Company (30 minutes, medium) Journal entries for acquisition of machine from foreign supplier, loan from foreign bank to pay for machine, and depreciation of machine. Allison Company (30 minutes, medium) Adjusting entries to correct accounting for two types of forward contracts.
Pr. 112
Pr. 113
Pr. 114
Pr. 115
Pr. 116
ANSWERS TO REVIEW QUESTIONS
1. 2. 3. 4. The U.S. term for jointly controlled entity is influenced investee. International Financial Reporting Standard 3 requires purchase accounting for all business combinations and periodic testing of goodwill for impairment. In IAS 27, Consolidated Financial Statements . . . , the IAS adopted neither the parent company concept nor the economic unit concept of consolidated financial statements. a. Exchange rate is an amount of U.S. dollars required to acquire one unit of a foreign currency on a specific date. b. Forward rate is an exchange rate applicable to foreign currency transactions that are to be consummated in the future. c. Selling spot rate is the exchange rate at which a foreign currency trader will sell a foreign currency on the spot. d. Spot rate is the exchange rate applicable to current exchanges of money.
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5. 6. 7. 8.
9.
10.
11. 12.
13.
The U.S. enterprise would have to exchange $215 (50,000 x $0.0043 selling spot rate = $215) for a 50,000 draft to settle the trade account payable to the Japanese supplier. A multinational enterprise is a business enterprise that carries on operations in more than one nation, through a network of branches, divisions, and subsidiaries. The U.S. enterprise would credit $9,600 (P80,000 x $0.12 selling rate = $9,600) to the Trade Accounts Payable ledger account for a P80,000 purchase from the Philippine exporter. The position of the Financial Accounting Standards Board on the recording of foreign currency transaction gains and losses is that they should be recognized when the exchange rate changes, in order to record the gains or losses in the period of the eventthe exchange rate changerather than on the date the account balance is settled. Proponents of the one-transaction perspective maintain that foreign currency transaction gains or losses resulting from foreign currency exchange rate fluctuations should be applied to adjust the cost of merchandise acquired or sold in a foreign trade transaction. In their view, the foreign trade transaction and the acquisition of foreign currency as a result of the transaction are a single economic event. Arguments advanced in support of the two-transaction perspective for foreign currency transaction gains and losses are as follows: (1) A foreign trade transaction is composed of two separate transactions: One is the purchase or sale of the merchandise; the other is the acquisition or disposal of the foreign currency paid or acquired in settlement of the purchase or sale. (2) Assumption of the risk of a foreign currency transaction gain or loss, rather than hedging the risk, is a financing-type activity, not a merchandising decision. A forward contract is an agreement to exchange currencies of different countries on a specified future date at the forward rate in effect when the contract was made. A U.S. multinational enterprise may hedge against the risk of fluctuations in exchange rates for foreign currencies by acquiring forward contracts for the foreign currencies at the forward rates for delivery on specified future dates. Market risk is the risk of a decline in value or an increase in onerousness of a financial instrument resulting from future changes in market prices.
