Dayag Solution To Chapter 20 PDF

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:
Forward Rate for

3/1/20x5 Settlement
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.
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 Hedging Instrument – Forward Contracts
(Exposed Liability) ( 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…………… 48,180

Accounts payable………………. 48,000 Pesos Payable to XD 48,180
To record purchase of goods on (P40.15 x $1,200)
account using the spot rate on To record forward contract to
2/1/1/x4. buy $12000 using forward rate.
*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……………………… P48,180
Less: Pesos payable to XD…………………… 48,180
Forward Contract (fair value)………………. P 0
December 31, 20x4

(Balance Sheet Date an intervening financial reporting date)
FC Transaction Loss 360 FC Receivable from XD…………… 300

Account payable……………. 360 FC Transaction Gain 300
[P40.30 – P48.00) x $1,200 [(P40.40 – P40.15) x $1,200]
To record a loss on the exposed To record a gain on foreign
liability denominated in foreign currency to be received from
currency. FC dealer.
*FC – foreign currency

FC Receivable from XD (P40.40 x $1,200)… P48,480
Less: Pesos payable to XD (fixed at P40.15) 48,180
Forward 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 240

FC Transaction gain……. 120 FC Receivable from XD 240
[(P40.20 – P40.30) x $1,200}…….. [(P40.40 – P40.20) x $1,200]
To record a gain from 12/31/x4 to To record a loss on foreign
3/1/x5 on liability denominated in currency to be received from
FC. FC dealer.
Pesos Payable from XD……………. 48,180

Cash………………………………. 48,180
To record payment to
exchange dealer.
Investment in FC……………………. 48,240

FC Receivable from XD 48,240
To record receipt of foreign
Currency.
Accounts payable…………………… 48,240 Cash……………………………………. 48,240

Cash (refer to note below)……… 48,240 Investment in FC…………………. 48,240
To record payment of accounts To record conversion of US
payable at spot rate. dollars into cash for payment of
accounts payable.
Note: This entry may be ignored and instead the
Investment in FC will be outright credited in payment
of accounts payable. For succeeding illustrations the
conversion of FC to peso cash to settle items
acquired will be used.
These transactions can be summarized in the following table.
Hedged Item (Exposed Liability) Hedging Instrument (Forward Contract)

Transaction Transaction
Accounts Payable Balance gain (loss) FC Receivable Balance gain (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 illustration
above:

(Exposed Liability) ( Net Position Accounting)
December 1, 20x4
Inventory ($1,200 x P40)…………... 48,000 Memorandum entry only,

Accounts payable………………. 48,000 No formal journal entry as the fair value of forward
To record purchase of goods on contract is zero.
account using the spot rate on
2/1/1/x4.
It should be noted that the accounts payable for the inventory purchase is recorded using
the 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 300

Accounts payable 360 FC Transaction Gain 300
[P40.30 – P40.00) x $1,200 [(P40.40 – P40.15) x $1,200]
To record a loss on the exposed To record a gain on foreign
liability denominated in foreign currency to be received from
currency. FC dealer.
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

FC Transaction gain……. 120 Forward Contract 240
[(40.20 – P40.30) x $1,200}…….. [(P40.40 – P40.20) x $1,200]
To record a gain from 12/31/x4 to To record a loss on foreign
FC. FC dealer.
Accounts payable (P40.20 x $1,200) 48,240 Cash………………………………….. 60

Cash (P40.20 x $1,200) or * 48,240 Forward Contract 60
To record payment to exchange Net settlement received from the
dealer (XD) dealer on expiration or maturity
date of forward contract.
*(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 required
d.3. Same amount with d.1
d.4. No entry required
e.
e.1.
Gross Method
Net Method: Zero. No entry required.
e.2. P300 asset

Gross method
Net Method: P300.

Forward contract (debit balance – asset)… P 300
e.3. P60 debit balance – asset

Gross method
Net Position
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)
Hedged Item – (Unrecognized Hedging Instrument – Forward Contracts
Foreign Currency Firm Commitment) ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Date of Commitment (Date of Issuing the Purchase
Order) Date of Inception/Hedging of 90 days Forwards
No journal entry is required to record the firm FC Receivable from XD…………… 48,180
commitment. The forward contract is designated as a Pesos Payable to XD 48,180
hedge of the firm commitment to purchase inventory (P40.15 x $1,200)
on March 1, 20x5. The hedge is accounted for as a To record forward contract to
fair value hedge. buy $1,200 using forward rate.
December 31, 20x4


Firm Commitment 300 FC Transaction Gain 300
[P40.40 – P40.15) x $1,200 [(P40.40 – P40.15) x $1,200]
To record a loss on firm To record a gain on foreign
commitment using the change in currency to be received from
the forward rate. FC dealer.

Assets Liability
FC Receivable from XD (P40.40 x $1,200)....…...P48,480 Firm Commitment…………………………………...P 300
Less: Pesos Payable to XD(fixed at P40.15)….… 48,180
Forward Contract (fair value)……………………P 300
March 1, 20x5
Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract
Firm Commitment………… 240 FC Transaction Loss …………… 240

FC Transaction gain……. 240 FC Receivable from XD……… 240
To record a gain on fair value of [(P40.40 – P40.20) x $1,200]
firm commitment. To record a loss on foreign
currency to be received from
exchange dealer.

Cash………………………………. 48,180
exchange dealer.

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

Cash ………………………………… 48,240 Investment in FC……………..…... 48,240
To record the purchase of To record conversion of US
inventory for $1,200 at spot rate. dollars into cash for purchase of
inventory.
Firm Commitment……………………. 60
Inventory……………………………. 60
To remove the carrying amount of
the firm commitment from the
balance sheet6 and adjust the
initial carrying amount of the
machine that results from the firm
commitment. This treatment is an
accordance 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 = P0
b.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 Liability

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 d.1
d.
d.1. Zero, no entry required
d.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 Liability

e.1. Net Method: Zero. No entry required.
Gross Method
e.2. P300 asset

Net Method: P300.
Gross method
e.3. P60 debit balance – asset

Gross method
Net Method
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 hedging

Inventory at spot rate on the date of transaction (P40.20 x $1,200)…………….P48,240
Less: Firm Commitment account – liability, 3/1/20x5………………………………. 60
Inventory at original (90-day) forward rate on the date of hedging, P40.15….P48,180
3. Cash Flow Hedge - Hedge of a Forecasted Transaction.

Hedged Item – Hedging Instrument – Forward Contracts

Forecasted Transaction ( Broad Approach or Gross Position Accounting)
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…………… 48,180
transaction. The forward contract is designated as a Pesos Payable to XD 48,180
hedge against the exposure to increases in the dollar (P40.15 x $1,200)
rate on March 1, 20x5. To record forward contract to
buy $1,200 using forward rate.
December 31, 20x4

No entry required, since it is only a forecasted FC Receivable from XD 300

transaction not guaranteed such as firm commitment. OCI – Exchange Gain (B/S) 300
[(P40.40 – P40.15) x $1,200]
To record a gain on foreign
FC dealer.
FC – foreign currency; OCI - Other Comprehensive Income; B/S – Balance Sheet

Forward Contract (fair value - asset)…..….. 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)……… 240

FC Receivable from XD……… 240
[(P40.40 – P40.20) x $1,200]
To record a loss on foreign
FC dealer.

