solutiontochapter20.pdf

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Chapter 20

Problem I

In relation to the above data, the following relevant exchange rates are needed for further analysis in relation to hedged item and hedging instrument:

Spot Rate

Forward Rate for 3/1/20x5 Settlement

(or Expiration)

December 1, 20x4…………………………. P40.00 P40.15 (*90 days)

December 31, 20x4…………………………. P40.30 P40.40 (**60 days)

March 1, 20x5………………………………….. P40.20****original 90-day forward rate on 12/1/20x4

**remaining or current forward rate on 12/31/20x4***the forward rate at expiration or maturity is equal to spot rate as the remaining period of the forward contract is

zero.

1. Not a Hedge Accounting - Importing Transaction (Exposed Liability).

a. The journal entries to record the hedged item and hedging instrument are as follows:Gross Method

Hedged Item – Importing Transaction(Exposed Liability)

Hedging Instrument – Forward Contracts( Broad Approach or Gross Position Accounting)

December 1, 20x4

Transaction Date Date of Inception/Hedging of 90 days Forwards

Inventory ($1,200 x P40)…………... 48,000 FC Receivable from XD…………… 48,180Accounts payable……………….

To record purchase of goods onaccount using the spot rate on

2/1/1/x4.

48,000 Pesos Payable to XD(P40.15 x $1,200)

To record forward contract tobuy $12000 using forward rate.

48,180

*XD – exchange dealer

If the financial statements are prepared on December 1, 20x4, the value of the forward

contract is as follows:

Balance Sheet Presentation on 12/1/20x4

FC Receivable from XD……………………… P48,180Less: Pesos payable to XD…………………… 48,180Forward Contract (fair value)………………. P 0

December 31, 20x4(Balance Sheet Date an intervening financial reporting date)

FC Transaction Loss 360 FC Receivable from XD…………… 300Account payable…………….[P40.30 – P48.00) x $1,200

To record a loss on the exposed

liability denominated in foreigncurrency.

360 FC Transaction Gain[(P40.40 – P40.15) x $1,200]

To record a gain on foreign

currency to be received fromFC dealer.

300

*FC – foreign currency

If the financial statements are prepared on December 31, 20x4, the value of the forwardcontract is as follows


FC Receivable from XD (P40.40 x $1,200)… P48,480Less: Pesos payable to XD (fixed at P40.15) 48,180Forward Contract (fair value – asset)……… P 300



On March 1, 20x5 (the transaction date and the settlement date), the journal entries are:

March 1, 20x5

Settlement Date Settlement Date/Date of Expiration of Contract

Accounts payable 120 FC Transaction Loss 240FC Transaction gain…….

[(P40.20 – P40.30) x $1,200}……..To record a gain from 12/31/x4 to3/1/x5 on liability denominated inFC.

120 FC Receivable from XD

[(P40.40 – P40.20) x $1,200]To record a loss on foreigncurrency to be received fromFC dealer.

240

Pesos Payable from XD……………. 48,180Cash……………………………….

To record payment toexchange dealer.

48,180

Investment in FC……………………. 48,240FC Receivable from XD

To record receipt of foreignCurrency.

48,240

Accounts payable…………………… 48,240 Cash……………………………………. 48,240Cash (refer to note below)………

To record payment of accountspayable at spot rate.

48,240 Investment in FC………………….To record conversion of USdollars into cash for payment of accounts payable.

48,240

Note: This entry may be ignored and instead theInvestment in FC will be outright credited in paymentof accounts payable. For succeeding illustrations theconversion of FC to peso cash to settle itemsacquired will be used.

These transactions can be summarized in the following table.

Hedged Item (Exposed Liability) Hedging Instrument (Forward Contract)

Accounts Payable BalanceTransactiongain (loss) FC Receivable Balance

Transactiongain (loss)

12/1/20x4 P48,000 12/1/20x4 P48,180

12/31/20x4 48,360 (P 360) 12/31/20x4 48,480 P 300

3/1/20x5 48,240 120 3/1/20x5 48,240 (240)

Total gain (loss) (P 240) P 60

Thus, the net effect is a P150 loss when the forward contract is used.

“Net” Position Accounting

The following illustrates the effects of “net” position accounting using the same illustrationabove:


Hedging Instrument – Forward Contracts( Net Position Accounting)

December 1, 20x4


Inventory ($1,200 x P40)…………... 48,000 Memorandum entry only,Accounts payable……………….


2/1/1/x4.

48,000 No formal journal entry as the fair value of forwardcontract is zero.



It should be noted that the accounts payable for the inventory purchase is recorded usingthe spot rate on the transaction date (on December 1, 20x3).

December 31, 20x4(Balance Sheet Date, an intervening financial reporting date)

FC Transaction Loss 360 Forward Contract 300Accounts payable[P40.30 – P40.00) x $1,200

To record a loss on the exposedliability denominated in foreigncurrency.


To record a gain on foreigncurrency to be received fromFC dealer.

300


If the financial statements are prepared on December 31, 20x4, the value of the forwardcontract is as follows:

Forward contract (debit balance – asset)………………………. P 300

The income statement would report an exchange loss of P360 and an exchange gain of

P250.


March 1, 20x5


Accounts payable 120 FC Transaction Loss 240FC Transaction gain…….[(40.20 – P40.30) x $1,200}……..

To record a gain from 12/31/x4 to3/1/x5 on liability denominated inFC.

120 Forward Contract[(P40.40 – P40.20) x $1,200]

To record a loss on foreigncurrency to be received fromFC dealer.

240

Accounts payable (P40.20 x $1,200) 48,240 Cash………………………………….. 60Cash (P40.20 x $1,200) or *

To record payment to exchangedealer (XD)

48,240 Forward ContractNet settlement received from thedealer on expiration or maturitydate of forward contract.

60

*(P40.15, forward rate on the date of inception x $1,200) + cash received from the exchange dealer of P50.

Forward Contract (Asset/Liability)

12/31/x4 Gain… 300 240… …..3/1/x5 Loss

3/1/x5 Net…… 60 60

b.b.1. P360 loss - [(P40.30 – P40.00) x $1,200]b.2. P300 gain - [(P40.40 – P40.15) x $1,200]b.3. P360 loss – P300 gain = P60 net loss (decrease in net income)

b.4. P120 gain - [(P40.20 – P40.30) x $1,200}b.5. P240 loss - [(P40.40 – P40.20) x $1,200]b.6. P240 loss – P120 gain = P120 net loss (decrease in net income)

c.c.1. P48,360 - [P40.30, spot rate/current rate on the balance sheet date x $1,200]c.2. P48,240 – [P40.20, spot rate on the date of settlement x $1,200]



d.d.1. P48,180 - [P40.15, original (90-day) forward rate on the date of hedging x $1,200]d.2. No entry requiredd.3. Same amount with d.1d.4. No entry required

e.e.1.

Gross MethodFC Receivable from XD……………………… P48,180Less: Pesos payable to XD…………………… 48,180Forward Contract (fair value)………………. P 0

Net Method: Zero. No entry required.

e.2. P300 assetGross method


Net Method: P300.Forward contract (debit balance – asset)… P 300

e.3. P60 debit balance – assetGross method


Net PositionForward Contract (Asset/Liability)

12/31/x4 Gain… 300 240… …..3/1/x5 Loss

3/1/x5 Net…… 60

f. P48,000 [P40, spot (current) rates on the date of transaction x $1,200]

2. Fair Value Hedge – Hedging an Unrecognized Foreign Currency Firm Commitment.Gross Method (for Net Position – same with Exposed Liability)a. The journal entries to record the hedged item and hedging instrument are as follows:

Hedged Item – (UnrecognizedForeign Currency Firm Commitment)


December 1, 20x4

Date of Commitment (Date of Issuing the PurchaseOrder) Date of Inception/Hedging of 90 days Forwards

No journal entry is required to record the firm FC Receivable from XD…………… 48,180commitment. The forward contract is designated as ahedge of the firm commitment to purchase inventoryon March 1, 20x5. The hedge is accounted for as afair value hedge.

Pesos Payable to XD(P40.15 x $1,200)

To record forward contract tobuy $1,200 using forward rate.

48,180


FC Transaction Loss 300 FC Receivable from XD…………… 300Firm Commitment[P40.40 – P40.15) x $1,200


300



To record a loss on firmcommitment using the change inthe forward rate.




Assets Liability

FC Receivable from XD (P40.40 x $1,200)....…...P48,480Less: Pesos Payable to XD(fixed at P40.15)….… 48,180Forward Contract (fair value)……………………P 300

Firm Commitment…………………………………...P 300


March 1, 20x5

Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract

Firm Commitment………… 240 FC Transaction Loss …………… 240FC Transaction gain…….

To record a gain on fair value of firm commitment.

240 FC Receivable from XD………[(P40.40 – P40.20) x $1,200]

To record a loss on foreigncurrency to be received fromexchange dealer.

240



48,180


To record receipt of foreigncurrency.

48,240

Inventory (P40.20 x $1,200)…………. 48,240 Cash……………………………………. 48,240

Cash ………………………………… 48,240 Investment in FC……………..…... 48,240To record the purchase of

inventory for $1,200 at spot rate.

To record conversion of US

dollars into cash for purchase of inventory.

Firm Commitment……………………. 60Inventory……………………………. 60

To remove the carrying amount of the firm commitment from thebalance sheet6 and adjust theinitial carrying amount of themachine that results from the firmcommitment. This treatment is anaccordance with PAS 39 par. 89b.

Firm Commitment

3/1/x5 Gain……. 240 300… …..12/31/x4 Loss

60 60 3/1/x5 Net

b.b.1. P300 loss - [(P40.40 – P40.15) x $1,200]b.2. P300 gain - [(P40.40 – P40.15) x $1,200]b.3. P300 loss – P300 gain = P0b.4. P240 gain - [(P40.40 – P40.20) x $1,200}b.5. P240 loss - [(P40.40 – P40.20) x $1,200]b.6. P240 loss – P240 gain = P0



c. – same with Exposed Liabilityc.1. P48,180 - [P40.15, original (90-day) forward rate on the date of hedging x $1,200]c.2. No entry requiredc.3. Same amount with d.1c.4. No entry required

d.d.1. Zero, no entry requiredd.2. P300 liability, [(P40.40 – P40.15) x $1,200]d.3. P60, liability

Firm Commitment

3/1/x5 Gain……. 240 300… …..12/31/x4 Loss

60 3/1/x5 Net

e. Same with Exposed Liabilitye.1. Net Method: Zero. No entry required.


e.2. P300 assetNet Method: P300.