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SOLUTIONS TO EXERCISES
Ex. 111 1. 2. 3. 4. 5. 6. b b ($1.00 $1.55 = 0.65) a ($1.00 1.9672 = 0.5083) a a (LCU100,000 x $0.15 = $15,000) c 7. d 8. a 9. c 10. c
Ex. 112
Journal entries for L.A. Company: 2005 June 26 30 Inventories (10,000 x $1.67) Trade Accounts Payable Foreign Currency Transaction Losses [10,000 x ($1.68 $1.67)] Trade Accounts Payable Trade Accounts Payable Cash (10,000 x $1.66) Foreign Currency Transaction Gains 16,700 16,700 100 100 16,800 16,600 200
July 26
Ex. 113
Journal entries for Walker, Inc.: 2005 Sept. 1 Machinery (C100,000 x $1.070) Trade Accounts Payable To record acquisition of machine from Pfau Company for C100,000, translated at selling spot rate. Trade Accounts Payable Cash (C100,000 x $1.065) Foreign Currency Transaction Gains To record payment of C100,000 to Pfau Company and recognition of transaction gain. 107,000 107,000
Oct. 25
107,000 106,500 500
Ex. 114
Journal entries for U.S. Company: 2005 Nov. 18 18 30 Dec. 18 Trade Accounts Receivable (C1,500 x $1.055) Sales Cost of Goods Sold Inventories Trade Accounts Receivable (C1,500 x ($1.060 $1.055)] Foreign Currency Transaction Gains Cash (C1,500 x $1.050) Foreign Currency Transaction Losses Trade Accounts Receivable ($1,583 + $8) 1,583 1,583 1,000 1,000 8 8 1,575 16 1,591
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Ex. 115
Journal entries for Lincoln Company: 2005 Mar. 25 Trade Accounts Receivable (Kr2,000,000 x $0.19) Sales 25 31 Apr. 24 Cost of Goods Sold Inventories Trade Accounts Receivable [Kr2,000,000 x ($0.20 $0.19)] Foreign Currency Transaction Gains Cash (Kr2,000,000 x $0.18) Foreign Currency Transaction Losses Trade Accounts Receivable ($380,000 + $20,000)
380,000 380,000 260,000 260,000 20,000 20,000 360,000 40,000 400,000
Ex. 116
Journal entries for Yankee Company: 2005 Mar. 1 Notes receivable (LCU600,000 x $0.30) Sales To record sale of merchandise for 60-day, 18% promissory note. Cash (LCU618,000 x $0.33) Notes Receivable 60 Interest Revenue ($180,000 x 0.18 x 360 ) Foreign Currency Transaction Gains [LCU618,000 x ($0.33 $0.30)] To record payment of note receivable and recognition of interest revenue and transaction gain. 180,000 180,000
Apr. 30
203,940 180,000 5,400 18,540
Ex. 117
Correcting entry for Transglobal Company, Nov. 19, 2005: Foreign Currency Transaction Losses Cost of Goods Sold Inventories To correct accounting for foreign currency transaction loss on settlement of liability to French supplier. 3,000 1,000 2,000
Ex. 118
Journal entries for Kingston Company: 2005 Mar. 31 Investment in Forward Contract Forward Contract Payable To record forward contract for LCU100,000, at forward rate of LCU1 = $0.25 (LCU100,000 x $0.25 = $25,000). 25,000 25,000
Ex. 119
Investment in LCUs (LCU100,000 x $0.22) 22,000 Forward Contract Payable 25,000 Foreign Currency Transaction Losses 3,000 Cash Investment in Forward Contract To recognize settlement of forward contract, fair value of investment in LUCs, and transaction loss as follows: Carrying amount of contract Mar. 31 $25,000 Fair value of contract Apr. 30 (LCU100,000 x $0.22) 22,000 Transaction loss $ 3,000 Journal entries for Concordia Company: 2005 Aug. 6 Inventories (C80,000 x $1.08) 86,400
Apr. 30
25,000 25,000
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Trade Accounts Payable To record purchase on 30-day open account from Belgian supplier for C80,000, translated at selling spot rate of C1= $1.08 (C80,000 x $1.08 = $86,400). 6 Investment in Forward Contract Forward Contract Payable To record forward contract for C80,000 at forward rate of C1 = $1.10 (C80,000 x $1.10 = $88,000). Foreign Currency Transaction Losses Inventories Investment in Forward Contract Currency Foreign Transaction Gains To recognize fair value of forward contract investment, resultant transaction loss, increase in fair value of inventories, and resultant transaction gain, as follows: Forward price of contract: Aug. 6 $88,000 Sept. 5 (C80,000 x $1.09) 87,200 Transaction loss and gain $ 800 Investment in Euros (C80,000 x $1.09) Forward Contract Payable Investment in Forward Contract ($88,000 $800) Cash To record settlement of forward contract and fair value of investment in euros. Trade Accounts Payable Inventories Investment in Euros To record payment of Belgian supplier; inventories acquired now carried at the U.S. dollar amount of the forward contract ($86,400 + $800 + $800 = $88,000). 88,000