Cash………………………………. 48,180
exchange dealer.

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

Cash ………………………………… 48,240 Investment in FC…………………. 48,240
equipment for $1,200 at the spot dollars into cash for purchase of
rate of P40.20 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/x5
OCI and adjust the carrying
amount if the machine that results
from the hedged transaction by
this amount. Also, to record the
basis adjustment of the carrying
value of the equipment. This entry
is recorded if PAS 39 par. 98b is
adopted.
b.
b.1. Gain or loss on hedged item, 3/1/20x4: None, no entry required
b.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 as
follows:
Other Comprehensive Income
3/1/x5 Loss 240 300… ….12/31/x4 Gain
60 3/1/x5
c. Same with Exposed Liability

c.1. Net Method: Zero. No entry required.
Gross Method
c.2. P300 asset

Net Method: P300.
Gross method
c.3. P60 debit balance – asset

Gross method
Net Method
12/31/x4 Gain… 300 240… …..3/1/x5 Loss
3/1/x5 Net…… 60
4. Not a Hedge Accounting – Speculation.

Hedging Instrument – Forward Contracts

Hedged Item - Speculation ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Date of Inception/Hedging of 90 days Forwards
FC Receivable from XD…………… 48,180

Pesos Payable to XD 48,180
(P40.15 x $1,200)
To record forward contract to
December 31, 20x4

FC Receivable from XD 300

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

March 1, 20x5
Settlement Date/Date of Expiration of Contract
FC Transaction Loss………………… 240

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

Cash………………………………. 48,180
exchange dealer.

currency.
Cash……………………………………. 48,240
Investment in FC…………………. 48,240
To record conversion of US
dollars 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.3. Same amount with c.1
d.
d.1.
Gross Method
d.2. P300 asset

Net Method: P300.
Gross method
d.3. P60 debit balance – asset

Gross method
Net 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:

(Exposed Liability) ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Purchases ($1,200 x P40)…………... 48,000 FC Receivable from XD…………… 48,180

Accounts payable………………. 48,000 Pesos Payable to XD 48,180
To record purchase of goods on (P40.15 x $1,200)
account using the spot rate on To record forward contract to
2/1/1/x4. buy $1,000 using forward rate.
*XD – exchange dealer

December 31, 20x4


Account payable……………. 360 FC Transaction Gain 294
[P40.30 – P40.00) x $1,200 To record a gain on foreign
To record a loss on the exposed currency to be received from
liability denominated in foreign FC dealer.
currency.
Note: Discounted or present value for hedged item is Gain [(P40.40 – P40.15) x $1,200]............ P 300
not necessary for exposed asset or liability since spot Less: Discount (P300 x 12% x 2/12)…………… ____6
Rate is in effect. Present value of gain*…………………………. P294
* or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2
months = 2%

FC Receivable from XD (P40.40 x $1,200)- P6. P48,474
Less: Pesos payable to XD (fixed at P40.15)… 48,180
March 1, 20x5

FC Transaction gain……. 120 FC Receivable from XD 234
[(P40.20 – P40.30) x $1,200}…….. To record a loss on foreign
To record a gain from 12/31/x4 to currency to be received from
3/1/x5 on liability denominated in FC dealer.
FC.
Note: Discounted or present value for hedged item is Overall gain (P40.20 – P40.15) x $1,200 …….. P 60
not 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

Cash………………………………. 48,180
exchange dealer.

Currency.

Cash (refer to note below)……… 48,240 Investment in FC…………………. 48,240
accounts payable.
Note: This entry may be ignored and instead the
Investment in FC will be outright credited in payment
of accounts payable. For succeeding illustrations the
conversion of FC to peso cash to settle items
acquired will be used.
a.
a.1. P360 loss
a.2. P294 gain
a.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 loss
a.6. P234 loss – P120 gain = P114 net loss (decrease in net income)
b.
b.1.
Gross Method
b.2. P294 asset

Gross method
Net Method: P294.

b.3. P60 debit balance – asset

Gross method
Net 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.


December 1, 20x4
This is computed using the change in the forward rate. These entries are as follows:
December 31, 20x4

Firm Commitment 294 FC Transaction Gain 294
[P40.40 – P40.15) x $1,200 [(P40.40 – P40.15) x $1,200]
To record a loss on firm To record a gain on foreign
Loss…………………………………..................... P 300 Gain [(P40.40 – P40.15) x $1,200] P 300
Less: Discount (P300 x 12% x 2/12)…………… ____6 Less: Discount (P300 x 12% x 2/12)…………….. ____6
Present value of loss*…………………………. P294 Present value of gain*…………………………… P294
months = 2%

Assets Liability
FC Receivable from XD (P40.40 x $1,200) - P6…P48,474 Firm Commitment…………………………………...P 294
Less: Pesos Payable to XD(fixed at P40.15)….… 48,180
Forward Contract (fair value)……………………P 294
March 1, 20x5
Firm Commitment………… 234 FC Transaction Loss …………… 234

FC Transaction gain……. 234 FC Receivable from XD……… 234
To record a gain on fair value of To record a loss on foreign
firm commitment. currency to be received from
exchange dealer.
Overall loss (P40.20 – P40.15) x $1,200 ……….. P 60 Overall gain (P40.20 – P40.15) x $1,200 …….. P 60
Less: 12/31/20x4 Gain at present value……… __294 Less: 12/31/20x4 Gain at present value…….. __294
FC Transaction Gain…………………………….. P234 FC Transaction loss……………………………… P234

Cash………………………………. 48,180
exchange dealer.

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

Cash ………………………………… 48,240 Investment in FC……………..…... 48,240
inventory for $1,200 at spot rate. dollars into cash for purchase of
inventory.
Firm Commitment……………………. 60
Inventory……………………………. 60
inventory that results from the
firm commitment. This treatment is
an 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 300
Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6
Present value of loss*…………………………………………………………… P294
a.2. P294 gain
Foreign Currency Exchange Gain [(P40.40 – P40.15) x $1,200]………. P 300
Present value of gain*………………………………………………………… P294
a.3. P294 loss(a.1) – P294 gain (a.2) = P0
a.4. P234 gain
Overall loss (P40.20 – P40.15) x $1,200 ……………………………………… P 60
Less: 12/31/20x4 Gain at present value……………………………………. __294
FC Transaction Gain……………………………………………………………. P234
a.5. P234 loss
Overall gain (P40.20 – P40.15) x $1,200 …….. P 60
Less: 12/31/20x4 Gain at present value…….. __294
FC Transaction loss……………………………… P234
a.6. P234 gain (a.4) – P234 loss (a.5) = P0
b.
b.1. Zero, no entry required
b.2. P294 liability
Present value of loss* / Firm Commitment…………………………………. P294
b.3. P60 - liability
Firm Commitment
3/1/x5 Gain……. 234 294… …..12/31/x4 Loss
60 3/1/x5 Net
c.
c.1.
Gross Method
c.2. P294 asset

Gross method
Net Method: P294.


