CPA REVIEW SCHOOL OF THE PHILIPPINES

Advanced Financial Accounting Guerrero/German/DeJesus/Lim/Ferrer/Laco/Valix

PAS 21: Foreign Currency Transaction/Translation

Part I: Theory of Accounts

1. Under PAS 21, which of the following statements pertains to functional currency?
a. It refers to the currency of the primary economic environment in which the entity
operates.
b. It refers to the currency in which the financial statements are presented.
c. It refers to the currency other than the functional currency of the entity.
d. It refers to the type of currency in a given jurisdiction which a creditor may be compelled to
accept.

2. Under PAS 21, monetary items are cash or elements of financial statements which are receivable or
payable in a fixed amount of cash. Which of the following is a monetary item?
a. Sales
b. Income tax payable
c. Unearned revenue
d. Inventory

3. Which of the following is a nonmonetary item?

a. Prepaid asset
b. Loan receivable
c. Accounts payable
d. Interest payable

4. Under PAS 21, what is the initial measurement of foreign currency denominated transaction?
a. Both monetary and nonmonetary items are measurement initially at transaction or
historical rate.
b. Monetary items are measured at closing rate while nonmonetary items are measured at
transaction rate.
c. Monetary items are measured at transaction rate while nonmonetary items are measured at
closing rate.
d. Both monetary and nonmonetary items are measurement initially at closing rate.

5. Under PAS 21, what is the subsequent measurement of nonmonetary items?

a. Closing rate
b. Transaction rate
c. Average rate
d. Monthly rate

6. Under PAS 21, what is the subsequent measurement of monetary items?

a. Closing rate
b. Transaction rate
c. Average rate
d. Monthly rate

7. Under PAS 21, what is the subsequent measurement of nonmonetary items subsequently measured
at fair value?
a. Closing rate
b. Transaction rate
c. Exchange rate at the date when the fair value was determined
d. Average rate

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8. PAS 21 provides that exchange differences/(gain/loss) arising on the settlement or translating

foreign currency transaction shall be recognized in
a. Profit or loss
b. Other comprehensive income
c. Share premium
d. Retained earnings

9. Which of the following items will result to foreign currency transaction gain/loss due to settlement
or translation?
a. Foreign currency denominated income statement accounts such as revenue, income, expense or
loss.
b. Foreign currency denominated non-monetary assets such as inventory, PPE, intangible asset or
prepaid asset.
c. Foreign currency denominated monetary items such as accounts payable, accounts
receivable, notes payable, loans receivable or interest payable.
d. Foreign currency denominated non-monetary liabilities such as unearned revenue, warranty
liability, premium liability and deferred tax liability.
e. Foreign currency denominated equity accounts such as ordinary shares, preference shares,
treasury shares and share premium.

10. Under PAS 21, when there is a change in the entity’s functional currency, how shall the entity
apply the translation procedures applicable to the new functional currency?
a. It shall be applied prospectively from the date of change.
b. It shall be applied retrospectively from the date of change.
c. It shall be applied retroactively from the reasonably possible date.
d. It shall be applied retrospectively as a prior period error.

11. IAS 21 provides that an entity may present its financial statements in any currency even different
from its functional currency. When the company translates its financial statements from its
functional currency to its selected presentation currency, how shall the exchange differences
arising from the translation be recognized?
a. It shall be recognized in profit or loss.
b. It shall be recognized in other comprehensive income with reclassification adjustment to
profit or loss if realized.
c. It shall be recognized in other comprehensive income without reclassification adjustment and
reclassified directly to retained earnings if realized.
d. It shall be recognized directly to retained earnings.

12. When translating the financial statements of an entity from its functional currency to its selected
presentation currency, which of the following translation measurement is incorrect?
a. Assets and liabilities are translated at the closing rate at the date of statement of financial
position.
b. Income and expenses are translated at (1) exchange rates at the date of the transaction or (2)
Average rate for the period for practicality.
c. Equity accounts other than retained earnings are translated at the date of the transaction
resulting to that equity items.
d. Retained earnings are translated using the average rate during period.

