Accounting For Derivatives and Hedging Transactions PDF

Accounting for Derivatives and Hedging Transactions1
(Part 1)
Multiple Choice – Computational
Fair value hedge of a recognized asset
Use the following information for the next eight questions:
On December 15, 20x1, ABC Co. sold goods to a Japanese firm for 4,000,000
yens. ABC Co. was concerned about the fluctuation in the Japanese yen, so
on this date, ABC Co. entered into a 30-day forward contract to sell
4,000,000 yens for ₱1,880,000 to a bank at the forward rate of ₱0.47.
Relevant rates are shown below:

Dec. 15, 20x1 Dec. 31, 20x1 Jan. 15, 20x2
Spot rate ₱0.48 ₱0.49 ₱0.46
Forward rate ₱0.47 ₱0.485 ₱0.46
1. The entry to record the hedging instrument on December 15, 20x1 includes
a. a debit to accounts receivable for ₱1,880,000
b. a credit to sales for ₱1,880,000
c. both a and b
d. none
2. How much is the FOREX gain (loss) on foreign currency transaction on

December 31, 20x1?
a. 40,000 b. (40,000) c. 60,0000 d. (60,000)
3. How much is the gain (loss) on change in fair value of the derivative on
December 31, 20x1?
a. 40,000 b. (40,000) c. 60,0000 d. (60,000)
4. The derivative asset (liability) to be included in the December 31, 20x1

statement of financial position is
a. 1,960,000 b. (1,920,000) c. 60,0000 d. (60,000)

January 15, 20x2?
a. 120,000 b. (120,000) c. 100,0000 d. (100,000)
6. How much is the gain (loss) on change in fair value of the derivative on
January 15, 20x2?
a. 120,000 b. (120,000) c. 100,0000 d. (100,000)
7. If the forward contract is settled on a net cash basis, how much is the
net cash settlement receipt (payment)?
a. 40,000 b. (40,000) c. 100,000 d. 0
8. The total net effect of the two contracts in 20x1 and 20x2 profit or
loss is – gain (loss)
a. 40,000 b. (40,000) c. 100,000 d. 0
No hedging designation (Held for speculation)

Use the following information for the next five questions:
ABC Co. expects the value of yens to decrease in the next 30 days.
Accordingly, on December 15, 20x1, ABC Co. enters into a 30-day forward
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ADAPTED QUESTIONS FROM V. Z. MILLAN
1
contract to sell 4,000,000 yens at the forward rate of ₱0.47. On December
31, 20x1, the forward rate was ₱0.485 and by January 15, 20x2, the spot
rate moved to ₱0.46.
9. The entry to record the forward contract on December 15, 20x1 includes
a. a debit to forward contract for ₱60,000
b. a credit to forward contract for ₱60,000
c. a debit to loss on forward contract for ₱60,000
d. none
10. How much is the gain (loss) on change in fair value of the derivative
on December 31, 20x1?
a. 60,000 in profit or loss c. (60,0000) in OCI
b. (40,000) in OCI d. (60,000) in profit or loss
11. The derivative asset (liability) to be included in the December 31,

20x1 statement of financial position is
a. 1,960,000 b. (1,920,000) c. 60,0000 d. (60,000)
on January 15, 20x2?
a. 120,000 b. (120,000) c. 100,000 d. (100,000)
13. How much is the net cash settlement receipt (payment) on January 15,
20x2?
a. 40,000 b. (40,000) c. 1,840,000 d. (1,840,000)
Fair value hedge of a recognized liability

Use the following information for the next seven questions:
On December 15, 20x1, ABC Co. purchased goods from a Korean firm for
40,000 wons. ABC Co. was concerned about the fluctuation in the Korean
won, so on this date, ABC Co. entered into a 30-day forward contract to
buy 40,000 wons for ₱49,600 from a bank at the forward rate of ₱1.24.

Dec. 15, 20x1 Dec. 31, 20x1 Jan. 15, 20x2
Spot rate 1.20 1.26 1.30
Forward rate 1.24 1.27 1.30
14. The purchased inventory shall be recognized at

a. 48,000 b. 49,600 c. 50,400 d. 50,800

a. 2,400 b. (2,400) c. 1,200 d. (1,200)
16. The adjustment to the inventory account on December 31, 20x1 is –

increase (decrease)
a. 2,400 b. (2,400) c. 1,200 d. 0
January 15, 20x2?
a. (2,400) b. (1,600) c. 1,200 d. (1,200)
on January 15, 20x2?
a. 1,200 b. (1,200) c. 1,600 d. (1,600)
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19. The total net effect of the two contracts on profit or loss in 20x2
is – gain (loss)
a. (1,600) b. (400) c. 1,600 d. 0
20. Assuming the forward contract is settled on a net cash basis, how
much is the net cash settlement receipt (payment) on January 15, 20x2?
a. 1,600 b. (400) c. 2,400 d. (2,400)
No hedging designation (Held for speculation)

Use the following information for the next two questions:
ABC Co. expects the value of wons to increase in the next 30 days.
Accordingly, on December 15, 20x1, ABC Co. enters into a 30-day forward
contract to buy 40,000 wons at the forward rate of ₱1.24. On December 31,
20x1, the forward rate was ₱1.27 and by January 15, 20x2, the spot rate
moved to ₱1.30.

a. 2,400 b. (2,400) c. 1,200 d. (1,200)
22. The total net effect of the transaction on profit or loss in 20x2 is
– gain (loss)
a. 2,400 b. (2,400) c. 1,200 d. (1,200)
Fair value hedge of a firm sale commitment

Use the following information for the next six questions:
On December 15, 20x1, ABC Co. received a sale order from a Japanese firm
in the amount of 4,000,000 yens. The delivery of the goods sold is due on
January 15, 20x1. ABC Co. was concerned about the fluctuation in the
Japanese yen, so on this date, ABC Co. entered into a 30-day forward
contract to sell 4,000,000 yens for ₱1,880,000 to a bank at the forward
rate of ₱0.47.

Dec. 15, 20x1 Dec. 31, 20x1 Jan. 15, 20x1
Spot rate ₱0.48 ₱0.49 ₱0.46
Forward rate ₱0.47 ₱0.485 ₱0.46
23. The entries on December 15, 20x1 include

a. a debit to accounts receivable for ₱1,880,000
b. a credit to sales for ₱1,880,000
c. both a and b
d. none
24. The entry on December 31, 20x1 for the hedged item includes
a. debit to loss on forward contract for ₱60,000
b. debit to gain on forward contract for ₱60,000
c. a credit to firm commitment for ₱60,000
d. a debit to firm commitment for ₱60,000
25. The derivative asset (liability) on December 31, 20x1 is

a. 60,000 b. (60,000) c. 40,000 d. (40,000)
26. The effectiveness of the hedging instrument as of December 31, 20x1

is
a. 60% b. 80% c. 100% d. 125%
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27. The entry on January 15, 20x2 pertaining to the hedged item includes
a. a credit to sales for ₱1,880,000
b. a debit to cash (foreign currency) ₱1,880,000
c. a credit to gain for ₱100,000
d. a and b
a. 40,000 b. (40,000) c. 2,400 d. (2,400)
Fair value hedge of a firm purchase commitment

Use the following information for the next four questions:
On December 15, 20x1, ABC Co. entered into a firm commitment to purchase
goods from a Korean firm for 40,000 wons. If ABC Co. will not purchase the
goods from the Korean firm, it would be required to pay a penalty of
24,000 wons (i.e., ABC’s contract with the Korean firm is a firm
commitment).
ABC Co. was concerned about the fluctuation in the Korean won, so on this
date, ABC Co. entered into a 30-day forward contract to buy 40,000 wons
for ₱49,600 from a bank at the forward rate of ₱1.24.

Dec. 15, 20x1 Dec. 31, 20x1 Jan. 15, 20x2
Spot rate 1.20 1.26 1.30
29. The gain (loss) on the firm commitment on December 31, 20x1 is
a. (2,400) b. (1,200) c. (800) d. 800

a. 60,000 b. (60,000) c. 1,200 d. (1,200)
31. How much inventory is recognized on January 15, 20x2?

a. 49,600 b. 52,000 c. 50,400 d. 48,000
a. 4,000 b. (4,000) c. 2,400 d. (2,400)
Fair value hedge of a firm purchase commitment – Present value

ABC Co. operates a chain of coffee shops nationally. On October 1, 20x1,
ABC Co. entered into a firm commitment to purchase 4,000 kilograms of
coffee beans for a contract price of ₱160 per kilogram on March 31, 20x2.
ABC Co. expects that there is a possible decrease in the price of coffee
beans, so on this date, ABC Co. entered into a six-month forward contract
with a bank to sell 4,000 kilograms of coffee beans at the current forward
rate of ₱160 per kilogram.
Information on fair values is shown below:
Fair value of
Fair value of firm
Forward forward contract commitment
Date Spot price price (asset) (liability)
Oct. 1, 20x1 155 160 - -
Dec. 31, 20x1 151 153 27,727 a (27,727)
Mar. 31, 20x2 147 147 52,000 b (52,000)
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a
[(160 – 153) x 4,000] x present value factor using 4%, assumed
appropriate rate, for three months (or 0.9902427).
b
[(160 – 147) x 4,000.
33. The entry on October 1, 20x1 to record the firm purchase commitment
includes a
a. debit to inventory for ₱640,000
b. credit to accounts payable for ₱640,000
c. both a and b
d. none
34. The entries on December 31, 20x1 includes a

a. a debit to loss on firm commitment for ₱27,727, recognized in profit
or loss
b. a debit to loss on firm commitment for ₱27,727, recognized in OCI
c. a credit to gain on firm commitment for ₱27,727, recognized in profit
or loss
d. a credit to gain on firm commitment for ₱27,727, recognized in OCI

a. 27,727 b. (27,728) c. 1,200 d. (1,200)
36. The debit to inventory on March 31, 20x2 is

a. 640,000 b. 612,000 c. 588,000 d. 0
37. The gain (loss) on forward contract on March 31, 20x2 is

a. (24,273) b. 24,273 c. 52,000 d. (52,000)
38. The net cash settlement receipt (payment) on the forward contract on
March 31, 20x2 is
a. 52,000 b. (52,000) c. (24,273) d. 24,273
Fair value hedge of a firm purchase commitment – Present value

ABC Co. supplies cabbage to various hotels and restaurants. On October 1,
20x1, ABC Co. entered into a firm commitment to purchase 4,000 kilograms
of cabbage for a contract price of ₱40 per kilogram on March 31, 20x2.
ABC Co. is worried about fluctuations in the price of cabbage. Therefore,

on October 1, 20x1, ABC Co. entered into a six-month, over-the-counter
(OTC) forward contract with a broker to sell 4,000 kilograms of cabbage at
the current forward rate of ₱40 per kilogram to be settled on a net cash
basis on March 31, 20x2.
Fair value of Fair value of firm

Forward forward contract commitment
Date Spot price price (asset) (liability)
Oct. 1, 20x1 41 40 - -
Dec. 31, 20x1 32 30 39,608 a (39,608)
Mar. 31, 20x2 50 50 (40,000)b 40,000
a
[(40 – 30) x 4,000] x present value factor using 4%, assumed appropriate
rate, for three months (or 0.9902427).
b
[(50 – 40) x 4,000.
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39. The fair value of the forward contract on Oct. 1, 20x1 is
a. 4,000 b. 164,000 c. 160,000 d. 0
40. The fair value of the firm commitment on Oct. 1, 20x1 is

a. 4,000 b. 164,000 c. 160,000 d. 0
41. The fair value of the forward contract on Dec. 31, 20x1 is – asset
(liability)
a. 39,608 b. (39,608) c. 40,000 d. 0
42. The fair value of the firm commitment on Dec. 31, 20x1 is – asset
(liability)
a. 39,608 b. (39,608) c. (40,000) d. 0
43. The gain (loss) on the derivative on March 31, 20x2 is

a. 38,608 b. (40,000) c. (79,608) d. 79,608
44. The net cash settlement – receipt (payment) – on March 31, 20x2 is
a. (79,608) b. 79,608 c, 40,000 d. (40,000)
Cash flow hedge of a forecasted purchase transaction

ABC Co. produces potato chips. On December 15, 20x1, ABC Co. anticipates
purchasing 4,000 kilograms of potatoes on January 15, 20x2.
ABC Co. is concerned about the fluctuation in the price of potatoes, so on

December 15, 20x1, ABC Co. enters into a 30-day forward contract to
purchase 4,000 kilograms of potatoes at a forward rate of ₱45 per kilogram
(or ₱180,000). The forward contract will be settled net on January 15,
20x2.
Relevant prices per kilogram of potatoes are shown below:

Dec. 15, 20x1 Dec. 31, 20x1 Jan. 15, 20x1
Spot price 40 50 60
Forward price 45 55 60
45. The fair value of the hedging instrument on Dec. 15, 20x1 is
a. 20,000 b. 180,000 c. 160,000 d. 0
46. The fair value of the hedged item on Dec. 15, 20x1 is
a. 20,000 b. 180,000 c. 160,000 d. 0
47. The fair value of the hedging instrument on Dec. 31, 20x1 is
a. 40,000 b. (40,000) c. 20,000 d. 0
48. The fair value of the hedged item on Dec. 31, 20x1 is
a. 40,000 b. (40,000) c. 20,000 d. 0
49. The net effect of the derivative instrument on the 20x1 profit or
loss is – gain (loss)
a. 40,000 b. (40,000) c. 20,000 d. 0
50. How much is the gain (loss) on the forward contract on January 15,
20x2?
a. 20,000 profit or loss c. 20,000 OCI
b. (20,000) profit or loss d. (20,000) OCI
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51. The net cash settlement – receipt (payment) – on January 15, 20x2 is
a. 60,000 b. (60,000) c. 40,000 d. (40,000)
52. Assume that all of the potatoes purchased were used to produce potato
chips at a total manufacturing cost of ₱400,000 and that all of the
potato chips were sold on February 14, 20x2 for ₱1,440,000, how much
cost of goods sold is recognized on February 14, 20x2?
a. 400,000 b. 460,000 c. 340,000 d. 420,000
Cash flow hedge of a forecasted sale transaction – Present value (Indirect

quotation)
ABC Co. produces tomato paste. On October 1, 20x1, ABC Co. anticipates
selling goods worth DOP 59,400,000 (Dominican Peso) on April 1, 20x2. ABC
Co. enters into to a six-month forward contract to sell DOP 59,400,000 at
a forward rate of ₱1:DOP 140 or ₱424,284. The appropriate discount rate is
6% per annum. The following are the relevant exchange rates:
Date Spot rate Forward rate
Oct. 1, 20x1 ₱1 : DOP 135 ₱1 : DOP 140
Dec. 31, 20x1 ₱1 : DOP 140 ₱1 : DOP 142
Apr. 1, 20x2 ₱1 : DOP 144 ₱1 : DOP 144
53. How much is the gain (loss) on the forward contract on December 31,
20x1?
a. 5,887 profit or loss c. (5,887) profit or loss
b. 5,887 OCI d. (5,887) OCI
54. How much is the gain (loss) on the hedged item on December 31, 20x1?
a. 5,887 profit or loss c. (5,887) OCI
b. (5,887) profit or loss d. 0
55. How much sale revenue is recognized in 20x2?
a. 424,286 b. 400,716 c. 406,772 d. 412,500
56. How much is the gain (loss) on the forward contract on April 1, 20x2?
a. 5,899 profit or loss c. (5,899) profit or loss
b. 5,899 OCI d. (5,899) OCI
a. 60,000 b. (60,000) c. 11,786 d. (11,786)
Cash flow hedge of a recognized liability – Present value

On December 1, 20x1, ABC Co. purchased goods from a Korean firm for
400,000 wons. ABC Co. was concerned about the fluctuation in the Korean
won, so on this date, ABC Co. entered into a 2-month forward contract to
buy 400,000 wons for ₱496,000 from a bank at the forward rate of ₱1.24.