Gross method
Net Method
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
December 31, 20x4

No entry required, since it is only a forecasted FC Receivable from XD…………… 294

transaction not guaranteed such as firm commitment. OCI – Exchange Gain (B/S)….... 294
FC dealer.
Gain [(P40.40 – P40.15) x $1,200] P 300
Less: Discount (P300 x 12% x 2/12)…………….. ____6
Present value of gain*…………………………… P294
months = 2%

FC Receivable from XD (P40.40 x $1,200)-P6 P48,474
Forward Contract (fair value - asset)…..….. P 294
March 1, 20x5
OCI – Exchange Loss (B/S)………. 234

FC dealer.

Cash………………………………. 48,180
exchange dealer.

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

equipment for $1,000 at the spot dollars into cash for purchase of
rate of P40.20 machinery.
OCI – Exchange Gain……………….. 60 Other Comprehensive Income

Machinery………………………….. 60 3/1/x5 Loss 234 294… ….12/31/x4 Gain
OCI and adjust the carrying
amount if the machine that results
from the hedged transaction by
this amount. Also, to record the
basis adjustment of the carrying
value of the equipment. This entry
is recorded if PAS 39 par. 98b is
adopted.
a.
a.1. Gain or loss on hedged item, 3/1/20x4: None, no entry required.
a.2. P294 gain, other comprehensive income
a.3. None
a.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 gain

Overall loss (P40.20 – P40.15) x $1,200 ……………………………………… P 60
Less: 12/31/20x4 Gain at present value……………………………………. __294
FC Transaction Gain……………………………………………………………. P234
a.5. P234 loss, other comprehensive income – {[(P40.40 – P40.20) x $1,200] – P6} to be
recorded on March 1, 20x5. The balance of the OCI – gain amounted to P60
computed as follows:
Other Comprehensive Income
3/1/x5 Loss 234 294… ….12/31/x4 Gain
60 3/1/x5
b.
b.1.
Gross Method
b.2. P294 asset

Gross method
Net Method: P294.

b.3. P60 debit balance – asset

Gross method
Net Method
12/31/x4 Gain… 300 240… …..3/1/x5 Loss
3/1/x5 Net…… 60
4. Not a Hedge Accounting – Speculation.

Hedging Instrument – Forward Contracts

Hedged Item - Speculation ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Date of Inception/Hedging of 90 days Forwards
FC Receivable from XD…………… 48,180

Pesos Payable to XD 48,180
(P40.15 x $1,200)
To record forward contract to
December 31, 20x4

FC Receivable from XD 294

FC Transaction Gain 294
FC dealer.
Gain [(P40.40 – P40.15) x $1,200] P 300
Less: Discount (P300 x 12% x 2/12)…………….. ____6
Present value of gain*…………………………… P294
months = 2%

FC Receivable from XD (P40.40 x $1,200)-P6 P48,474
March 1, 20x5
Settlement Date/Date of Expiration of Contract
FC Transaction Loss………………… 234

FC Receivable from XD…………. 234
FC dealer.

Cash………………………………. 48,180
exchange dealer.

currency.
Cash……………………………………. 48,240
Investment in FC…………………. 48,240
To record conversion of US
dollars into cash.
a.
a.1. P294 gain
a.3. P294 gain.
a.5. P234 loss – other comprehensive income
b.
b.1. Zero, no entry required
b.2. P294 liability
Present value of loss* / Firm Commitment…………………………………. P294
b.3. P60 - liability
Firm Commitment
3/1/x5 Gain……. 234 294… …..12/31/x4 Loss
60 3/1/x5 Net
c.
c.1.
Gross Method
c.2. P294 asset
Gross method
Net Method: P294.


Gross method
Net Method
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 item
and hedging instrument:
Forward Rate for

8/1/20x5 Settlement
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****
***remaining or current forward rate on 3/1/20x5
zero.

November 1, 20x4
December 31, 20x4

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

FC Transaction Gain……………... 300 FC Receivable from XD………… 300
[P41.25 – P41.00) x $1,200 (P41.25 – P41.00) x $1,200]
To record a loss on firm To record a loss on foreign
Assets Liability
Firm Commitment…………………………………...P 300 Pesos payable to XD (fixed at P41.25)………..P 49,500
Less: FC Receivable from XD (at spot rate)…. 49,200
Forward 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………………. 48,840
(P40.70 x $1,200)
To record the purchase of
inventory for $1,200 at spot rate
and recognize accounts payable.
Inventory ……………………………… 300

Firm Commitment ……………….. 300
inventory that results from the firm
commitment. This treatment is an
accordance 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……………. 660

Accounts payable…. 1,020 FC Transaction Gain……………. 660
[(P41.55 – P40.70) x $1,200}…….. [(P41.55 – P41.00) x $1,200]
To record a loss from 3/1/x5 to To record a gain on foreign
FC. FC dealer.

Cash………………………………. 49,500
exchange dealer.

currency.

Cash…………………………………. 49,860 Investment in FC…………………. 49,860
accounts payable.
Problem IV
The following relevant exchange rates are needed for further analysis in relation to hedged item
and hedging instrument:
Forward Rate for

3/1/20x5 Settlement
December 1, 20x4…………………………. P40.00 P40.15 (*90 days)
December 31, 20x4…………………………. P40.30 P40.40 (**60 days)
March 1, 20x5………………………………….. P40.20***
zero.

December 1, 20x4
December 31, 20x4

No entry required, since it is only a forecasted FC Receivable from XD 300

transaction not guaranteed such as firm commitment. OCI – Exchange Gain (B/S) 300
[(P40.40 – P40.15) x $1,200]
FC 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 will
affect the income statement when the inventory is eventually sold. On the balance sheet, the
forward contract is reported as an asset at its fair value of P300, and the offsetting amount is
reported in other comprehensive income (as a gain).

Fair 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)……… 240

[(P40.40 – P40.20) x $1,200]
FC dealer.

Cash………………………………. 48,180
exchange dealer.

