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DAYAG Solution to Chapter 20

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ADVANCED ACCOUNTING
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Chapter 20
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Problem I
In relation to the above data, the following relevant exchange rates are needed for further
analysis in relation to hedged item and hedging instrument:

Forward Rate for

3/1/20x5 Settlement
Spot Rate (or Expiration)

Facebook December 1, 20x4………………………….

December 31, 20x4…………………………. Twitter
P40.00
P40.30
P40.15 (*90 days)
P40.40 (**60 days)
March 1, 20x5………………………………….. P40.20***
*original 90-day forward rate on 12/1/20x4
**remaining or current forward rate on 12/31/20x4
***the forward rate at expiration or maturity is equal to spot rate as the remaining period of the forward contract is
zero.

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

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a. The journal entries to record the hedged item and hedging instrument are as follows:
Gross Method
Hedged Item – Importing Transaction Hedging Instrument – Forward Contracts
(Exposed Liability) ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Transaction Date Date of Inception/Hedging of 90 days Forwards

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

Books, audiobooks, and more.

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

Get our free app 2/1/1/x4.

*XD – exchange dealer
buy $12000 using forward rate.

$ If the financial statements are prepared on December 1, 20x4, the value of the forward
contract is as follows:
%
Balance Sheet Presentation on 12/1/20x4
FC Receivable from XD……………………… P48,180
Less: Pesos payable to XD…………………… 48,180

Is this content inappropriate? Report This Document Forward Contract (fair value)………………. P 0

December 31, 20x4

(Balance Sheet Date an intervening financial reporting date)

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

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

)
*FC – foreign currency

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

Balance Sheet Presentation on 12/31/20x4

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

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Forward Contract (fair value – asset)……… P 300

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

March 1, 20x5
Settlement Date Settlement Date/Date of Expiration of Contract

Accounts payable 120 FC Transaction Loss 240

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

Pesos Payable from XD……………. 48,180

Cash………………………………. 48,180
To record payment to
exchange dealer.

Investment in FC……………………. 48,240

FC Receivable from XD 48,240
To record receipt of foreign
Currency.

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

Cash (refer to note below)………
To record payment of accounts
payable at spot rate.
48,240 I nvestment in FC……… …………. 48,240
To record conversion of US
dollars into cash for payment of
accounts payable.
Note: This entry may be ignored and instead the
Investment in FC will be outright credited in payment
of accounts payable. For succeeding illustrations the
conversion of FC to peso cash to settle items
acquired will be used.

These transactions can be summarized in the following table.

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

Transaction Transaction
Accounts Payable Balance gain (loss) FC Receivable Balance gain (loss)

12/1/20x4
12/31/20x4 P48,000
48,360 (P 360) 12/1/20x4
12/31/20x4 P48,180
48,480 P 300
3/1/20x5 48,240 120 3/1/20x5 48,240 (240)
Total gain (loss) (P 240) P 60
Thus, the net effect is a P150 loss when the forward contract is used.

“Net” Position Accounting

The following illustrates the effects of “net” position accounting using the same illustration
above:
Hedged Item – Importing Transaction Hedging Instrument – Forward Contracts
(Exposed Liability) ( Net Position Accounting)
December 1, 20x4
Transaction Date Date of Inception/Hedging of 90 days Forwards

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

Accounts payable………………. 48,000 No formal journal entry as the fair value of forward

To record purchase of goods on contract is zero.

account using the spot rate on

2/1/1/x4.

It should be noted that the accounts payable for the invento

the spot rate on the transaction date (on December 1, 20x3).

December 31, 20x4

(Balance Sheet Date, an intervening financia

FC Transaction Loss 360 Forward C

Accounts payable 360 FC Trans
[P40.30 – P40.00) x $1,200 [(P40.40
To record a loss on the exposed To record a gain
liability denominated in foreign currency to be re
currency. FC dealer.
*FC – foreign currency

If the financial statements are prepared on December 31, 2

contract is as follows:

Forward contract (debit balance – asset)…………………

The income statement would report an exchange loss

P250.

On March 1, 20x5 (the transaction date and the settleme

March 1, 20x5
Settlement Date Settleme

Accounts payable 120 FC Transac

FC Transaction gain……. 120 Forward
 FC Transaction gain……. 120 Forward
b. [(40.20 – P40.30) x $1,200}…….. [(P40.40
To record
b.1. P360 a gain
loss -from 12/31/x4
[(P40.30 to
– P40.00) x $1,200] To record
3/1/x5 on liability denominated in currency to be re
b.2.
FC.
P300 gain - [(P40.40 – P40.15) x $1,200] FC dealer.
b.3. P360 loss – P300 gain = P60 net loss (decrease in ne
Accounts
b.4. P120payable
gain(P40.20 x $1,200)
- [(P40.20 48,240
– P40.30) x $1,200} Cash………
b.5.
CashP240 loss
(P40.20 - [(P40.40
x $1,200) or * – P40.20) x $1,200]
48,240 Forward C
b.6.
To P240
record loss – P120
payment gain = P120 net loss (decrease
to exchange in net
Net settlement
dealer (XD) dealer on expirati
date of forward c
c.
*(P40.15, forward rate
c.1. P48,360 on the date
- [P40.30, spotof rate/current
inception x $1,200)
rate+ cash received
on the ba from
c.2. P48,240 – [P40.20, spot rate on the date of settlement
12/31/x4
d. 3/1/x5
d.1. P48,180 - [P40.15, original (90-day) forward rate on
d.2. No entry required
d.3. Same amount with d.1
d.4. No entry required

e.
e.1.
Gross Method
FC Receivable from XD………………………
Less: Pesos payable to XD……………………

Forward Contract (fair value)……………….

Net Method: Zero. No entry required.

e.2. P300 asset

Gross method
FC Receivable from XD (P40.40 x $1,200)…
Less: Pesos payable to XD (fixed at P40.15)
Forward Contract (fair value – asset)………

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

e.3. P60 debit balance – asset

Gross method
FC Receivable from XD (P40.20 x $1,200)…
Less: Pesos payable to XD (fixed at P40.15)
Forward Contract (fair value – asset)………

Net Position

12/31/x4 Gain… 300 Forward Contract 240…

(Asset/Liability)
…..3/1/x5 Los
3/1/x5 Net…… 60

f. P48,000 [P40, spot (current) rates on the date of transactio

2. Fair Value Hedge – Hedging an Unrecognized Foreign Currency
Gross Method (for Net Position – same with Exposed Liability)
a. The journal entries to record the hedged item and hedging
Hedged Item – (Unrecognized Hedging

Foreign Currency Firm Commitment) ( Broad Approac

December 1, 20x4
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