Dec. 1, 20x1 Dec. 31, 20x1 Jan. 31, 20x2
Spot rate 1.20 1.23 1.30
Additional information:
 ABC Co. chooses to account for the hedging instrument as a cash flow
hedge.
 The initial spot/forward difference (or ‘forward points’) amounts to
₱16,000 over the 2-month term of the forward contract [400,000 x (1.24
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forward rate - 1.20 spot rate)]. This difference will be amortized as
interest expense using the effective interest method.
 Given the spot/forward relationship above, the implicit interest rate is
19.84% per annum or 1.6530% per month.
 The following are the relevant present value factors:
Dec. 31, 20x1: PV of ₱1, @ 0.5%, n=1 (1 month)………0.99502
Jan. 31, 20x2: PV of ₱1, @ 0.5%, n=0 (maturity date)…1
58. The inventory account is debited on December 1, 20x1 for

a. 400,000 b. 480,000 c. 496,000 d. 0
59. The FOREX gain (loss) on the hedged item on December 31, 20x1 is
a. (12,000) b. 12,000 c. 9,886 d.
60. How much is recognized in other comprehensive income on December 31,

20x1? debit (credit)
a. 19,876 b. (19,838) c. 16,312 d. 0
61. The derivative asset (liability) recognized on December 31, 20x1 is

a. 19,876 b. (19,874) c. 11,940 d. (11,940)
62. The FOREX gain (loss) on the hedged item on January 31, 20x2 is
a. (28,000) b. 28,000 c. 26,399 d. 0
63. How much is recognized in other comprehensive income on January 31,

20x2? debit (credit)
a. 20,126 b. (20,126) c. 18,234 d. 0
a. (20,130) b. 20,130 c. (24,000) d. 24,000

(Part 2)

No hedging designation
On December 1, 20x1, ABC Co. enters into a silver futures contract to
purchase 4,000 ounces of silver on February 1, 20x2 for ₱200 per ounce.
The broker requires an initial margin deposit of ₱80,000. The quoted
prices per ounce of silver are as follows:
Dec. 1, 20x1 Dec. 31, 20x1 Feb. 1, 20x2
200 190 185

a. debit to “deposit with broker” for ₱80,000
b. credit to cash for ₱80,000
c. a and b
d. none
2. How much is the derivative asset (liability) as of December 31, 20x1?

a. 0 b. (34,668) c. (40,000) d. 40,000
2
8
3. How much is the total net effect of the derivative on the 20x1 and 20x2
profit or loss? Gain (loss)
a. (60,000) b. 60,000 c. (40,000) d. 40,000
4. How much is the net settlement on February 1, 20x2? – Receipt (payment)

a. 20,000 b. (20,000) c. (60,000) d. 60,000
Fair value hedge of a recognized asset – hedged item measured at fair

value
ABC Co. is a commodity trader. On December 1, 20x1, ABC Co. carries in its
inventory 400 troy ounces of gold valued at ₱4,800,000 (or ₱12,000 per
troy ounce). ABC Co. measures its inventory of gold at fair value less
costs to sell through profit or loss.
To protect the fair value of its inventory against a potential decline in

prices, ABC Co. enters into a “short” futures contract on December 1, 20x1
to sell 400 troy ounces of gold at ₱12,100 per troy ounce on February 1,
20x2 (the expected date of sale of the inventory). The futures contract
requires an initial margin deposit of ₱384,000.
We will assume that the fair values shown below already reflect costs to
sell.
Dec. 1, 20x1 Dec. 31, 20x1 Feb. 1, 20x2
Spot price 12,000 12,250 11,800
Futures price 12,100 12,300 11,800

a. debit to “deposit with broker” for ₱384,000
b. credit to cash for ₱384,000
c. a and b
d. none
6. How much is the adjustment to the inventory account on December 31,

20x1? Increase (decrease)
a. 100,000 b. (100,000) c. 80,000 d. 0

a. (100,000) b. 100,000 c. (80,000) d. 80,000
8. How much is the gain (loss) on the futures contract on February 1, 20x2?
a. 0 b. (80,000) c. (200,000) d. 200,000
9. How much is the net settlement on February 1, 20x2? – Receipt (payment)

a. 120,000 b. (120,000) c. 504,000 d. 504,000
10. How much is the total net cash receipt (payment) on the two
contracts?
a. 4,840,000 b. (4,840,000) c. (504,000) d. 504,000
Fair value hedge of a recognized asset – hedged item measured at lower of

cost or net realizable value (NRV)
On December 1, 20x1, ABC Co. has a soybean inventory of 4,000 bushels
carried at a cost of ₱240 per bushel (or total cost of ₱960,000). ABC Co.
measures its inventory of soybeans at the lower of cost or net realizable
value (NRV).
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ABC Co. intends to sell the whole inventory by February 1, 20x1. On
December 1, 20x1, ABC Co. enters into a futures contract to sell the whole
inventory on February 1, 20x1 at a price of ₱360 per bushel. The broker
requires a deposit of ₱80,000.
Information on fair values is as follows:

Dec. 1,
20x1 Dec. 31, 20x1 Feb. 1, 20x2
Spot price 354 371 338

Futures
price 360 374 338
11. How much is the adjustment to the inventory account on December 31,
20x1? Increase (decrease)
a. 100,000 b. 68,000 c. (68,000) d. 0
a. 0 b. (68,000) c. (56,000) d. 56,000
13. How much is the gain (loss) on the futures contract on February 1,
20x2?
a. 0 b. (56,000) c. (144,000) d. 144,000
14. How much is the net settlement on the derivative instrument on

February 1, 20x2? – Receipt (payment)
a. 168,000 b. (168,000) c. 88,000 d. (88,000)
15. How much gross profit from sales is recognized on February 1, 20x2?
a. 0 b. 364,000 c. 388,000 d. 456,000
Fair value hedge of a firm sale commitment

Use the following information on the next five questions:
On December 1, 20x1, ABC Co. enters into a fixed-price contract to sell
4,000 ounces of silver on February 1, 20x2 for ₱210 per ounce. ABC Co.
prefers to have the sales contract settled at market value on delivery
date. Therefore, on December 1, 20x1, ABC Co. enters into a “long” futures
contract to purchase 4,000 ounces of silver at ₱200 per ounce. The futures
contract requires an initial margin deposit of ₱120,000.
Information on market values is shown below:

Dec. 1, 20x1 Dec. 31, 20x1 Feb. 1, 20x2
Spot price 210 240 250
Futures price 200 235 250
16. How much is the firm commitment asset (liability) on December 31,
20x1?
a. 120,000 b. (120,000) c. (140,000) d. (100,000)
17. How much is the derivative asset (liability) on December 31, 20x1?
a. 140,000 b. (140,000) c. 120,000 d. (120,000)
18. How much is the sale revenue recognized on February 1, 20x2?

a. 1,000,000 b. 840,000 c. 800,000 d. 960,000
19. How much gain (loss) from firm commitment is recognized on February
1, 20x2?
10
a. 40,000 b. (40,000) c. (60,000) d. 60,000
20. How much is the net cash settlement on the derivative instrument on
February 1, 20x2?
a. 200,000 b. (200,000) c. (320,000) d. 320,000
Cash flow hedge of a forecasted purchase transaction – Assessment of Hedge

ineffectiveness
Use the following information for the next eleven questions:
On July 1, 20x1, ABC Co., a vegetable dealer, forecasts the purchase of
4,000 kilograms of broccoli in 6 months. Because ABC Co. is worried that
the price of broccoli will increase during the coming months, it enters
into 10 long cauliflower futures contracts on July 1, 20x1. Each futures
contract is based on the purchase of 400 kilograms of cauliflower at
₱92.98 per kilogram on July 1, 20x1.
Relevant prices per kilogram of commodity are shown below:

Broccoli Cauliflower
Jan. 1 93.76 92.98
Mar. 31 95.18 94.52
June 30 96.20 95.36
21. What is the percentage of effectiveness of the hedging instrument on

March 31, 20x1 and June 30, 20x1, respectively?
March 31, 20x1 June 30, 20x1
a. 102% 96%
b. 95% 103%
c. 108% 98%
d. 97% 85%
22. How much is derivative asset (liability) on March 31, 20x1?

a. (6,160) b. 6,160 c. (5,680) d. 5,680
23. How much is the effective portion of the change in fair value of
derivative recognized in other comprehensive income on March 31, 20x1? –
Gain (loss)
a. 5,680 b. (5,680) c. 6,160 d. (6,160)
24. How much is the ineffective portion of the change in fair value of
derivative recognized in profit or loss on March 31, 20x1? – Gain (loss)
a. 0 b. 560 c. 480 d. (480)
25. As of March 31, 20x1, the effect of the futures contract is referred
to as
a. overhedge b. underhedge c. middle hedge d. bottom hedge
26. How much is the debit to inventory on June 30, 20x1?

a. 375,280 b. 371,920 c. 384,800 d. 381,440
27. How much is the effective portion of the change in fair value of
derivative recognized in other comprehensive income on June 30, 20x1? –
Gain (loss)
a. (3,840) b. 3,840 c. (4,321) d. 0
28. How much is the ineffective portion of the change in fair value of
derivative recognized in profit or loss on June 30, 20x1? – Gain (loss)
a. (480) b. 480 c. (960) d. 960
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29. How much is the net cash settlement receipt (payment) on the
derivative instrument on June 30, 20x1?
a. 3,360 b. (3,360) c. (9,520) d. 9,520
30. How much is the total net effect of the hedging instrument on profit
or loss? Favorable (unfavorable)
a. 3,840 b. (3,840) c. (9,520) d. 9,520
31. If all of the inventory purchased were sold on July 15, 20x1, how
much is the cost of goods sold?
a. 384,800 b. 375,280 c. 381,440 d. 371,920
Fair value hedge of a recognized asset – Put option

Use the following information for the next three questions:
On December 15, 20x1, ABC Co. sold goods to a Japanese firm for 4,000,000
yens. ABC Co. was concerned about the fluctuation in the Japanese yen, so
on this date, ABC Co. purchased a foreign currency put option for ₱30,000
to sell 4,000,000 yens at ₱0.47 on January 15, 20x2.
Dec. 15, Dec. 31, Jan. 15,
20x1 20x1 20x1
Spot rate ₱0.48 ₱0.49 ₱0.46
Fair values of the foreign
currency put option 30,000 20,000 32,000
32. How much is the gain (loss) on the put option on December 31, 20x1?
a. 0 b. 40,000 c. (10,000) d. 10,000
33. How much is the net gain (loss) on the exercise of the put option on
January 15, 20x1?
a. (20,000) b. 20,000 c. 12,000 d. 8,000
34. Assume that the spot rate on January 15, 20x2 is ₱0.48. How much is
the gain (loss) on the put option on January 15, 20x1?
a. (20,000) b. 20,000 c. (32,000) d. (40,000)
No hedging designation – Call option

On April 1, 20x1, ABC Co. enters into a call option contract with an
investment banker which gives ABC Co. the option to purchase 4,000 XYZ,
Inc. shares of stocks at a strike price of ₱100 per share. The call option
expires on July 1, 20x1. ABC Co. pays the investment banker ₱2,400 for the
call option. The market price of the XYZ, Inc. shares on April 1, 20x1 is
₱100 per share.
Additional information:
April 1, 20x1 June 30, 20x1
Market price of XYZ, Inc. shares 100/sh. 106/sh.
Time value 2,400 1,600
35. How much is the gain (loss) on the call option on June 30, 20x1
arising from change in intrinsic value?
a. 24,000 b. (24,000) c. 800 d. (800)
36. How much is the gain (loss) on the call option on June 30, 20x1
arising from change in time value?
a. 800 b. (800) c. 24,000 d. (24,000)
12
37. How much is the net cash settlement receipt (payment) on the call
option on July 1, 20x1?
a. 24,000 b. (24,000) c. 23,200 d. (23,200)
Cash flow hedge of a forecasted sale transaction (Indirect quotation)

ABC Co. forecasts a sale to an Indian customer of INR 1,120,000 (Indian
Rupee) in six months. On October 1, 20x1 when the spot rate is ₱1: INR
1.40, ABC Co. obtained an option to sell INR 1,120,000 for ₱783,216 (₱1 :
INR1.43). The option has a cost and fair value of ₱25,600 on inception
date.
ABC Co. chose to base effectiveness on the changes in the intrinsic value
of the option, as measured by the spot rate of the currency underlying the
option (e.g., “spot” intrinsic value). Changes in the fair value of the
option other than “intrinsic value” (e.g., time value, impact of
counterparty nonperformance risk) are excluded from the assessment of
effectiveness and will be reported in profit or loss as they occur.
The following information was determined:

Time value of Fair value of
Date Spot rate
option a option a
Oct. 1, 20x1 ₱1 : INR 1.40 25,600 25,600
Dec. 31, 20x1 ₱1 : INR 1.45 13,196 24,000
Apr. 1, 20x2 ₱1 : INR 1.50 - 36,552
a
These amounts are determined using an option pricing model. They are
provided in order to simplify the problem.
38. How much derivative asset (liability) is recognized on October 1,

20x1?
a. 23,664 b. (25,600) c. 25,600 d. 0
39. The hedging instrument is most likely designated as a

a. fair value hedge b. cash flow hedge c. a or b d. none
40. The effective portion of the hedge recognized in other comprehensive

income on December 31, 20x1 is
a. 10,802 b. 25,746 c. 13,366 d. 0
41. How much derivative asset (liability) is recognized on December 31,

20x1?
a. 13,196 b. (24,000) c. 24,000 d. 37,196
42. The effective portion of the hedge recognized in other comprehensive

income on April 1, 20x2 is
a. 10,802 b. 24,000 c. 12,404 d. 25,747
43. The adjusted sale revenue recognized on April 1, 20x2 is

a. 798,364 b. 788,312 c. 783,215 d. 776,325
Cash flow hedge of a variable-rate debt (Swap payment at maturity)

On January 1, 20x1, ABC Co. obtained a two-year, ₱4,000,000 variable-rate
loan with interest payments due at each year-end and the principal due on
December 31, 20x2.
13
As protection from possible fluctuations in current market rates, ABC Co.
enters into an interest rate swap for the whole principal of the loan.
Under the agreement, ABC Co. shall receive variable interest and pay fixed
interest based on a fixed rate of 8%. The interest rate swap will be
settled net on maturity date.
The following are the current market rates:

Jan. 1, 20x1 8%
Jan. 1, 20x2 10%
44. The hedging instrument is most likely designated as a

a. fair value hedge b. cash flow hedge c. a or b d. none
45. How much derivative asset (liability) is recognized on December 31,

20x1?
a. 80,000 b. (72,728) c. 72,728 d. 74,074
46. How much is the derivative gain (loss) recognized in profit or loss
on December 31, 20x1?
a. 74,074 b. (72,728) c. 72,728 d. 0
47. The net cash settlement on the interest rate swap on December 31,
20x2 is – Receipt (payment)
a. 80,000 b. (80,000) c. 72,728 d. 0
48. The interest expense recognized in profit or loss in 20x2 is

a. 320,000 b. 240,000 c. 335,728 d. 0
Cash flow hedge of a variable-rate debt (Swap payments at each year-end)

Use the following information for the next nine questions:
On January 1, 20x1, ABC Co. obtained a three-year, ₱4,000,000 variable-
rate loan with interest payments due at each year-end and the principal
due on December 31, 20x3.

interest based on a fixed rate of 9%. Swap payments shall be made at each
year-end.

Jan. 1, 20x1 9%
Jan. 1, 20x2 8%
Jan. 1, 20x3 12%
49. The net cash settlement on December 31, 20x1 is

a. 40,000 b. 37,037 c.36,697 d. 0

a. 37,037 b. (71,331) c. 36,697 d. 40,000
51. The net cash settlement receipt (payment) on December 31, 20x2 is
a. 36,697 b. (71,331) c. (40,000) d. 0
52. The balance of accumulated OCI recognized on the hedging instrument

as of December 31, 20x2 is – Debit (credit)
a. (67,140) b. (107,141) c. (138,472) d. 0
14
53. The interest expense recognized in profit or loss in 20x2 is
a. 400,000 b. 387,542 c. 421,984 d. 0

a. 107,141 b. (107,141) c. 138,472 d. (67,140)
55. How much is the derivative gain (loss) recognized in OCI on December
31, 20x2?
a. 138,472 b. (138,472) c. 107,141 d. (107,141)
56. The net cash settlement – receipt (payment) – on the interest rate
swap on December’ 31, 20x3 is
a. 50,000 b. 120,000 c. 80,000 d. (120,000)
57. The interest expense recognized in 20x3 is

a. 400,000 b. 240,000 c. 520,000 d. 320,000
Fair value hedge of a fixed-rate debt

On January 1, 20x1, ABC Co. obtained a three-year, ₱4,000,000, 10% fixed-
rate loan with interest payments due at each year-end and the principal
due on December 31, 20x3.
ABC Co. expects that the current interest rates will decrease in the
future. Thus, ABC Co. enters into a “receive fixed, pay variable” interest
rate swap. Swap payments shall be made at each year-end.

