CHAPTER 11INTERNATIONAL 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. 11–1 Caribbean Company (25 minutes, medium)

Journal entries for 60-day forward contract under two different assumptions as to purpose of contract.

Pr. 11–2 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.

Pr. 11–3 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.

Pr. 11–4 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.

Pr. 11–5 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.

Pr. 11–6 Allison Company (30 minutes, medium)

Adjusting entries to correct accounting for two types of forward contracts.

ANSWERS TO REVIEW QUESTIONS

1. The U.S. term for jointly controlled entity is influenced investee.

2. International Financial Reporting Standard 3 requires purchase accounting for all business combinations and periodic testing of goodwill for impairment.

3. In IAS 27, “Consolidated Financial Statements . . . ,” the IAS adopted neither the parent company concept nor the economic unit concept of consolidated financial statements.

4. 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. 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.

6. A multinational enterprise is a business enterprise that carries on operations in more than one nation, through a network of branches, divisions, and subsidiaries.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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. 11–1 1. b 7. d2. b ($1.00 $1.55 = £0.65) 8. a3. a ($1.00 1.9672 = £0.5083) 9. c4. a 10. c5. a (LCU100,000 x $0.15 = $15,000)6. c

Ex. 11–2 Journal entries for L.A. Company:

2005June 26 Inventories (£10,000 x $1.67) 16,700

Trade Accounts Payable 16,700

30 Foreign Currency Transaction Losses [£10,000 x ($1.68 – $1.67)] 100

Trade Accounts Payable 100

July 26 Trade Accounts Payable 16,800Cash (£10,000 x $1.66) 16,600Foreign Currency Transaction Gains 200

Ex. 11–3 Journal entries for Walker, Inc.:

2005Sept. 1 Machinery (C100,000 x $1.070) 107,000

Trade Accounts Payable 107,000To record acquisition of machine from Pfau Company for C100,000, translated at selling spot rate.

Oct. 25 Trade Accounts Payable 107,000Cash (C100,000 x $1.065) 106,500Foreign Currency Transaction Gains 500

To record payment of C100,000 to Pfau Company and recognition of transaction gain.

Ex. 11–4 Journal entries for U.S. Company:

2005Nov. 18 Trade Accounts Receivable (C1,500 x $1.055) 1,583

Sales 1,583

18 Cost of Goods Sold 1,000Inventories 1,000

30 Trade Accounts Receivable (C1,500 x ($1.060 – $1.055)] 8Foreign Currency Transaction Gains 8

Dec. 18 Cash (C1,500 x $1.050) 1,575Foreign Currency Transaction Losses 16

Trade Accounts Receivable ($1,583 + $8) 1,591

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Ex. 11–5 Journal entries for Lincoln Company:2005Mar. 25 Trade Accounts Receivable (Kr2,000,000 x $0.19) 380,000

Sales 380,000

25 Cost of Goods Sold 260,000Inventories 260,000

31 Trade Accounts Receivable [Kr2,000,000 x ($0.20 – $0.19)] 20,000Foreign Currency Transaction Gains 20,000

Apr. 24 Cash (Kr2,000,000 x $0.18) 360,000Foreign Currency Transaction Losses 40,000

Trade Accounts Receivable ($380,000 + $20,000) 400,000

Ex. 11–6 Journal entries for Yankee Company:

2005Mar. 1 Notes receivable (LCU600,000 x $0.30) 180,000

Sales 180,000To record sale of merchandise for 60-day, 18% promissory note.

Apr. 30 Cash (LCU618,000 x $0.33) 203,940Notes Receivable 180,000

Interest Revenue ($180,000 x 0.18 x )5,400

Foreign Currency Transaction Gains [LCU618,000 x ($0.33 – $0.30)] 18,540

To record payment of note receivable and recognition of interest revenue and transaction gain.

Ex. 11–7 Correcting entry for Transglobal Company, Nov. 19, 2005:

Foreign Currency Transaction Losses 3,000Cost of Goods Sold 1,000Inventories 2,000

To correct accounting for foreign currency transaction loss on settlement of liability to French supplier.

Ex. 11–8 Journal entries for Kingston Company:

2005Mar. 31 Investment in Forward Contract 25,000

Forward Contract Payable 25,000To record forward contract for LCU100,000, at forward rate of LCU1 = $0.25 (LCU100,000 x $0.25 = $25,000).