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

merchandise for $1,200 at the dollars into cash for purchase of
spot rate of P40.20 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) into
earnings are as follows:
April 1, 20x5
Date of Transaction (Sale) Settlement Date/Date of Expiration of Contract
Cash………... 54,000
Sales………………………………… 54,000
To record the sale of merchandise.
Cost of goods sold…………………… 48,240

Inventory, at cost………………… 48,240
To 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
OCI and release the OCI to profit
or loss. This entry is recorded in
accordance with PAS 39 par. 98a
is 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 was
P39,900 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 foreign
currency (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 adjusted
trial 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 and
unadjusted 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 to
Exchange Broker is denominated in pesos and does not change as a result of
exchange rate changes.
Foreign Currency Receivable from

Exchange 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 / FC2
400,000 = P.205. The P82,000 is the amount of the pesos payable to exchange
broker. 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, 20x4
Accounts Receivable (FC1) 42,000
Sales 42,000
P42,000 = FC1 70,000 x (P1/FC1 1.667)
Pesos Receivable from Exchange Broker 40,600

Foreign Currency Payable to
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, 20x4

Foreign Currency Transaction Loss 300
Accounts Receivable (FC1) 300
P300 = change in accounts receivable (FC1) as noted
in problem information.
Foreign Currency Payable to

Exchange Broker 700
Foreign Currency Transaction Gain 700
P39,900 = FC1 70,000 x P.57 Dec. 31 forward rate
- 40,600 = FC1 70,000 x P.58 Dec. 1 forward rate
P 700 = FC1 70,000 x (P.57 - P.58)
2. Transactions with Foreign Company 2 (FC2)
October 2, 20x4
Equipment 80,000
Accounts Payable (FC2) 80,000
P80,000 = FC2 400,000 x P.20

Pesos Payable to Exchange Broker 82,000
P82,000 = FC2 400,000 x P.2050, and the
P82,000 is presented in the problem
for the foreign currency receivable.
December 31, 20x4

Accounts Payable (FC2) 800
P80,800 = FC2 400,000 x P.202 Dec. 31 spot rate
- 80,000 = FC2 400,000 x P.200 October 2 spot rate
P 800 = FC2 400,000 x (P.202 - P.200)
Foreign Currency Transaction Loss 1,000

Exchange Broker 1,000
P81,000 = FC2 400,000 x P.2025 Dec. 31 forward rate
- 82,000 = FC2 400,000 x P.2050 Oct. 2 forward rate
P 1,000 = FC2 400,000 x (P.2025 - P.2050)
Problem VI
Based on the data given, the following situations can be derived:
Strike price Foreign

(exercise price Currency
Market or or option Option Element Time Intrinsic
Spot Rate price) Situation Existing Value** 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 P4,200
TV – 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…….. 360

Accounts payable………………. 72,000 Cash……………………………….. 360
To record purchase of goods on To record purchase of call
account using the spot rate on option.
12/1/1/x4.
December 31, 20x4

FC Transaction Loss………………….. 4,800 Investment in FC Call Option…… 4,680

Account payable………………… 4,800 FC Transaction Gain…. 4,680
[P1.28 – P1.20) x 60,000 FC (P5,040 – P360 = P4,680)
To record a loss on the exposed To record a gain on call option.
liability denominated in foreign
currency.
March 1, 20x5
Accounts payable……………. 600 FC Transaction Loss…………………. 840

FC Transaction gain……. 600 Investment in FC Call Option… 840
[(P1.28 – P1.27) x 60,000 FC…….. (P5,040 – P4,200)
To record a gain from 12/31/x4 to To record a loss on call option
3/1/x5 on liability denominated in
FC.

Cash [(P1.20 x 60,000 FC) + Investment in FC Call Option… 4,200
P4,200, proceeds from call To record the derecognition of
option]………………………….. 76,200 call option on realization.
To record payment of accounts
payable at spot rate.
Problem VII
The following table summarizes the succeeding journal entries in relation to hedged item and
hedging instrument:
Firm Commitment Call Option Contract

Total Call Option (CO Premium x FCs)
Spot Fair Change in (CO)Premium Fair Value of Call Change in
Date Rate value Fair Value per FC Option Fair 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:

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 600

(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 agreement Investment in FC Call Option…… 120
because it is an executory contract. Cash………………………………. 120
To record purchase of call
option.
December 20, 20x4

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

Firm Commitment………………… 600 FC Transaction Gain…. 120
[(P.21 – P0.20) x 60,000 FC] (P600 – P480 = P100)
To record loss on firm commitment To record a gain on call option.
based on spot rate.
Equipment…………………………….. 12,600 Cash……………………………….. 600

Cash [(P0.20 x 60,000 FC) + 12,600 Investment in FC Call Option 600
P600, proceeds from call To record the derecognition of
option]………………………….. call option on realization.
To record purchase of equipment
at spot rate (P.21 x 60,000 FC)
Firm Commitment …………………… 600

Equipment…………………………. 600
To derecognized firm
commitment and adjust the
carrying amount of equipment.
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/A
N/A – not applicable
The following table summarizes the succeeding journal entries in relation to hedged item and
hedging instrument:
Firm Commitment Call Option Contract

Total Call Option (CO Premium x FCs)
Spot Fair Change in (CO)Premium Fair Value of Call Change in
Date Rate value Fair Value per FC Option Fair 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:

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 0
** None since the option price is greater than the market price.

(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 agreement Investment in FC Call Option…… 120
because it is an executory contract. Cash………………………………. 120
To record purchase of call
option.
December 20, 20x4

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

FC Gain on Firm Commitment 1,200 Investment in FC Call Option 120
[(P0.20 – P0.18) x 60,000 FC] (P120 – P0 = P120)
To record loss on firm commitment To record a gain on call option.
based on spot rate.
Equipment…………………………….. 12,000 No entry required since the

Cash [(P0.20 x 60,000 FC) + 12,000 Investment in call option has no
P0, no proceeds from call value.
option]…………………………..
To record purchase of equipment
at spot rate (P.21 x 50,000 FC)
Equipment……….…………………… 1,200
Firm Commitment………………. 1,200
To derecognized firm
commitment and adjust the
carrying amount of equipment.
Problem IX
Based on the data given in the problem, the following situations can be derived:

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 P36,000
***time already expired, so need to determine time value unless It is a residual amount.

(Forecasted Transaction) Hedging Instrument – Option Contracts
December 1, 20x4
No journal entry is required to record the forecasted Investment in FC Call Option…….. 20,400
transaction. The forward contract is designated as a Cash……………………………….. 20,400
hedge against the exposure to increases in the dollar To record purchase of call
rate on March 1, 20x5. option.
December 31, 20x4

No entry required, since it is only a forecasted Investment in FC Call Option…….. 32,400

transaction not guaranteed such as firm commitment. OCI – FC Transaction Gain (B/S) 32,400
[P1.18 – P1.14) x 1,200,000 =
P52,800 – P20,400 = P32,400]
To record a gain on call option.
OCI – FC Transaction Gain (B/S) 25,920

FC Transaction Gain 25,920
To reclassify 80% of OCI to
earnings (720,000 /900,000) =
80% ; (80% × P32,400 = P25,920)
On December 31, 20x4 (the transaction date and the settlement date), the journal entries are:
December 31, 20x4

FC Transaction Loss…………………. 16,800

Investment in FC Call Option… 16,800
[(P1.17 – P1.14) x 1,200,000
baht = P36,000 – P52,800]
To record a loss on call option
OCI – FC Transaction Gain (B/S)…. 6,480

FC Transaction Gain………….… 6,480
To record reclassify the
remaining P6,480 of FC gain
from OCI to earnings
(180,000/900,000 x P32,400).n
This entry is recorded if PAS 39
par. 98b is adopted.
Cash……………………………………. 36,000
Investment in FC Call Option… 36,000
[(P1.17 – P1.14) x 1,200,000 baht]
To record the derecognition of
call option on realization.
Multiple Choice Problems
1. c
Peso Value in 3 months = 3,750 + 37.50 = 3,787.50
FC Value in 3 months = 5,000 + 87.50 = 5,087.50
Fwd rate 3,787.50 ÷ 5,087.50 = .745
2. e
Pound should be FCU
11/10/x6: Original forward rate on the date of hedging..……………………….P 1.64
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6......……. 1.59
Gain on forward contract per FC………...…………………………………………..P .05
Multiplied by: No. of FCs……………………………………………………………….. 100,000
Gain on forward contract..…………………………………………………………….P 5,000
3. a
Euro should be FCU
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6.………. 0.445
Gain on forward contract per FC…………………………………………………..P .005
Gain on forward contract.....………………………………………………………….P 500
4. c -15,000,000 x P.0092
5. b - 15,000,000 x P.0094
6. b - 15,000,000 (P.0094 - P.0092)
7. d - 15,000,000 x P.0091
8. 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 asset
11. d - P4,500 - P0
12. c
13. c - P3,000 - P4,500
14. b - 1,000,000 x P1.116
15. d - 1,000,000 x P1.129
16. a - 1,000,000 (P1.129 - P1.116)
17. a - 1,000,000 x P1.138
18. c - 1,000,000 (P1.138 - P1.129)
19. d – forward contract is zero on the date of hedging
20. a
21. b
22. c
23. 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 as
follows (using the gross or broad approach):
Forward contract receivable……………………………………………… 74,000
Pesos payable to exchange dealer……………………………. 74,000
26. d
Original value of Forward Contract Receivable-FC 100,000 x .74 = 74,000
Current (6/30) value of the Fwd Contract Rec-FC 100,000 x .75 = 75,000
Increase in value of Forward Contract Receivable 1,000
Value of Receivable, discounted at 8%, n 1 1,000 - (1,000 x [.08 ÷ 12]) = 993
Value of receivable 74,000 + 993 = 74,993
or,
FC Receivable – date of hedging, 6/1 20x4……………………………………...P 74,000
Add: Forward contract gain P1,000 x [1/1 + (8%/12 x 1 month remaining)].. 993
Forward Contract (FC) Receivable, 6/30/20x4…………………………………. P 74,993
27. d
January 1: Origininal forward rate on the date of hedging..………………..P 0.94
March 1: Spot rate…………………………………………………………………… 0.93
Gain……………………………………………………………………………………..P 0.01
Multiplied by: No. of FCs……………………………………………………………. 100,000
FC Forward Contract Gain…………………………………………………………P 1,000
28. c
Hedging Instrument:
January 1: Origininal forward rate on the date of hedging..………………..P 0.94
March 1: Spot rate…………………………………………………………………… 0.93
Gain……………………………………………………………………………………..P 0.01
Hedged Item:
January 1: Spot rate………………………………………………..………………..P 0.945
March 1: Spot rate…………………………………………………………………… 0.930
Loss………………………………………………………………………………………P 0.015
Multiplied by: No. of FCs…………………………………………………………….. 100,000
Foregin currency exchange loss……..………………………………………….. P 1,500
Net loss………………………………………………………………………………….P 500
29. d
Hedged Item:
January 1: Spot rate………………………………………………..………………..P 0.945
March 1: Spot rate…………………………………………………………………… 0.930
Loss………………………………………………………………………………………P 0.015
Multiplied by: No. of FCs…………………………………………………………….. 100,000
Foreign currency exchange loss……..………………………………………….. P 1,500
30. c – (P.1865 – P.1850) gain x 100,000 FC = P150 gain
31. c – using spot rate
32. c
5/1: Original forward rate (90 days)……..……………………………….P .693
6/30: Current (remaining) forward rate (30 days)……....……………… .695
Forex gain per unit.......……………………………………………………….P .002
Multiplied by: Number of foreign currencies……………………………. 500,000
Foreign exchange gain due to hedging instrument……..……………P 1,000
Less: Discount – P1,000 x 6% x 30/360 days………………………………. 5
PV of foreign exchange gain due to hedging instrument……………P 995
Or, alternatively the computation of present value may also be presented as:
Foreign exchange gain………………………………………………...P 1,000
Divided by: [1% + (6%/12 x 1 month = equivalent to 30 days)]….. 1.005
PV 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. c
Foreign exchange loss due to Hedged Item:
5/1: Spot rate………………………………………………………………P .687
6/30: Spot rate……………………………………………………………… .691
Forex loss per foreign currency…….……………………………………..P .04
Multiplied by: Number of foreign currencies………………………….. 500,000
Foreign 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. d
5/1: Original forward rate (90 days)…..…………………………………….P .693
8/1: Spot rate…………………………………………………………………… .696
Forex gain per currency ……………………………………………………….P .003
Multiplied by: Number of foreign currencies……………………………….. 500,000
Total Foreign Exchange gain due to hedging instrument
(forward contract)............................................................................. .....P 1,500
Less: 6/30 cut-off - PV of foreign exchange gain due to hedging
instrument (forward contract – refer to No. 32)………………..... 995
August 1 - Foreign exchange gain due to hedging instrument
(forward contract)……………………………………………………….P 505
35. e
Hedging Instrument:
Origininal forward rate on the date of hedging……………………………….P 0.105
Balance Sheet date: Remaining (current) forward rate – 12/3/1/20x4…… 0.095
Loss………………………………………………………………………………………P 0.010
FC Forward Contract Loss…………………………………………………………..P 500
Multiplied by: PV factor……………………………………..………………………. .98,03
Forward 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 premium
revenue since it was sold at a higher rate.
37. b
November 1, 20x4:
Exchange Broker (FC) 12,600
Pesos Payable to Exchange Broker 12,600
Signed 90-day forward exchange contract
to purchase 100,000 FC:
P12,600 = 100,000 FC x P.126 forward rate
38. c
December 31, 20x4
Exchange Broker (FC) 300
Foreign Currency Transaction Gain 300
Revalue foreign currency receivable to
fair value:
P300 = 100,000 FC x (P.129 - P.126)
39. b
January 30, 20x5
Pesos Payable to Exchange Broker (Pesos) 12,600
Cash 12,600
Deliver pesos to exchange broker in
accordance with forward exchange contract:
P12,600 = 100,000 FC x P.126 contract rate
40. b
January 30, 20x5
Pesos Payable to Exchange Broker (Pesos) 12,600
Cash 12,600
Deliver pesos to exchange broker in
accordance with forward exchange contract:
P12,600 = 100,000 FC x P.126, the 90-day forward rate
41. a
January 30, 20x5
Foreign Currency Receivable from Exchange Broker (FC) 200
Adjust foreign currency receivable to
current 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 rate
P 200 = 100,000 FC x (P.127 - P.129)
Foreign Currency Units 12,700
Foreign 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. d
PAS 32 and 39 (PFRS 9) requires the FCU payable be recorded at the forward rate on the
date of hedging.
Letter (d) is the required entry under the old practice wherein the FCU payable are recorded
using the spot rate on the date of hedging.
43. b
Receivable 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 premium
expense since it was purchase at a higher rate plus a loss on firm commitment (i.e., P1.21 –
P1.20)
45. e
Firm Commitment:
Balance Sheet date: Remaining (current) forward rate – 12/31/206…………. 1.59
Loss on Forward Contract per FC…………………………………………………....P .05
Loss on forward contract……………………………………………………………….P 5,000
46. e
Firm Commitment:
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6......……. 1.59
Gain on forward contract per FC………...…………………………………………..P .05
Gain on forward contract..…………………………………………………………….P 5,000
47. b
Firm Commitment:
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6.………. 0.445
Gain on forward contract per FC…………………………………………………..P .005
Gain on forward contract.....………………………………………………………….P 500
48. a
December 1, 20x6: Spot rate – P1.64 x 100,000....…………............. P164,000
Less: Firm Commitment – liability (credit balance)
8/3/20x6: Original (120-day) forward rate…………………….P 1.60
12/1/20x6: Remaining (60-day) forward rate………………… 1.64
Loss on Firm Commitment………………………………………....P 0.04
Multiplied by: No. of FCs…………………………………………… 100,000 4,000
Value of machine...........................……………………………………… P160,000
49. c - refer to No. 48 (Note: There is no more commitment after the date of transaction which is
12/1/20x6)
50. c -
December 9, 20x6: Spot rate – P2.45 x 100,000……………………… P245,000
Add: Firm Commitment – asset (debit balance)
Gain on Firm Commitment………………………………………..P 0.02
Value of sales, 1/31/20x6…...............…………………………………… P243,000
51. b - refer to No. 50 for computation ((Note: There is no more commitment after the date of
transaction which is 12/9/20x6)
52. c - Forward contracts always have a value of P0 at the date they are established
53. a
54. a - P10,000 - P0
55. c - The forward contract gain or loss is offset by the loss or gain on the sales commitment
56. b
57. c - P25,000 - P10,000
59. 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. c
62. d - P7,500 - P0
64. d
65. b - P2,500 + P7,500
66. a - The forward contract gain or loss is offset by the loss or gain on the sales commitment
67. 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………………………............. P159,000
Add: Firm Commitment – asset (debit balance)
Gain on Firm Commitment………………………………………..P 0.05
Value of merchandise, 1/31/20x4……………………………………… P164,000
The entry would be as follows on 1/31/20x4:

Inventory………………………………………………………………… 164,000
Firm Commitment……………………………………………. 5,000
Cash (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]……. 3,000
Firm Commitment………………………………………………. 3,000
Inventory (P.28 x 100,000 FC)……………………………………………28,000

Cash……………………………………………………………….. 28,000
Firm Commitment………………………………………………………… 3,000

Inventory………………………………………………………….. 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 it
was 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 with
PAS 39 par.98b.
71. e - the accounts payable should be valued based on the spot rate on the date of
transaction.
72. c
Firm Commitment:
Original forward rate on the date of hedging…………………………………….P .58
Balance Sheet date: Remaining (current) forward rate – 6/30/20x4…………. .56
Loss on Firm Commitment per FC…………………………………………………..P .02
Loss 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. b
Fwd value 4/1 200,000 x 0.58 116,000
Fwd value 6/30 200,000 x 0.56 112,000
Decrease in Fair Value of Payable 4,000
PV 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 116,000
Less: Forward contract gain [P4,000 x 1/1 + (8%/12 x 1 month remaining)]... 3,960
FC 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 because
the contract already expired.
75. b
1-Aug 30-Aug 30-Sep
Notional amount 15,000 15,000 15,000
Forward 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 pesos:
Original forward value 10,350 10,350
Current forward value 10,200 10,125
(Gain) Loss in forward rate (150) (225)
Current present value
PV 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. d
1-Aug 30-Aug 30-Sep
Notional amount 15,000 15,000 15,000
Forward 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 value
PV 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 established
78. a
79. d - [(P600) - P0]
80. b
81. c - [P300 - (P600)]
82. b - Forward contracts always have a value of P0 at the date they are established
83. a
84. c - [(P1,950) - P0]
85. c
86. b - [P635 - (P1,905)]
87. c
Cost of equipment…………………………………………………………………..P 211,000
Less: Fair value of the equipment………………………………………………… 199,000
Impairment loss……………………………………………………………………….P 12,000
88. a – (P17,500 – P13,200) reclassified to earnings

89. e
Original forward rate on the date of hedging…………………………………P 1.64
Balance Sheet date: Remaining (current) forward rate – Dec. 31, 20x6… 1.59
Loss……………………………………………………………………………………..P 0.05
Multiplied by: No. of FCs…………………………………………………………… 100,000
FC Forward Contract Loss…………………………………………………………..P 5,000
90. a
P400 = 10,000 foreign currency units x (P.82 - P.78). The loss is calculated using only forward
rates. On December 31, 20x4, the loss is the difference between the 90-day future rate on
November 1 (P.78) and the 30-day forward rate on December 31 (P.82).
91. b - speculation (gain or loss – income statement)

Balance Sheet date: Remaining (current) forward rate – Dec. 31, 20x4… 0.036
Loss……………………………………………………………………………………..P 0.003
FC Forward Contract Loss…………………………………………………………P 300
92. b - (220,000 FCUs)x (P0.68) = P149,600
93. 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 the
forward exchange rate (FER). Note that the question asks only for the effect on income from
the forward contract transaction; thus, any effect on income from the foreign currency
denominated account payable is not included in the answer.
FER, 12/12/x4 P.90

FER, 12/31/x4 P.93
AJE:
Forward Contact Receivable 3,000
Foreign Exchange Gain 3,000
Revalue forward contract:
P3,000 = 100,000 FCU x (P.93 - P.90) change in forward rates
Foreign Exchange Loss 10,000

Account 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 3,000
Revalue forward contract, using the forward rates.
Foreign Exchange Loss 3,000

Firm Commitment 3,000
Recognize loss on firm commitment.
Again, note that the question asks only about the effect on income from the forward
contract, not the underlying firm commitment portion of the transaction
96. b
Speculation:
Value forward exchange contract at fair value based on changes in the forward rate
AJE:
Forward Contract Receivable 3,000
97. b
Call Option:
P29.80 (Market price/Spot Price) > P27.90 (Option/Strike Price)..P1.90 in-the-money
Put Option
P14.25 (Market price/Spot Price) > P16.40 (Option/Strike Price).. 2.15 in-the-money
Intrinsic Value………………………………………………………………….. P4.05
98. d
January 1, 20x6
(the inception date of the 1-yr. put FX option period)
FX Contract Value—Option ............................................................ 8,000
Cash ........................................................................................... 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 Gain (P30,000 × 300,000 FCUs/1,000,000 FCUs)............. 9,000
OCI—FX Gain (P30,000 × 700,000 FCUs/1,000,000 FCUs) 21,000
To adjust option’s carrying value to its fair
value of P106,000 (a given amount). P106,000 – P6,000 = P100,000)
99. a
Note: 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. d
January 1, 20x6
(the inception date of the 1-yr. put FX option period)
Cash ........................................................................................... 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 Gain (P80,000 × 500,000 FCUs/2,000,000 FCUs) x 50%.. 10,000
OCI—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 14
Spot 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 13,300
Intrinsic Value: ( P.16 Option price less P.15 market price,
lower if put option) x 1,000,000 bolivar……………………………………. 10,000
Time 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. b
Hedging Instrument/Hedging Transaction/Option Contract:
Inception date: Fair value of call option…………………….............................P 4,000
Balance sheet date: Fair value of call option……………………………........ 13,300
Foreign exchange gain……………………………………………………............P 9,300
106. c
Foreign Currency Transaction (Hedged Item):
12/16/20x4: Spot rate…………………………………………………………………P .16
12/31/20x4: Spot rate………………………………………………………………... .15
Forex loss per unit……………………………………………………………………. P .01
Multiplied by: Number of foreign currencies…………………………………… 1,000,000
Foreign exchange loss..........…………………………………................................P 10,000
Inception date: Fair value of call option……………………..............................P 4,000
Balance sheet date: Fair value of call option………………………………….. 13,300
Foreign exchange gain……………………………………………………………...P 9,300
Net foreign exchange loss……………………………………………………………..P 700
107. c
Foreign Currency Transaction (Hedged Item):
12/31/20x4: Spot rate…………………………………………………………………..P .150
2/14/20x5: Spot rate………………………………………………………………….. .147
Forex loss per unit………………………………………………………………………P .003
Multiplied by: Number of foreign currencies…………………………………….. 1,000,000
Foreign exchange loss..........…………………………………..................................P 3,000
Balance sheet date (12/31/x4): Fair value of call option….…………..............P 13,300
Expiration date (2/14/x5): Fair value of call option..…………………………….. 13,000
Foreign exchange loss………………………………………………………………..P 300
Total foreign exchange loss……………………………………………………………..P 3,300
108. c
12/1/20x4:Spot rate……………………………………………………………P .92
12/31/20x4:Spot rate…………………………………………………………. .93
Foreign currency gain……………………………………………. …………P .01
x: No. of foreign currencies…………………………………………………. 1,000,000
Foreign currency gain due to hedged item/commitment…………...P 10,000
Less: Discount – P10,000 x 12% x 2/12 (January and February).…........ 200
PV 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..…………………………………………P 10,000
Divided by: [100% + (12%/12 x 2 months remaining)]………………….. 1.02
PV of foreign exchange gain due to hedged item/commitment….P 9,803*
*P3 discrepancy due to rounding-off.
109. c
12/1/20x4: Fair value of Option (P10,000 x P.009)……………………………..P 9,000
12/31/20x4: Fair value of Option (P10,000 x P.006)…………………………… 6,000
Foreign 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. c
PV of foreign exchange gain due to hedged item/commitment
(refer to No. 70)…………………………………………………………………. P 9,803
Foreign currency loss on hedging transaction (option contract)
– refer to no. 71)………………………………………………………………… ( 3,000)
Impact on net income – increase………………………………………………… P 6,803
112. b
Sales (3/1/20x5 spot rate: P.90 x FC 1,000,000) ……………………… P900,000
Foreign exchange loss on hedged item/commitment, 3/31/20x5:
12/1/20x4 Spot rate…………………………………………………..P .92
3/31/20x5 Spot rate…………………………………………………... .90
Foreign currency loss……………………………………. …………P .02
x: No. of foreign currencies………………………………………… 1,000,000
Foreign currency loss for the entire hedged
item/commitment…………………………………………… P 20,000
Add 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 firm
commitment 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 6,000
3/1/20x4 (expiration date) : Fair value of option
(P0.020 x FC 1,000,000)……………………………………….… 20,000 14,000
Impact 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 .095
12/31/20x3: Spot rate…………………………………………….. .094
Foreign currency loss per unit…………………………………. P .001
x: No. of foreign currencies……………………………………... 2,000,000
Foreign currency loss due to hedged item/commitment..P 2,000
x: PV factor of an annuity of P1 @ for 12 periods………..… .9803
PV of foreign exchange loss due to hedged item/
commitment..………. ………………………………………. P 1,960.60
Hedging Instrument:
3/01/20x3: Fair value of Option………………………………..P 3,000
12/31/20x3: Fair value of Option6)……………………………... 3,200
Foreign currency gain on hedging transaction
(option contract)………………………………………………………… 200.00
Net impact on 20x3 income – loss (decrease)……………………..……P1,760.60
118. d
Sales (3/1/20x4 spot rate: P.089 x FC 2,000,000) …………………… P 178,000.00
Adjustment: Firm Commitment Account balance
(credit balance) – since the P12,000 is a foreign currency
loss 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 .095
3/01/20x4 Spot rate…………………………………………. .089
Foreign currency loss…………………………………. ……P .006
x: No. of foreign currencies…..……………………………. 2,000,000
Foreign 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)……………….. P188,760.60
119. c
Net cash inflow with option (P190,000 – P3,000)…………………… P187,000
Cash 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. a
Note: 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 transaction
since 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 rate

Accounts payable…………………………………………………………18,650
FC Units………………………………………………………………… 18,650
4. c – (P42 – P40) gain x 1,000 FC = P2,000 gain
5.
Accounts payable…………………………………………………………42,000
FC Units………………………………………………………………… 42,000
6. b
Hedging Instrument:
Origininal forward rate on the date of hedging……………………………….P 0.90
Balance Sheet date: Remaining (current) forward rate – 12/3/1/20x4…… 0.93
Gain…………………………………………………………………………………….P .03
The entry would be as follows:

Foreign Currency Receivable from Exchange Broker………………6,000
Foreign Currency Gain……………………………………………… 6,000
7. a
The entry on the date of expiration of the contract:
Pesos Payable to Exchange Broker (P.90 x 200,000 FC)……………..180,000
Cash…………………………………………………………………….. 180,000
Foreign Currency Units or Investment in Foreign Currency (P.92)…184,000

Foreign 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. On
September 30, 20x4, the loss is the difference between the 60-day forward rate of P.74 on
September 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 1.46
Balance Sheet date: Sept. 30, 20x4: Spot rate………………………………… 1.50
Gain…………………………………………………………………………………….P .04
FC Transaction Loss………..…………………………………………………………P 10,000
The question refers to foreign currency transaction loss which indicates that only the exposed
liability had a loss, while the the forward contract transaction results in a gain computed as
follows:

Balance Sheet date: Remaining (current) forward rate – Sept. 30, 20x4… 1.48
Gain…………………………………………………………………………………….P .01
If the question is the net impact on the net income the loss on exposed liability and the gain
of forward contract should be offsetted, thereby resulting a net effect of P7,500 decrease in
net income.
12. b – speculation (gain or loss – income statement)

Gain…………………………………………………………………………………….P .01
13. b
Receivable 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.
Balance Sheet date: 4/30/20x4: Spot rate……………………………………… 1.20
Gain…………………………………………………………………………………….P .04
follows:

Gain…………………………………………………………………………………….P .01
net income.
15. P12,000
Balance Sheet date: 4/30/20x4: Spot rate……………………………………… 1.20
Gain…………………………………………………………………………………….P .04
follows:

Gain…………………………………………………………………………………….P .01
net income.
16. P3,000
Gain…………………………………………………………………………………….P .01
17. d
PAS 32 and 39 requires the FCU payable be recorded at the forward rate on the date of
hedging.
Letter (d) is the required entry under the old practice wherein the FCU payable are recorded
using 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 the
foreign currency exchange gain on exposed asset position.
Spot rate on the date of transaction: 12/16/20x4…………………………….P 0.00090
Balance Sheet date: Spot rate – December 31, 20x4………………………. 0.00092
Gain……………………………………………………………………………………P 0.00002
Multiplied by: No. of FCs…………………………………………………………… 10 M
Foreign Currency Exchange Gain……………………………………………….P 200
21. P695.05 increase

Hedged Item: Exposed Asset:
Spot rate on the date of transaction: 12/16/20x4…………………………….P 0.00090
Balance Sheet date: Spot rate – December 31, 20x4………………………. 0.00092
Gain……………………………………………………………………………………P 0.00002
Multiplied by: No. of FCs……………………………………………………………. 10 M
Hedging Instrument:
Original forward rate on the date of hedging: 12/16/20x4…………………P 0.00098
Balance Sheet date: Remaining (current) forward rate – 12/31/20x4…… 0.00093
Gain…………………………………………………………………………………….P .00005
Multiplied by: No. of FCs……………………………………………………………. 10,000,000
FC Forward Contract Gain…………………………………………………………P 500
Multiplied by: PV of P 1 at 12%............……………………………………………. .9901
FC Forward Contract Gain…………………………………………………………P 495.50
Net impact on 20x4 income statement…………………………………………..P 695.05
22. P100 increase

Hedged Item: Exposed Asset:
Balance Sheet date: Spot rate – December 31, 20x4……………………….P 0.00092
Date of Settlement: Spot rate – January 15, 20x5……………………………. 0.00095
Gain……………………………………………………………………………………P 0.00003
Multiplied by: No. of FCs……………………………………………………………. 10 M
Hedging Instrument:
Balance Sheet date: Remaining (current) forward rate – 12/31/20x4……P 0.00093
Date of expiration: Spot rate – January 15, 20x5……………………………… 0.00095
Loss……………………………………………………………………………………..P .00002
Multiplied by: No. of FCs…………………………………………………………… 10,000,000
FC Forward Contract Loss………………………………………………………….P 200
Net impact on 20x5 income statement…………………………………………..P 100
23. c – (forward rate > spot rate – premium) buyer’s point of view considered as premium
expense since it was purchase at a higher rate plus a loss on firm commitment (i.e., P1.21 –
P1.20)
Theories
Completion Statements
1. hedging
2. existing assets and liabilities, firm commitments, forecasted transactions
3. firm commitment
4. forecasted
5. hedged item
6. hedging instrument
7. FX forwards, FX options
8. two-sided, counterbalanced
9. one-sided, counterbalanced
10. Hedge accounting
11. exchange rate, specified period
12. call, put
13. option holder
14. option writer
15. premium
16. “in the money”
17. time value element, intrinsic value element
18. exchange rate, future date
19. fulfill, obligation
20. take
21. executory
22. unrealized
23. the net position, setoff
24. premium, discount, time value
25. premium, decrease
26. split accounting
27. designated, effective, firm
28. speculating
29. firm commitment, forecasted transaction
30. market, credit, liquidity
31. market, credit
32. market, liquidity
33. unlimited
34. “on-balance-sheet,” “off-balance-sheet”
35. rights, obligations, assets, liabilities
36. fair values
37. assets, liabilities
38. undesignated, fair value, cash flow, net investment
39. asset, liability, firm commitment
40. forecasted transaction.
41. fair value
42. cash flow
43. net investment
44. earnings
45. other comprehensive income, earnings
46. earnings, earnings
47. forward
48. valuing, reporting
49. hedging effectiveness
50. time value
51. 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. False
57. 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 more
classification as to trading and available-for-sale instead it is now classified either as FVTPL and
FVTOCI.

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Chapter 20

Forward Rate for

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

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

Balance Sheet Presentation on 12/1/20x4

December 31, 20x4

FC Transaction Loss 360 FC Receivable from XD…………… 300

Balance Sheet Presentation on 12/31/20x4

Accounts payable 120 FC Transaction Loss 240

Pesos Payable from XD……………. 48,180

Investment in FC……………………. 48,240

Accounts payable…………………… 48,240 Cash……………………………………. 48,240

These transactions can be summarized in the following table.

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

“Net” Position Accounting

Hedged Item – Importing Transaction Hedging Instrument – Forward Contracts

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

December 31, 20x4

FC Transaction Loss 360 Forward Contract 300

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

Accounts payable 120 FC Transaction Loss 240

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

Forward Contract (Asset/Liability)

Net Method: Zero. No entry required.

e.2. P300 asset

Net Method: P300.

e.3. P60 debit balance – asset

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.

December 31, 20x4

FC Transaction Loss 300 FC Receivable from XD…………… 300

Balance Sheet Presentation on 12/31/20x4

Firm Commitment………… 240 FC Transaction Loss …………… 240

Pesos Payable from XD……………. 48,180

Investment in FC……………………. 48,240

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

c. – same with Exposed Liability

e. Same with Exposed Liability

e.2. P300 asset

e.3. P60 debit balance – asset

g. P48,180, original (90-day) forward rate on the date of hedging

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

Hedged Item – Hedging Instrument – Forward Contracts

December 31, 20x4

No entry required, since it is only a forecasted FC Receivable from XD 300

Balance Sheet Presentation on 12/31/20x4

OCI – Exchange Loss (B/S)……… 240

Pesos Payable from XD……………. 48,180

Investment in FC……………………. 48,240

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

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

c. Same with Exposed Liability

c.2. P300 asset

c.3. P60 debit balance – asset

4. Not a Hedge Accounting – Speculation.

Hedging Instrument – Forward Contracts

FC Receivable from XD…………… 48,180

December 31, 20x4

FC Receivable from XD 300

Balance Sheet Presentation on 12/31/20x4

FC Transaction Loss………………… 240

Pesos Payable from XD……………. 48,180

Investment in FC……………………. 48,240