Jan. 1, 20x1 10%
Jan. 1, 20x2 12%
Jan. 1, 20x3 14%

a. 135,204 b. (135,204) c. 80,000 d. (80,000)
59. Unrealized gain (loss) on the derivative instrument recognized in

profit or loss on December 31, 20x1 is
a. 135,204 b. (135,204) c. 80,000 d. 0
60. Unrealized gain (loss) on the hedged item recognized in profit or

loss on December 31, 20x1 is
a. 135,204 b. (135,204) c. 80,000 d. 0

a. 400,000 b. 264,796 c. 463,776 d. 535,204

a. 140,352 b. (140,352) c. 168,342 d. (168,342)
63. Unrealized gain (loss) on the derivative instrument recognized in

profit or loss on December 31, 20x2 is
a. 140,352 b. (140,352) c. (168,342) d. 0
64. Unrealized gain (loss) on the hedged item recognized in profit or

loss on December 31, 20x2 is
a. 140,352 b. (140,352) c. (168,342) d. 0
15
a. 400,000 b. 540,351 c. 493,867 d. 565,304

(Part 3)
Hedge of a net investment in foreign operation
Use the following fact pattern for the next eight questions:
Fact pattern
On July 1, 20x1, ABC Co. acquired 100% interest in XYZ, Inc., a company
situated in a foreign country. The currency of this country is the
Armenian Dram (AMD). The business combination did not result to any
goodwill. The year-end financial statements of the combining constituents
show the following information:
July 1, 20x1 Dec. 31, 20x1

Date of acquisition Reporting date
ABC Co. XYZ, Inc. ABC Co. XYZ, Inc.
(in pesos) (in AMD) (in pesos) (in AMD)
Assets 40,000,000 24,000,000 56,000,000 40,000,000
Investment in
8,000,000 - 8,000,000 -
subsidiary
Receivable from
- - 4,000,000 -
XYZ, Inc.
Total assets 48,000,000 24,000,000 68,000,000 40,000,000
Liabilities 32,000,000 12,000,000 32,000,000 14,000,000

Payable to ABC Co. - - - 7,000,000
Equity - Jan. 1,
16,000,000 12,000,000 16,000,000 12,000,000
20x1
Profit for the year 20,000,000 7,000,000
Total liabilities
48,000,000 24,000,000 68,000,000 40,000,000
and equity
The following are the relevant exchange rates:

Spot rate at 7/1/20x1 ₱1 : AMD 1.50
Spot rate at 12/31/20x1 ₱1 : AMD 2.00
Average spot rate from 7/1/20x1 to 12/31/20x1 ₱1 : AMD 1.75
Twelve-month forward rate at 7/1/20x1 ₱1 : AMD 1.54
Six-month forward rate at 12/31/20x1 ₱1 : AMD 2.02
Case#1: No hedging instrument

1. How much is the FOREX gain (loss) arising from translation of inter-
company accounts recognized in the subsidiary’s 20x1 separate financial
statements?
a. 2,400,000 b. (2,400,000) c. (1,000,000) d. 1,000,000
2. How much is the subsidiary’s 20x1 adjusted separate profit immediately

before consolidation?
a. 6,000,000 b. 8,000,000 c. 6,362,524 d. 8,429,824
3. How much is the translation adjustment to be recognized in OCI in the

20x1 consolidated financial statements? - gain (loss)
a. (2,571,429) b. 2,571,429 c. 2,428,571 d. (2,428,571)
3
16
4. How much is the year-end consolidated total assets?
a. 76,000,000 b. 80,000,000 c. 74,362,428 d. 78,522,542
5. How much is the year-end consolidated total equity?
a. 37,571,428 b. 40,000,000 c. 37,000,000 d. 42,376,542
Case #2: With hedging instrument

Use the same fact pattern, except that ABC Co. decided on July 1, 20x1 to
limit its foreign currency exposure as it relates to the initial net
investment by entering into a forward contract to sell ADM 20,000,000 (tax
rate 40%) at a forward rate of 1.54 in 12 months and to designate it as a
hedge of the net investment. The appropriate discount factor is 0.971286.
6. How much is the translation adjustment to be recognized in OCI in the

20x1 consolidated financial statements? - gain (loss)
a. (630,124) b. 621,739 c. 428,571 d. (428,571)
7. How much is the year-end consolidated total assets?

a. 72,340,242 b. 80,000,000 c. 71,798,447 d. 78,000,000
8. How much is the year-end consolidated total equity?

a. 38,798,448 b. 40,000,000 c. 37,000,000 d. 42,376,542
Forward contract – Hedge of a recognized asset

On March 1, 20x1, ABC Co. sold inventory to a foreign company for FC
4,000,000 (‘FC’ means foreign currency) when the spot exchange rate is FC
40: ₱1. The payment is due on April 1, 20x1.
ABC Co. is concerned about the possible fluctuation in exchange rates, so

on this date, ABC Co. entered into a forward contract to sell FC 4,000,000
for ₱100,000 to a broker. According to the terms of the forward contract,
if FC 4,000,000 is worth less than ₱100,000 on April 1, 20x1, ABC Co.
shall receive from the broker the difference; if it is worth more than
₱100,000, ABC Co. shall pay the broker the difference.
9. Case #1: If the exchange rate on April 1, 20x1 is FC35: ₱1, how much is
the net cash settlement? - Receipt / (Payment)
a. 14,286 b. (14,286) c. 12,366 d. (12,366)
10. Case #2: If the exchange rate on April 1, 20x1 is FC50: ₱1, how much
is the net cash settlement? - Receipt / (Payment)
a. 23,478 b. (23,478) c. 20,000 d. (20,000)
11. Case #3: If the exchange rate on April 1, 20x1 is FC45: ₱1, how much
is the fair value of the interest rate swap? – Asset / (Liability)
a. 11,111 b. (11,111) c. 12,366 d. (12,366)
Forward contract – Hedge of a forecast transaction

ABC Co. does printing jobs for various customers. On January 1, 20x1, ABC
Co. forecasted the purchase of 1,000 reams of paper in the next quarter.
The expected purchase date is on April 15, 20x1.
ABC Co. expects that the price of paper will fluctuate because of the
upcoming elections. Thus, on January 1, 20x1, ABC Co. enters into a
forward contract to purchase 1,000 reams of paper at a forward rate of
₱2,400 per ream. If the market price on April 15, 20x1 is more than
17
₱2,400, ABC Co. shall receive the difference from the broker. On the other
hand, if the market price is less than ₱2,400, ABC Co. shall pay the
difference to the broker. The forward contract will be settled net on
April 15, 20x1. The discount rate is 10%.
12. If the price of paper is ₱2,800 per ream on March 31, 20x1, how much
is the derivative asset (liability) to be recognized in ABC Co.’s first
quarter financial statements?
a. 367,338 b. (367,338) c. 400,000 d. (400,000)
13. If the price of paper is ₱2,200 per ream on March 31, 20x1, how much
is the derivative asset (liability) to be recognized in ABC Co.’s first
quarter financial statements?
a. 187,333 b. (187,333) c. 200,000 d. (200,000)
Forward contract – Present value

ABC Co. produces feeds for hogs and chickens. In its long-term budget
completed on November 1, 20x1, ABC Co. forecasts a purchase of 100,000
kilos of corn on January 1, 20x3.
To protect itself from fluctuation in prices, ABC Co. enters into a

forward contract on November 1, 20x1 to purchase 100,000 kilos of corn for
₱20,000,000 (or ₱200 per kilo). The forward contract will be settled net
on January 1, 20x3.
14. What is the notional value of the forward contract?

a. 20,000,000 b. 30,000,000 c. 40,000,000 d. 50,000,000
15. If the current market price of corn is ₱260 per kilo on December 31,
20x1, what amount of derivative asset (liability) shall be reported in
ABC Co.’s 20x1 year-end financial statements? The appropriate discount
rate is 10%.
a. 5,454,545 b. (5,454,545) c. 6,000,000 d. (6,000,000)
16. If the current market price of corn is ₱160 per kilo on December 31,
20x2, what amount of derivative asset (liability) shall be reported in
ABC Co.’s 20x2 year-end financial statements? The appropriate discount
rate is 10%.
a. 3,636,364 b. (3,636,364) c. 4,000,000 d. (4,000,000)
Futures contract
17. ABC Co. has the following futures contract:
Futures price Market price
Quantity - 1/1/x1 - 12/31/x1
1. "Long" futures contract to
400 2,000 1,800
purchase gold
2. "Long" futures contract to
800 1,600 1,900
purchase silver
3. "Short" futures contract to
4,000 250 220
sell coffee beans
4. "Short" futures contract to
6,000 60 75
sell potatoes
How much is the total net derivative asset (liability) on December 31,
20x1?
a. 220,000 b. (220,000) c. 190,000 d. (190,000)
18
Call option
On May 6, 20x1, ABC Co. entered into a firm commitment to purchase
equipment from a foreign company for FC 4,000,000 when the exchange rate
was FC 40: ₱1. Payment is due on June 1, 20x1.
ABC Co. is concerned about the possible fluctuation in exchange rates, so

on this date, ABC Co. entered into a call option to purchase FC 4,000,000
for ₱100,000 to a broker. ABC Co. paid ₱4,000 for the purchased option.
18. Case #1: If the exchange rate on June 1, 20x1 is FC 35: ₱1, how much
did ABC Co. save by purchasing the call option?
a. 14,286 b. (14,286) c. (14,000) d. 0
19. Case #2: If the exchange rate on June 1, 20x1 is FC 50: ₱1, how much
did ABC Co. save by purchasing the call option?
a. 20,000 b. (20,000) c. (6,000) d. 0
Put option
20. On March 31, 20x1, ABC Co. acquired for ₱40,000 a put option which
entitles ABC Co. to sell 20,000 units of a commodity for ₱880 per unit.
The option expires on July 1, 20x1. On July 1, 20x1, the current market
price of the commodity is ₱1,000 per unit. How much is the loss on the
put option to be recognized by ABC Co. in its 20x1 financial statements?
a. 40,000 b. 240,000 c. 280,000 d. 0
Call option – No hedging designation

On October 1, 20x1, ABC Co. acquired for ₱40,000 a call option which
entitles ABC Co. to purchase 20,000 units of a commodity for ₱880 per
unit. The option is exercisable on March 31, 20x2. The call option was not
designated as a hedging instrument. The following are the current market
prices:
October 1, 20x1 880
December 31, 20x1 960
March 31, 20x1 1,000
21. How much is the derivative asset (liability) on December 31, 20x1?
a. (1,600,000) b. 1,640,000 c. 1,600,000 d. (1,560,000)
22. How much is the unrealized gain (loss) on December 31, 20x1?
a. (1,560,000) b. 1,560,000 c. 1,600,000 d. (1,600,000)
23. How much is the net cash settlement – receipt (payment) – on March
31, 20x2?
a. 2,440,000 b. 2,360,000 c. (2,400,000) d. 2,400,000
24. How much is the realized gain (loss) on the call option on March 31,
20x2?
a. 760,000 b. (840,000) c. (800,000) d. 800,000
Interest rate swap (swap payment at maturity)

Use the following fact pattern for the next four questions:
On January 1, 20x1 when the current market rate of interest was 10%, ABC
Co. obtained a two-year, ₱4,000,000, variable-rate loan. Interest payments
on the loan are due every year-end.
19
ABC Co. was worried about future fluctuations in interest rates. Thus, on
January 1, 20x1, ABC Co. entered into an interest rate swap wherein ABC
Co. shall receive interest at whatever the current market rate of interest
is at the beginning of the year and pay fixed interest at 10%. Swap
payment shall be made only at maturity date.
Case #1:
25. If the current market rate of interest on January 1, 20x3 is 8%, how
much is the net cash settlement at maturity date? – Receipt (Payment)
a. (80,000) b. 80,000 c. (30,000) d. 0
26. If the current market rate of interest on December 31, 20x2 is 8%,
how much is the fair value of the interest rate swap? - Asset
(Liability)
a. (74,072) b. 74,072 c. (80,000) d. (72,727)
Case #2:
27. If the current market rate of interest on January 1, 20x3 is 12%, how
much is the net cash settlement at maturity date? – Receipt (Payment)
a. (80,000) b. 80,000 c. (30,000) d. 0
28. If the current market rate of interest on December 31, 20x2 is 12%,
how much is the fair value of the interest rate swap? – Asset
(Liability)
a. (71,432) b. 71,432 c. 80,000 d. 72,727
Interest rate swap (periodic swap payments)

On January 1, 20x1, ABC Co. obtained a five-year, ₱4,000,000 variable-rate
loan with interest payments due at each year-end and the principal due on
December 31, 20x5.

interest based on a fixed rate of 8%. Swap payments shall be made at each
year-end.

Jan. 1, 20x1 8%
Jan. 1, 20x2 9%
Jan. 1, 20x3 12%
29. What is the “notional” amount of the interest rate swap agreement?
a. 4,000,000 b. 320,000 c. 4,320,000 d. 0
30. How much is the fair value of the interest rate swap on December 31,
20x1? – Asset (Liability)
a. 40,000 b. (36,697) c. 36,697 d. 129,589
31. How much is the fair value of the interest rate swap on December 31,
20x2? – Asset (Liability)
a. 384,292 b. 202,806 c. 143,234 d. 36,697
20
Theory of Accounts Reviewer
1. In accordance with PFRS 7, which of the following best describes the
risk that an entity will encounter if it has difficulty in meeting
obligations associated with its financial liabilities?
a. Liquidity risk
b. Credit risk
c. Financial risk
d. Payment risk
2. In accordance with PFRS 7, which of the following best describes credit

risk?
a. The risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an
obligation
b. The risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities
c. The risk that the fair value associated with an instrument will vary
due to changes in the counterparty's credit rating
d. The risk that an entity's credit facilities will be withdrawn due to
cash flow sensitivities
3. Which of the following are types of hedging relationship?

I. Cash flow hedge
II. Credit risk hedge
III. Interest rate hedge
IV. Fair value hedge
a. I only b. I and II c. I and IV d. All of these
4. In accordance with PFRS 7, which of the following are components of

market risk?
I. Credit risk
II. Currency risk
III. Interest rate risk
IV. Liquidity risk
a. I only b. I and II c. I and IV d. All of these
5. Techniques such as hedging, forward contracts and options can:

a. Reduce risk. c. Totally eliminate risk.
b. Increase risk. d. Are purely for speculation.
6. Which of the following is the characteristic of a perfect hedge?

a. No possibility of future gain or loss
b. No possibility of future gain only
c. No possibility of future loss only
d. The possibility of future gain and no future loss
(AICPA)
7. It is a financial instrument which its return is based on the return of

some other underlying asset
a. FVPL
b. FVOCI
c. Amortized cost
d. Derivative
8. When an entity is unable to separate an embedded derivative from its

host contract, the entity should classify the hybrid instrument as
a. FVPL
b. FVOCI
21
c. Amortized cost
d. a or b
9. If a company having a floating-rate debt is concerned that interest

rates will rise causing interest costs to increase, it would most likely
to enter into a swap to
a. Pay-variable rate and receive-fixed rate.
b. Pay-fixed rate and receive-floating rate.
c. Swaps are not used for this purpose.
d. It would depend on whether the swap is in, at, or out-of-the money.
10. Arnold Co. purchased a call option on the rice field of Robert Co. on
January 1, 200A exercisable on or before January 1, 200B. On December
31, 200A, the fair market value of the rice field was below the call
option price, making the instrument “out of the money,” and Arnold Co.
decided not to exercise the call option. Which of the following
statements is correct?
a. The call option does not meet the definition of a derivative under
PFRSs regarding settlement at a future date.
b. The call option does not meet the definition of a derivative under
PFRSs regarding the absence of initial net investment or the presence
of a little initial net investment
c. The call option meets the definition of a derivative under PFRSs
regarding settlement at a future date since expiry at maturity is a
form of settlement even though there is no additional exchange of
consideration.
d. The call option meets the definition of a derivative; however, it
should be written off on December 31, 200A and a corresponding
financial liability should be recognized.
11. On January 1, 200A, Clifton Co. enters into a forward contract to

purchase 10,000 shares of stock from Jane Co. on December 31, 200A at a
forward price of ₱100 per share. Clifton Co. prepays the shares at ₱100
per share which is the current price of the shares on January 1, 200A.
Which of the following is correct?
a. The forward contract meets the definition of a derivative.
b. The forward contract fails the “underlying” test for a derivative
since the current price and forward price are equal on inception.
c. The forward contract fails the “future settlement” test for a
derivative since Clifton Co. prepaid the shares at inception at an
amount equal to settlement price. Prepayment at an amount equal to
settlement price is tantamount to settlement.
d. The forward contract fails the “no initial net investment or an
initial net investment that is smaller than would be required for
other types of contracts that would be expected to have a similar
response to changes in market factors” test for a derivative.
12. Which of the following may qualify as net investment in a foreign

operation, of a Philippine company, to be a hedged item for hedge
accounting purposes?
a. fish ball and kikyam operations in the US
b. investment in associate on a company operating in Canada
c. joint venture with McDonalds to sell Mcbalut in retail stores all
over the world
d. investment in subsidiary on a domestic corporation selling e-load and
auto load only within the Philippines.
22
13. To be considered highly effective, actual results of the hedge should
a. be 100% effective c. result to no gain or loss
b. be within a range of 80 to 125% d. be documented properly
14. Which of the following is not a derivative?

