Problem I
KAPATID CORPORATION, A Philippine company forms a wholly-owned subsidiary in a
foreign country (Foreign Company) on December 31, 2016. On that date, KAPATID
invested P300,000 in exchange for all of the subsidiary’s common stock. The exchange
rate on this date is P0.60 per FC unit. The initial capital investment was FC 500,000,
150,000 of which was immediately invested in inventory and the remainder held in cash.
The balance sheet of the Foreign company (whose functional currency is the FC) when
it began operation on January 1, 2017 follows:
Cash FC 350,000 Common Stock FC 100,000
Inventory FC 150,000 APIC FC 400,000
Total FC 500,000 Total FC 500,000
During 2017, foreign company generated income after taxes of FC 470,000 and
declared dividends of FC 150,000 on October 1, 2017.
The financial statements of foreign company for 2017 are as follows:
Income Statement for the year ended COGS Statement for the year 2017
December 31, 2017 Inventory, Jan. 1 FC 150,000
Sales FC 4,000,000 Purchases in 2017, evenly throughout
COGS (3,000,000) the year 3,250,000
Gross Profit 1,000,000 Inventory, Dec 31(evenly throughout the
Depreciation (100,000) 4th quarter) (400,000)
Amortization (10,000) Total COGS 3,000,000
Other expenses (220,000)
Income before tax 670,000 Statement of Retained Earnings for the
Income taxes (200,000) year ended December 31, 2017
Net Income (470,000) RE, Jan. 1 FC 0
Net Income for 2017 470,000
Dividends paid (150,000)
Total RE, Dec. 31 320,000
Balance Sheet as of December 31, 2017
Cash FC 130,000 Accounts payable FC 600,000
Accounts Receivable 200,000 LTD 250,000
Inventory 400,000 Common Stock 100,000
PPE, net 900,000 APIC 400,000
Patent, net 40,000 RE 320,0000
Total 1,670,000 Total 1,670,000
The relevant exchange rates in Philippine pesos are as follows:
January 1, 2017 P0.60
Average for 2017 0.65
March 15, 2017(date when PPE was 0.61
acquired and LTD was incurred)
April 10, 2017 (date when patent was 0.62
acquired)
October 1, 2017 (date when dividends 0.67
were declared)
4th quarter average rate 0.68
December 31, 2017 0.70
Required:
1. Assuming the functional currency of foreign subsidiary is the local currency,
translate its FS into the peso functional and presentation currency of the parent
company.
2. Assuming the functional currency of foreign subsidiary is the Philippine peso, re-
measure its FS into its functional currency.
Problem II
SPRATLYS Inc. whose functional currency is the peso acquired a 100% interest in
EFCEE ENTERPRISES a foreign company several years ago. EFFCEE’s functional
currency is the FC. As at December 31, 2016 EFCEE’s share capital was FC 1,000,000
and retained earnings is FC 200,000. The exchange rate on 12/31/2016 was P1.85 to 1
FC. On the same date SPRATLYS Inc decided to hedge its investment in EFCEE by
taking a loan of FC 1,200,000 at 5% interest. For the year ended December 31, 2017
EFCEE reported a net profit of FC 380,000. No dividend has been paid. The exchange
rate on 12/31/2017 was P1.70 to 1 FC; the average exchange rate for the year was
P1.78 to 1 FC. Assume that the foreign currency translation reserve in the group
accounts as at 12/31/2016 showed a credit balance of P15,000.
Required:
1. Calculate the change in foreign currency translation reserve during 2017 and the
cumulative balance at the end of 2017.
2. Prepare journal entries in the books of SPRATLYS for the above-mentioned
CASH FLOW HEDGE of its net investment in EFCEE ENTERPRISES.