Forward contract (debit balance – asset)… P 300

Gross methodFC Receivable from XD (P40.40 x $1,200)… P48,480Less: Pesos payable to XD (fixed at P40.15) 48,180Forward Contract (fair value – asset)……… P 300

e.3. P60 debit balance – assetGross method

FC Receivable from XD (P40.20 x $1,200)… P48,240

Less: Pesos payable to XD (fixed at P40.15) 48,180Forward Contract (fair value – asset)……… P 60

Net MethodForward Contract (Asset/Liability)

12/31/x4 Gain… 300 240… …..3/1/x5 Loss

3/1/x5 Net…… 60

f. P48,240, spot rate on the date of transaction.Inventory at spot rate on the date of transaction (P40.20 x $1,200)…………….P48,240

g. P48,180, original (90-day) forward rate on the date of hedgingInventory at spot rate on the date of transaction (P40.20 x $1,200)…………….P48,240

Less: Firm Commitment account – liability, 3/1/20x5………………………………. 60Inventory at original (90-day) forward rate on the date of hedging, P40.15….P48,180

3. Cash Flow Hedge - Hedge of a Forecasted Transaction.

Gross Method (for Net Position – same with Exposed Liability)a. The journal entries to record the hedged item and hedging instrument are as follows:



Hedged Item – Forecasted Transaction


December 1, 20x4

Date of Forecast Date of Inception/Hedging of 90 days Forwards

No journal entry is required to record the forecasted FC Receivable from XD…………… 48,180transaction. The forward contract is designated as a

hedge against the exposure to increases in the dollar rate on March 1, 20x5.

Pesos Payable to XD

(P40.15 x $1,200)To record forward contract tobuy $1,200 using forward rate.

48,180


No entry required, since it is only a forecasted FC Receivable from XD 300transaction not guaranteed such as firm commitment. OCI – Exchange Gain (B/S)

[(P40.40 – P40.15) x $1,200]To record a gain on foreigncurrency to be received fromFC dealer.

300

FC – foreign currency; OCI - Other Comprehensive Income; B/S – Balance Sheet


FC Receivable from XD (P40.40 x $1,200)… P48,480Less: Pesos payable to XD (fixed at P40.15) 48,180Forward Contract (fair value - asset)…..….. P 300

On March 1, 2011 (the transaction date and the settlement date), the journal entries are:

March 1, 20x5

Date of Transaction and Settlement Settlement Date/Date of Expi ration of Contract

OCI – Exchange Loss (B/S)……… 240FC Receivable from XD………[(P40.40 – P40.20) x $1,200]

To record a loss on foreign


240



48,180



48,240

Machinery (P40.20 x $1,200)………... 48,240 Cash……………………………………. 48,240

Cash ………………………………… 48,240 Investment in FC…………………. 48,240To record the purchase of equipment for $1,200 at the spot

rate of P40.20

To record conversion of USdollars into cash for purchase of machinery.

OCI – Exchange Gain……………….. 60 Other Comprehensive Income

Machinery………………………….. 60 3/1/x5 Loss 240 300… ….12/31/x4 Gain

To remove the gain recognized in 60 60 3/1/x5OCI and adjust the carryingamount if the machine that resultsfrom the hedged transaction by



this amount. Also, to record thebasis adjustment of the carryingvalue of the equipment. This entryis recorded if PAS 39 par. 98b isadopted.

b.b.1. Gain or loss on hedged item, 3/1/20x4: None, no entry requiredb.2. P300 gain, other comprehensive income - [(P40.40 – P40.15) x $1,200]b.3. None.b.4. Gain or loss on hedged item, 3/1/20x4: None, no entry required for gain or loss. the

only entry is to record the purchase of machinery.b.5. P240 loss, other comprehensive income - [(P40.40 – P40.20) x $1,200] to be recorded

on March 1, 20x5. The balance of the OCI – gain amounted to P60 computed asfollows:

Other Comprehensive Income

3/1/x5 Loss 240 300… ….12/31/x4 Gain

60 3/1/x5

c. Same with Exposed Liabilityc.1. Net Method: Zero. No entry required.


c.2. P300 assetNet Method: P300.


Gross methodFC Receivable from XD (P40.40 x $1,200)… P48,480Less: Pesos payable to XD (fixed at P40.15) 48,180Forward Contract (fair value – asset)……… P 300

c.3. P60 debit balance – assetGross method



12/31/x4 Gain… 300 240… …..3/1/x5 Loss

3/1/x5 Net…… 60

4. Not a Hedge Accounting – Speculation.Gross Method (for Net Position – same with Exposed Liability)a. The journal entries to record the hedged item and hedging instrument are as follows:

Hedged Item - SpeculationHedging Instrument – Forward Contracts

( Broad Approach or Gross Position Accounting)

December 1, 20x4

Date of Inception/Hedging of 90 days Forwards

FC Receivable from XD…………… 48,180Pesos Payable to XD(P40.15 x $1,200)


48,180




FC Receivable from XD 300FC Transaction Gain[(P40.40 – P40.15) x $1,200]


300



March 1, 20x5Settlement Date/Date of Expiration of Contract

FC Transaction Loss………………… 240FC Receivable from XD………….

[(P40.40 – P40.20) x $1,200]To record a loss on foreigncurrency to be received fromFC dealer.

240



48,180



48,240

Cash……………………………………. 48,240Investment in FC…………………. 48,240

To record conversion of USdollars into cash.

b.b.1. No gain or loss, since it is the date of hedging.b.2. P300 gain - [(P40.40 – P40.15) x $1,200], only hedging instrument.b.3. P240 loss

c.c.1. P48,180 - [P40.15, original (90-day) forward rate on the date of hedging x $1,200]c.2. No entry required

c.3. Same amount with c.1c.4. No entry required

d.d.1.

Net Method: Zero. No entry required.Gross Method




d.2. P300 assetNet Method: P300.


Gross methodFC Receivable from XD (P40.40 x $1,200)… P48,480

Less: Pesos payable to XD (fixed at P40.15) 48,180Forward Contract (fair value – asset)……… P 300

d.3. P60 debit balance – assetGross method



12/31/x4 Gain… 300 240… …..3/1/x5 Loss

3/1/x5 Net…… 60

Problem II (Discounting the Fair Value of the Forward Contract)1. Not a Hedge Accounting - Importing Transaction (Exposed Liability).

The journal entries to record the hedged item and hedging instrument are as follows:



December 1, 20x4


Purchases ($1,200 x P40)…………... 48,000 FC Receivable from XD…………… 48,180Accounts payable……………….


2/1/1/x4.

48,000 Pesos Payable to XD(P40.15 x $1,200)


48,180

*XD – exchange dealer





FC Transaction Loss 360 FC Receivable from XD…………… 294

Account payable…………….[P40.30 – P40.00) x $1,200

To record a loss on the exposedliability denominated in foreigncurrency.

360 FC Transaction GainTo record a gain on foreigncurrency to be received fromFC dealer.

294

Note: Discounted or present value for hedged item is Gain [(P40.40 – P40.15) x $1,200]............ P 300not necessary for exposed asset or liability since spot Less: Discount (P300 x 12% x 2/12)…………… ____6Rate is in effect. Present value of gain*…………………………. P294

* or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2months = 2%





FC Receivable from XD (P40.40 x $1,200)- P6. P48,474Less: Pesos payable to XD (fixed at P40.15)… 48,180Forward Contract (fai r value – asset)……… P 294


March 1, 20x5


Accounts payable 120 FC Transaction Loss 234FC Transaction gain…….[(P40.20 – P40.30) x $1,200}……..


120 FC Receivable from XDTo record a loss on foreign


234

Note: Discounted or present value for hedged item is Overall gain (P40.20 – P40.15) x $1,200 …….. P 60not necessary for exposed asset or liability since spot Less: 12/31/20x4 Gain at present value…….. __294

rate is in effect. FC Transaction loss……………………………… P234



48,180


To record receipt of foreignCurrency.

48,240

Accounts payable…………………… 48,240 Cash……………………………………. 48,240Cash (refer to note below)………


48,240 Investment in FC………………….To record conversion of USdollars into cash for payment of accounts payable.

48,240

Note: This entry may be ignored and instead theInvestment in FC will be outright credited in paymentof accounts payable. For succeeding illustrations theconversion of FC to peso cash to settle itemsacquired will be used.

a.a.1. P360 lossa.2. P294 gaina.3. P360 loss – P294 gain = P66 net loss (decrease in net income)a.4. P120 gain - [(P40.20 – P40.30) x $1,200}

a.5. P234 lossa.6. P234 loss – P120 gain = P114 net loss (decrease in net income)

b.b.1.





b.2. P294 assetGross method

FC Receivable from XD (P40.40 x $1,200)- P6. P48,474Less: Pesos payable to XD (fixed at P40.15)… 48,180Forward Contract (fair value – asset)……… P 294


b.3. P60 debit balance – assetGross method



12/31/x4 Gain… 300 240… …..3/1/x5 Loss

3/1/x5 Net…… 60

2. Fair Value Hedge – Hedging an Unrecognized Foreign Currency Firm Commitment.The journal entries to record the hedged item and hedging instrument are as follows:



December 1, 20x4





48,180

This is computed using the change in the forward rate. These entries are as follows:


FC Transaction Loss 294 FC Receivable from XD…………… 294Firm Commitment[P40.40 – P40.15) x $1,200




294

Loss…………………………………..................... P 300 Gain [(P40.40 – P40.15) x $1,200] P 300Less: Discount (P300 x 12% x 2/12)…………… ____6 Less: Discount (P300 x 12% x 2/12)…………….. ____6Present value of loss*…………………………. P294 Present value of gain*…………………………… P294



Assets Liability

FC Receivable from XD (P40.40 x $1,200) - P6…P48,474Less: Pesos Payable to XD(fixed at P40.15)….… 48,180Forward Contract (fair value)……………………P 294

Firm Commitment…………………………………...P 294




March 1, 20x5

Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract

Firm Commitment………… 234 FC Transaction Loss …………… 234FC Transaction gain…….

To record a gain on fair value of firm commitment.

234 FC Receivable from XD………To record a loss on foreigncurrency to be received fromexchange dealer.

234

Overall loss (P40.20 – P40.15) x $1,200 ……….. P 60 Overall gain (P40.20 – P40.15) x $1,200 …….. P 60Less: 12/31/20x4 Gain at present value……… __294 Less: 12/31/20x4 Gain at present value…….. __294FC Transaction Gain…………………………….. P234 FC Transaction loss……………………………… P234



48,180



48,240

Inventory (P40.20 x $1,200)…………. 48,240 Cash……………………………………. 48,240Cash ………………………………… 48,240 Investment in FC……………..…... 48,240To record the purchase of inventory for $1,200 at spot rate.

To record conversion of USdollars into cash for purchase of inventory.