a. Equity contracts c. Option Contract
b. Futures contract d. Swap contracts
(Adapted)
15. An interest rate swap in which company has fixed rate of interest and
pays a variable rate is called a :
a. cash flow hedge
b. fair value hedge
c. deferred hedge
d. hedge of foreign currency exposure of net investment in foreign
operations
(Adapted)
16. A derivative may be:

a. an asset account c. an equity account
b. a liability account d. either an asset or liability account
17. The PFRSs require a company to recognize in its current net income
any gain or loss from a change in the fair value of the derivative for
a: (Item #1) Fair Value Hedge; (Item #2) Cash Flow Hedge
a. Yes, Yes b. Yes, No c. No, No d. No, Yes
18. Uncertainty about the future market value of an asset is referred to

as
a. price risk. c. interest rate risk.
b. credit risk. d. exchange rate risk.
19. Uncertainty that the party on the other side of an agreement will
abide by the terms of the agreement is referred to as
a. price risk. c. interest rate risk.
b. credit risk. d. exchange rate risk.
20. A contract, traded on an exchange, that allows a company to buy a

specified quantity of a commodity or a financial security at a specified
price on a specified future date is referred to as a(n)
a. interest rate swap. c. futures contract.
b. forward contract. d. option.
21. An agreement between two parties to exchange a specified amount of a

commodity, security, or foreign currency at a specified date in the
future with the price or exchange rate being set now is referred to as
a(n)
22. If a cannery wanted to lock in the price they would pay for peaches
in August four months before harvest (in April of the same year), they
would be most likely to enter into which kind of agreement?
a. Interest rate swap c. Futures contract
b. Fixed commodities contract d. Option
23
23. A contract giving the owner the right, but not the obligation, to buy
or sell an asset at a specified price any time during a specified period
in the future is referred to as a(n)
24. In exchange for the rights inherent in an option contract, the owner
of the option will typically pay a price
a. only when a call option is exercised.
b. only when a put option is exercised.
c. when either a call option or a put option is exercised.
d. at the time the option is received regardless of whether the option
is exercised or not.
25. Which type of contract is unique in that it protects the owner

against unfavorable movements in the prices or rates while allowing the
owner to benefit from favorable movements?
26. When gains or losses on derivatives designated as fair value hedges

exceed the gains or losses on the item being hedged, the excess
a. affects reported net income.
b. is recognized as an equity adjustment.
c. is recognized as part of comprehensive income.
d. is not recognized.
27. For which type of derivative are changes in the fair value deferred
and recognized as an equity adjustment?
a. Fair value hedge c. Operating hedge
b. Cash flow hedge d. Notional value hedge
(Adapted)
28. Which choice best describes the information that should be disclosed
related to derivative contracts?
a. Fair value c. Both a and b
b. Notional amount d. Neither a nor b
29. On February 1, Shoemaker Corporation entered into a firm commitment

to purchase specialized equipment from the Okazaki Trading Company for
¥80,000,000 on April 1. Shoemaker would like to reduce the exchange rate
risk that could increase the cost of the equipment in U.S. dollars by
April 1, but Shoemaker is not sure which direction the exchange rate may
move. What type of contract would protect Shoemaker from an unfavorable
movement in the exchange rate while allowing them to benefit from a
favorable movement in the exchange rate?
a. Interest rate swap c. Call option
b. Forward contract d. Put option
30. A company enters into a futures contract with the intent of hedging
an account payable of DM400,000 due on December 31. The contract
requires that if the U.S. dollar value of DM400,000 is greater than
$200,000 on December 31, the company will be required to pay the
difference. Alternatively, if the U.S. dollar value is less than
$200,000, the company will receive the difference. Which of the
following statements is correct regarding this contract?
24
a. The Deutsche mark futures contract effectively hedges against the
effect of exchange rate changes on the U.S. dollar value of the
Deutsche mark payable.
b. The futures contract is a contract to buy Deutsche marks at a fixed
price.
c. The futures contract is a contract to sell Deutsche marks at a fixed
price.
d. The contract obligates the company to pay if the value of the U.S.
dollar increases.
31. A company enters into a futures contract with the intent of hedging
an expected purchase of some equipment from a German company for
DM400,000 on December 31. The contract requires that if the U.S. dollar
value of DM800,000 is greater than $400,000 on December 31, the company
will receive the difference. Alternatively, if the U.S. dollar value is
less than $400,000, the company will pay the difference. Which of the
following statements is correct regarding this contract?
a. The Deutsche mark futures contract effectively hedges against the
effect of exchange rate changes on the U.S. dollar value of the
Deutsche mark commitment.
b. The futures contract exceeds the amount of the commitment and thus
hedges movements in the Deutsche mark exchange rate.
c. The futures contract is a contract to sell Deutsche marks at a fixed
price.
d. The extra DM400,000 would be accounted for as a speculative
investment.
32. A company enters into an interest rate swap in order to hedge a

$5,000,000 variable-rate loan. The loan is expected to be fully repaid
this year on June 10. The contract requires that if the interest rate on
April 30 of next year is greater than 11%, the company receives the
difference on a principal amount of $5,000,000. Alternatively, if the
interest rate is less than 11%, the company must pay the difference.
Which of the following statements is correct regarding this contract?
a. The swap agreement effectively hedges the variable interest payments.
b. The timing of the swap payment matches the timing of the interest
payments and, therefore, the variable interest payments are hedged.
c. The timing of the swap payment does not match the timing of the
interest payments and, therefore, the variable interest payments are
not hedged.
d. This swap represents a fair value hedge.

Fact pattern
Hall, Inc., enters into a call option contract with Bennett Investment Co.
on January 2, 2016. This contract gives Hall the option to purchase 1,000
shares of WSM stock at $100 per share. The option expires on April 30,
2016. WSM shares are trading at $100 per share on January 2, 2016, at
which time Hall pays $100 for the call option.
33. The call option would be recorded in the accounts of Hall as

a. an asset.
b. a liability.
c. a gain.
d. would not be recorded in the accounts (memorandum entry only).
25
34. Assume that the price of the WSM shares has risen to $120 per share
on March 31, 2016, and the Hall is preparing financial statements for
the quarter ending March 31. As regards this option, Hall, Inc., would
report which of the following?
a. A $20,000 realized gain.
b. A $20,000 unrealized gain.
c. a description of the change in price would be disclosed in the notes
to the financial statements, but would not be reflected in the
financial statements.
d. Nothing would be reported in the financial statements or the notes
thereto.
35. The 1,000 shares of WSM stock in this contract is referred to as

a. the collateral. c. the option premium.
b. the notional amount. d. the derivative.
(Adapted)
36. The $400 paid by Hall, Inc., to Baird Investment is referred to as

a. the option premium. c. the strike price.
b. the notional amount. d. the intrinsic value.
(Adapted)
37. Assume that the price per share of WSM stock is $120 on April 30,
2016, and that the time value of the option has not changed. In order to
settle the option contract, Hall, Inc., would most likely
a. pay Baird Investment $20,000.
b. purchase the shares of WSM at $100 per share and sell the shares at
$120 per share to Baird.
c. receive $20,000 from Baird Investment.
d. receive $400 from Baird Investment.
(Adapted)
38. Alpha Company purchases a call option to hedge an investment in

20,000 shares of Beta Company stock. The option agreement provides that
if the prices of a share of Beta Company stock is greater than $30 on
October 25, Alpha receives the difference (multiplied by 20,000 shares).
Alternatively, if the price of the stock is less than $30, the option is
worthless and will be allowed to expire. Which of the following
statements regarding this call option is correct?
a. The call option effectively hedges the investment in the shares of
Beta stock.
b. The call option is an option to sell Beta Company stock at a fixed
price.
c. The call option represents a speculative option rather than a hedge.
d. Alpha could have purchased a put option or a call option to
effectively hedge the investment in the shares of Beta stock.
(Adapted)
39. Which of the following statements about options and their underlying
assets is FALSE?
a. The value of an option, in comparison to its underlying asset, has
the potential of creating an arbitrage opportunity.
b. The owner of the option is legally required to engage in a
transaction involving the asset.
c. The holder of a long position on an option is the only party with the
right to initiate a transaction involving the asset.
d. The seller of the option is legally required to engage in a
transaction involving the asset.
26
(Adapted)
40. Which of the following statements about forward and future contracts
is FALSE?
a. A future requires the contract purchaser to receive delivery of the
good at a specified time.
b. A predetermined price to be paid for a good is a necessary
requirement in the terms of a forward contract.
c. The future value of a financial derivative depends on the value of
its underlying asset.
d. The primary difference between forwards and futures is that only
futures are considered financial derivatives.
(Adapted)
41. Futures contracts differ from forward contracts in which of the

following ways?
a. Performance of each party in a futures transaction is guaranteed by a
clearinghouse.
b. All of these choices are correct.
c. Futures contracts require a daily settling of any gains or loses.
d. Futures contracts are standardized.
(Adapted)
42. Which of the following statements accurately describes how futures

contracts differ from forward contracts?
a. Futures contracts are standardized.
b. Futures contracts require a daily settling of gains and losses.
c. All of these choices are correct.
d. The performance of counterparties to a futures contract is guaranteed
by a clearinghouse.
(Adapted)
43. When a call option on a future is exercised, the buyer receives:

a. a short position in the underlying future.
b. an option to purchase the underlying future.
c. the physical good.
d. a long position in the underlying future and a cash payment.
(Adapted)
44. Which of the following statements about swap agreements is FALSE?
a. They are standardized agreements, similar to futures.
b. Counterparties are the principles who engage in a swap agreement.
c. They allow for the exchange of different sets of future cash flows.
d. Interest rate and currency are common types of swaps.
(Adapted)
45. Which of the following requires the purchase of the underlying asset
at a specified price?
a. Purchasing a call option. c. Writing a call option.
b. Writing a put option. d. Purchasing a put option.
(Adapted)
46. Frank Jameson is a portfolio manager with 90 percent of the large-cap

diversified mutual fund he controls invested in common stocks. Jameson
is concerned the overall market will decline by a significant amount
over the next two months due to a slowing of the general economy. Which
of the following actions will provide a hedge for the mutual fund?
a. Selling interest rate future contracts.
27
b. Writing put options on the S&P 500.
c. Purchasing put options on the Standard and Poor's 500 Index (S&P
500).
d. Purchasing call options on the S&P 500.
(Adapted)
47. Ron Jensen is a speculator who does not currently own GHP Corporation
common stock but believes it will increase in market value by 25 percent
over the next month. Jensen can most likely achieve the highest
percentage return on the expected stock price increase by:
a. writing GHP put options. c. buying GHP put options.
b. buying GHP call options. d. buying GHP common stock.
(Adapted)
48. Which of the following statements about derivatives is TRUE?

a. Although forwards have terms that are not standardized, the
clearinghouse of that exchange still takes the opposite position of
each trade, thereby protecting the counterparties from default risk.
b. Although minimal, arbitragers face the risk of the market value of
the underlying asset declining by an amount greater then what was
protected with the hedge.
c. When a call option on a future is exercised, the seller receives a
short position in the underlying future plus pays cash to the holder
of the option.
d. The market value of a financial derivative is primarily a function of
the relative demand and supply for that contract.
(Adapted)
49. If an oil wholesaler expects to buy some gasoline for his customers
in the future and wants to hedge his risk, he needs to:
a. sell gasoline now. c. do nothing.
b. sell crude oil futures contract. d. buy crude oil futures contract.
(Adapted)
50. Which of the following statements about forward contracts is CORRECT?
A long trader agrees to:
a. take delivery, and a short trader agrees to take delivery
b. take delivery, and a short trader agrees to make delivery.
c. take delivery, and a short trader agrees to make delivery.
d. make delivery, and a short trader agrees to take delivery.
(Adapted)
51. If a farmer expects to sell his wheat in anticipation of a harvest

and wants to hedge his risk, he needs to:
a. sell wheat now. c. buy wheat futures contracts now.
b. buy wheat now. d. sell wheat futures contracts now.
(Adapted)
52. Which of the following statements about speculators and hedgers in

the futures market is TRUE?
a. Hedging can allow a business to guard against a price increase in a
commodity without sacrificing profit if the commodity price
decreases.
b. A speculator would use futures to take a long position in a commodity
if its price is expected to decrease.
c. A speculator would use futures to take a short position in a
commodity if its price is expected to increase.
d. Hedgers guard against market price changes that would cause a
reduction in their operating profit.
28
(Adapted)
53. Standardized futures contracts are an aid to increased market

liquidity because:
a. standardization results in less trading activity.
b. uniformity of the contract terms broadens the market for the futures
by appealing to a greater number of traders.
c. standardization of the futures contract stabilizes the market price
of the underlying commodity.
d. non-standardized forward contracts are not allowed to trade.
(Adapted)
54. Futures have greater market liquidity than forward contracts, because
futures are:
a. developed with specific characteristics to meet the needs of the
buyer.
b. standardized contracts.
c. sold only for widely traded commodities, unlike forwards.
d. written for shorter periods of time.
(Adapted)
55. Standardization features of futures contracts do not include the:

a. quality of the good that can be delivered.
b. delivery time.
c. quantity of the good to be delivered.
d. delivery price of the commodity.
(Adapted)
56. What is the primary difference between an American and a European
option?
a. American and European options are never written on the same
underlying asset.
b. The European option can only be traded on overseas markets.
c. The American option can be exercised at any time on or before its
expiration date.
d. American and European options always have different strike prices
when written on the same underlying asset.
(Adapted)
57. American options are worth no less than European options with the
same maturity, exercise price, and underlying stock because:
a. purchasers of American options receive stock dividends, while
purchasers of European options do not.
b. American options are traded in U.S. exchanges where trading costs are
less than in European exchanges.
c. all of these choices are correct.
d. American options can be exercised before maturity, while European
options can be exercised only at maturity.
(Adapted)
58. Which of the following statements about European and American options
is FALSE?
a. European options offer more flexible trading opportunities for
speculators.
b. American options can be exercised at any time on or before the
expiration date.
c. European options are easier to analyze and value than American
options.
d. American options are far more common than European options.
(Adapted)
29
59. Which of the following statements regarding options is TRUE?
a. An American option is worth no less than a European option with the
same maturity, exercise price, and underlying stock.
b. European options are always worth the same as American options with
the same maturity, exercise price, and underlying stock.
c. European options are always worth more than American options with the
same maturity, exercise price, and underlying stock.
d. All of these choices are correct.
60. The writer of the put option has the:

a. obligation to sell the underlying asset in the future under certain
conditions.
b. right to buy the underlying asset in the future under certain
conditions.
c. right to sell the underlying asset in the future under certain
conditions.
d. obligation to buy the underlying asset in the future under certain
conditions.
61. The writer of an option has:

a. neither the right nor obligation. c. the right.
b. both the right and obligation. d. the obligation.
62. John Elam has a position in an option in which Elam pays an upfront
fee to receive payments if the value of a stock is below $18 at
expiration. If the stock is not below $18 at expiration, Elam receives
nothing. Elam’s position in the option is:
a. short a put option. c. long a call option.
b. short a call option. d. long a put option.
63. James Anthony has a short position in a put option with a strike
price of $94. If the stock price is below $94 at expiration, what will
happen to Anthony’s short position in the option?
a. The person who is long the put option will not exercise the put
option.
b. He will have the option exercised against him at $94 by the person
who is long the put option.
c. He will exercise the option at $94.
d. He will let the option expire.
64. Which of the following represents a long position in an option?

a. Writing a call option. c. Writing a naked call option.
b. Writing a put option. d. Buying a put option.
65. The options market is a zero-sum game in that:

a. whatever the long call gains, the short call loses.
b. the short put position has limited gain but also has limited loss.
c. the long put position can gain infinitely, but the long call position
can only lose the premium.
d. the long put position has limited gain but also has limited loss.
66. The options market is a zero-sum game because:

a. there are no net profits or losses in the market.
b. the profits from the buyer and seller of a call option together are
always zero.
c. all of these choices are correct.
d. profits come only at the expense of another trader.
30
67. Which of the following statements regarding buyers of call and put
options is TRUE?
a. Buyers of calls anticipate the value of the underlying asset to
decrease, while the buyers of puts anticipate the value of the
underlying asset to increase.
b. Buyers of calls anticipate the value of the underlying asset to
decrease, and buyers of puts also anticipate the value of the
underlying asset to decrease.
c. Buyers of calls anticipate the value of the underlying asset to
increase, and buyers of puts also anticipate the value of the
underlying asset to increase.
d. Buyers of calls anticipate the value of the underlying asset to
increase, while the buyers of puts anticipate the value of the
underlying asset to decrease.
68. Which of the following is a reason to use the swaps market rather
than the futures market? To:
a. maintain the firm's privacy.
b. increase the liquidity of the contract.
c. reduce the credit risk involved with the contract.
d. provide for a standardized contract.
69. Which of the following statements about notional principal in swaps

is TRUE?
a. Notional principal is used as a base for computation of payments.
b. Notional principal is useless in most swaps.
c. Notional principal is not actually exchanged.
d. Notional principal is not actually exchanged and notional principal
is used as a base for computation of payments.
70. Parties agreeing to swap cash flows are:

a. dealers.
b. agents.
c. counterparties.
d. swap facilitators.
71. Consider a commercial bank that is about to make a large variable-

rate loan. Which of the following would be an appropriate position for
the bank to hedge its risk with this loan? Pay:
a. variable to a currency swap counterparty and receive fixed.
b. variable to an interest rate swap counterparty and receive fixed.
c. fixed to an interest rate swap counterparty and receive variable.
d. fixed to a currency swap counterparty and receive variable.
72. Consider a commercial bank that has many floating-rate liabilities

and has many fixed-rate assets. Which of the following would be an
appropriate position for the bank to hedge its risk? Pay:
a. variable to an interest rate swap counterparty and receive fixed.
b. fixed to a currency swap counterparty and receive variable.
c. variable to a currency swap counterparty and receive fixed.
d. fixed to an interest rate swap counterparty and receive variable.
73. A typical savings and loan association accept deposits (which is

floating rate in nature) and lend those funds on fixed rate terms. As a
result, it can be left with floating rate liabilities and fixed rate
31
assets. To escape this interest rate risk, the savings and loan might be
motivated to engage in:
a. a currency swap. c. an interest rate swap.
b. an equity swap. d. swaps can never help.
74. An interest rate swap:

a. all of these choices are correct.
b. allows a firm to convert outstanding fixed rate debt to floating rate
debt.
c. allows a firm to convert outstanding floating rate debt to fixed rate
debt.
d. obligates two counterparties to exchange cash flows at one or more
future dates.
75. The main motivation for engaging in swap transactions is:

a. commercial needs. c. both of these choices are correct.
b. comparative borrowing advantages. d. none of these choices are
correct.
76. Which of the following MUST be part of ANY swap transaction?