86,400
88,000
Sept. 5
800 800 800 800
5
87,200 88,000 87,200 88,000
5
86,400 800 87,200
CASES
Case 111 Arguments in favor of the FASBs continuing issuance of Statements include the unique features of many accounting issues in the United States, such as financial instruments (including derivative instruments) valuation and disclosure, accounting for stock compensation plans, and accounting for postemployment benefits other than pensions, that necessitate action by the FASB; and the past slow progress of the IASB, as evidenced by its paucity of output as compared with that of the FASB. Arguments in favor of the FASBs serving as a collaborator in the convergence project with the IASB center on the more efficient use of scarce resources available to accounting standard setters: Focusing efforts in one international standard-setting organization, rather than in several national organizations, would assure more rapid achievement of uniform international accounting standards. Case 112 Supporters of the SECs participation in the work of IOSCO argue that enhancing the ability of multinational enterprises to have their securities traded on international stock exchanges will facilitate international movements of capital and increase alternative investments available to the worlds investors. Those who oppose the SECs possible acquiescence to the application of International Accounting Standards in financial reports of foreign enterprises wanting to have their securities traded in the United States point to the potential danger of erosion of U.S. accounting standards in areas that appear superior to International Accounting Standards. In the view of opponents, the sanctioning of alternatives in some International Accounting
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Standards will decrease comparability among the financial reports of U.S. enterprises and foreign enterprises because the trend in U.S. accounting standard setting has been to limit significantly alternative accounting principles for a specific business transaction or event. Case 113 Students solutions to this case should be evaluated on the extent to which they address the numerous qualitative and quantitative disclosures required for derivative instruments by paragraphs 44 and 45 of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Perhaps selected students might make a Powerpoint-enhanced oral presentation of their solution.
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25 Minutes, Medium Caribbean Company Caribbean Company Journal Entries a.
20 05 Aug 1 Investment in Forward Contract (50,000 x $1.95) Forward Contract Payable 31 Foreign Currency Transaction Losses [$97,500 (50,000 x $1.93) ($1,000 x 0.06 x 30/360)] Investment in Forward Contract Sept 30 Investment in Pounds (50,000 x $1.92) Forward Contract Payable Foreign Currency Transaction Losses [($97,500 $995) $96,000] Cash Investment in Forward Contract ($97,500 $995) 97500
Pr. 111
97500
995 995 96000 97500 505 97500 96505
b. 20 05 Aug 1 Investment in Forward Contract Forward Contract Payable 31 Foreign Currency Transaction Losses Firm Commitment for Inventories Investment in Forward Contract Foreign Currency Transaction Gains Sept 30 Foreign Currency Transaction Losses Firm Commitment for Inventories Investment in Forward Contract Foreign Currency Transaction Gains 30 Investment in Pounds Forward Contract Payable Investment in Forward Contract ($97,500 $995 $505) Cash 30 Inventories ($96,000 + $995 + $505) Investment in Pounds Firm Commitment for Inventories ($995 + $505) 97500 97500 995 995 995 995 505 505 505 505 96000 97500 96000 97500 97500 96000 1500
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U.S. Company and Spheric Company a. U.S. Company Journal Entries
20 05 June 27 Inventories (C100,000 x $1.05) Trade Accounts Payable 27 Trade Accounts Receivable ($C180,000 x $0.84) Sales 27 Cost of Goods Sold Inventories July 27 Trade Accounts Payable Foreign Currency Transaction Losses Cash (C100,000 x $1.06) 27 Cash ($C180,000 x $0.85) Trade Accounts Receivable Foreign Currency Transaction Gains
Pr. 112
105000 105000 151200 151200 105000 105000 105000 1000 106000 153000 151200 1800
b.