Firm Commitment……………………. 60Inventory……………………………. 60

To remove the carrying amount of the firm commitment from thebalance sheet6 and adjust theinitial carrying amount of theinventory that results from thefirm commitment. This treatment isan accordance with PAS 39 par.89b.

Firm Commitment

3/1/x5 Gain……. 234 294… …..12/31/x4 Loss

60 60 3/1/x5 Net

a.a.1. P294 loss

Foreign Currency Exchange Loss [(P40.40 – P40.15) x $1,200]………… P 300Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6Present value of loss*…………………………………………………………… P294

a.2. P294 gainForeign Currency Exchange Gain [(P40.40 – P40.15) x $1,200]………. P 300Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6Present value of gain*………………………………………………………… P294

a.3. P294 loss(a.1) – P294 gain (a.2) = P0a.4. P234 gain

Overall loss (P40.20 – P40.15) x $1,200 ……………………………………… P 60Less: 12/31/20x4 Gain at present value……………………………………. __294FC Transaction Gain……………………………………………………………. P234

a.5. P234 lossOverall gain (P40.20 – P40.15) x $1,200 …….. P 60Less: 12/31/20x4 Gain at present value…….. __294FC Transaction loss……………………………… P234

a.6. P234 gain (a.4) – P234 loss (a.5) = P0



b.b.1. Zero, no entry requiredb.2. P294 liability

Foreign Currency Exchange Loss [(P40.40 – P40.15) x $1,200]………… P 300Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6Present value of loss* / Firm Commitment…………………………………. P294

b.3. P60 - liabilityFirm Commitment

3/1/x5 Gain……. 234 294… …..12/31/x4 Loss

60 3/1/x5 Net

c.c.1.



c.2. P294 asset

Gross methodFC Receivable from XD (P40.40 x $1,200)- P6. P48,474Less: Pesos payable to XD (fixed at P40.15)… 48,180Forward Contract (fair value – asset)……… P 294





12/31/x4 Gain… 300 240… …..3/1/x5 Loss

3/1/x5 Net…… 60

3. Cash Flow Hedge - Hedge of a Forecasted Transaction.




December 1, 20x4


No journal entry is required to record the forecasted FC Receivable from XD…………… 48,180transaction. The forward contract is designated as ahedge against the exposure to increases in the dollar

rate on March 1, 20x5.



48,180



a.a.1. Gain or loss on hedged item, 3/1/20x4: None, no entry required.a.2. P294 gain, other comprehensive income

Foreign Currency Exchange Gain [(P40.40 – P40.15) x $1,200]………. P 300Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6Present value of gain*………………………………………………………… P294

a.3. Nonea.4. Gain or loss on hedged item, 3/1/20x4: None, no entry required for gain or loss. The

only entry is to record the purchase of machinery.

a.4. P234 gainOverall loss (P40.20 – P40.15) x $1,200 ……………………………………… P 60Less: 12/31/20x4 Gain at present value……………………………………. __294FC Transaction Gain……………………………………………………………. P234

a.5. P234 loss, other comprehensive income – {[(P40.40 – P40.20) x $1,200] – P6} to berecorded on March 1, 20x5. The balance of the OCI – gain amounted to P60computed as follows:

Other Comprehensive Income

3/1/x5 Loss 234 294… ….12/31/x4 Gain

60 3/1/x5

b.b.1.



b.2. P294 assetGross method

FC Receivable from XD (P40.40 x $1,200)- P6. P48,474

Less: Pesos payable to XD (fixed at P40.15)… 48,180Forward Contract (fair value – asset)……… P 294


b.3. P60 debit balance – assetGross method



12/31/x4 Gain… 300 240… …..3/1/x5 Loss3/1/x5 Net…… 60

4. Not a Hedge Accounting – Speculation.The journal entries to record the hedged item and hedging instrument are as follows:

Hedged Item - SpeculationHedging Instrument – Forward Contracts

( Broad Approach or Gross Position Accounting)

December 1, 20x4

Date of Inception/Hedging of 90 days Forwards



FC Receivable from XD…………… 48,180Pesos Payable to XD(P40.15 x $1,200)


48,180


FC Receivable from XD 294FC Transaction Gain


294

Gain [(P40.40 – P40.15) x $1,200] P 300Less: Discount (P300 x 12% x 2/12)…………….. ____6Present value of gain*…………………………… P294



FC Receivable from XD (P40.40 x $1,200)-P6 P48,474Less: Pesos payable to XD (fixed at P40.15) 48,180Forward Contract (fair value – asset)……… P 294

March 1, 20x5Settlement Date/Date of Expiration of Contract

FC Transaction Loss………………… 234FC Receivable from XD………….


234

Overall gain (P40.20 – P40.15) x $1,200 …….. P 60Less: 12/31/20x4 Gain at present value…….. __294FC Transaction loss……………………………… P234



48,180



40,200

Cash……………………………………. 48,240Investment in FC…………………. 48,240

To record conversion of US

dollars into cash.

a.a.1. P294 gain

Foreign Currency Exchange Gain [(P40.40 – P40.15) x $1,200]………. P 300Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6Present value of gain*………………………………………………………… P294

a.3. P294 gain.a.5. P234 loss – other comprehensive income



Overall gain (P40.20 – P40.15) x $1,200 …….. P 60Less: 12/31/20x4 Gain at present value…….. __294FC Transaction loss……………………………… P234

b.b.1. Zero, no entry requiredb.2. P294 liability

Foreign Currency Exchange Loss [(P40.40 – P40.15) x $1,200]………… P 300Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6Present value of loss* / Firm Commitment…………………………………. P294

b.3. P60 - liabilityFirm Commitment

3/1/x5 Gain……. 234 294… …..12/31/x4 Loss

60 3/1/x5 Net

c.c.1.


FC Receivable from XD……………………… P48,180

Less: Pesos payable to XD…………………… 48,180Forward Contract (fair value)………………. P 0

c.2. P294 assetGross method

FC Receivable from XD (P40.40 x $1,200)- P6. P48,474Less: Pesos payable to XD (fixed at P40.15)… 48,180Forward Contract (fair value – asset)……… P 294





12/31/x4 Gain… 300 240… …..3/1/x5 Loss

3/1/x5 Net…… 60

Problem III

The following relevant exchange rates are needed for further analysis in relation to hedged itemand hedging instrument:

Spot Rate


(or Expiration)

November 1, 20x4…………………. P40.60 P41.25 (*270 days)

December 31, 20x4…………………. P40.75 P41.00 (**210 days)

March 1, 20x5…………………………………… P40.70 P40.95 (***150 days)

August 1, 20x5……………………………….. P41.55*****original 270-day forward rate on 12/1/20x4

**remaining or current forward rate on 12/31/20x4***remaining or current forward rate on 3/1/20x5



***the forward rate at expiration or maturity is equal to spot rate as the remaining period of the forward contract is zero.




November 1, 20x4





49,500


Firm Commitment ……………………. 300 FC Transaction Loss……………….. 300

FC Transaction Gain……………...[P41.25 – P41.00) x $1,200


300 FC Receivable from XD…………(P41.25 – P41.00) x $1,200]


300

Assets Liability

Firm Commitment…………………………………...P 300 Pesos payable to XD (fixed at P41.25)………..P 49,500Less: FC Receivable from XD (at spot rate)…. 49,200Forward Contract (fair value)………………….P 300

On March 1, 20x5 (the transaction date), the journal entries are:

March 1, 20x5

Transaction Date (Exposed Liability)

Inventory (P40.70 x $1,200)…………. 48,840

Accounts payable……………….(P40.70 x $1,200)

48,840

To record the purchase of inventory for $1,200 at spot rateand recognize accounts payable.

Inventory ……………………………… 300Firm Commitment ……………….. 300

To remove the carrying amount of the firm commitment from thebalance sheet6 and adjust theinitial carrying amount of the

inventory that results from the firmcommitment. This treatment is anaccordance with PAS 39 par. 89b.

Firm Commitment

12/31/x4 Gain….. 300

3 / 1/x5 300 300



August 1, 20x5


FC Transaction Loss………………… 1,020 FC Receivable from XD……………. 660Accounts payable….[(P41.55 – P40.70) x $1,200}……..

To record a loss from 3/1/x5 to

8/1/x5 on liability denominated inFC.

1,020 FC Transaction Gain…………….[(P41.55 – P41.00) x $1,200]

To record a gain on foreign


660



49,500



49,860

Accounts payable…………………… 49,860 Cash……………………………………. 49,860Cash………………………………….


49,860 Investment in FC………………….

To record conversion of USdollars into cash for payment of accounts payable.

49,860

Problem IV

The following relevant exchange rates are needed for further analysis in relation to hedged itemand hedging instrument:

Spot Rate


(or Expiration)

December 1, 20x4…………………………. P40.00 P40.15 (*90 days)

December 31, 20x4…………………………. P40.30 P40.40 (**60 days)

March 1, 20x5………………………………….. P40.20****original 90-day forward rate on 12/1/20x4

**remaining or current forward rate on 12/31/20x4***the forward rate at expiration or maturity is equal to spot rate as the remaining period of the forward contract is

zero.




December 1, 20x4


No journal entry is required to record the forecasted FC Receivable from XD…………… 48,180

transaction. The forward contract is designated as ahedge against the exposure to increases in the dollar

rate on March 1, 20x5.



48,180


No entry required, since it is only a forecasted FC Receivable from XD 300transaction not guaranteed such as firm commitment. OCI – Exchange Gain (B/S) 300



[(P40.40 – P40.15) x $1,200]To record a gain on foreigncurrency to be received fromFC dealer.

FC – foreign currency; OCI - Other Comprehensive Income; B/S – Balance Sheet

Notice that unlike the fair value hedge, there is no offsetting firm commitment entry since this is a

forecasted transaction. The exchange gain or loss is reported in comprehensive income and willaffect the income statement when the inventory is eventually sold. On the balance sheet, theforward contract is reported as an asset at its fair value of P300, and the offsetting amount isreported in other comprehensive income (as a gain).


FC Receivable from XD (P40.40 x $1,200)… P48,480Less: Pesos payable to XD (fixed at P40.15) 48,180Fair value of Forward Contract, 12/1/20x4.. P 300

On March 1, 2011 (the transaction date and the settlement date), the journal entries are:

March 1, 20x5


OCI – Exchange Loss (B/S)……… 240FC Receivable from XD………[(P40.40 – P40.20) x $1,200]


240



48,180

Investment in FC……………………. 48,240

FC Receivable from XDTo record receipt of foreigncurrency.

48,240

Inventory (P40.20 x $1,200)………... 48,240 Cash……………………………………. 48,240

Cash ………………………………… 48,240 Investment in FC…………………. 48,240To record the purchase of merchandise for $1,200 at the

spot rate of P40.20

To record conversion of USdollars into cash for purchase of machinery.

Suppose that in April 1, 20x5, the inventory is sold for P54,000 cash.

The entries to record the sale and to reclassify the amounts from Other Comprehensive Income(a P50 gain, including P250 gain on December 31, 20x4, plus the P200 loss on March 1, 20x5) intoearnings are as follows:

April 1, 20x5

Date of Transaction (Sale) Settlement Date/Date of Expiration of Contract

Cash………... 54,000

Sales………………………………… 54,000To record the sale of merchandise.

Cost of goods sold…………………… 48,240

Inventory, at cost………………… 48,240To record cost of sales.



OCI – Exchange Loss……………….. 60 Other Comprehensive Income

Cost of goods sold....................... 60 3/1/x5 Loss 240 300… ….12/31/x4 Gain

To remove the gain recognized in 60 60 3/1/x5OCI and release the OCI to profitor loss. This entry is recorded inaccordance with PAS 39 par. 98ais adopted.

Problem V

1. Indirect exchange rates for Australian dollars were:December 1, 20x4: FC70,000 / P42,000 = 1.667 [P1 equals FC 1.667]December 31, 20x4: FC70,000 / P41,700 = 1.679 [P1 equals FC 1.679]

2. The balance in the account Foreign Currency Payable to Exchange Broker wasP39,900 at December 31, 20X5, computed as:

P39,900 = FC 70,000 x P.57 Dec. 31 forward rate

3. The direct exchange rate for the 60-day forward contract for the 70,000 foreigncurrency (FC) was FC 1 = P.58. This is the result of the following computation:

(P40,600 / FC 70,000) = P.58.

4. P40,600 is the amount of Pesos Receivable from Exchange Broker in the adjustedtrial balance at December 31, 20x4. The balance in this account does not change

because it is denominated in Philippine peso.

5. Indirect spot exchange rates for FC2 were:October 2: FC2 400,000 / P80,000 = 5 [P1 equals FC2 5]December 31: FC2 400,000 / P80,800 = 4.950 [P1 equals FC2 4.950]

Or, 4.950 = FC2 1 / P.2020

6. The Pesos Payable to Exchange Broker was P82,000 in both the adjusted andunadjusted trial balances. The entry to record the forward contract for the 400,000

FC2 on October 2, 20x4, appears below. Note that the account Pesos Payable toExchange Broker is denominated in pesos and does not change as a result of

exchange rate changes.

Foreign Currency Receivable fromExchange Broker (FC2) 82,000

Pesos Payable to Exchange Broker (P) 82,000

7. The direct exchange rate for the 120-day forward contract in FC2 on October 2,20x4, was P.205. This amount is determined in the following manner: P82,000 / FC2400,000 = P.205. The P82,000 is the amount of the pesos payable to exchangebroker. This amount is computed by using the forward rate.

8. The accounts payable balance was P80,800 at December 31, 20x4.P80,800 = FC2 400,000 x P.2020 Dec. 31 spot rate

The entries to support the computations for are presented below:1. Transactions with Foreign Company 1 (FC1)

December 1, 20x4Accounts Receivable (FC1) 42,000

Sales 42,000P42,000 = FC1 70,000 x (P1/FC1 1.667)



Pesos Receivable from Exchange Broker 40,600Foreign Currency Payable toExchange Broker (FC1) 40,600

P40,600 = FC1 70,000 x P.58 Dec. 1 forward rate,and also peso amount stated in problem

information

(P.58 = P40,600 / FC1 70,000)

December 31, 20x4Foreign Currency Transaction Loss 300

Accounts Receivable (FC1) 300P300 = change in accounts receivable (FC1) as

notedin problem information.

Foreign Currency Payable toExchange Broker 700

Foreign Currency Transaction Gain 700P39,900 = FC1 70,000 x P.57 Dec. 31 forward rate- 40,600 = FC1 70,000 x P.58 Dec. 1 forward rateP 700 = FC1 70,000 x (P.57 - P.58)

2. Transactions with Foreign Company 2 (FC2)

October 2, 20x4Equipment 80,000

Accounts Payable (FC2) 80,000P80,000 = FC2 400,000 x P.20

Foreign Currency Receivable fromExchange Broker (FC2) 82,000

Pesos Payable to Exchange Broker 82,000P82,000 = FC2 400,000 x P.2050, and theP82,000 is presented in the problemfor the foreign currency receivable.

December 31, 20x4Foreign Currency Transaction Loss 800

Accounts Payable (FC2) 800P80,800 = FC2 400,000 x P.202 Dec. 31 spot rate- 80,000 = FC2 400,000 x P.200 October 2 spot rateP 800 = FC2 400,000 x (P.202 - P.200)

Foreign Currency Transaction Loss 1,000Foreign Currency Receivable fromExchange Broker 1,000

P81,000 = FC2 400,000 x P.2025 Dec. 31 forwardrate- 82,000 = FC2 400,000 x P.2050 Oct. 2 forward rateP 1,000 = FC2 400,000 x (P.2025 - P.2050)



Problem VI

Based on the data given, the following situations can be derived:

Market or

Spot Rate

Strike price(exercise price

or option

price)

ForeignCurrency

Option

Situation

Element

Existing

Time

Value**

Intrinsic

Value*12/ 1/20x4 P1.20 P1.20 At-the-money TV P360 P 0

12/31/20x4 P1.28 P1.20 In-the-money TV & IV P240 P4,800

3/ 1/20x5 P1.27 P1.20 In-the-money IV*** P 0 P4,200TV – time value; IV – intrinsic value.* (Market price less – option price) x foreign currencies** Fair value of option – intrinsic value***time already expired, so need to determine time value unless It is a residual amount.


Hedged Item – Importing Transaction(Exposed Liability) Hedging Instrument – Option Contracts

December 1, 20x4


Inventory (60,000 FC x P1.2)……….. 72,000 Investment in FC Call Option…….. 360Accounts payable……………….

To record purchase of goods onaccount using the spot rate on12/1/1/x4.

72,000 Cash………………………………..To record purchase of calloption.

360


FC Transaction Loss………………….. 4,800 Investment in FC Call Option…… 4,680Account payable…………………[P1.28 – P1.20) x 60,000 FC

To record a loss on the exposed

liability denominated in foreigncurrency.

4,800 FC Transaction Gain….(P5,040 – P360 = P4,680)

To record a gain on call option.

4,680


March 1, 20x5


Accounts payable……………. 600 FC Transaction Loss…………………. 840FC Transaction gain…….[(P1.28 – P1.27) x 60,000 FC……..


600 Investment in FC Call Option…(P5,040 – P4,200)

To record a loss on call option

840

Accounts payable…………………… 76,200 Cash……………………………………. 4,200Cash [(P1.20 x 60,000 FC) +

P4,200, proceeds from calloption]…………………………..


76,200

Investment in FC Call Option…To record the derecognition of call option on realization.

4,200



Problem VII

The following table summarizes the succeeding journal entries in relation to hedged item andhedging instrument:

Firm Commitment Call Option Contract

Date SpotRate

Total

Fair value Change inFair Value

Call Option

(CO)Premiumper FC

(CO Premium x FCs)

Fair Value of CallOption Change inFair Value

11/20/x4 P0.20 P.002 P120

12/20/x4 P0.21 (P 600)* (P 600)** P.010*** P600 P480* $12,000 – $12,600 = $(600).**(P0.21 – P0.20, spot) x 60,000 FC.***The premium on 12/20 for an option that expires on that date is equal to the option’s intrinsic value. Given the spot

rate on 12/20 of P.21, a call option with a strike price of P.20 has an intrinsic value of P.01 per mark.

Based on the above data, the following situations can be derived:

Market or

Spot Rate


or option

price)

ForeignCurrency

Option

Situation

Element

Existing

Time

Value**

Intrinsic

Value*11/20/20x4 P0.20 P0.20 At-the-money TV P120 P 0

12/20/20x4 P0.21 P0.20 In-the-money IV P 0 P 600TV – time value; IV – intrinsic value.* (Market price less – option price) x foreign currencies** Fair value of option – intrinsic value


Hedged Item – Importing Transaction(Firm Commitment) Hedging Instrument – Option Contracts

November 20, 20x4

Date of Commitment Date of Inception/Hedging of 90 days Forwards

There is no entry to record the sales agreementbecause it is an executory contract.

Investment in FC Call Option……Cash……………………………….To record purchase of calloption.

120 120

December 20, 20x4


FC Loss on Firm Commitment……… 600 Investment in FC Call Option…… 120

Firm Commitment…………………[(P.21 – P0.20) x 60,000 FC]

To record loss on firm commitmentbased on spot rate.

600 FC Transaction Gain….(P600 – P480 = P100)


120

Equipment…………………………….. 12,600 Cash……………………………….. 600

Cash [(P0.20 x 60,000 FC) +P600, proceeds from calloption]…………………………..

To record purchase of equipmentat spot rate (P.21 x 60,000 FC)

12,600 Investment in FC Call OptionTo record the derecognition of

call option on realization.

600

Firm Commitment …………………… 600Equipment………………………….

To derecognized firmcommitment and adjust thecarrying amount of equipment.

600



Problem VIII

The relevant exchange rates and option premiums are as follows:

11/20/20x4 12/20/20x4

Spot rate (market price) P0.20 P0.18

Strike price (exercise price) 0.20 0.20

Fair value of call option P480 N/AN/A – not applicable

The following table summarizes the succeeding journal entries in relation to hedged item andhedging instrument:

Firm Commitment Call Option Contract

DateSpotRate

TotalFair

valueChange inFair Value

Call Option(CO)Premium

per FC

(CO Premium x FCs)Fair Value of Call

OptionChange inFair Value

11/20/x4 P0.20 P.002 P120

12/31/x4 P0.18 P1,200* P1,200** P.000*** P 0 (P120)* P12,000 – P10,800 = P1,200**(P.20 – P.18) x 60,000 FC

***The premium on 12/20 for an option that expires on that date is equal to the option’s intrinsic value. Given the spot rate on 12/20 of P.18, a call option with a strike price of P.20 has no intrinsic value – the premium on 12/20 is P.000.

Based on the above data, the following situations can be derived:

Market or Spot Rate


or optionprice)

ForeignCurrency

OptionSituation

ElementExisting

TimeValue**

IntrinsicValue*

11/20/20x4 P0.20 P0.20 In-the-money TV & IV P120 P 0

12/20/20x4 P0.18 P0.20 In-the-money IV P 0 P 0TV – time value; IV – intrinsic value.* (Market price less – option price) x foreign currencies** None since the option price is greater than the market price.


Hedged Item – Importing Transaction(Firm Commitment) Hedging Instrument – Option Contracts

November 20, 20x4

Date of Commitment Date of Inception/Hedging of 90 days Forwards

There is no entry to record the sales agreementbecause it is an executory contract.

Investment in FC Call Option……Cash……………………………….

To record purchase of calloption.

120120

December 20, 20x4


Firm Commitment……… 1,200 FC Transaction Loss……….…… 120

FC Gain on Firm Commitment[(P0.20 – P0.18) x 60,000 FC]

To record loss on firm commitmentbased on spot rate.

1,200 Investment in FC Call Option(P120 – P0 = P120)


120

Equipment…………………………….. 12,000 No entry required since the

Cash [(P0.20 x 60,000 FC) + 12,000 Investment in call option has no value



P0, no proceeds from calloption]…………………………..

To record purchase of equipmentat spot rate (P.21 x 50,000 FC)

Equipment……….…………………… 1,200Firm Commitment……………….

To derecognized firmcommitment and adjust thecarrying amount of equipment.

1,200

Problem IX

Based on the data given in the problem, the following situations can be derived:

Market or Spot Rate


or optionprice)

ForeignCurrency

OptionSituation

ElementExisting

TimeValue**

IntrinsicValue*

1/ 1/20x4 P1.15 P1.14 In-the-money TV & IV P8,400 P12,000

6/30/20x4 P1.18 P1.14 In-the-money TV & IV P4,800 P48,000

12/31/20x4 P1.17 P1.14 In-the-money IV*** P 0 P36,000TV – time value; IV – intrinsic value.* (Market price less – option price) x foreign currencies** Fair value of option – intrinsic value***time already expired, so need to determine time value unless It is a residual amount.


Hedged Item – Importing Transaction(Forecasted Transaction) Hedging Instrument – Option Contracts

December 1, 20x4


No journal entry is required to record the forecasted Investment in FC Call Option…….. 20,400transaction. The forward contract is designated as a

hedge against the exposure to increases in the dollar rate on March 1, 20x5.

Cash………………………………..

To record purchase of calloption.

20,400


No entry required, since it is only a forecasted Investment in FC Call Option…….. 32,400transaction not guaranteed such as firm commitment. OCI – FC Transaction Gain (B/S)

[P1.18 – P1.14) x 1,200,000 =P52,800 – P20,400 = P32,400]


32,400

OCI – FC Transaction Gain (B/S) 25,920FC Transaction Gain

To reclassify 80% of OCI to

earnings (720,000 /900,000) =80% ; (80% × P32,400 = P25,920)

25,920

On December 31, 20x4 (the transaction date and the settlement date), the journal entries are:



December 31, 20x4


FC Transaction Loss…………………. 16,800Investment in FC Call Option…

[(P1.17 – P1.14) x 1,200,000baht = P36,000 – P52,800]

To record a loss on call option

16,800

OCI – FC Transaction Gain (B/S)…. 6,480FC Transaction Gain………….…

To record reclassify the remaining P6,480 of FC gainfrom OCI to earnings(180,000/900,000 x P32,400).nThis entry is recorded if PAS 39par. 98b is adopted.

6,480

Cash……………………………………. 36,000Investment in FC Call Option…[(P1.17 – P1.14) x 1,200,000 baht]

To record the derecognition of

call option on realization.

36,000

Multiple Choice Problems

1. cPeso Value in 3 months = 3,750 + 37.50 = 3,787.50FC Value in 3 months = 5,000 + 87.50 = 5,087.50

Fwd rate 3,787.50 ÷ 5,087.50 = .7452. e

11/10/x6: Original forward rate on the date of hedging..……………………….P 1.64Balance Sheet date: Remaining (current) forward rate – 12/31/20x6......……. 1.59Gain on forward contract per FC………...…………………………………………..P .05Multiplied by: No. of FCs……………………………………………………………….. 100,000Gain on forward contract..…………………………………………………………….P 5,000

3. a10/22/x6: Original forward rate on the date of hedging..……………………….P 0.45Balance Sheet date: Remaining (current) forward rate – 12/31/20x6.………. 0.445Gain on forward contract per FC…………………………………………………..P .005Multiplied by: No. of FCs……………………………………………………………….. 100,000Gain on forward contract.....………………………………………………………….P 500

4. c -15,000,000 x P.00925. b - 15,000,000 x P.00946. b - 15,000,000 (P.0094 - P.0092)7. d - 15,000,000 x P.00918. c - 15,000,000 (P.0091 - P.0094)9. a – forward contract is zero on the date of hedging

10. b – since it is a gain (refer to No. 11) therefore the value of forward contract is an asset11. d - P4,500 - P012. c13. c - P3,000 - P4,50014. b - 1,000,000 x P1.11615. d - 1,000,000 x P1.12916. a - 1,000,000 (P1.129 - P1.116)17. a - 1,000,000 x P1.13818. c - 1,000,000 (P1.138 - P1.129)



19. d – forward contract is zero on the date of hedging20. a21. b22. c23. d - (P8,000 - P6,000)24. e – there is no fair value of forward contract on the date of hedging.

25. b – (100,000 FCU x P.74, the forward rate on the date of hedging), the entry would be asfollows (using the gross or broad approach):

Forward contract receivable……………………………………………… 74,000Pesos payable to exchange dealer……………………………. 74,000

26. dOriginal value of Forward Contract Receivable-FC 100,000 x .74 = 74,000Current (6/30) value of the Fwd Contract Rec-FC 100,000 x .75 = 75,000Increase in value of Forward Contract Receivable 1,000Value of Receivable, discounted at 8%, n 1 1,000 - (1,000 x [.08 ÷ 12]) = 993Value of receivable 74,000 + 993 = 74,993or,

FC Receivable – date of hedging, 6/1 20x4……………………………………...P 74,000Add: Forward contract gain P1,000 x [1/1 + (8%/12 x 1 month remaining)].. 993Forward Contract (FC) Receivable, 6/30/20x4…………………………………. P 74,993

27. dJanuary 1: Origininal forward rate on the date of hedging..………………..P 0.94March 1: Spot rate…………………………………………………………………… 0.93Gain……………………………………………………………………………………..P 0.01Multiplied by: No. of FCs……………………………………………………………. 100,000FC Forward Contract Gain…………………………………………………………P 1,000

28. cHedging Instrument:

January 1: Origininal forward rate on the date of hedging..………………..P 0.94March 1: Spot rate…………………………………………………………………… 0.93

Gain……………………………………………………………………………………..P 0.01Multiplied by: No. of FCs……………………………………………………………. 100,000FC Forward Contract Gain…………………………………………………………P 1,000Hedged Item:

January 1: Spot rate………………………………………………..………………..P 0.945March 1: Spot rate…………………………………………………………………… 0.930Loss………………………………………………………………………………………P 0.015Multiplied by: No. of FCs…………………………………………………………….. 100,000Foregin currency exchange loss……..………………………………………….. P 1,500Net loss………………………………………………………………………………….P 500

29. dHedged Item:

January 1: Spot rate………………………………………………..………………..P 0.945March 1: Spot rate…………………………………………………………………… 0.930Loss………………………………………………………………………………………P 0.015Multiplied by: No. of FCs…………………………………………………………….. 100,000Foreign currency exchange loss……..………………………………………….. P 1,500

30. c – (P.1865 – P.1850) gain x 100,000 FC = P150 gain31. c – using spot rate



32. c5/1: Original forward rate (90 days)……..……………………………….P .693

6/30: Current (remaining) forward rate (30 days)……....……………… .695Forex gain per unit.......……………………………………………………….P .002Multiplied by: Number of foreign currencies……………………………. 500,000Foreign exchange gain due to hedging instrument……..……………P 1,000

Less: Discount – P1,000 x 6% x 30/360 days………………………………. 5PV of foreign exchange gain due to hedging instrument……………P 995Or, alternatively the computation of present value may also be presented as:

Foreign exchange gain………………………………………………...P 1,000Divided by: [1% + (6%/12 x 1 month = equivalent to 30 days)]….. 1.005PV of foreign exchange gain due to hedging instrument……….P 995

Note: Since, the discount rate is given it is assumed that all times present value should be

computed. Present value for hedged item is not necessary for exposed asset or liability since

spot rate is in effect. Unlike, the other types of hedging wherein, forward rates is used to

determine the gain or loss on the hedged item

33. cForeign exchange loss due to Hedged Item:

5/1: Spot rate………………………………………………………………P .6876/30: Spot rate……………………………………………………………… .691Forex loss per foreign currency…….……………………………………..P .04Multiplied by: Number of foreign currencies………………………….. 500,000Foreign exchange loss due to hedged item ………………………..P 2,000

PV of foreign exchange gain due to hedging instrument(forward contract – refer to No. 32).………………………......... 995

Net Income effect – decrease ………………………………………........ P 1,005

34. d5/1: Original forward rate (90 days)…..…………………………………….P .6938/1: Spot rate…………………………………………………………………… .696Forex gain per currency ……………………………………………………….P .003

Multiplied by: Number of foreign currencies……………………………….. 500,000Total Foreign Exchange gain due to hedging instrument

(forward contract)............................................................................. .....P 1,500

Less: 6/30 cut-off - PV of foreign exchange gain due to hedginginstrument (forward contract – refer to No. 32)………………..... 995

August 1 - Foreign exchange gain due to hedging instrument

(forward contract)……………………………………………………….P 50535. e

Hedging Instrument:

Origininal forward rate on the date of hedging……………………………….P 0.105Balance Sheet date: Remaining (current) forward rate – 12/3/1/20x4…… 0.095Loss………………………………………………………………………………………P 0.010Multiplied by: No. of FCs……………………………………………………………. 50,000FC Forward Contract Loss…………………………………………………………..P 500Multiplied by: PV factor……………………………………..………………………. .98,03Forward contract – a liability account (since it is a loss)………………………P 490.15

36. b – (forward rate > spot rate – premium) seller’s point of view considered as premiumrevenue since it was sold at a higher rate.



37. bNovember 1, 20x4:

Foreign Currency Receivable fromExchange Broker (FC) 12,600

Pesos Payable to Exchange Broker 12,600Signed 90-day forward exchange contract

to purchase 100,000 FC:P12,600 = 100,000 FC x P.126 forward rate

38. cDecember 31, 20x4

Foreign Currency Receivable fromExchange Broker (FC) 300

Foreign Currency Transaction Gain 300Revalue foreign currency receivable tofair value:P300 = 100,000 FC x (P.129 - P.126)

39. bJanuary 30, 20x5

Pesos Payable to Exchange Broker (Pesos) 12,600Cash 12,600

Deliver pesos to exchange broker in

accordance with forward exchange contract:P12,600 = 100,000 FC x P.126 contract rate

40. bJanuary 30, 20x5

Pesos Payable to Exchange Broker (Pesos) 12,600Cash 12,600

Deliver pesos to exchange broker inaccordance with forward exchange contract:P12,600 = 100,000 FC x P.126, the 90-day forward rate

41. a

January 30, 20x5Foreign Currency Transaction Loss 200

Foreign Currency Receivable from Exchange Broker (FC) 200Adjust foreign currency receivable tocurrent peso equivalent:P12,700 = 100,000 FC x P.127 Jan. 30 spot rate- 12,900 = 100,000 FC x P.129 Dec. 31 forward rateP 200 = 100,000 FC x (P.127 - P.129)

Foreign Currency Units 12,700Foreign Currency Receivable from Exchange Broker 12,700

Receive 100,000 FC from exchange broker:P12,700 = 100,000 FC x P.127 spot rate

42. dPAS 32 and 39 (PFRS 9) requires the FCU payable be recorded at the forward rate on thedate of hedging.

Letter (d) is the required entry under the old practice wherein the FCU payable are recordedusing the spot rate on the date of hedging.

43. bReceivable balance: P319,500 (spot rate on the balance sheet date, P.71 x 450,000 FCU)Gain or loss: P9,000 loss [(P.73 – P.71) x 450,000 FCU]



44. c – (forward rate > spot rate= premium) buyer’s point of view considered as premiumexpense since it was purchase at a higher rate plus a loss on firm commitment (i.e., P1.21 – P1.20)

45. eFirm Commitment:

11/10/x6: Original forward rate on the date of hedging..……………………….P 1.64

Balance Sheet date: Remaining (current) forward rate – 12/31/206…………. 1.59Loss on Forward Contract per FC…………………………………………………....P .05Multiplied by: No. of FCs……………………………………………………………….. 100,000Loss on forward contract……………………………………………………………….P 5,000

46. eFirm Commitment:

11/10/x6: Original forward rate on the date of hedging..……………………….P 1.64Balance Sheet date: Remaining (current) forward rate – 12/31/20x6......……. 1.59Gain on forward contract per FC………...…………………………………………..P .05Multiplied by: No. of FCs……………………………………………………………….. 100,000Gain on forward contract..…………………………………………………………….P 5,000

47. bFirm Commitment:

10/22/x6: Original forward rate on the date of hedging..……………………….P 0.45Balance Sheet date: Remaining (current) forward rate – 12/31/20x6.………. 0.445

Gain on forward contract per FC…………………………………………………..P .005Multiplied by: No. of FCs……………………………………………………………….. 100,000Gain on forward contract.....…………………………………………………………P 500

48. aDecember 1, 20x6: Spot rate – P1.64 x 100,000....…………............. P164,000Less: Firm Commitment – liability (credit balance)

8/3/20x6: Original (120-day) forward rate…………………….P 1.6012/1/20x6: Remaining (60-day) forward rate………………… 1.64

Loss on Firm Commitment………………………………………....P 0.04

Multiplied by: No. of FCs…………………………………………… 100,000 4,000Value of machine...........................……………………………………… P160,000

49. c - refer to No. 48 (Note: There is no more commitment after the date of transaction which is12/1/20x6)

50. c -December 9, 20x6: Spot rate – P2.45 x 100,000……………………… P245,000Add: Firm Commitment – asset (debit balance)

11/10/20x6: Original (90-day) forward rate…………………….P 2.4412/9/20x6: Remaining (30-day) forward rate………………… 2.46Gain on Firm Commitment………………………………………..P 0.02

Multiplied by: No. of FCs…………………………………………… 100,000 2,000Value of sales, 1/31/20x6…...............…………………………………… P243,000

51. b - refer to No. 50 for computation ((Note: There is no more commitment after the date oftransaction which is 12/9/20x6)

52. c - Forward contracts always have a value of P0 at the date they are established53. a54. a - P10,000 - P0



55. c - The forward contract gain or loss is offset by the loss or gain on the sales commitment56. b57. c - P25,000 - P10,00058. c - The forward contract gain or loss is offset by the loss or gain on the sales commitment59. a - (50,000,000 x P.0088) + [50,000,000 (P.0092 - P.0087)]60. b - Forward contracts always have a value of P0 at the date they are established

61. c62. d - P7,500 - P063. c - The forward contract gain or loss is offset by the loss or gain on the sales commitment64. d65. b - P2,500 + P7,50066. a - The forward contract gain or loss is offset by the loss or gain on the sales commitment67. b - (2,500,000 x P1.129) + [2,500,000 (P1.139 - P1.138)]68. b

January 31: Spot rate – P1.59 x 100,000………………………............. P159,000Add: Firm Commitment – asset (debit balance)

11/30/20x3: Original (90-day) forward rate…………………….P 1.651/31/20x4: Remaining (30-day) forward rate………………… 1.60

Gain on Firm Commitment………………………………………..P 0.05Multiplied by: No. of FCs…………………………………………… 100,000 5,000

Value of merchandise, 1/31/20x4……………………………………… P164,000

The entry would be as follows on 1/31/20x4:Inventory………………………………………………………………… 164,000

Firm Commitment……………………………………………. 5,000Cash (P1.59 x 100,000)………………………………………. 159,000

69. d – the original (30-day) forward rate on the date of hedging. Thus,Hedged Item (Commitment):

Foreign currency exchange loss [(P.28 – P.25) x 100,000 FC]……. 3,000Firm Commitment………………………………………………. 3,000

Inventory (P.28 x 100,000 FC)……………………………………………28,000Cash……………………………………………………………….. 28,000

Firm Commitment………………………………………………………… 3,000Inventory………………………………………………………….. 3,000

Therefore, inventory should be valued at P25,000 (P28,000 – P3,000)

70. e – the inventory should be valued based on the spot rate on the date of transaction since itwas assumed that the firm commitment account will be closed through earnings account.Normally, the firm commitment should be closed to the asset account in accordance withPAS 39 par.98b.

71. e - the accounts payable should be valued based on the spot rate on the date oftransaction.

72. cFirm Commitment:

Original forward rate on the date of hedging…………………………………….P .58Balance Sheet date: Remaining (current) forward rate – 6/30/20x4…………. .56Loss on Firm Commitment per FC…………………………………………………..P .02Multiplied by: No. of FCs……………………………………………………………….. 200,000Loss on firm commitment……………………………………………………………….P 4,000



Loss on commitment (debit) results in a credit to Firm Commitment, thus:Loss on Firm Commitment…………………………………………… 4,000

Firm Commitment (a liability account)…………………….. 4,000

73. bFwd value 4/1 200,000 x 0.58 116,000

Fwd value 6/30 200,000 x 0.56 112,000Decrease in Fair Value of Payable 4,000PV of change: 4,000 ÷ 1.01 3,960

[n 1; i (.12 ÷ 12) = .01]

Current value of fwd contract = 116,000 - 3,960 = 112,040

or,FC payable – date of hedging, 4/1 20x4………………………………………….P 116,000Less: Forward contract gain [P4,000 x 1/1 + (8%/12 x 1 month remaining)]... 3,960FC payable – date of hedging, 6/30/ 20x4……………………………………….P 112,040

74. c – (P2.17 – P2.14) x 200,000 FCs = P6,000 loss. No need to compute present value becausethe contract already expired.

75. b

1-Aug 30-Aug 30-SepNotional amount 15,000 15,000 15,000Forward rate for remaining time 0.690 0.680 0.675Initial forward rate 0.690 0.690

Change in original forward rate (0.010) (0.015)

Fair value of fwd contract in future pesos:Original forward value 10,350 10,350Current forward value 10,200 10,125(Gain) Loss in forward rate (150) (225)

Current present valuePV of (P150) n=1; i=0.667% (149)PV of (P225) n=0; no discounting (225)

Prior present value 0 149

Change in present value (149) (76)

76. d1-Aug 30-Aug 30-Sep

Notional amount 15,000 15,000 15,000Forward rate for remaining time 0.690 0.680 0.675

Initial forward rate 0.690 0.690

Change in original forward rate (0.010) (0.015)

Fair value of fwd contract in future dollars:Original forward value 10,350 10,350

Current forward value 10,200 10,125(Gain) Loss in forward rate (150) (225)

Current present valuePV of (P150) n=1; i=0.667% (149)PV of (P225) n=0; no discounting (225)

Prior present value 0 149

Change in present value (149) (76)



77. c - Forward contracts always have a value of P0 at the date they are established78. a79. d - [(P600) - P0]80. b81. c - [P300 - (P600)]82. b - Forward contracts always have a value of P0 at the date they are established

83. a84. c - [(P1,950) - P0]85. c86. b - [P635 - (P1,905)]87. c

Cost of equipment…………………………………………………………………..P 211,000Less: Fair value of the equipment………………………………………………… 199,000Impairment loss……………………………………………………………………….P 12,000

88. a – (P17,500 – P13,200) reclassified to earnings89. e

Original forward rate on the date of hedging…………………………………P 1.64Balance Sheet date: Remaining (current) forward rate – Dec. 31, 20x6… 1.59Loss……………………………………………………………………………………..P 0.05Multiplied by: No. of FCs…………………………………………………………… 100,000

FC Forward Contract Loss…………………………………………………………..P 5,00090. a

P400 = 10,000 foreign currency units x (P.82 - P.78). The loss is calculated using only forwardrates. On December 31, 20x4, the loss is the difference between the 90-day future rate onNovember 1 (P.78) and the 30-day forward rate on December 31 (P.82).

91. b - speculation (gain or loss – income statement)Original forward rate on the date of hedging…………………………………P 0.033Balance Sheet date: Remaining (current) forward rate – Dec. 31, 20x4… 0.036Loss…………………………………………………………………………………….. P 0.003

Multiplied by: No. of FCs……………………………………………………………. 100,000FC Forward Contract Loss………………………………………………………….. P 300

92. b - (220,000 FCUs)x (P0.68) = P149,60093. B - (220,000 FCUs)x(P.68 - P.70) = P4,400 loss

(To adjust the contract to the 30 day futures amount)94. b

Manage an exposed position:Value the forward exchange contract (FEC) at its fair value, measured by changes in theforward exchange rate (FER). Note that the question asks only for the effect on income fromthe forward contract transaction; thus, any effect on income from the foreign currencydenominated account payable is not included in the answer.

FER, 12/12/x4 P.90FER, 12/31/x4 P.93AJE:

Forward Contact Receivable 3,000Foreign Exchange Gain 3,000

Revalue forward contract:P3,000 = 100,000 FCU x (P.93 - P.90) change in forward rates

Foreign Exchange Loss 10,000Account Payable 10,000



Revalue foreign currency payable:P10,000 = 100,000 FCU x (P.98 - P.88) change in spot rates

95. b

Hedge of a Firm Commitment:

Value FEC based on changes in forward rate.AJE:

Forward Contract Receivable 3,000Foreign Exchange Gain 3,000

Revalue forward contract, using the forward rates.

Foreign Exchange Loss 3,000Firm Commitment 3,000

Recognize loss on firm commitment.

Again, note that the question asks only about the effect on income from the forwardcontract, not the underlying firm commitment portion of the transaction

96. bSpeculation:

Value forward exchange contract at fair value based on changes in the forward rateAJE:

Forward Contract Receivable 3,000Foreign Exchange Gain 3,000

97. bCall Option:

P29.80 (Market price/Spot Price) > P27.90 (Option/Strike Price)..P1.90 in-the-moneyPut Option

P14.25 (Market price/Spot Price) > P16.40 (Option/Strike Price).. 2.15 in-the-moneyIntrinsic Value………………………………………………………………….. P4.05

98. dJanuary 1, 20x6

(the inception date of the 1-yr. put FX option period)

FX Contract Value—Option............................................................ 8,000Cash ........................................................................................... 8,000

To record cost of put option acquired.

Note: P1.40, OP > P1.368, Market/spot rate – In-the-money (put option)

March 31, 20x6

(an intervening financial reporting date)

FX Contract Value—Option............................................................ 30,000FX Gain (P30,000 × 300,000 FCUs/1,000,000 FCUs)............. 9,000

OCI—FX Gain (P30,000 × 700,000 FCUs/1,000,000 FCUs) 21,000To adjust option’s carrying value to its fair value of P106,000 (a given amount). P106,000 – P6,000 = P100,000)

99. aNote: P1.40, OP > P1.368, Market/spot rate – Out-of-the-money (call option). Time value

element only, therefore any gain or loss is charged to profit and loss or current earnings, not

OCI.



100. dJanuary 1, 20x6

(the inception date of the 1-yr. put FX option period)

FX Contract Value—Option............................................................ 16,000Cash ........................................................................................... 16,000

To record cost of put option acquired.

Note: P.25, OP < P.292, Market/spot rate – In-the-money (Call option)

March 31, 20x6

(an intervening financial reporting date)

FX Contract Value—Option............................................................ 80,000FX Gain (P80,000 × 500,000 FCUs/2,000,000 FCUs) x 50%.. 10,000OCI—FX Gain (P80,000 – P10,000)……................................. 70,000

To adjust option’s carrying value to its fair value of P106,000 (a given amount). P96,000 – P16,000 = P80,000)

Items 101 through 107 Solution Guide Table:

December 16 December 31 February 14Spot rate (Market Price) ... P .16 P .15 P .147

Strike price (Option Price) P .16 P .16 .16

Notional amount (in Bolivar) 1,000,000 1,000,000 1,000,000

Intrinsic value (if Market

is < Option (Strike)*........ P 0 P 10,000 P 13,000

Time value** ........................ P 4,000 3,300 0

Fair (Total) value of Option. P 4,000 P 13,300 P 13,000* (Option Price – Market Price ) x notional amount

** Fair value of option less Intrinsic Value

101. d - The notional amount is the total face amount of the asset or liability that underlies the

derivative contract. A notional amount may be expressed in the number of currency units, shares, bushels, pounds or other units specified in the financial instrument. Choices letter (a) ,

(b), and (c) are all fair value of the option contract at different dates.

102. c

On December 31, 20x4:Fair value of Call Option…………………………………………………………..P 13,300Intrinsic Value: ( P.16 Option price less P.15 market price,

lower if put option) x 1,000,000 bolivar……………………………………. 10,000Time Value……………………………………………………………………………P 3,300

103. c (P3,300 – P4,000 = P700 loss); refer to the solution guide table for further analysis.

104. a – (P10,000 – P0 = P10,000 gain); refer to the solution guide table for further analysis.

105. bHedging Instrument/Hedging Transaction/Option Contract:

Inception date: Fair value of call option…………………….............................P 4,000Balance sheet date: Fair value of call option……………………………......... 13,300Foreign exchange gain…………………………………………………….............P 9,300



106. cForeign Currency Transaction (Hedged Item):

12/16/20x4: Spot rate…………………………………………………………………P .1612/31/20x4: Spot rate………………………………………………………………... .15Forex loss per unit……………………………………………………………………. P .01Multiplied by: Number of foreign currencies…………………………………… 1,000,000

Foreign exchange loss..........…………………………………................................P 10,000Hedging Instrument/Hedging Transaction/Option Contract:

Inception date: Fair value of call option……………………..............................P 4,000Balance sheet date: Fair value of call option………………………………….. 13,300Foreign exchange gain……………………………………………………………...P 9,300

Net foreign exchange loss……………………………………………………………….P 700

107. c

Foreign Currency Transaction (Hedged Item):

12/31/20x4: Spot rate…………………………………………………………………..P .1502/14/20x5: Spot rate………………………………………………………………….. .147Forex loss per unit………………………………………………………………………P .003Multiplied by: Number of foreign currencies…………………………………….. 1,000,000Foreign exchange loss..........…………………………………................ ............... ...P 3,000

Hedging Instrument/Hedging Transaction/Option Contract:

Balance sheet date (12/31/x4): Fair value of call option….…………..............P 13,300Expiration date (2/14/x5): Fair value of call option..…………………………….. 13,000Foreign exchange loss………………………………………………………………….P 300

Total foreign exchange loss………………………………………………………………P 3,300

108. c12/1/20x4:Spot rate……………………………………………………………P .9212/31/20x4:Spot rate…………………………………………………………. .93Foreign currency gain……………………………………………. …………P .01 x: No. of foreign currencies…………………………………………………. 1,000,000

Foreign currency gain due to hedged item/commitment…………...P 10,000Less: Discount – P10,000 x 12% x 2/12 (January and February).…........ 200PV of foreign exchange gain due to hedged item/commitment.... P 9,800*

Or, alternatively the computation of present value may also be presented as:

Foreign exchange gain – equity..…………………………………………P10,000Divided by: [100% + (12%/12 x 2 months remaining)]………………….. 1.02PV of foreign exchange gain due to hedged item/commitment….P 9,803*

*P3 discrepancy due to rounding-off.

109. c12/1/20x4: Fair value of Option (P10,000 x P.009)……………………………..P 9,00012/31/20x4: Fair value of Option (P10,000 x P.006)…………………………… 6,000Foreign currency loss on hedging transaction (option contract)…………P 3,000

110. b– refer to No. 101 for computation. It is an asset since the counterpart entry is a gain. Thus,the entry should be:

Firm Commitment…………………………………………………….9, 803

Foreign Currency Gain on Hedged Item/Commitment…. 9,803



111. cPV of foreign exchange gain due to hedged item/commitment

(refer to No. 70)…………………………………………………………………. P 9,803Foreign currency loss on hedging transaction (option contract)

– refer to no. 71)………………………………………………………………… ( 3,000)Impact on net income – increase………………………………………………… P 6,803

112. bSales (3/1/20x5 spot rate: P.90 x FC 1,000,000) ……………………… P900,000Foreign exchange loss on hedged item/commitment, 3/31/20x5:

12/1/20x4 Spot rate…………………………………………………..P .923/31/20x5 Spot rate…………………………………………………... .90Foreign currency loss……………………………………. …………P .02 x: No. of foreign currencies………………………………………… 1,000,000Foreign currency loss for the entire hedged

item/commitment…………………………………………… P 20,000Add back: PV of foreign gain due to hedged

item/commitment………………………………………….… 9,803 ( 29,803)Adjustment: Firm Commitment Account balance (credit balance) –

since the P20,000 is a foreign currency loss then the firmcommitment account is a credit balance……………………… 20,000

Foreign currency gain on hedging transaction (option contract)12/31/20x4 (inception date): Fair value of option

(P0.006 x FC 1,000,000)………………………………………… P 6,0003/1/20x4 (expiration date) : Fair value of option

(P0.020 x FC 1,000,000)……………………………………….… 20,000 14,000Impact on Net Income……………………………………………………. P904,197

113. d – (150,000 FC x P.05 premium = P7,500)114. a – (150,000 FC x P.04 premium = P6,000)

115. b – (150,000 FC x P.03 premium = P4,500)116. c – (150,000 FC x P.97 = P145,500)117. a

Hedged Item/Commitment:

3/01/20x3: Spot rate……………………………………………..P .09512/31/20x3: Spot rate…………………………………………….. .094Foreign currency loss per unit…………………………………. P .001 x: No. of foreign currencies……………………………………... 2,000,000Foreign currency loss due to hedged item/commitment..P 2,000 x: PV factor of an annuity of P1 @ for 12 periods………..… .9803PV of foreign exchange loss due to hedged item/

commitment..………. … ……………………………………. P 1,960.60

Hedging Instrument:3/01/20x3: Fair value of Option………………………………..P 3,00012/31/20x3: Fair value of Option6)……………………………... 3,200Foreign currency gain on hedging transaction

(option contract)………………………………………………………… 200.00Net impact on 20x3 income – loss (decrease)……………………..……P1,760.60



118. dSales (3/1/20x4 spot rate: P.089 x FC 2,000,000) …………………… P 178,000.00Adjustment: Firm Commitment Account balance

(credit balance) – since the P12,000 is a foreign currencyloss then the firm commitment account is a credit balance 12,000.00*

Adjusted Sales…………………………………………………………… P190,000.00

Foreign exchange loss on hedged item/commitment, 3/31/2012:

5/01/20x3: Spot rate…………………………………………P .0953/01/20x4 Spot rate…………………………………………. .089Foreign currency loss…………………………………. ……P .006 x: No. of foreign currencies…..……………………………. 2,000,000Foreign currency loss for the entire hedged item

/commitment…………………………………………P 12,000*Less: PV of foreign loss due to hedged item

/commitment………………………………………… 1,960.60 (10,039.40)Foreign currency gain on hedging instrument

(option contract):12/31/20x3 (balance sheet date): Fair value of option.P 3,200

3/01/20x4 (expiration date) : Fair value of option[(P0.95 – P.089) x FC 2,000,000)..……………………… 12,000 8,800.00

Net impact on 20x4 income – loss (decrease)……………….. P 188,760.60

119. cNet cash inflow with option (P190,000 – P3,000)…………………… P 187,000Cash inflow without option (at spot rate of P.089 x 2,000,000 FC. 178,000

Net increase in cash inflow P 9,000

120. aNote: P1.40, OP < P1.368, Market/spot rate – Out-of-the-money (put option). Time value

element only, therefore any gain or loss is charged to profit and loss or current earnings, not

OCI. Refer to No. 99.

Quiz - XX

1. a – the machine’s final recorded value should be the spot rate on the date of transactionsince it is hedging that involves exposed liability (P.00781 x 200,000,000 = P1,562,000).