a. Swap dealers. c. Counterparties.
b. Swap facilitators. d. Counterparties and swap facilitators.
(Adapted)
77. A derivative designated as a fair value hedge must be:

I. Specifically identified to the hedged asset, liability or
unrecognized firm commitment.
II. Expected to be highly effective in offsetting changes in the fair
value of the hedged item.
a. I only. b. II only. c. Both I and II. d. Neither I
nor II.
(AICPA)
78. In order for a financial instrument to be a derivative for accounting

purposes, the financial instrument must:
I. Have one or more underlyings.
II. Require an initial net investment.
a. I only. b. II only. c. Both I and II. d. Neither I nor
II.
(AICPA)
79. The determination of the value or settlement amount of a derivative

involves a calculation which uses:
I. An underlying.
II. A notional amount.
II.
(AICPA)
80. On December 31, 199X, the end of its fiscal year, Smarti Company held
a derivative instrument which it had acquired for speculative purposes
during November, 199X. Since its acquisition the fair value of the
derivative had increased materially. On December 31, how should the
increase in fair value of the derivative instrument be reported by
Smarti in its financial statements?
a. Recognized as a deferred credit until the instrument is settled.
32
b. Recognized in current net income for 199X.
c. Recognized as a component of other comprehensive income for 199X.
d. Disregarded until the instrument is settled.
(AICPA)
81. Gains and losses from changes in the fair value of a derivative
designated and qualified as a fair value hedge should be:
a. Disregarded until the derivative is settled.
b. Recognized as a deferred debit or deferred credit in the balance
sheet until the derivative is settled.
c. Recognized in current net income in the period in which the fair
value of the derivative changes.
d. Recognized as a component of other comprehensive income in the period
in which the fair value of the derivative changes.
(AICPA)
82. Qualified derivatives may be used to hedge the cash flow associated
with an/a: (Item #1) Forecasted; (Item #2) Asset transaction
a. Yes Yes b. Yes No c. No Yes d. No No
(AICPA)
83. A change in the fair value of a derivative qualified as a cash flow

hedge is determined to be either effective in offsetting a change in the
hedged item or ineffective in offsetting such a change. How should the
effective and ineffective portions of the change in value of a
derivative which qualifies as a cash flow hedge be reported in financial
statements?
Effective portion in Ineffective portion in
a. Current income Current income
b. Current income Other comprehensive income
c. Other comprehensive income Current income
d. Other comprehensive income Other comprehensive income
(AICPA)
84. Which of the following risks are inherent in an interest rate swap
agreement?
I. The risk of exchanging a lower interest rate for a higher interest
rate.
II. The risk of nonperformance by the counterparty to the agreement.
II.
(AICPA)
85. Which of the following financial instruments is not considered a

derivative financial instrument?
a. Interest-rate swaps. c. Stock-index options.
b. Currency futures. d. Bank certificates of deposit.
(AICPA
86. Derivatives that are not hedging instruments are always classified in
which category of financial instruments?
a. Financial assets or liabilities with fair values through profit or
loss
b. Held-to-maturity investments.
c. Loans and receivables originated by the enterprise.
d. Available-for-sale financial assets.
(AICPA)
33
87. Which of the following is the best description of a financial
instrument?
a. Any monetary contract denominated in a foreign currency.
b. Cash, an investment in equities, and any contract to receive or pay
cash.
c. Any form of a company’s own capital stock.
d. Any transaction with a bank or other financial institution.
(Adapted)
88. On November 1, Year One, the Jeter Company signs a contract to

receive one million Japanese yen on February 1, Year Two, for $10,000
based on the three-month forward exchange rate at that time of $1 for
100 Japanese yen (1,000,000 x 1/100 or $10,000). Why would Jeter obtain
this contract?
a. Jeter believes the value of the Japanese yen will be increasing in
relation to the value of the US dollar.
b. Jeter believes the value of the Japanese yen will be decreasing in
relation to the value of the US dollar.
c. Jeter believes that the economy of Japan will be growing at a rate
faster than that of the US economy.
d. Jeter could be hedging a future need to make a payment in Japanese
yen or it could be speculating that the Japanese yen will become more
valuable.
(Adapted)
89. On November 1, Year One, the Haynie Company signs a contract to

receive one million Japanese yen on February 1, Year Two, for $10,000
based on the three-month forward exchange rate at that time of $1 for
100 Japanese yen (1,000,000 x 1/100 or $10,000). This contract is a
derivative because its value is derived from the future value of the
Japanese yen in relation to the US dollar. On December 31, Year One, the
Haynie Company is producing financial statements. How is this forward
exchange contract reported?
a. It is shown as an asset or a liability at its fair value.
b. It is shown only as an asset at its fair value.
c. It is shown only as a liability at its fair value.
d. It is only disclosed in the notes to the financial statements because
it is a future transaction.
(Adapted)
90. On December 1, Year One, a company acquires two three-month financial

instruments that qualify as derivatives. Financial instrument A was
bought to serve as a fair value hedge. Financial instrument B was bought
to serve as a cash flow hedge. By the end of Year One, both of these
financial instruments have increased in value by $1,000. How should
these gains in value be reported by the company on the Year One
financial statements?
a. Both gains are reported within net income.
b. Both gains are reported within accumulated other comprehensive
income.
c. The gain on the fair value hedge is reported within net income
whereas the gain on the cash flow hedge is reported within
accumulated other comprehensive income.
d. The gain on the fair value hedge is reported within accumulated other
comprehensive income whereas the gain on the cash flow hedge is
reported within net income.
(Adapted)
34
91. Some financial instruments qualify as derivatives. Which of the
following is the best description of a derivative?
a. A contract denominated in two different currencies.
b. A contract that derives its value from some other index, item, or
security.
c. A contract that may happen but is not guaranteed to happen.
d. A contract made by two parties but which directly impacts a third
party.
(Adapted)
92. The functional currency of Nash, Inc.’s subsidiary is the French

franc. Nash borrowed French francs as a partial hedge of its investment
in the subsidiary. In preparing consolidated financial statements,
Nash’s translation loss on its investment in the subsidiary exceeded its
exchange gain on the borrowing. How should the effects of the loss and
gain be reported in Nash’s consolidated financial statements?
a. The translation loss less the exchange gain is reported separately as
other comprehensive income.
b. The translation loss less the exchange gain is reported in the income
statement.
c. The translation loss is reported separately in the stockholders’
equity section of the balance sheet and the exchange gain is reported
in the income statement.
d. The translation loss is reported in the income statement and the
exchange gain is reported separately in the stockholders’ equity
section of the balance sheet.
(AICPA)
93. A gain in the fair value of a derivative may be included in

comprehensive income if the derivative is appropriately designated as a
a. Speculation in Foreign Currency.
b. Hedge of a Foreign Currency exposure of an available-for-sale
security.
c. Hedge of a Foreign Currency exposure of a forecasted foreign currency
denominated transaction.
d. Hedge of a foreign currency firm commitment.
(AICPA)
94. Shore Co. records its transactions in US dollars. A sale of goods

resulted in a receivable denominated in Japanese yen, and a purchase of
goods resulted in a payable denominated in euros. Shore recorded a
foreign exchange transaction gain on collection of the receivable and an
exchange transaction loss on settlement of the payable. The exchange
rates are expressed as so many units of foreign currency to one dollar.
Did the number of foreign currency units exchangeable for a dollar
increase or decrease between the contract and settlement dates?
(Item #1) Yen exchangeable for ₱1; (Item #2) Euros exchangeable for ₱1
a. Increase Increase c. Decrease Increase
b. Decrease Decrease d. Increase Decrease
(AICPA)
95. On October 1, 2016, Mild Co., a US company, purchased machinery from

Grund, a German company, with payment due on April 1, 2017. If Mild’s
2016 operating income included no foreign exchange transaction gain or
loss, then the transaction could have
a. Resulted in an extraordinary gain.
35
b. Been denominated in US dollars.
c. Caused a foreign currency gain to be reported as a contra account
against machinery.
d. Caused a foreign currency translation gain to be reported as other
comprehensive income.
(AICPA)
96. On October 1, 2016, Velec Co., a US company, contracted to purchase

foreign goods requiring payment in Qatari rials, one month after their
receipt at Velec’s factory. Title to the goods passed on December 15,
2016. The goods were still in transit on December 31, 2016. Exchange
rates were one dollar to twenty-two rials, twenty rials, and twenty-one
rials on October 1, December 15, and December 31, 2016, respectively.
Velec should account for the exchange rate fluctuation in 2016 as
a. A loss included in net income c. An extraordinary gain.
b. A gain included in net income d. An extraordinary loss.
(AICPA)
97. Derivatives are financial instruments that derive their value from
changes in a benchmark based on any of the following except
a. Stock prices. c. Commodity prices.
b. Mortgage and currency rates. d. Discounts on accounts
receivable.
(AICPA)
98. Derivative instruments are financial instruments or other contracts

that must contain
a. One or more underlyings, or one or more notional amounts.
b. No initial net investment or smaller net investment than required for
similar response contacts.
c. Terms that do not require or permit net settlement or delivery of an
asset.
d. All of the above.
(AICPA)
99. The basic purpose of derivative financial instruments is to manage

some kind of risk such as all of the following except
a. Stock price movements. c. Currency fluctuations.
b. Interest rate variations. d. Uncollectibility of accounts
receivables.
(AICPA)
100. Which of the following statements is(are) true regarding derivative

financial instruments?
I. Derivative financial instruments should be measured at fair value and
reported in the balance sheet as assets or liabilities.
II. Gains and losses on derivative instruments not designated as hedging
activities should be reported and recognized in earnings in the
period of the change in fair value.
II.
(AICPA)
101. Which of the following is an underlying?

a. A credit rating. c. An average daily temperature.
b. A security price. d. All of the above could be underlyings.
(AICPA)
36
102. If the price of the underlying is greater than the strike or exercise
price of the underlying, the call option is
a. At the money. c. On the money.
b. In the money. d. Out of the money.
(AICPA)
103. Which of the following is not a distinguishing characteristic of a

derivative instrument?
a. Terms that require or permit net settlement.
b. Must be “highly effective” throughout its life.
c. No initial net investment.
d. One or more underlyings and notional amounts.
(AICPA)
104. An example of a notional amount is

a. Number of barrels of oil. c. Currency swaps.
b. Interest rates. d. Stock prices.
(AICPA)
105. Disclosures related to financial instruments, both derivative and

nonderivative, used as hedging instruments must include
a. A list of hedged instruments.
b. Maximum potential accounting loss.
c. Objectives and strategies for achieving them.
d. Only a. and c.
(AICPA)
106. Which of the following financial instruments or other contracts is

not specifically excluded from the definition of derivative instruments
in PAS 39?
a. Leases. c. Adjustable rate loans.
b. Call (put) option. d. Equity securities.
(AICPA)
107. Which of the following is not a derivative instrument?

a. Futures contracts. c. Interest rate swaps.
b. Credit indexed contracts. d. Variable annuity contracts.
(AICPA)
108. Which of the following criteria must be met for bifurcation to occur?
a. The embedded derivative meets the definition of a derivative
instrument.
b. The hybrid instrument is regularly recorded at fair value.
c. Economic characteristics and risks of the embedded instrument are
“clearly and closely” related to those of the host contract.
(AICPA)
109. Financial instruments sometimes contain features that separately meet

the definition of a derivative instrument. These features are classified
as
a. Swaptions. c. Embedded derivative instruments.
b. Notional amounts. d. Underlyings.
(AICPA)
110. The process of bifurcation

a. Protects an entity from loss by entering into a transaction.
37
b. Includes entering into agreements between two counterparties to
exchange cash flows over specified period of time in the future.
c. Is the interaction of the price or rate with an associated asset or
liability.
d. Separates an embedded derivative from its host contract.
(AICPA)
111. Hedge accounting is permitted for all of the following types of

hedges except
a. Trading securities.
b. Unrecognized firm commitments.
c. Available-for-sale securities.
d. Net investments in foreign operations.
(AICPA)
112. Which of the following is a general criterion for a hedging

instrument?
a. Sufficient documentation must be provided at the beginning of the
process.
b. Must be “highly effective” only in the first year of the hedge's
life.
c. Must contain a nonperformance clause that makes performance probable.
d. Must contain one or more underlyings.
(AICPA)
113. For an unrecognized firm commitment to qualify as a hedged item it

must
a. Be binding on both parties.
b. Be specific with respect to all significant terms.
c. Contain a nonperformance clause that makes performance probable.
(AICPA)
114. A hedge of the exposure to changes in the fair value of a recognized

asset or liability, or an unrecognized firm commitment, is classified as
a
a. Fair value hedge. c. Foreign currency hedge.
b. Cash flow hedge. d. Underlying.
(AICPA)
115. Gains and losses on the hedged asset/liability and the hedged
instrument for a fair value hedge will be recognized
a. In current earnings.
b. In other comprehensive income.
c. On a cumulative basis from the change in expected cash flows from the
hedged instrument.
d. On the balance sheet either as an asset or a liability.
(AICPA)
116. Gains and losses of the effective portion of a hedging instrument

will be recognized in current earnings in each reporting period for
which of the following? (Item #1) Fair value hedge; (Item #2) Cash flow
hedge
a. Yes No b. Yes Yes c. No No d. No Yes
(AICPA)
117. Which of the following risks are inherent in an interest rate swap
agreement?
38
I. The risk of exchanging a lower interest rate for a higher interest
rate.
II. The risk of nonperformance by the counterparty to the agreement.
II.
(AICPA)
118. Which of the following meet the definition of assets and/or

liabilities?
(Item #1) Derivative instruments; (Item #2) G/L on the fair value of
derivatives
a. Yes No b. No Yes c. Yes Yes d. No No
(AICPA)
119. The risk of an accounting loss from a financial instrument due to

possible failure of another party to perform according to terms of the
contract is known as
a. Off-balance-sheet risk. c. Credit risk.
b. Market risk. d. Investment risk.
(AICPA)
120. Examples of financial instruments with off-balance sheet risk include

all of the following except
a. Outstanding loan commitments written. c. Warranty obligations
b. Recourse obligations on receivables. d. Futures contracts.
(AICPA)
121. Off-balance-sheet risk of accounting loss does not result from

a. Financial instruments recognized as assets entailing conditional
rights that result in a loss greater than the amount recognized in
the balance sheet.
b. Financial instruments not recognized as either assets or liabilities
yet still expose the entity to risk of accounting loss.
c. Financial instruments recognized as assets or liabilities where the
amount recognized reflects the risk of accounting loss to the entity.
d. Financial instruments recognized as liabilities that result in an
ultimate obligation that is greater than the amount recognized in the
balance sheet.
(AICPA)
122. Are there any circumstances when a contract that is not a financial
instrument would be accounted for as a financial instrument under PAS 32
and PAS 39 (and PFRS 9)?
a. No. Only financial instruments are accounted for as financial
instruments.
b. Yes. Gold, silver, and other precious metals that are readily
convertible to cash are accounted for as financial instruments.
c. Yes. A contract for the future purchase or delivery of a commodity or
other nonfinancial item (e.g., gold, electricity, or gas) generally
is accounted for as a financial instrument if the contract can be
settled net.
d. Yes. An entity may designate any nonfinancial asset that can be
readily convertible to cash as a financial instrument.
(Adapted)
123. All of the following are characteristics of a derivative except:

a. It is acquired or incurred by the entity for the purpose of
generating a profit from short-term fluctuations in market factors.
39
b. Its value changes in response to the change in a specified underlying
(e.g., interest rate, financial instrument price, commodity price,
foreign exchange rate, etc.).
c. It requires no initial investment or an initial net investment that
is smaller than would be required for other types of contracts that
would be expected to have a similar response to changes in market
factors.
d. It is settled at a future date.
(Adapted)
124. Is a derivative (e.g., an equity conversion option) that is embedded

in another contract (e.g., a convertible bond) accounted for separately
from that other contract?
a. Yes. PFRSs require all derivatives (both freestanding and embedded)
to be accounted for as derivatives.
b. No. PFRSs preclude entities from splitting financial instruments and
accounting for the components separately.
c. It depends. PFRSs require embedded derivatives to be accounted for
separately as derivatives if, and only if, the entity has embedded
the derivative in order to avoid derivatives accounting and has no
substantive business purpose for embedding the derivative.
d. It depends. PFRSs require embedded derivatives to be accounted for
separately if, and only if, the economic characteristics and risks of
the embedded derivative and the host contract are not closely related
and the combined contract is not measured at fair value with changes
in fair value recognized in profit or loss.
(Adapted)
125. Which of the following is not a condition for hedge accounting?