Apr. 30 Investment in LCUs (LCU100,000 x $0.22) 22,000Forward Contract Payable 25,000Foreign Currency Transaction Losses 3,000

Cash 25,000Investment in Forward Contract 25,000

To recognize settlement of forward contract, fair value of investment in LUCs, and transaction loss as follows:

Carrying amount of contract Mar. 31 $25,000Fair value of contract Apr. 30 (LCU100,000 x $0.22) 22,000Transaction loss $ 3,000

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Ex. 11–9 Journal entries for Concordia Company:2005Aug. 6 Inventories (C80,000 x $1.08) 86,400

Trade Accounts Payable 86,400To 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 88,000Forward Contract Payable 88,000

To record forward contract for C80,000 at forward rate of C1 = $1.10 (C80,000 x $1.10 = $88,000).

Sept. 5 Foreign Currency Transaction Losses 800Inventories 800

Investment in Forward Contract 800Foreign Currency Transaction Gains 800

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 $88,000Sept. 5 (C80,000 x $1.09) 87,200Transaction loss and gain $ 800

5 Investment in Euros (C80,000 x $1.09) 87,200Forward Contract Payable 88,000

Investment in Forward Contract ($88,000 – $800) 87,200Cash 88,000

To record settlement of forward contract and fair value of investment in euros.

5 Trade Accounts Payable 86,400Inventories 800

Investment in Euros 87,200To 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).

CASES

Case 11–1 Arguments in favor of the FASB’s 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 FASB’s 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 11–2 Supporters of the SEC’s 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

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available to the world’s investors. Those who oppose the SEC’s 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 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 11–3 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, MediumCaribbean Company Pr. 11–1

Caribbean Company

Journal Entries

a.

20 05

Aug 1 Investment in Forward Contract (£50,000 x $1.95) 9 7 5 0 0

Forward Contract Payable 9 7 5 0 0

31 Foreign Currency Transaction Losses [$97,500 –

(£50,000 x $1.93) – ($1,000 x 0.06 x 30/360)] 9 9 5

Investment in Forward Contract 9 9 5

Sept 30 Investment in Pounds (£50,000 x $1.92) 9 6 0 0 0

Forward Contract Payable 9 7 5 0 0

Foreign Currency Transaction Losses

[($97,500 – $995) – $96,000] 5 0 5

Cash 9 7 5 0 0

Investment in Forward Contract ($97,500 –

$995) 9 6 5 0 5

b.

20 05

Aug 1 Investment in Forward Contract 9 7 5 0 0

Forward Contract Payable 9 7 5 0 0

31 Foreign Currency Transaction Losses 9 9 5

Firm Commitment for Inventories 9 9 5

Investment in Forward Contract 9 9 5

Foreign Currency Transaction Gains 9 9 5

Sept 30 Foreign Currency Transaction Losses 5 0 5

Firm Commitment for Inventories 5 0 5

Investment in Forward Contract 5 0 5

Foreign Currency Transaction Gains 5 0 5

30 Investment in Pounds 9 6 0 0 0

Forward Contract Payable 9 7 5 0 0

Investment in Forward Contract

($97,500 – $995 – $505) 9 6 0 0 0

Cash 9 7 5 0 0

30 Inventories ($96,000 + $995 + $505) 9 7 5 0 0

Investment in Pounds 9 6 0 0 0

Firm Commitment for Inventories

($995 + $505) 1 5 0 0

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U.S. Company and Spheric Company Pr. 11–2