Spheric Company Journal Entries
20 05 Mar 31 Foreign Currency Transaction Losses [$35,000 (S$100,000 x $0.33) ($2,000 x 0.06 x 30/360)] Investment in Forward Contract Apr 30 Investment in Singapore Dollars (S$100,000 x $0.31) Forward Contract Payable Forward Currency Transaction Losses [($35,000 $1,990) $31,000] Cash Investment in Forward Contract ($35,000 $1,990)
1990 1990 31000 35000 2010 35000 33010
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30 Minutes, Medium Zonal Corporation and Iberia Company a. Zonal Corporation Journal Entries
20 05 Nov 19 Trade Accounts Receivable (38,000 x $1.45) Sales 19 Cost of Goods Sold Inventories 30 Foreign Currency Transaction Losses[(38,000 x ($1.45 $1.44)] Trade Accounts Receivable Dec 19 Cash (38,000 x $1.43) Foreign Currency Transaction Losses [38,000 x ($1.44 $1.43)] Trade Accounts Receivable
Pr. 113
55100 55100 40000 40000
380 380 54340 380 54720
b.
Iberia Company Journal Entries
20 05 Jun 30 Notes Receivable (LCU7,500 000 x $0.014) Sales 30 Cost of Goods Sold Inventories
105000 105000 75000 75000 122400 105000 2100 15300
Aug
29 Cash (LCU7,650,000 x $0.016) Notes Receivable Interest Revenue ($105,000 x 0.12 x 60/360) Foreign Currency Transaction Gains [LCU7,650,000 x ($0.016 $0.014)]
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30 Minutes, Medium Imex Company Imex Company Journal Entries a.
20 05 Mar 6 Inventories (B100,000 x $0.007) Trade Accounts Payable 6 Investment in Forward Contract (B100,000 x $0.008) Forward Contract Payable 18 Inventories (C75,000 x $1.06) Trade Accounts Payable 25 Trade Accounts Receivable (Sfr50,000 x $0.52) Sales 25 Cost of Goods Sold Inventories Apr 4 Inventories (C150,000 x $1.07) Trade Accounts Payable 5 Investment in Bolivars (B100,000 x $0.007) Forward Contract Payable Inventories Cash Investment in Forward Contract 5 Trade Accounts Payable Investment in Bolivars 17 Trade Accounts Payable Cash (C75,000 x $1.05) Foreign Currency Transaction Gains 24 Cash (Sfr50,000 x $0.53) Trade Accounts Receivable Foreign Currency Transaction Gains b. 30 Trade Accounts Payable [$160,500 (C150,000 x $1.05)] Foreign Currency Transaction Gains 700
Pr. 114
700 800 800 79500 79500 26000 26000 15000 15000 160500 160500 700 800 100 800 800 700 700 79500 78750 750 26500 26000 500
3000 3000
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30 Minutes, Medium Impo Corporation Impo Company Journal Entries
20 05 June 30 Machinery and Equipment (500,000 x $0.0084) Accounts Payable 30 Cash (500,000 x $0.0084) Notes Payable 30 Accounts Payable Cash July 31 Interest Expense ($4,200 x 0.12 x 30/360) Interest Payable 31 Depreciation Expense ($4,200 x 1/5 x 1/12) Accumulated Depreciation of Machinery and Equipment 31 Notes Payable [500,000 x ($0.0084 $0.0082)] Interest Payable [5,000 x ($0.0084 $0.0082)] Foreign Currency Transaction Gains Aug 29 Notes Payable Interest Payable Interest Expense Foreign Currency Transaction Losses Cash (510,000 x $0.0085)
Pr. 115
4200 4200 4200 4200 4200 4200 42 42 70 70 100 1 101 410 4 4 15 0 1 1 3 4335
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30 Minutes, Medium Allison Company Allison Company Adjusting Entries Sept. 30, 2005
Travel Expenses (100,000 x $0.00786) Foreign Currency Transaction Losses Forward Contracts To correct accounting for forward contract that matured Apr. 30, 2005. Inventories Forward Contracts To correct accounting for forward contract that matured Sept. 30, 2005 786 15
Pr. 116
801
52000 52000
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