a. Formal designation and documentation of the hedging relationship and
the entity’s risk management objective and strategy for undertaking
the hedge at inception of the hedging relationship.
b. The hedge is expected to be highly effective in achieving offsetting
changes in fair value or cash flows attributable to the hedged risk,
the effectiveness of the hedge can be reliably measured, and the
hedge is assessed on an ongoing basis and determined actually to have
been effective.
c. For cash flow hedges, a forecast transaction must be highly probable
and must present an exposure to variations in cash flows that could
ultimately affect profit or loss.
d. The hedge is expected to reduce the entity’s net exposure to the
hedged risk, and the hedge is determined actually to have reduced the
net entity-wide exposure to the hedged risk.
(Adapted)
126. What is the accounting treatment of the hedging instrument and the
hedged item under fair value hedge accounting?
a. The hedging instrument is measured at fair value, and the hedged item
is measured at fair value with respect to the hedged risk. Changes in
fair value are recognized in profit or loss.
b. The hedging instrument is measured at fair value, and the hedged item
is measured at fair value with respect to the hedged risk. Changes in
fair value are recognized directly in equity to the extent the hedge
is effective.
c. The hedging instrument is measured at fair value with changes in fair
value recognized directly in equity to the extent the hedge is
effective. The accounting for the hedged item is not adjusted.
40
d. The hedging instrument is accounted for in accordance with the
accounting requirements for the hedged item (i.e., at fair value,
cost or amortized cost, as applicable), if the hedge is effective.
(Adapted)
127. What is the accounting treatment of the hedging instrument and the
hedged item under cash flow hedge accounting?
a. The hedged item and hedging instrument are both measured at fair
value with respect to the hedged risk, and changes in fair value are
recognized in profit or loss.
b. The hedged item and hedging instrument are both measured at fair
value with respect to the hedged risk, and changes in fair value are
recognized directly in equity.
c. The hedging instrument is measured at fair value, with changes in
fair value recognized directly in equity to the extent the hedge is
effective. The accounting for the hedged item is not adjusted.
d. The hedging instrument is accounted for in accordance with the
accounting requirements for the hedged item (i.e., at fair value,
cost or amortized cost, as applicable), if the hedge is effective.
(Adapted)
Suggested answers to Theory of accounts questions

1. A 21. B 41. B 61. D 81. C 101. D 121. C
2. A 22. C 42. C 62. D 82. A 102. B 122. C
3. C 23. D 43. D 63. B 83. C 103. B 123. A
4. B 24. D 44. A 64. D 84. C 104. A 124. D
5. A 25. D 45. B 65. A 85. D 105. D 125. D
6. A 26. A 46. C 66. C 86. A 106. B 126. A
7. D 27. B 47. B 67. D 87. B 107. D 127. C
8. A 28. C 48. C 68. A 88. D 108. A
9. B 29. C 49. D 69. D 89. A 109. C
10. C 30. C 50. B 70. C 90. C 110. D
11. D 31. D 51. D 71. B 91. B 111. A
12. A 32. C 52. D 72. D 92. A 112. A
13. B 33. A 53. B 73. C 93. C 113. D
14. A 34. C 54. B 74. A 94. B 114. A
15. B 35. B 55. D 75. C 95. B 115. A
16. D 36. A 56. C 76. C 96. B 116. A
17. B 37. C 57. D 77. C 97. D 117. C
18. A 38. C 58. A 78. A 98. B 118. A
19. B 39. B 59. A 79. C 99. D 119. C
20. C 40. D 60. D 80. B 100. C 120. C
41
Accounting for Derivatives and Hedging Transactions (Part 1)
Answers at a glance:
1. D 11. D 21. C 31. A 41. A 51. A
2. A 12. C 22. C 32. C 42. B 52. C
3. D 13. A 23. D 33. D 43. C 53. B
4. D 14. A 24. D 34. A 44. D 54. D
5. B 15. C 25. B 35. A 45. D 55. A
6. C 16. D 26. C 36. C 46. D 56. B
7. A 17. B 27. A 37. B 47. A 57. C
8. B 18. A 28. A 38. A 48. D 58. B
9. D 19. B 29. B 39. D 49. D 59. A
10. D 20. C 30. C 40. D 50. C 60. E
61. C
62. A
63. A
64. D
Solutions:
1. D
Solution:
Hedged item – Hedging instrument –
Account receivable Forward contract (Derivative)
Dec. 15, 20x1 Dec. 15, 20x1
Accounts receivable……1.92M No entry
(4M yens x 0.48 spot rate)
Sales…………………….1.92M
2. A
Solution:
Dec. 31, 20x1 Dec. 31, 20x1
Accounts receivable……40K Loss on forward contract….60K
[(0.49 - 0.48) x 4M] Forward contract (liability)...60K
FOREX gain……………....40K [(0.485 - 0.47) x 4M]
to adjust accounts receivable for the to record the value of the derivative
increase in spot rate
3. D (See entries above)
5. B
Solution:
Jan. 15, 20x2 Jan. 15, 20x2
Cash – foreign currency…1.84M Cash – local currency……1.88M
(4M x 0.46 current spot rate) (4M x 0.47 agreed rate)
FOREX loss………………...120K Forward contract (liability)….60K
Accounts receivable……...1.96M Cash – foreign currency…1.84M
(1.92M + 40K) Gain on forward contract ...100K
to record the receipt of 1M yens from the to record the remittance of 4M yens to the
customer bank in exchange for the pre-agreed sale
price of ₱1,880,000
6. C (See entries above)
7. A (1.88M debit to cash – 1.84 credit to cash) = 40,000 net cash

receipt (See entry above)
8. B 20x1: (40,000 gain – 60,000 loss) - 20x2: (120,000 loss –

100,000 gain) = 40,000 net loss (See entries above)
9. D
Solution:
Hedged item – None Forward contract (Derivative)
Dec. 15, 20x1
No entry
10. D
Solution:
Dec. 31, 20x1
Loss on forward contract…..60K
Forward contract (liability)....60K
[ (0.485 - 0.47) x 4M]
to record the value of the derivative
11. D (See entry above)

12. C
Solution:
Jan. 15, 20x2
Cash – local currency…...1.88M
(4M x 0.47 agreed rate)
Forward contract (liability). 60K
Cash – foreign currency. 1.84M
Gain on forward contract…100K
to record the remittance of 4M yens to the
bank in exchange for the pre-agreed sale
price of ₱1,880,000
13. A (1.88M debit to cash – 1.84 credit to cash) = 40,000 net cash
receipt (See entry above)
14. A
Solution:
Account payable Forward contract (Derivative)
Dec. 15, 20x1 Dec. 15, 20x1
Inventory……………48,000 No entry
(40K wons x 1.20 spot rate)
Accounts payable…48,000
15. C
Solution:
Dec. 31, 20x1 Dec. 31, 20x1
FOREX loss ………… 2,400 Forward contract (asset).. 1,200
[40K x (1.26 – 1.20)] Gain on forward contract.. 1,200
Accounts payable…. 2,400 [(1.27 forward rate – 1.24 forward rate) x
40K]
16. D
17. B
Solution:
Jan. 15, 20x2 Jan. 15, 20x2
Accounts payable…….50,400 Cash - foreign currency...52,000
(48K + 2.4K) (40K x 1.30)
FOREX loss…………… 1,600 Cash - local currency….….49,600
[(1.30 -1.26) x 40K] Forward contract (asset)… 1,200
Cash - foreign currency…...52,000 Gain on forward contract.....1,200
[(1.30 – 1.27) x 40K]
to record the payment of 40,000 wons to to record the purchase of 40,000 wons
the supplier from the bank at the pre-agreed purchase
price of ₱49,600
18. A (See entries above)
19. B (1,600 loss – 1,200 gain) = 400 net loss (See entries above)
20. C (52,000 debit to cash – 49,600 credit to cash) = 2,400 net cash
receipt (See entries above)
21. C
Solutions:
Dec. 15, 20x1
No entry
Dec. 31, 20x1

Forward contract (asset).. 1,200
Gain on forward contract.. 1,200
[(1.27 forward rate – 1.24 forward rate) x
40K]
Jan. 15, 20x2
Cash - foreign currency.. .52,000
(40K x 1.30)
Cash - local currency….….49,600
Forward contract (asset)… 1,200
Gain on forward contract.... 1,200
[(1.30 – 1.27) x 40K]
23. D
Solution:
Firm sale commitment Forward contract (Derivative)
Dec. 15, 20x1 Dec. 15, 20x1
No entry No entry
24. D
Solution:
Dec. 31, 20x1 Dec. 31, 20x1
Firm commitment (asset)..60K Loss on forward contract..60K
Gain on firm Forward contract (liability)..60K
commitment……………60K [(0.485 – 0.47) x 4M yens
to recognize the change in the fair value to recognize the change in the fair value
of the firm commitment of the forward contract
25. B (See entry above)
26. C (60,000 loss ÷ 60,000 gain) = 100%
27. A
Solution:
Jan. 15, 20x2 Jan. 15, 20x2
Cash (foreign currency)… 1.84M Cash (local currency)….....1.88M
(4M yens x 0.46 spot rate) Forward contract (liability)… 60K
Loss on firm commitment...100K Gain on forward contract…100K
Sales…………………… 1.88M Cash (foreign currency)….1.84M
(4M yens x 0.47 forward rate)
Firm commitment (asset).. 60K
to record the actual sale transaction, to

recognize the change in the fair value of to record the remittance of 4M yens to the
the firm commitment, and to derecognize bank in exchange for the pre-agreed sale
the firm commitment price of ₱1,880,000
28. A (1,880,000 debit to cash – 1,840,000 credit to cash) = 40,000
net cash receipt (See entries above)
29. B
Solution:
Firm purchase commitment Forward contract (Derivative)
Dec. 15, 20x1 Dec. 15, 20x1
No entry No entry

Dec. 31, 20x1 Dec. 31, 20x1
Loss on firm commitment .. 1,200 Forward contract (asset)… 1,200
Firm commitment (liability).. 1,200 [(1.27 – 1.24) x 40K yens
Gain on forward contract… 1,200
30. C (See entry above)
31. A
Solution:
Jan. 15, 20x2 Jan. 15, 20x2
Inventory…………………..49.6K Cash (foreign currency)…...52K
(40K wons x 1.24 forward rate) Gain on forward contract.. 1.2K
Loss on firm commitment... 1.2K Forward contract (asset)… 1.2K
Firm commitment (liability).. 1.2K Cash (local currency)…. 49.6K
Cash (foreign currency)……52K
to record the purchase of 40,000 wons
to record the payment of 40,000 wons to from the bank at the pre-agreed purchase
the supplier price of ₱49,600
32. C (52,000 debit to cash – 49,600 credit to cash) = 2,400 net cash
receipt (See entries above)
33. D
Solution:
Oct. 1, 20x1 Oct. 1, 20x1
No entry No entry
34. A
Solution:
Dec. 31, 20x1 Dec. 31, 20x1
Loss on firm commitment ..27,727 Forward contract (asset)..27,727
Firm commitment (liability).. 27,727 Gain on forward contract 27,727
36. C
Solution:
Mar. 31, 20x2 Mar. 31, 20x2
Inventory (147 x 1,000).588,000 Cash [(160 - 147) x 4,000]...52,000
Loss on firm commitment Gain on forward
(52,000 – 27,727)……… 24,273 contract (52,000 – 27,727).
Firm commitment l24,273beoForward contract
(liability)………………...27,727 (asset)…27,727
Cash ………………………640,000
(160 fixed contract price x 4,000)
to record the actual purchase transaction, to recognize the change in forward rates
to recognize the change in the fair value during the period and to record the net
of the firm commitment, and to cash settlement of the forward contract.
derecognize the firm commitment
37. B (See entries above)
39. D
Solutions:
Oct. 1, 20x1 Oct. 1, 20x1
No entry No entry
Dec. 31, 20x1 Dec. 31, 20x1

Loss on firm commitment 39,608 Forward contract (asset) 39,608
Firm commitment (liability). 39,608 Gain on forward contract. 39,608
Mar. 31, 20x2 Mar. 31, 20x2
Inventory (50 x 4,000) 200,000 Loss on forward contract..79,608
Firm commitment [40,000 minus (negative 39,608)]
(liability)……………….39,608 Forward contract (asset)…39,908
Cash…………………… 160,000 Cash………………………. 40,000
Gain on firm [(50 – 40) x 4,000]
commitment……………… 79,608
[40,000 minus (negative 39,608)]
to record the actual purchase transaction, to recognize the change in forward rates
to recognize the change in the fair value during the period and to record the net
of the firm commitment, and to cash settlement of the forward contract.
derecognize the firm commitment
45. D
Solution:
Hedged item – Highly probable Hedging instrument –
forecast transaction Forward contract (Derivative)
Dec. 15, 20x1 Dec. 15, 20x1
No entry No entry
47. A
Solution:
Dec. 31, 20x1 Dec. 31, 20x1
No entry Forward contract (asset)… 40K
[(55 –45) x 4,000
Accumulated OCI… ……. 40K
to recognize the change in the fair value
of the forward contract

50. C
Solution:
Jan. 15, 20x2 Jan. 15, 20x2
Inventory………………….240K Forward contract (asset)… 20K
(4,000 x 60 current spot rate) [(60 –55) x 4,000
Cash (foreign currency)….240K Accumulated OCI… ……. 20K
to record the actual purchase transaction to recognize the change in the fair value
Jan. 15, 20x2
Cash [(60 – 45) x 4,000]…. 60K
Forward contract (asset)…60K
to record the net settlement of the

forward contract.
52. C
Solution:
Feb. 14, 20x2 Feb. 14, 20x2
Cash…………………….1.44M Accumulated OCI… ……. 60K
Cost of goods sold………400K (40K + 20K)
Inventory……………………400K Cost of goods sold…………..60K
Sales……………………….1.44M
to record the sale of inventory to reclassify accumulated gains on
forward contract to profit or loss as a
reduction to cost of goods sold.
Net cost of goods sold = 400,000 debit – 60,000 credit = 340,000
53. B
Solutions:
The fair values of the forward contract are determined as follows:
Translation using forward Cumulative changes
Date
rates since inception date
10/1/0x1 (DOM 59.400M ÷ 140) = ₱424,286 - -
12/31/x1 (DOM 59.400M ÷ 142) = ₱418,310 (418,310 – 424,286) = 5,976
4/1/x2 (DOM 59.400M ÷ 144) = ₱412,500 (412,500 – 424,286) = 11,786
Fair value of
Changes in
Date Cumulative PV of 1* PV forward fair values –
changes factors contract -
asset (liability) gain (loss)
10/1/0x1 - - -
12/31/x1 5,976 @ .5% n=3 0.98515 5,887 5,887
4/1/x2 11,786 @ .5% n=0 1 11,786 5,899
* (6% ÷ 12 months = .5% per month); n= 3 is three months, Dec. 31 to Apr. 1
The measurements resulted to assets and gains because the forward
prices were ₱418,310 and ₱412,500 on December 31 and April 1,
respectively, but ABC Co. can sell at a higher price of ₱424,286.
These conditions are favorable to ABC.
54. D – None, the actual sale have not yet taken place.
55. A
Solutions:
Oct. 1, 20x1 Oct. 1, 20x1
No entry No entry
Dec. 31, 20x1 Dec. 31, 20x1
No entry Forward contract (asset).. 5,887
Accumulated OCI… ……. 5,887
April 1, 20x2 April 1, 20x2
Accounts receivable..412,500 Forward contract (asset)..5,899
Sales……………………412,500 Accumulated OCI… ……. 5,899
(59.4M ÷ 144 spot rate)
to record the actual sale transaction of the forward contract
Accumulated OCI……. 11,786 Cash (5,887 + 5,899)……11,786
(5,887 + 5,899) Forward contract (asset)…11,786
Sales……………………...11,786
to reclassify the gain accumulated in OCI to record the net settlement of the
to profit or loss. forward contract.
Sales at current spot rate (59.4M ÷ 144) 412,500

Reclassification of accumulated OCI to P/L 11,786
Total sales 424,286

58. B
Solution:
Dec. 15, 20x1 Dec. 15, 20x1
Inventory……………480,000 No entry
Accounts payable…480,000
59. A
Solution:
The amortization table is prepared as follows:
Interest expense Present value
a = b x 1.6530% Discount b = prev. bal. + a
Dec. 1, 20x1 480,000*
IGNORED
Dec. 31, 20x1 7,934 487,934
Jan. 31, 20x2 8,066 496,000
Total 16,000
*400,000 notional amount x 1.20 spot rate
The fair values of the forward contract are computed as follows:

Fair value Change
of forward in fair
contract values
Dec. 1, 20x1 -
Dec. 31, 20x1: (1.27 - 1.24) x 400,000 x .99502 11,940 11,940
Jan. 31, 20x2: (1.30 - 1.24) x 400,000 x 1 24,000 12,060