2. c – (P.1865 – P.1850) gain x 100,000 FC = P150 gain

3. using spot rateAccounts payable…………………………………………………………18,650

FC Units………………………………………………………………… 18,650

4. bAmount paid is the forward price; P0.148 x 1,000,000 = P148,000Merchandise is reported at the spot rate at the date of purchase; P0.15 x 1,000,000 =P150,000.

5. b

P1.05 x FCU1,200,000 ……………………………………………………………. P1,260,000

(P1.05 - P.95) x FCU1,200,000 …………………………………………………… ( 120,000)

P1,140,000



6. bHedging Instrument:

Origininal forward rate on the date of hedging……………………………….P 0.90Balance Sheet date: Remaining (current) forward rate – 12/3/1/20x4…… 0.93Gain…………………………………………………………………………………….P .03Multiplied by: No. of FCs……………………………………………………………. 200,000

FC Forward Contract Gain…………………………………………………………P 6,000

The entry would be as follows:Foreign Currency Receivable from Exchange Broker………………6,000

Foreign Currency Gain……………………………………………… 6,000

7. aThe entry on the date of expiration of the contract:

Pesos Payable to Exchange Broker (P.90 x 200,000 FC)……………..180,000Cash…………………………………………………………………….. 180,000

Foreign Currency Units or Investment in Foreign Currency (P.92)…184,000Foreign Currency Loss – forward contract...………………………….. 2,000

Foreign Currency Receivable from Exchange Broker (.P93)… 186,000

8. b – refer to No. 7

9. d – refer to No.7

10. c

P1,000 = 50,000 FCs x (P.74 - P.72). The loss is calculated using only forward rates. OnSeptember 30, 20x4, the loss is the difference between the 60-day forward rate of P.74 onSeptember 1 and the 30-day forward rate of P.72 on September 30, 20x4.

11. d

Date of transaction: 9/1/20x4: Spot rate………………………………………..P 1.46Balance Sheet date: Sept. 30, 20x4: Spot rate………………………………… 1.50Gain…………………………………………………………………………………….P .04Multiplied by: No. of FCs……………………………………………………………. 250,000FC Transaction Loss………..…………………………………………………………P 10,000

The question refers to foreign currency transaction loss which indicates that only the exposedliability had a loss, while the the forward contract transaction results in a gain computed asfollows:

Original forward rate on the date of hedging…………………………………P 1.47Balance Sheet date: Remaining (current) forward rate – Sept. 30, 20x4… 1.48

Gain…………………………………………………………………………………….P .01Multiplied by: No. of FCs……………………………………………………………. 250,000FC Forward Contract Gain…………………………………………………………P 2,500

If the question is the net impact on the net income the loss on exposed liability and the gainof forward contract should be offsetted, thereby resulting a net effect of P7,500 decrease innet income.



12. b – speculation (gain or loss – income statement)Original forward rate on the date of hedging…………………………………P 1.47Balance Sheet date: Remaining (current) forward rate – Sept. 30, 20x4… 1.48Gain…………………………………………………………………………………….P .01Multiplied by: No. of FCs……………………………………………………………. 250,000FC Forward Contract Gain…………………………………………………………P 2,500

13. bReceivable balance: P162,000 (spot rate on the balance sheet date, P.81 x 200,000 FCU)Gain or loss: P4,000 loss [(P.83 – P.81) x 200,000 FCU]

14.Date of transaction: 8/1/20x4: Spot rate………………………………………..P 1.16Balance Sheet date: 4/30/20x4: Spot rate……………………………………… 1.20Gain…………………………………………………………………………………….P .04Multiplied by: No. of FCs……………………………………………………………. 300,000FC Transaction Loss………..…………………………………………………………P 12,000


Original forward rate on the date of hedging…………………………………P 1.17Balance Sheet date: Remaining (current) forward rate – Sept. 30, 20x4… 1.18Gain…………………………………………………………………………………….P .01Multiplied by: No. of FCs……………………………………………………………. 300,000FC Forward Contract Gain…………………………………………………………P 3,000


15. P12,000Date of transaction: 8/1/20x4: Spot rate………………………………………..P 1.16Balance Sheet date: 4/30/20x4: Spot rate……………………………………… 1.20Gain…………………………………………………………………………………….P .04Multiplied by: No. of FCs……………………………………………………………. 300,000FC Transaction Loss………..…………………………………………………………P 12,000


Original forward rate on the date of hedging…………………………………P 1.17Balance Sheet date: Remaining (current) forward rate – Sept. 30, 20x4… 1.18Gain…………………………………………………………………………………….P .01Multiplied by: No. of FCs……………………………………………………………. 300,000FC Forward Contract Gain…………………………………………………………P 3,000




16. P3,000Original forward rate on the date of hedging…………………………………P 1.17Balance Sheet date: Remaining (current) forward rate – Sept. 30, 20x4… 1.18Gain…………………………………………………………………………………….P .01Multiplied by: No. of FCs……………………………………………………………. 300,000FC Forward Contract Gain…………………………………………………………P 3,000

17. dPAS 32 and 39 requires the FCU payable be recorded at the forward rate on the date ofhedging.

Letter (d) is the required entry under the old practice wherein the FCU payable are recordedusing the spot rate on the date of hedging.

18. d – no adjustment required on the date of transaction.

19. (P1.47 x 600,000 FC) the original (60-day) forward rate on the date of hedging (i.e.,November 30, 20x4)

20. since no forward contract was entered into, the only effect on income statement is only theforeign currency exchange gain on exposed asset position.

Spot rate on the date of transaction: 12/16/20x4…………………………….P 0.00090Balance Sheet date: Spot rate – December 31, 20x4………………………. 0.00092Gain……………………………………………………………………………………P 0.00002Multiplied by: No. of FCs…………………………………………………………… 10 MForeign Currency Exchange Gain……………………………………………….P 200

21. P695.05 increaseHedged Item: Exposed Asset:

Spot rate on the date of transaction: 12/16/20x4…………………………….P 0.00090Balance Sheet date: Spot rate – December 31, 20x4………………………. 0.00092

Gain……………………………………………………………………………………P 0.00002Multiplied by: No. of FCs……………………………………………………………. 10 MForeign Currency Exchange Gain……………………………………………….P 200Hedging Instrument:

Original forward rate on the date of hedging: 12/16/20x4…………………P 0.00098Balance Sheet date: Remaining (current) forward rate – 12/31/20x4…… 0.00093Gain…………………………………………………………………………………….P .00005Multiplied by: No. of FCs……………………………………………………………. 0,000,000FC Forward Contract Gain…………………………………………………………P 500Multiplied by: PV of P 1 at 12%............……………………………………………. .9901FC Forward Contract Gain…………………………………………………………P 495.50Net impact on 20x4 income statement……………………………………… . P 695.05

22. P100 increaseHedged Item: Exposed Asset:

Balance Sheet date: Spot rate – December 31, 20x4……………………….P 0.00092Date of Settlement: Spot rate – January 15, 20x5……………………………. 0.00095Gain……………………………………………………………………………………P 0.00003Multiplied by: No. of FCs……………………………………………………………. 10 MForeign Currency Exchange Gain……………………………………………….P 300Hedging Instrument:



Balance Sheet date: Remaining (current) forward rate – 12/31/20x4……P 0.00093Date of expiration: Spot rate – January 15, 20x5……………………………… 0.00095Loss……………………………………………………………………………………..P .00002Multiplied by: No. of FCs…………………………………………………………… 10,000,000FC Forward Contract Loss………………………………………………………….P 200Net impact on 20x5 income statement…………………………………………..P 100

23. c – (forward rate > spot rate – premium) buyer’s point of view considered as premiumexpense since it was purchase at a higher rate plus a loss on firm commitment (i.e., P1.21 – P1.20)

Theories

Completion Statements1. hedging2. existing assets and liabilities, firm commitments, forecasted transactions3. firm commitment4. forecasted5. hedged item6. hedging instrument7. FX forwards, FX options8. two-sided, counterbalanced

9. one-sided, counterbalanced10. Hedge accounting11. exchange rate, specified period12. call, put13. option holder 14. option writer 15. premium16. “in the money”17. time value element, intrinsic value element18. exchange rate, future date

19. fulfill, obligation20. take21. executory22. unrealized23. the net position, setoff24. premium, discount, time value25. premium, decrease26. split accounting27. designated, effective, firm28. speculating29. firm commitment, forecasted transaction30. market, credit, liquidity

31. market, credit32. market, liquidity33. unlimited34. “on-balance-sheet,” “off-balance-sheet”35. rights, obligations, assets, liabilities36. fair values37. assets, liabilities38. undesignated, fair value, cash flow, net investment39. asset, liability, firm commitment



40. forecasted transaction.41. fair value42. cash flow43. net investment44. earnings45. other comprehensive income, earnings

46. earnings, earnings47. forward48. valuing, reporting49. hedging effectiveness50. time value51. ineffective

True or False

52. False 68. False 84. True 100. False 116. True 132. True 148. False

53. False 69. False 85. False 101. True 117. False 133. False 149. True

54. False 70. True 86. True 102. True 118. False 134. True 150 False

55. False 71. False 87. True 103. False 119. True 135. False 151. True

56. True 72. False 88. False 104. True 120 True 136. False 152. False57. True 73. False 89. False 105. True 121. False 137. False

58. False 74. True 90. False 106. True 122. False 138. False

59. True 75. True 91. True 107. True 123. False 139. False

60. True 76. True 92. False 108. False 124. False 140. True

61. False 77. True 93. True 109. True 125. True 141. False

62. True 78. True 94. False 110. False 126. False 142. True

63. False 79 False 95. True 111. False 127. True 143. False

64. False 80. False 96. False 112. False 128. False 144. True

65 True 81. False 97. False 113. False 129. True 145. False

66. False 82. False 98. False 114. True 130. False 146. True

67. False 83. True 99. False 115. False 131. False 147. False

Multiple Choice Questions (theories)

153. E 161. C 171. E 181. E 191. C 201. b 211. c

154. B 162. B 172. C 182. C 192. A 202. c 212. c

155. A 163. B 173. B 183. A 193. C 203. d 213. b

156. E 164. B 174. C 184. D 194. B 204. d 204. b

157. E 165 A 175. A 185. D 195. B 205. b 215. b

158. D 166. E 176. A 186. B 196. B 206. c 216. b

159. B 167. E 177. A 187. A 197. d 207. d 217. c

160. D 168. A 178. C 188. B 198. c 208. c 218. d

169. A 179 A 189. A 199. c 209. d 219. d

170. D 180. D 190. C 200. a 210. b 220 a

Note for:197. An underlying is a financial or physical variable.199. The net investment must be less than that required for other types.

202. Trading securities do not qualify for hedge accounting. Under PFRS 9, there is no moreclassification as to trading and available-for-sale instead it is now classified either as FVTPL andFVTOCI.

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