a. U.S. Company

Journal Entries

20 05

June 27 Inventories (C100,000 x $1.05) 1 0 5 0 0 0

Trade Accounts Payable 1 0 5 0 0 0

27 Trade Accounts Receivable ($C180,000 x $0.84) 1 5 1 2 0 0

Sales 1 5 1 2 0 0

27 Cost of Goods Sold 1 0 5 0 0 0

Inventories 1 0 5 0 0 0

July 27 Trade Accounts Payable 1 0 5 0 0 0

Foreign Currency Transaction Losses 1 0 0 0Cash (C100,000 x $1.06) 1 0 6 0 0 0

27 Cash ($C180,000 x $0.85) 1 5 3 0 0 0

Trade Accounts Receivable 1 5 1 2 0 0

Foreign Currency Transaction Gains 1 8 0 0

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)] 1 9 9 0

Investment in Forward Contract 1 9 9 0

Apr 30 Investment in Singapore Dollars (S$100,000 x $0.31) 3 1 0 0 0

Forward Contract Payable 3 5 0 0 0

Forward Currency Transaction Losses

[($35,000 – $1,990) – $31,000] 2 0 1 0

Cash 3 5 0 0 0

Investment in Forward Contract ($35,000 –

$1,990) 3 3 0 1 0

The McGraw-Hill Companies, Inc., 2006360 Modern Advanced Accounting, 10/e

30 Minutes, MediumZonal Corporation and Iberia Company Pr. 11–3

a. Zonal Corporation

Journal Entries

20 05

Nov 19 Trade Accounts Receivable (£38,000 x $1.45) 5 5 1 0 0

Sales 5 5 1 0 0

19 Cost of Goods Sold 4 0 0 0 0

Inventories 4 0 0 0 0

30 Foreign Currency Transaction Losses[(£38,000 x

($1.45 – $1.44)] 3 8 0

Trade Accounts Receivable 3 8 0

Dec 19 Cash (£38,000 x $1.43) 5 4 3 4 0

Foreign Currency Transaction Losses [£38,000 x

($1.44 – $1.43)] 3 8 0

Trade Accounts Receivable 5 4 7 2 0

b. Iberia Company

Journal Entries

20 05

Jun 30 Notes Receivable (LCU7,500 000 x $0.014) 1 0 5 0 0 0

Sales 1 0 5 0 0 0

30 Cost of Goods Sold 7 5 0 0 0

Inventories 7 5 0 0 0

Aug 29 Cash (LCU7,650,000 x $0.016) 1 2 2 4 0 0

Notes Receivable 1 0 5 0 0 0

Interest Revenue ($105,000 x 0.12 x 60/360) 2 1 0 0

Foreign Currency Transaction Gains

[LCU7,650,000 x ($0.016 – $0.014)] 1 5 3 0 0

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30 Minutes, MediumImex Company Pr. 11–4

Imex Company

Journal Entries

a.

20 05

Mar 6 Inventories (B100,000 x $0.007) 7 0 0

Trade Accounts Payable 7 0 0

6 Investment in Forward Contract (B100,000 x $0.008) 8 0 0

Forward Contract Payable 8 0 0

18 Inventories (C75,000 x $1.06) 7 9 5 0 0

Trade Accounts Payable 7 9 5 0 0

25 Trade Accounts Receivable (Sfr50,000 x $0.52) 2 6 0 0 0

Sales 2 6 0 0 0

25 Cost of Goods Sold 1 5 0 0 0

Inventories 1 5 0 0 0

Apr 4 Inventories (C150,000 x $1.07) 1 6 0 5 0 0

Trade Accounts Payable 1 6 0 5 0 0

5 Investment in Bolivars (B100,000 x $0.007) 7 0 0

Forward Contract Payable 8 0 0

Inventories 1 0 0

Cash 8 0 0

Investment in Forward Contract 8 0 0

5 Trade Accounts Payable 7 0 0

Investment in Bolivars 7 0 0

17 Trade Accounts Payable 7 9 5 0 0Cash (C75,000 x $1.05) 7 8 7 5 0

Foreign Currency Transaction Gains 7 5 0

24 Cash (Sfr50,000 x $0.53) 2 6 5 0 0

Trade Accounts Receivable 2 6 0 0 0

Foreign Currency Transaction Gains 5 0 0

b. 30 Trade Accounts Payable [$160,500 – (C150,000 x

$1.05)] 3 0 0 0

Foreign Currency Transaction Gains 3 0 0 0

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30 Minutes, MediumImpo Corporation Pr. 11–5

Impo Company

Journal Entries

20 05

June 30 Machinery and Equipment (¥500,000 x $0.0084) 4 2 0 0

Accounts Payable 4 2 0 0

30 Cash (¥500,000 x $0.0084) 4 2 0 0

Notes Payable 4 2 0 0

30 Accounts Payable 4 2 0 0

Cash 4 2 0 0

July 31 Interest Expense ($4,200 x 0.12 x 30/360) 4 2

Interest Payable 4 2

31 Depreciation Expense ($4,200 x 1/5 x 1/12) 7 0

Accumulated Depreciation of Machinery and

Equipment 7 0

31 Notes Payable [¥500,000 x ($0.0084 – $0.0082)] 1 0 0

Interest Payable [¥5,000 x ($0.0084 – $0.0082)] 1

Foreign Currency Transaction Gains 1 0 1

Aug 29 Notes Payable 4 1 0 0

Interest Payable 4 1

Interest Expense 4 1

Foreign Currency Transaction Losses 1 5 3

Cash (¥510,000 x $0.0085) 4 3 3 5

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30 Minutes, MediumAllison Company Pr. 11–6

Allison Company

Adjusting Entries

Sept. 30, 2005

Travel Expenses (¥100,000 x $0.00786) 7 8 6

Foreign Currency Transaction Losses 1 5

Forward Contracts 8 0 1

To correct accounting for forward contract that

matured Apr. 30, 2005.

Inventories 5 2 0 0 0

Forward Contracts 5 2 0 0 0

To correct accounting for forward contract that

matured Sept. 30, 2005

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