Dec. 31, 20x1 Dec. 31, 20x1
FOREX loss ………… 12,000 Interest expense……….. 7,934
[400K x (1.23 – 1.20)] Forward contract (asset)...11,904
Accounts payable… 12,000 Accumulated OCI ………19,838
to recognize FOREX loss on the increase to recognize the change in the fair value
in exchange rates. of the derivative and to record the
effective portion in OCI, taking into
account the interest expense implicit in
the forward contract.
Dec. 31, 20x1
Accumulated OCI …12,000
Gain on forward contract 12,000
to reclassify an amount out of OCI to
offset the transaction loss on the
account payable.
60. B
The CORRECT ANSWER is 19,838. (See entries above)
62. A
Solutions:
Jan. 31, 20x2 Jan. 31, 20x2
FOREX loss ………… 28,000 Interest expense……….. 8,066
[400K x (1.30 – 1.23)] Forward contract (asset)...12,060
Accounts payable….28,000 Accumulated OCI ………20,126
to recognize FOREX loss on the increase to recognize the change in the fair value
in exchange rates. of the derivative and to record the
effective portion in OCI, taking into
account the interest expense implicit in
the forward contract.
Accounts payable…520,000 Cash – foreign currency..520K
Cash - foreign currency…520,000 Cash – local currency… 496K
Forward contract……… 24K
to record the settlement of the account to record the settlement of the forward
payable contract.
Accumulated OCI …… 27,964
(19,838 – 12,000 + 20,126)
Gain on forward contract 27,964
to reclassify the remaining amount of

accumulated OCI.
64. D (520,000 debit – 496,000 credit) = 24,000 net cash receipt

1. C 11. B 21. C 31. B 41. C 51. C
2. C 12. C 22. B 32. C 42. D 52. B
3. A 13. D 23. A 33. B 43. C 53. E
4. A 14. A 24. C 34. A 44. B 54. A
5. C 15. D 25. A 35. A 45. C 55. A
6. A 16. B 26. C 36. B 46. D 56. B
7. C 17. A 27. B 37. A 47. A 57. E
8. D 18. A 28. A 38. C 48. A 58. B
9. D 19. B 29. D 39. B 49. D 59. B
10. A 20. D 30. D 40. A 50. B 60. A
61. C
62. B
63. E
64. E
65. B
Solutions:
1. C
Solution:
Hedged item – None Futures contract (Derivative)
Dec. 1, 20x1
Deposit with broker ……..80K
Cash………………………..80K
to record the initial margin deposit with

the broker
2. C
Solution:
Dec. 31, 20x1
Loss on futures contract…..40K
Futures contract (liability)...40K
[(200 - 190) x 4,000]
to record the value of the derivative

computed as the change in the underlying
multiplied by the notional amount.
3. A
Solution:
Feb. 1, 20x2
Loss on futures contract… 20K
[(190 - 185) x 4,000]
Futures contract (liability)..40K
Cash – local currency…… 20K
Deposit with broker…….....80K
to recognize loss on the change in the fair
value of the futures contract and to record
the net cash settlement of the futures
contract.
40,000 loss in 20x1 + 20,000 loss in 20x2 = 60,000 total loss
4. A (See entry above)
5. C
Solution:
Hedged item – Inventory Hedging instrument –
Futures contract (Derivative)
Dec. 1, 20x1 Dec. 1, 20x1
No entry Deposit with broker …….384K
Cash………………………...384K
the broker
6. A
Solution:
Hedged item – Inventory Hedging instrument –
Futures contract (Derivative)
Dec. 31, 20x1 Dec. 31, 20x1
Inventory………….……100K Loss on futures contract….80K
Gain on fair value change...100K Futures contract (liability)...80K
[(12,250 – 12,000) x 400] [(12,300 -12,100) x 400]
less costs to sell of the gold inventory. of the futures contract.
8. D
Solution:
Hedged item – Inventory Futures contract (Derivative)
Feb. 1, 20x2 Feb. 1, 20x2
Loss on fair value change…180K Futures contract (asset).. 200K
[(12,250 – 11,800) x 400] Gain on futures contract…200K
Inventory……………………180K [(12,300 – 11,800) x 400]
less costs to sell of the gold inventory. of the futures contract.
Feb. 1, 20x2 Feb. 1, 20x2
Cash……………………..4.72M Cash……………………….504K
Sale (11.8 spot price x 400).. 4.72M [(12.1K – 11.8K) x 400] + 384K
Futures contract (asset)......120K
Cost of goods sold……. 4.72M (200K asset – 80K liability)
Inventory (4.8M +100K – 180K) 4.72M Deposit with broker………..384K
to recognize the sale of the gold to record the net cash settlement of the
inventory. futures contract.
10. A
Solution:
Outflow on deposit with broker - Dec. 1, 20x1 (384,000)
Cash receipt from sale 4,720,000
Net cash receipt on settlement of futures contract 504,000
Net cash receipt (equal to the pre-agreed sale price) 4,840,000
11. B
Solutions:

Inventor
y Futures contract (Derivative)
Dec. 1, 20x1 Dec. 1, 20x1
No entry Deposit with broker ……..80K
Cash………………………..80K

the broker
Dec. 31, 20x1 Dec. 31, 20x1
Inventory………….……68K Loss on futures contract....56K
Gain on fair value change.....68K Futures contract (liability).. 56K
[(371 – 354) x 1,000] [(374 -360) x 4,000]
of the inventory due to changes in the of the futures contract.
hedged risk.
14. A
Solution:
Hedged item – Inventory Futures contract (Derivative)
Feb. 1, 20x2 Feb. 1, 20x2
Loss on fair value change…132K Futures contract (asset).. 144K
[(371 – 338) x 4,000] Gain on futures contract… 144K
Inventory……………………132K [(374 – 338) x 4,000]
of the inventory due to changes in the of the futures contract.
hedged risk.
Feb. 1, 20x2 Feb. 1, 20x2
Cash (338 spot price x 4K)..1.352M Cash……………………….168K
Sales……………………..….1.352M [(360 – 338) x 4K] + 80K deposit
Futures contract (asset) ........88K
Cost of goods sold……….896K (144K asset – 56K liability)
Inventory (960K + 68K –132K) 896K Deposit with broker…………80K
to recognize the sale of the soybean to record the net cash settlement of the
inventory. futures contract.
15. D (1,352,000 sales less 896,000 cost of sales) = 456,000 (See

entries above)
16. B
Solution:
Firm sale commitment Futures contract (Derivative)
Dec. 1, 20x1 Dec. 1, 20x1
No entry Deposit with broker …….120K
Cash……………………….120K

the broker
Dec. 31, 20x1 Dec. 31, 20x1
Loss on firm commitment.. 120K Future contract (asset)… 140K
[(240 – 210) x 4,000] [(235 – 200) x 4,000]
Firm commitment (liability) 120K Gain on futures contract…..140K
of the firm commitment of the futures contract
18. A
Solution:
Firm sale commitment Futures contract (Derivative)
Feb. 1, 20x2 Feb 1, 20x2
Firm commitment (liability)..120K Cash ……………………….320K
Loss on firm commitment.... 40K [(250 – 200) x 4,000] + 120K deposit
[(250 – 240) x 4,000] Deposit with broker ………120K
Cash……………………….. 840K Futures contract (asset)….140K
(210 contract price x 4,000) Gain on futures contract….. 60K
Sale (250 spot price x 4,000)... 1M [(250 – 235) x 4,000]
to record the actual sale transaction to record the net settlement of the futures
contract.
21. C
Solution:
The changes in the expected cash flows on the forecasted
transaction and the changes in the fair values of futures contract are
computed as follows:
Hedging
Hedged item: instrument:
Forecasted Futures
transaction contracts
(Broccoli) (Cauliflower)
Mar. 31, 20x1
Current prices – Mar. 31 95.18 94.52
Previous prices – Jan. 1 93.76 92.98
Increase (Decrease) 1.42 1.54
a
Multiplied by: Kilograms of commodity 4,000 4,000
Changes during the period – 3/31/x1 (5,680) 6,160
Fair value - 1/1/x1 - -
Cumulative changes – 3/31/x1 (5,680) 6,160
June 30, 20x1

Current prices – June 30 96.20 95.36
Previous prices – Mar. 31 95.18 94.52
Increase (Decrease) 1.02 0.84
Multiplied by: Kilograms of commodity 4,000 4,000
Changes during the period – 6/30/x1 (4,080) 3,360
Fair value - 3/31/x1 (5,680) 6,160
Cumulative changes – 6/30/x1 (9,760) 9,520
a
No. of futures contracts x Kilograms covered by each contract = (10 x 400) = 4,000.
Cumulative changes in: March 31 June 30

Fair values of futures contract 6,160 9,520
Expected cash flows of forecasted transaction 5,680 9,760
Ratio 108% 98%
22. B (See solutions above)

23. A
Solution:
To determine the ineffectiveness of the hedge, the following
procedures are performed:
Step 1: Determine the cumulative changes in the expected cash
flows on the forecasted transaction.
Step 2: Determine the cumulative changes in the fair values of the
hedging instrument.
Step 3: Determine the lower of the amounts computed in Step 1
and Step 2, in absolute values.
Step 4: The amount determined in Step 3 is the effective portion
which is recognized in other comprehensive income. The
difference between the change in the fair value of the
hedging instrument and the effective portion represents the
ineffective portion which is recognized in profit or loss.
The steps above are applied as follows:

Forecasted Futures
transaction contract Effective portion - OCI Ineffective portion -
Broccoli Cauliflower (Step 3) P/L (Step 4)
Lower of a
Cumulative Cumulative OCI P/L
and b – Cumula-
change in change in during during
Dates Cumulative tive
cash flows fair values the the
OCI P/L
(Step 1) (Step 2) period period
d=c- f=e-
a b c prev. bal. e=b-c prev. bal.
1/1/x1 - - - - - -
3/31/x1 (5,680) 6,160 5,680 5,680 480 480
6/30/x1 (9,760) 9,520 9,520 3,840 - (480)
24. C (See table above)
25. A - On March 31, 20x1, the effect of the hedge is “overhedge”

(the increase in the cash inflows from the hedging instrument is
greater than the increase in the expected cash outflows on the
hedged item).
26. C
Solution:
forecast transaction Futures contract (Derivative)
Jan. 1, 20x1 Jan. 1, 20x1
No entry No entry
Mar. 31, 20x1 Mar. 31, 20x1

No entry Futures contract…..6,160
Accumulated OCI……… 5,680
Gain on futures contract…. 480

of the effective portion of the futures
contract in OCI and the ineffective
portion in profit or loss.
June 30, 20x1 June 30, 20x1

Inventory……………384,800 Futures contract……. 3,360
(4,000 x 96.20) Loss on futures contract.. 480
Cash…………………….384,800 Accumulated OCI………. 3,840
to record the purchase of broccoli at the to recognize the change in the fair value
current price. of the effective portion of the futures
contract in OCI and the ineffective
portion in profit or loss.
June 30, 20x1

Cash…………………9,520
Futures contract……….. 9,520
(6,160 + 3,360)
to record the net settlement of the futures

contract.
27. B (See table above)
28. A (See table above)
29. D (See entry above)
30. D – This amount is reclassified to profit or loss when the related

inventory is sold.
31. B (384,800 cost of inventory – 9,520 reclassification adjustment of

OCI) = 375,280
32. C
Solution:
Account receivable Put option (Derivative)
Dec. 15, 20x1 Dec. 15, 20x1
Accounts receivable…… 1.92M Put option ……..…….. 30K
(4M yens x 0.48 spot rate) Cash………..……………… 30K
Sales……………………...1.92M
Dec. 31, 20x1 Dec. 31, 20x1
Accounts receivable……40K Loss on put option…..…..10K
[4M x (0.49 - 0.48)] Put option…………………..10K
FOREX gain……………....40K (30K – 20K)
to adjust the accounts receivable for the to recognize loss on the decrease in the
increase in spot exchange rate fair value of the option.
Jan. 15, 20x2 Jan. 15, 20x2

Cash – foreign currency.. 1.84M Cash – local currency…1.88M
(4M x 0.46 current spot rate) (4M x 0.47 option price)
FOREX loss…………….. 120K Put option (30K – 10K)…….. 20K
Accounts receivable……….1.96M Cash – foreign currency. 1.84M
(1.92M + 40K) Gain on put option….…… 20K
to record the receipt of 4M yens from to record the exercise of the put option
customer which is in the money.
34. A 20,000 - carrying amount of the option

35. A
Solution:
Hedged item – None Call option (Derivative)
Call option ……..…….. 2,400
Cash………..……………… 2,400
June 30, 20x1 June 30, 20x1

Call option ……..…….. 24,000
[(106 – 100) x 4,000]
Gain on call option………. 24,000
to record the increase in the fair value of

the call option due to the increase in
intrinsic value (excess of market value of
shares over exercise price).
June 30, 20x1

Loss on call option……….800
(2,400 – 1,600)
Call option……………………..800
to record the decrease in the fair value of

the call option due to the decrease in
1
time value.
July 1, 20x1 July 1, 20x1
Cash…………… 24,000
[(106 – 100) x 4,000]
Loss on call option….1,600
Call option ……..……..….. 25,600
(2,400 + 24,000 – 800)
to record the net settlement of the call

option contract.
38. C
Solution:
forecast transaction Put option (Derivative)
Oct. 1, 20x1 Oct. 1, 20x1
No entry Put option ……..……..25.6K
Cash………..…………… 25.6K
to record the purchase of option contract
39. B – Cash flow hedge because the hedged item is a highly

probable forecasted transaction.
40. A
Solution:
The gain or loss on December 31, 20x1 is computed as follows:
Change in: Change in
Intrinsic value Time value fair value of
(OCI) (P/L) option
10.1.x1 (see table above) - 25,600 25,600
12.31.x1
(1.12M ÷ 1.45) – 783,216 10,802 13,196 24,000
Gain (Loss) 10,802 (12,404) (1,600)
41. C (See table above)
42. D
Solution:
Change in: Change in
Intrinsic value Time value fair value of
(OCI) (P/L) option
12.31.x1(see table above) 10,802 13,196 24,000
4.1.x2
(1.12M ÷ 1.50) – 783,216 36,549 - 36,549
Gain (Loss) 25,747 (13,196) 12,549
43. C 746,667 + 36,550 = 783,217

Solution:
Hedged item – Highly probable
forecast transaction
191
April 1, 20x2
Accounts receivable….746,667
Sales………………………746,667
(1,120,000 ÷ 1.50 spot rate)
to record the actual sale transaction

April 1, 20x2
Accumulated OCI……..36,550
(10,802 + 25,748)
Sales……………………… 36,550
to reclassify accumulated OCI to profit or

loss
44. B
45. C
Solution:
20x1 20x2
a
Receive variable 320,000 400,000
Pay 8% fixed 320,000 320,000
Net cash settlement - receipt - 80,000
a
The interest rates used are the current rates as at the beginning of
the year (i.e., 4M x 8% = 320,000) & (4M x 10% = 400,000).
There is no cash settlement in 20x1 because the variable and fixed

rates are the same (i.e., 8% and 8%, respectively).
The net cash settlement in 20x2 is discounted to determine the fair

value of the derivative on Dec. 31, 20x1:
Net cash settlement – receipt (due on Dec. 31, 20x2) 80,000
PV of 1 @ 10%, n=1 0.90909
Fair value of derivative - 12/31/x1 (asset) 72,727
46. D – the gain is recognized in OCI not in P/L

Solution:
Variable interest payments Interest rate swap (Derivative)
Dec. 31, 20x1 Dec. 31, 20x1
Interest expense… 320,000 Interest rate swap…..72,727
Cash (4M x 8%)….……... 320,000 Accumulated OCI……….72,727
to recognize interest expense on the to recognize the change in the fair value
variable-rate loan of the interest rate swap
47. A (See computation in #45)

192
48. A (400,000 – 80,000) = 320,000 (See entries below)
Solution:
Dec. 31, 20x2 Dec. 31, 20x2
Interest expense….400,000 Cash…………………80,000
Cash (4M x 10%) ……..….400,000 Interest rate swap……....72,727
Accum. OCI (squeeze)……7,273
to recognize interest expense on the to record the net cash settlement of the
variable-rate loan interest rate swap
Dec. 31, 20x2 Dec. 31, 20x2
Loan payable……….4M Accumulated OCI…..80,000
Cash……………………………4M Interest expense……….80,000
to record the settlement of the loan to reclassify accumulated OCI to profit or

loss
49. D
Solution:
20x1 20x2
a
Receive variable (4M x 9%) & (4M x 8%) 360,000 320,000
Pay 9% fixed 360,000 360,000
Net cash settlement – payment - (40,000)
a
Based on the current rates as at the beginning of the year.
The net cash settlement is discounted to determine the fair value of

the derivative on Dec. 31, 20x1.
Net cash payment (due annually starting on Dec. 31, 20x2) (40,000)
PV of ordinary annuity of 1 @8%, n=2 1.783265
Fair value of derivative - 12/31/x1 (liability) (71,331)
50. B (See computation above)
51. C (See computation above)
52. B – The fair value of the derivative on this

date. Solution:
20x3
Receive variable (4M x 12%) 480,000
Pay 9% fixed 360,000
Net cash settlement – receipt 120,000

Net cash receipt (due on Dec. 31, 20x3 – maturity date) 120,000
Multiply by: PV of 1 @12%, n=1 0.892857
Fair value of derivative - 12/31/x2 (asset) 107,143
53. E
The CORRECT ANSWER is 360,000 (320,000 + 40,000) (See
entries below)
Solution:
Dec. 31, 20x2 Dec. 31, 20x2
Interest expense…320,000 Interest rate swap…..40,000
Cash (4M x 8%)…...……320,000 Cash…………………….40,000
to recognize interest expense on the to record the periodic net cash settlement
variable-rate loan on the interest rate swap - (see previous
computation)
Dec. 31, 20x2
Interest expense……...40,000
Accumulated OCI……40,000
to record a piecemeal reclassification of

accumulated OCI to profit or loss
54. A (See computations in #52)
55. A
Solution:
The change in the fair value of the interest rate swap is determined as
follows:
Fair value of interest rate swap – Dec. 31, 20x2 - (asset) 107,143
Less: Carrying amount of interest rate swap – Dec. 31, 20x2
(71,331 liability – 40,000 net cash settlement) - (liability) (31,331)
Change in fair value – gain 138,474
56. B
Solution:
20x3
Net cash settlement – receipt 120,000
57. E
The CORRECT ANSWER is 360,000 (See solution below)
Interest expense (4M x 12%) 480,000

Reclassification of accum. OCI (120,000)
Net interest expense - 20x3 360,000
58. B
Solutions:
Hedging instrument:
The net cash settlement on the swap is determined as follows:
20x1 20x2
Receive 10% fixed 400,000 400,000
a
Pay variable (4M x 10%) & (4M x 12%) 400,000 480,000
Net cash settlement – payment - (80,000)
a
Based on the current rates as at the beginning of the year.