13. When an entity’s functional currency is the currency of a hyperinflationary economy, how shall the
elements of the Financial Statements be translated to presentation currency?
a. All amounts (including assets, liabilities, equity, income and expenses) shall be translated
at the closing rate at the date of most recent statement of financial position.
b. Assets and liabilities shall be translated at closing rate while income and expenses at average
rate while equity at transaction rate.
c. All amounts are translated at average rate.
 d. All amounts are translated at historical rate.
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14. Which of the following statements concerning exchange differences arising from entity’s net
investment in foreign operation is correct?
a. Exchange differences arising on a monetary item that forms part of a reporting entity’s net
investment in a foreign operation shall be recognized in profit or loss in the separate financial
statement of the reporting entity or the individual financial statements of the foreign operation,
as appropriate.
b. In the consolidated financial statements of the reporting entity which includes that of a foreign
operation which is a subsidiary, the exchange differences shall be recognized initially in other
comprehensive income.
c. On the disposal of foreign operation, the cumulative amount of the exchange differences
relating to foreign operation, recognized in other comprehensive income and accumulated in
separate component of equity shall be reclassified from equity/cumulative OCI to profit or loss
as reclassification adjustment when the gain or loss on disposal is recognized.
d. All of the above.

Part II: Problem Solving

1. Entity A owns majority of the outstanding ordinary shares of Entity B which is operating in United
States of America wherein the functional currency is the USA $. However, the presentation
currency of Entity B is the Philippine Peso because that is the presentation currency of Entity A.
For the year ended December 31, 2020, Entity B presented its Statement of Financial Position in its
functional currency of USA $:

Current assets $10,000 Current liabilities $10,000

Noncurrent assets 40,000 Noncurrent liabilities 20,000
Ordinary share capital 5,000
Preference share capital 8,000
Retained earnings 7,000
Total Assets $50,000 Total Liabilities and shareholders $50,000

 The ordinary shares are issued on January 1, 2019 while the preference shares are issued on
July 1, 2019.
 B reported $1,000 net income during 2020 and declared dividends in the amount of $200 on
December 1, 2020.
 The translated amount of retained earnings on December 31, 2019 is P300,000.
The following direct exchange rates are provided:
January 1, 2019 P40
July 1, 2019 42
December 31, 2019 43
December 1, 2020 41
December 31, 2020 45
Average rate 2020 44

1. What is the amount of net assets in US dollars on December 31, 2019?

a. 19,200
b. 20,000
c. 19,000
d. 20,200

2. What amount of translation gain as component of other comprehensive income should be

presented in the of statement of comprehensive income for the year ended December 31, 2020?
a. 38,600
b. 39,200
 c. 40,400
d. 41,800
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3. What is the translated retained earnings balance on December 31, 2020?

a. 300,000
b. 335,800
c. 344,000
d. 281,800

4. What is the cumulative translation credit that should to be presented in the statement of
financial position on December 31, 2020?
a. 25,400
b. 28,200
c. 26,800
d. 24,600

2. GWA Corporation of Makati paid P1,128,750 for a 35% interest in KYJ Company of Taiwan on
January 1, 2022, when KYJ’s net asset totaled 375,000 NT Dollar and the exchange rate for NT
Dollar was P8.60. A summary of changes in KYJ’s net assets during 2022 is as follows:
NT Dollar Exchange Rates
Net assets, January 1 375,000 P8.60
Net income for 2022 75,000 8.55
Dividends paid for 2022 25,000 8.54
GWA Corporation anticipated a strengthening of the Philippine peso against the NT Dollar during
the last half of 2022, and it borrowed 150,000 NT Dollar from a Taiwanese bank for one year at
10% interest on July 1, 2022 to hedge its net investment in KYJ.
The loan was made when the exchange rate for NT Dollar was P8.55. The loan was denominated
in NT dollar and the current exchange rate at December 31, 2022 was P8.50.
What is the other comprehensive income – translation adjustment presented in equity in
2022 as a result of hedging?
a. 6,587.50
b. 14,087.50
c. 20,675.00
d. 0

3. Honda Phil. is a subsidiary of Honda Japan. The functional currency of Honda Phil. is peso while
the presentation currency of its parent, Honda Japan is yen. For the year ended December 31, 2020,
Honda Phil. has the following foreign currency denominated assets: Accounts Receivable of
$1,000 and Prepaid Asset of $100. The historical rates of Accounts receivable and Prepaid asset are
$1=P30 and $1=P20 and P1=2Yen and P1=4Yen, respectively. The exchange rate on December
31, 2020 is 1$=40 and P1=3Yen.

1. In the separate statement of financial position of Honda Phil. on December 31, 2020, what
is the book value of accounts receivable and prepaid asset, respectively?
a. P30,000 and P2,000
b. P40,000 and P4,000
c. P40,000 and P2,000
d. P30,000 and P4,000

2. Using the same data above, what is the book value of accounts receivable and prepaid
asset, respectively, in the Consolidated Statement of Financial Position of Honda Japan?
a. Y120,000 and Y6,000
b. Y90,000 and Y4,000
c. Y120,000 and Y8,000
d. Y90,000 and Y24,000
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