Net cash payment (due annually starting on Dec. 31, 20x2) (80,000)
PV of ordinary annuity of 1 @12%, n=2 1.69005
PV of ordinary annuity is used because swap payments are made at each year-
end (i.e., Dec. 31, 20x2 and Dec. 31, 20x3; ‘n=2’). A liability is recognized
because the net cash settlement is a payment.
59. B
Solution:
Fair value of derivative - 12/1/x1 -
Unrealized loss on the derivative instrument (135,204)
60. A
Solution:
Hedged item:
The fair value of the loan payable on Dec. 31, 20x1 is determined as
follows:
PVF @12%
Future cash flows: current rate, Present
n=2 value
Principal 4,000,000 0.797193878 3,188,776
Interest at 10% fixed rate 400,000 1.69005102 676,020
3,864,796
Fair value of loan payable - Dec. 31, 20x1 3,864,796

Carrying amount of loan payable - Dec. 31, 20x1 4,000,000
Gain on decrease in liability 135,204
61. C
Solution:
Interest Interest Present
Date payments expense @ 12% Amortization value
12/31/x1 3,864,796
12/31/x2 400,000 463,776 63,776 3,928,572
62. B
Solution:
Hedging instrument:
The net cash settlement in 20x3 is determined as a basis for adjusting
the fair value of the interest rate swap on Dec. 31, 20x2.
20x3
Receive 10% fixed 400,000
Pay variable (4M x 14%) 560,000
Net cash settlement – payment (160,000)

Net cash payment (due on Dec. 31, 20x3 – maturity date) (160,000)
63. E
The CORRECT ANSWER is (85,147) (See solution below)
Fair value of interest rate swap – Dec. 31, 20x2 - (liability) 140,351
Carrying amount of interest rate swap – Dec. 31, 20x2
(135,204 liability – 80,000 net cash settlement) - (liability) (55,204)
Change in fair value – loss (increase in liability) 85,147
64. E
The CORRECT ANSWER is (68,923) (See solution below)
Solution:
Hedged item:
The fair value of the loan payable on Dec. 31, 20x2 is determined as
follows:
PVF @14%
Future cash flows: current rate, Present
n=1 value
Principal 4,000,000 0.877192982 3,508,772
Interest at 10% fixed rate 400,000 0.877192982 350,877
3,859,649
The gain or loss on the change in the fair value of the loan payable is
determined as follows:
Fair value of loan payable - Dec. 31, 20x2 3,859,649
Carrying amt. - Dec. 31, 20x2 (see amortization table above) 3,928,572
Gain on decrease in liability – Dec. 31, 20x2 68,923
65. B
Solution:
Interest Interest Present
Date payments expense @ 14% Amortization value
12/31/x2 3,859,649
12/31/x3 400,000 540,351 140,351 4,000,000
1. C 6. A 11. A 16. D 21. C 26. A
2. A 7. E 12. C 17. C 22. B 27. B
3. D 8. A 13. D 18. E 23. D 28. B
4. A 9. B 14. A 19. D 24. D 29. A
5. C 10. C 15. A 20. A 25. A 30. D
31. A
Solutions:
1. C
Solution:
Receivable from XYZ, Inc. (in pesos) ₱4,000,000
Multiply by: Closing rate, Dec. 31, 20x1 2
Adjusted balance of Payable to ABC Co. (in AMD) 8,000,000
Payable to ABC Co. (in AMD) - unadjusted 7,000,000

Payable to ABC Co. (in AMD) - adjusted 8,000,000
FOREX loss in subsidiary's P/L (in AMD) (1,000,000)
2. A
Solution:
XYZ's separate profit before FOREX loss (in 7,000,000
AMD) FOREX loss (in AMD) (1,000,000)
XYZ's separate profit after FOREX loss (in AMD) 6,000,000
3. D
Solution:
1) Translation of XYZ's opening net assets:
Net assets of sub., July 1 - at opening rate (12M ÷ 1.50) 8,000,000
Net assets of sub., July 1 - at closing rate (12M ÷ 2.00) 6,000,000
Decrease in opening net assets - loss (2,000,000)
Cumulative translation difference - Jan. 1 -
2) Translation of changes in net assets during the period:

Profit of subsidiary at average rate (6M ÷ 1.75) 3,428,571
Profit of subsidiary at closing rate (6M ÷ 2.00) 3,000,000
Decrease in profit – loss (428,571)
3) Translation of goodwill: Goodwill, Dec.

31 - at opening rate Goodwill, Dec. 31 - at -
closing rate Increase (Decrease) in -
goodwill -gain (loss) -
Total translation loss – OCI (2,428,571)
4. A
Solution:
XYZ, Inc. XYZ, Inc.
ABC Co. (in AMD) - Adjustments (in AMD) - Rates XYZ, Inc. (in Consolidation Consolidated
(in pesos) unadjusted adjusted pesos)
Assets 56,000,000 40,000,000 40,000,000 2 20,000,000 (56M + 20M) 76,000,000
Investment in subsidiary 8,000,000 - - (eliminated) -
Receivable from XYZ 4,000,000 - - (eliminated)
Total assets 68,000,000 40,000,000 40,000,000 20,000,000 76,000,000
Liabilities 32,000,000 14,000,000 14,000,000 2 7,000,000 (32M + 7M) 39,000,000
Payable to ABC Co. - 7,000,000 1,000,000 8,000,000 2 4,000,000 (eliminated)
Total liabilities 32,000,000 21,000,000 22,000,000 11,000,000 39,000,000
Equity - July 1, 20x1 16,000,000 12,000,000 12,000,000 (omitted) (parent only) 16,000,000
Profit for the year (1,000,000) 1.75 3,428,571 (20M+ 23,428,571
20,000,000 7,000,000 6,000,000 3,428,571)
Translation loss – OCI (see above) (2,428,571)
Total equity – Dec. 31 36,000,000 19,000,000 18,000,000 2 9,000,000 37,000,000
68,000,000 40,000,000 40,000,000
Total liabilities & equity 20,000,000 76,000,000
The 1,000,000 adjustments pertain to the FOREX loss on the intercompany payable which is recognized in the subsidiary’s separate profit or
loss. Notice that the even though the intercompany accounts have been eliminated, the FOREX loss remains in the consolidated total equity
5. C (See solution above)
6. A
Solution:
Hedging instrument:
The fair value of the forward contract on July 1, 20x1 is zero.
The fair value of the forward contract on December 31, 20x1 is

computed as follows:
Sale price at 6-month forward rate - 12/31/20x1 (20M ÷ 2.02) 9,900,990
Sale price at the pre-agreed forward rate (20M ÷ 1.54) 12,987,013
Difference 3,086,023
Multiply by: PV factor (given) 0.971286
Fair value of forward contract - Dec. 31, 20x1 (asset) 2,997,411
An asset is recognized because the sale price at the six-month

forward rate is ₱9,900,990 but ABC can sell at a higher price of
₱12,987,013 – a condition that is favorable to ABC.
The gain (loss) on the forward contract is computed as follows:

Fair value of forward contract - July 1, 20x1 -
Fair value of forward contract - Dec. 31, 20x1 2,997,411
Increase in fair value - Unrealized gain in OCI (gross of tax) 2,997,411
Less: Deferred tax liability (2,997,411 x 40%) (1,198,964)
Unrealized gain in OCI (net of tax) 1,798,447
The net translation gain (loss) to be recognized in other

comprehensive income is computed as follows:
Total translation loss – OCI (without hedging - see Case #1) (2,428,571)
Unrealized gain in OCI - net of tax 1,798,447
Total FOREX translation loss - OCI (with hedging) (630,124)
7. E
The CORRECT ANSWER is 78,997,411 (See solution below)
Solution:
Hedging instrument –
Forward contract (Derivative)
July 1, 20x1
No entry
Dec. 31, 20x1

Forward contract….2,997,411
Deferred tax liability….... 1,198,964
Accumulated OCI……… 1,798,447
to recognize the change in the fair value of the forward

contract
Consolidated Journal entry

Consolidated
(without on hedging
hedging) instrument (with hedging)
Total assets 76,000,000 2,997,411 78,997,411
Total liabilities 39,000,000 1,198,964 40,198,964

Equity - July 1, 20x1 16,000,000 16,000,000
Profit for the year 23,428,571 23,428,571
Translation loss – OCI (2,428,571) 1,798,447 (630,124)

Total equity – Dec. 31 37,000,000 38,798,447
Total liab. & equity 76,000,000 78,997,411
8. A (See solution above)
9. B
Solution:
Fixed selling price 100,000
Selling price at current spot rate (4M ÷ 35) 114,286
Excess – payment to broker (14,286)
10. C
Solution:
Deficiency - receipt from broker 20,000
223
11. A
Solution:
Fair value of forward contract – receivable (asset) 11,111
12. C
Solution:
Fixed purchase price (₱2,400 x 1,000) 2,400,000
Purchase price at current mkt. price (₱2,800 x 1,000) 2,800,000
Derivative asset - receivable from broker 400,000
13. D
Solution:
Fixed purchase price (₱2,400 x 1,000) 2,400,000
Purchase price at current mkt. price (₱2,200 x 1,000) 2,200,000
Derivative liability - payable to broker (200,000)
14. A ₱20,000,000 (100,000 kilos notional figure x ₱200 forward price)
15. A
Solution:
Fixed purchase price (100,000 x ₱200) 20,000,000
Purchase price at current mkt. price (100,000 x ₱260) 26,000,000
Receivable from broker 6,000,000
Fair value of forward contract (asset) 5,454,540
16. D
Solution:
Fixed purchase price (100,000 x ₱200) 20,000,000
Purchase price at current mkt. price (100,000 x ₱160) 16,000,000
Payable to broker (4,000,000)
Multiply by: PV of 1 @10%, n=0 1
Fair value of forward contract (liability) (4,000,000)
17. C
Solution:
"Long" futures contract to purchase gold:
Fixed purchase price (₱2,000 x 400) 800,000
Purchase price at current market price (₱1,800 x 400) 720,000
Payable to broker (80,000)
"Long" futures contract to purchase silver:
Fixed purchase price (₱1,600 x 800) 1,280,000
224
Purchase price at current market price (₱1,900 x 800) 1,520,000
Receivable from broker 240,000
"Short" futures contract to sell coffee beans:
Fixed selling price (₱250 x 4,000) 1,000,000
Selling price at current market price (₱220 x 4,000) 880,000
Receivable from broker 120,000
"Short" futures contract to sell potatoes:
Fixed selling price (₱60 x 6,000) 360,000
Selling price at current market price (₱75 x 6,000) 450,000
Payable to broker (90,000)
Net derivative asset 190,000
18. E
The CORRECT ANSWER is 10,286 (See solution below)
Solution:
Purchase price using the option 100,000
Purchase price without the option (4M ÷ 35) 114,286
Savings from exercising the option - gross 14,286
Less: Cost of purchased option (4,000)
Net savings from call option 10,286
19. D
20. A 40,000 – the cost of option
21. C
Solution:
Fixed purchase price (₱880 x 20,000) 17,600,000
Purchase price at current market price (₱960 x 20,000) 19,200,000
Derivative asset - receivable from broker 1,600,000
22. B
Solution:
Fair value of call option - July 1, 20x1 (cost) 40,000
Fair value of call option - Dec. 31, 20x1 (see above) 1,600,000
Unrealized gain - increase in fair value 1,560,000
23. D
Solution:
Fixed purchase price (₱880 x 20,000) 17,600,000
Purchase price at current market price (₱1,000 x 20,000) 20,000,000
Net cash settlement - receipt 2,400,000
24. D
Solution:
March. Cash (see above) 2,400,000
31, Call option (see above) 1,600,000
20x2
Gain on call option (squeeze) 800,000
to record the net settlement of the call
option
25. A
Solution:
20x1 20x2
Receive variable (at Jan. 1 current rates) 400,000 320,000
Pay 10% fixed 400,000 400,000
Net cash settlement - (payment) (due on Dec. 31, 20x3) - (80,000)
26. A
Solution:
Net cash settlement - (payment) (due on Dec. 31, 20x3) (80,000)
Fair value of interest rate swap - liability (74,072)
27. B
Solution:
20x1 20x2
Receive variable (at Jan. 1 current rates) 400,000 480,000
Pay 10% fixed 400,000 400,000
Net cash settlement – receipt (due on Dec. 31, 20x3) - 80,000
28. B
Solution:
Net cash settlement - receipt (due on Dec. 31, 20x3) 80,000
Fair value of interest rate swap - asset 71,432
29. A 4,000,000 – the principal amount of the loan
30. D
Solution:
Net cash settlement - receipt (due annually for the next 4 yrs.) 40,000
Multiply by: PV ordinary annuity @9%, n=4 3.23972
Fair value of forward contract – asset 129,589
31. A
Solution:
Net cash settlement - receipt (due annually for the next 4 yrs.) 160,000
Multiply by: PV ordinary annuity @12%, n=3 2.40183
Fair value of forward contract - receivable 384,293

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Accounting for Derivatives and Hedging Transactions1

Relevant rates are shown below:

2. How much is the FOREX gain (loss) on foreign currency transaction on

4. The derivative asset (liability) to be included in the December 31, 20x1

5. How much is the FOREX gain (loss) on foreign currency transaction on

No hedging designation (Held for speculation)

11. The derivative asset (liability) to be included in the December 31,

Fair value hedge of a recognized liability

Relevant rates are shown below:

14. The purchased inventory shall be recognized at

15. The derivative asset (liability) to be included in the December 31,

16. The adjustment to the inventory account on December 31, 20x1 is –

No hedging designation (Held for speculation)

21. The derivative asset (liability) to be included in the December 31,

Fair value hedge of a firm sale commitment

Relevant rates are shown below:

23. The entries on December 15, 20x1 include

25. The derivative asset (liability) on December 31, 20x1 is

26. The effectiveness of the hedging instrument as of December 31, 20x1

Fair value hedge of a firm purchase commitment

Relevant rates are shown below:

30. The derivative asset (liability) on December 31, 20x1 is

31. How much inventory is recognized on January 15, 20x2?

Fair value hedge of a firm purchase commitment – Present value

34. The entries on December 31, 20x1 includes a

35. The derivative asset (liability) on December 31, 20x1 is

36. The debit to inventory on March 31, 20x2 is

37. The gain (loss) on forward contract on March 31, 20x2 is

Fair value hedge of a firm purchase commitment – Present value

ABC Co. is worried about fluctuations in the price of cabbage. Therefore,

Fair value of Fair value of firm

40. The fair value of the firm commitment on Oct. 1, 20x1 is

43. The gain (loss) on the derivative on March 31, 20x2 is

Cash flow hedge of a forecasted purchase transaction

ABC Co. is concerned about the fluctuation in the price of potatoes, so on

Relevant prices per kilogram of potatoes are shown below:

Cash flow hedge of a forecasted sale transaction – Present value (Indirect

Cash flow hedge of a recognized liability – Present value

Relevant rates are shown below:

58. The inventory account is debited on December 1, 20x1 for

60. How much is recognized in other comprehensive income on December 31,

61. The derivative asset (liability) recognized on December 31, 20x1 is

63. How much is recognized in other comprehensive income on January 31,

Accounting for Derivatives and Hedging Transactions2

Multiple Choice – Computational

1. The entries on December 1, 20x1 include

2. How much is the derivative asset (liability) as of December 31, 20x1?

4. How much is the net settlement on February 1, 20x2? – Receipt (payment)

Fair value hedge of a recognized asset – hedged item measured at fair

To protect the fair value of its inventory against a potential decline in

5. The entries on December 1, 20x1 include

6. How much is the adjustment to the inventory account on December 31,

7. How much is the derivative asset (liability) as of December 31, 20x1?

9. How much is the net settlement on February 1, 20x2? – Receipt (payment)

Fair value hedge of a recognized asset – hedged item measured at lower of

Information on fair values is as follows:

Spot price 354 371 338

14. How much is the net settlement on the derivative instrument on

Fair value hedge of a firm sale commitment

Information on market values is shown below:

18. How much is the sale revenue recognized on February 1, 20x2?

Cash flow hedge of a forecasted purchase transaction – Assessment of Hedge

Relevant prices per kilogram of commodity are shown below: