Dayag Solution To Chapter 20 PDF

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

3/1/20x5 Settlement
Spot Rate (or Expiration)
December 1, 20
2 0x4…………………………. P40.00 P40.15 (*90 days)
December 31, 20x4…………………………. P40.30 P40.40 (**60 days)
March 1,
1, 20
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
contract is
zero.
1. Not a Hedge
Hedge Accounting
Accounting - Importing
Importing Transac
Transaction
tion (Exposed
(Exposed Liabil
Liability).
ity).
a. The journal
journal entries to record
record the hedged item and hedging
hedging instrument
instrument are as follows:
Gross Method
Hedged
Hedged Item – Importing
Importing Transact
Transaction
ion Hedging
Hedging Instrument
Instrument – Forward
Forward Contracts
Contracts
(Exposed Liability) ( Broad
Broad Approach
Approach or Gross
Gross Position
Position Account
Accounting)
ing)
December 1, 20x4
Transacti on Date Date of In
I nception/Hedging of 90 days Forwards
Inventory ($1,200 x P40)…………... 48,000 FC Receivable from XD…………… 48,180

Accounts payable………………. 48,000 Pesos Payable to XD 48,180
To record purchase of goods on (P40.15 x $1,200)
account using the spot rate on To record forward contract to
2/1/1/x4. buy $12000 using forward rate.
*XD – exchang
exchange e deale
dealer
r
If the financial statements are prepared on December 1, 20x4, the value of the forward
contract
contract is as follows:
follows:
Balance Sheet Presentation on 12/1/20x4

FC Rece
Receiv ivab
able
le fro
from
m XD………
XD…………… …………
…………
…… P48,
P48,18
180
0
Less
Less:: Peso
Pesoss pay
payab
able
le to
to XD……
XD……………………
…………
…… 48,1
48,180
80
Forward Contract (f (fair value)………………. P 0
December 31, 20x4

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

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

December 31, 20x4, the value of the forward

FC Rece
Receivaivable
ble from
from XD (P40.4
(P40.400 x $1,2
$1,200)
00)…
… P48,48
P48,480
0
Less
Less:: Peso
Pesoss pay
payab
able
le to
to XD (fix
(fixed
ed at
at P40.
P40.15
15)) 48,1
48,180
80
Forwa
orwarrd Con
Conttract
ract (fa
(fair valu
value
e – asset
sset))………
……… P 300
On March 1, 20x5 (the transaction

transaction date and the settleme
settlement
nt date), the journal
journal entries are:
are:
March 1, 20x5
Settlement D
Daate Settlement Date/Date of Expiration of Contract
Accounts payable 120 FC Transaction Loss 240

FC Transaction gain……. 120 FC ReReceivable from XD 240
[(P40.20
[(P40.20 – P40.30)
P40.30) x $1,200}
$1,200}……..
…….. [(P40.40
[(P40.40 – P40.20)
P40.20) x $1,200
$1,200]]
To record a gain from
from 12/31/x4 to To record
record a loss on foreig
foreign
n
3/1/x5 on liability denominated in currency to be received from
FC. FC dealer.
Peso
Pesoss Pay
Payab
able
le from
from XD……
XD…………
……….
…. 48,1
48,180
80
Cash………………………………. 48,180
To record
record payment to
exchange dealer.
Inve
Invest
stme
ment
nt in FC…
FC………
………… ………………….
…. 48,2
48,240
40
FC Receivable from XD 48,240
To record receipt of foreign
Currency.
Accounts pa
p ayable…………………… 48,240 Cash……………………………………. 48,240
Cash (refer to note below)……… 48,240 I nv
nvestment in
in FC
FC……… ………………. 48,240
To record payment of accounts
accounts To record
record conversion of US
payable at spot rate. dollars
dollars into
into cash for payment
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 I tem (Exposed Liabili ty) Hedging I nstrument (Forw ard Contract)
Transaction Transaction
Accounts Payable Balance gain (loss) FC Receivable Balance gain (loss)
12/1/20x4 P48,000 12/1/20x4 P48,180
12/31/20x4 48,360 (P 360) 12/31/20x4 48,480 P 300
3/1/20x5 48,240 120 3/1/20x5 48,240 (240)
Total gain (loss) (P 240) P 60
Thus, the net effect is a P150 loss when the forward contract is used.
“Net” Position Accounting
The following illustrates the effects of “net” position accounting using the same illustration
above:
Hedged
Importing Transact
Transaction
ion Hedging
Hedging Instrument
Forward Contracts
Contracts
(Exposed Liability) ( Net Positi
Position
on Accou
Accountin
nting)
g)
December 1, 20x4
Transacti on Date Date of Incepti on/Hedging of 90 days Forw ards
Inv
Invento
entory
ry ($1,
($1,20
200
0 x P40)
P40)……
…………
……..
.... 48,0
48,000
00 Memorandum
Memorandum entry only,
only,
Accounts pa
payable………………. 48,000 No formal
formal journal entry as the fair value
value of forward
forward
To record purchase of goods on contract is zero.
account using the spot rate on
2/1/1/x4.
It should be noted that the accounts payable for the inventory purchase
purchase is recorded using
the spot rate on the transaction date (on December
December 1, 20x3).
December 31, 20x4

(Balance Sheet Date, an intervening financial
financial reporting date)
FC Transacti on Loss 360 Forw ard Contract 300

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

December 31, 20x4, the value of the forward
Forward contract (debit balance – asset)………………………. P 300
The income
income statement
statement would report
report an exchange
exchange loss of P360 and an exchange
exchange gain of
P250.
On March 1, 20x5 (the transactio

transaction
n date and the settlement
settlement date), the journal
journal entries
entries are:
March 1, 20x5
Settlement D
Accounts payable 120 FC Transaction Loss 240

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

Cash (P40.20
(P40.20 x $1,200)
$1,200) or * 48,240 Forward CoContract 60
To record payment to exchange Net settlement received from
from the
dealer (XD) dealer on expiration or maturity
date of forward contract.
contract .
*(P40.15, forward
forward rate on the date of inception x $1,200) + cash received from the exchange dealer
dealer of P50.
Forward Contract (Asset/Liability)

12/3
12/31/
1/x4
x4 Gain
Gain…
… 300
300 240…
240… …..3
…..3/1
/1/x/x5
5 Loss
Loss
3/1/x5 Net…… 60 60
b.
b.1.
b.1. P360
P360 loss
loss - [(P40
[(P40.3
.30
0 – P40.
P40.00
00)) x $1,2
$1,200
00]]
b.2.
b.2. P300
P300 gain
gain - [(P4
[(P40.4
0.40
0 – P40.
P40.15
15)) x $1,20
$1,200]0]
b.3. P360
P360 loss – P300
P300 gain = P60
P60 net loss
loss (decre
(decrease
ase in net
net income
income))
b.4.
b.4. P120
P120 gai
gainn - [(P4
[(P40.
0.20
20 – P40.
P40.30
30)) x $1,20
$1,200}0}
b.5.
b.5. P240
P240 loss
loss - [(P40
[(P40.4
.40
0 – P40.
P40.20
20)) x $1,2
$1,200
00]]
b.6. P240 loss – P120 gain = P120 net net loss
loss (decre
(decrease
ase in net income
income))
c.
c.1. P48,360
P48,360 - [P40.30,
[P40.30, spot
spot rate/curren
rate/currentt rate
rate on
on the
the balance
balance sheet
sheet date
date x $1,200
$1,200]]
c.2. P48,240
P48,240 – [P40.20,
[P40.20, spot
spot rate
rate on the date of settlement
settlement x $1,200]
$1,200]
d.
d.1. P48,18
P48,180
0 - [P40.15
[P40.15,, origin
original
al (90-d
(90-day)
ay) forw
forward
ard rate on the
the date
date of hedg
hedging
ing x $1,200
$1,200]]
d.2. No entry
entry require
required
d
d.3. Same amount with d.1
d.4. No entry
entry require
required
d
e.
e.1.
Gross Method
FC Recei vable from XD……………………… P48,180
Less: Pesos payable to XD…………………… 48,180
Forw ard Contract (fair value)………………. P 0
Net Method: Zero. No entry required.
e.2.
e.2. P300 asset
asset
Gross method
FC Recei vable from XD (P40.40 x $1,200)… P48,480
Less: Pesos payable to XD (fixed at P40.15) 48,180
Forw ard Contract (fair value – asset)……… P 300
Net Method: P300.

Forward contract (debit balance – as
asset)… P 300
e.3.
e.3. P60
P60 debi
debitt balan
balance
ce – asse
assett
Gross method
Net Position
12/31/x4 Gain… 300 240… …..3/1/x5 Loss
3/1/x5 Net…… 60
f. P48,000 [P40,
[P40, spot (current)
(current) rates
rates on the date of transactio
transaction
n x $1,200]
$1,200]
2. Fair Value Hedge

Hedge – Hedging
Hedging an Unreco
Unrecognized
gnized Forei
Foreign
gn Currency
Currency FFirm
irm Commitme
Commitment nt .
Gross Method
Method (for Net
Net Position
Position – same with
with Exposed
Exposed Liability)
Liability)
a. The journal
journal entries to record the hedged
hedged item and hedging instrume
instrument
nt are as follows:
Hedged
Hedged Item – (Unre
(Unrecog
cogniz
nized
ed Hedging
Hedging Instrument
Forward Contracts
Contracts
Foreign Currency Firm Commitment) ( Broad
Broad Approac
Approach h or Gross
Gross Position
Position Account
Accounting)
ing)
December 1, 20x4
Date of Commitment (Date
(Date of Issuing the Purchase
Order) Date of Inception/Hedging of 90 days Forwards
No journal en
entry is
is re
required to re
record the firm FC Receivable frfrom XD…………… 48,180
commitment. The forward contract is designated as a Pesos Payable to XD 48,180
hedge of the firm commitment to purchase
purchase inventory (P40.15 x $1,200)
on March 1, 20x5. The hedge is accounted for as a To record forward contract to
fair value hedge. buy $1,200 using forward rate.
December 31, 20x4

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

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

Assets Liability
FC Receivable from
from XD (P40.40 x $1,200)....…...P48,480
$1,200)....…...P48,480 Firm Commitment…………………………………...P 300
Less: Pesos
Pesos Payable
Payable to XD(fixed
XD(fixed at P40.15)….…
P40.15)….… 48,180
48,180
Forward
Forward Contra
Contract
ct (fair
(fair value
value)…
)……………
…………………P ………P 300
On March 1, 20x5 (the transaction

transaction date and the settlemen
settlementt date), the journal
journal entries
entries are:
March 1, 20x5
Date of
of Tr
Transaction an
and Se
Settl em
ement Settl em
ement Da
Date/Date of
of Ex
Expirati on
on of
of Co
Con tr
tract
Firm Commi tment………… 240 FC Transaction Loss …………… 240

FC Transaction gain……. 240 FC ReReceivable fr
from XD
XD……… 240
To record a gain on fair value
value of [(P40.40
[(P40.40 – P40.20)
P40.20) x $1,200]
$1,200]
firm commitment. To record
foreign
n
currency to be received from
exchange dealer.
Peso
Pesoss Pay
Payab
able
le from
from XD……
XD…………
……….
…. 48,1
48,180
80
Cash………………………………. 48,180
To record
record payment to
exchange dealer.
Inve
Invest
stme
ment
nt in
in FC……
FC…………………… ……………….. 48,2
48,240
40
currency.
Inventory (P
(P40.20 x $1,200)…………. 48,240 Cash……………………………………. 48,240
Cash ………………………………… 48,240 Investment in FC……………..…... 48,240
To record
record the purchase
purchase of To record
inventory for $1,200 at spot rate. dollars
dollars into cash for purchase
purchase of
inventory.
Firm CoCommi tment……………………. 60

Inventory……………………………. 60
To remove the carrying amount of
the firm commitment from the
balance sheet6 and adjust the
initial carrying amount of the
machine that results from the firm
commitment. This treatment is an
accordance
accordance with PAS 39 par. 89b.
Firm Commitment
3/1/
3/1/x5
x5 Gain
Gain…….
……. 240
240 300…
300… …..1
…..12/
2/31
31/x
/x4
4 Loss
Loss
60 60 3/1/x5 Net
b.
b.1. P300 loss
loss - [(P40.4
[(P40.40
0 – P40.15)
P40.15) x $1,200
$1,200]]
b.2.
b.2. P30
P300
0 gain
gain - [(P4
[(P40.4
0.40
0 – P40.
P40.15
15)) x $1,2
$1,200
00]]
b.3. P300 loss
loss – P300
P300 gain
gain = P0
b.4. P240 gain - [(P40.4
[(P40.400 – P40.20)
P40.20) x $1,200}
$1,200}
b.5. P240 loss
loss - [(P40.4
[(P40.40
0 – P40.20)
P40.20) x $1,200
$1,200]]
b.6. P240
P240 loss
loss – P240
P240 gain
gain = P0
c. – same
same with Expose
Exposed d Liabili
Liability
ty
c.1.
c.1. P48,18
P48,180
0 - [P40.15
[P40.15,, origin
original
al (90-day
(90-day)) forward
forward rate
rate on the
the date
date of hedgin
hedging
g x $1,200
$1,200]]
c.2.
c.2. No entry
entry requir
required
ed
c.3. Same amount with d.1
c.4.
c.4. No entry
entry requir
required
ed
d.
d.1. Zero,
Zero, no entry
entry require
requiredd
d.2. P300
P300 liabil
liability,
ity, [(P40.4
[(P40.40
0 – P40.15
P40.15)) x $1,2
$1,200]
00]
d.3. P60, liability
liability
Firm Commitment
3/1/
3/1/x5
x5 Gain
Gain…….
……. 240
240 300…
300… …..1
…..12/
2/31
31/x
/x4
4 Loss
Loss
60 3/1/x5 Net
e. Same with Exposed Liability

e.1. Net Method: Zero. No entry required.
Gross Method
e.2.
e.2. P300 asset
asset
Net Method: P300.
asset)… P 300
Gross method
e.3.
e.3. P60 debit
debit balance
balance – asset
asset
Gross method
Net Method
12/31/x4 Gain… 300 240… …. …..3/1/x5 Loss
3/1/x5 Net…… 60
f. P48,240,
P48,240, spot rate
rate on the date of transac
transaction.
tion.
Inventory at spot rate on the date of transaction (P40.20 x $1,200)…………….P48,240
g. P48,180,
P48,180, original
original (90-day) forward
forward rate
rate on the date of hedging
hedging
Inventory at spot rate on the date of transaction (P40.20 x $1,200)…………….P48,240
Less
Less:: Fir
Firm
m Com
Commimitm
tmen
entt acc
accou
ount
nt – liab
liabililit
ity,
y, 3/1/
3/1/20
20x5
x5……
…………
………………………………
…………
…….. 60
Inventory at original (90-day) forward rate on the date of hedging, P40.15….P48,180
3. Cash
Cash Flow Hedg
Hedge e - Hedge
Hedge of a Forec
Forecast
asted
ed Transa
Transacti
ction.
on.
Gross Method
Method (for Net
Net Position
Position – same with
with Exposed
Exposed Liability)
Liability)
a. The journal entries to record the hedged item and hedging instrument are as follows:
follows:
Hedged
Hedged Item – Hedging
Hedging Instrument
Forward Contracts
Contracts
Forecasted Transaction ( Broad
Broad Approach
Approach or Gross
Gross Position
Position Accountin
Accounting)
g)
December 1, 20x4
Date of
o f Forecast Date of Inception/Hedging of 90 days Forw ards
No jour
journa
nall entr
entry
y is requ
requir
ired
ed to reco
record
rd the
the fore
foreca
cast
sted
ed FC Rece
Receiva
ivabl
ble
e from
from XD………
XD…………… …… 48,1
48,180
80
transaction. The forward contract is designated as a Pesos Payable to XD 48,180
hedge against the exposure to increases in the dollar (P40.15 x $1,200)
rate on March 1, 20x5. To record forward contract to
buy $1,200 using forward rate.
December 31, 20x4

No entry required, since it is only a forecasted FC Re

R ecei vable from XD 300
tran
transa
sact
ction
ion not
not guar
guaran
ante
teed
ed such
such as firm
firm comm
commitm
itmen
ent.
t. OCII – Exch
OC Exchan
angege Gain
Gain (B/S
(B/S)) 300
[(P40.40
[(P40.40 – P40.15)
P40.15) x $1,200]
$1,200]
To record a gain on foreign
FC dealer.
FC – foreign
foreign curre
currency;
ncy; OCI - Other
Other Compr
Comprehe
ehensive
nsive Income;
Income; B/S – Balance
Balance Sheet
Sheet

FC Rece
Receiva
ivable
ble from
from XDXD (P40
(P40.40
.40 x $1,20
$1,200)
0)…… P48,48
P48,480
0
Less:
Less: Pes
Pesos
os pay
payab
ablele to
to XD (fix
(fixed
ed at P40.
P40.15
15)) 48,1
48,180
80
For
Forward
ward Cont
Contrract
act (f
(fair va
value
lue - asset
sset))…..…
…..…..
.. P 300
300
On March 1, 2011 (the transaction date and the settlement date),

date), the journal entries are:
March 1, 20x5
Date of Transaction and Se
Settlement Settlement Date/Date of Expi ra
rati on
on of Contract
OCI – Exchange Loss (B (B/S)……… 240

FC Receivable from XD………
XD……… 240
[(P40.40
[(P40.40 – P40.20)
P40.20) x $1,200]
$1,200]
To record a loss on foreign
FC dealer.
Peso
Pesoss Paya
Payabl
ble
e from
from XD……
XD…………
……….
…. 48,1
48,180
80
Cash………………………………. 48,180
To record
record payment to
exchange dealer.
Inve
Invest
stme
ment
nt in
in FC……
FC…………
………… ………… …….. 48,2
48,240
40
currency.
Machinery (P40.20 x $1,200)………... 48,240 Cash……………………………………. 48,240

Cash ………………………………… 48,240 Investment in FC…………………. 48,240
To record
record the purchase
equipment for $1,200 at the spot dollars
dollars into cash
cash for purchas
purchase
e of
rate of P40.20 machinery.
OCI – Ex
Exchange Gain……………….. 60 Other Comprehensive Income
Machinery………………………….. 60 3/1/x5 Loss 240 300… ….12/31/x4 Ga
Gain
To remove the gain recognized in 60 60 3/1/x5
OCI and adjust the carrying
amount if the machine that results
from the hedged transaction by
this amount. Also, to record the
basis adjustment of the carrying
value of the equipment. This entry
is recorded if PAS 39 par. 98b i s
adopted.
b.
b.1. Gain or loss on hedged item, 3/1/20x4: None, no entry required
b.2. P300
P300 gain,
gain, other
other compre
comprehen
hensiv
sive
e incom
incomee - [(P40.4
[(P40.40
0 – P40.15)
P40.15) x $1,200
$1,200]]
b.3. None.
b.4. Gain oror loss on hedged
hedged item,
item, 3/1/20x4:
3/1/20x4: None, no
no entry
entry required
required for
for gain or loss. the
only entry
entry is to record
record the purchas
purchasee of machinery.
machinery.
b.5. P240
P240 loss,
loss, other
other comp
compreh
rehens
ensive
ive income
income - [(P40.4
[(P40.40
0 – P40.20
P40.20)) x $1,200
$1,200]] to be reco
recorde
rded d
on March
March 1, 20x5.
20x5. The balance
balance ofof the OCI
OCI – gain amounted
amounted to P60 computed
computed as
follows:
Other Comprehensive
Comprehensive Income
3/1/x5 Loss 240 300… ….12/31/x4 Ga
Gain
60 3/1/x5
c. Same with Exposed Liability

c.1. Net Method: Zero. No entry
entry required.
Gross Method
c.2.
c.2. P300 asset
asset
Net Method: P300.
asset)… P 300
Gross method
FC Receivable from XD (P40.40 x $1,200)… P48,480
c.3.
c.3. P60 debit
debit balanc
balance
e – asset
asset
Gross method
Net Method
12/31/x4 Gain… 300 240… …..3/1/x5 Loss
3/1/x5 Net…… 60
4. Not a Hedge Accounting Speculation.

Accounting – Speculation
Gross Method
Method (for Net
Net Position
Position – same with Exposed
Exposed Liability
Liability))
a. The journal entries to record the hedged
hedged item and hedging instrument are as follows:
follows:
Hedging
Hedging Instrument
Forward Contracts
Contracts
Hedge
Hedged
d Item
Item - Specu
Speculat
lation
ion ( Broad
Broad Approach
Approach or Gross
Gross Position
Position Accountin
Accounting)
g)
December 1, 20x4
Date of Inception/Hedging of 90 days Forwards
FC Rece
Receiv
ivab
able
le from
from XD……
XD………………… … 48,1
48,180
80
Pesos Payable to XD 48,180
(P40.15 x $1,200)
To record forward contract to
December 31, 20x4

(Balance Sheet Date an intervening financial
FC Recei vable from XD 300

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

FC Rece
Receiva
ivable
ble from
from XDXD (P40
(P40.40
.40 x $1,20
$1,200)
0)…
… P48,48
P48,480
0
Less:
Less: Pes
Pesos
os pay
payab
ablele to
to XD (fix
(fixed
ed at P40.
P40.15
15)) 48,1
48,180
80
For
Forward
ward Cont
Contrract
act (fa
(fair valu
value
e – asse
assett)………
……… P 300 300
March 1, 20x5
Settlement Date/Date of Expiration of Contract
FC Transacti on
on Loss………………… 240
FC Receivable from XD…………. 240
[(P40.40
[(P40.40 – P40.20)
P40.20) x $1,200]
$1,200]
To record
foreign
n
FC dealer.
Peso
Pesoss Paya
Payabl
ble
e from
from XD……
XD…………
……….
…. 48,1
48,180
80
Cash………………………………. 48,180
To record
record payment to
exchange dealer.
Inve
Invest
stme
ment
nt in
in FC……
FC…………………… ……………….. 48,2
48,240
40
To record
record receipt of foreign
currency.
Cash
Cash……………… ………………………………
……………………
…….. 48,2
48,240
40
Investment in FC…………………. 48,240
To record
dollars
dollars into cash
cash.
b.
b.1. No gain or loss, since it is the date of hedging.
b.2. P300
P300 gain
gain - [(P40.4
[(P40.400 – P40.15)
P40.15) x $1,20
$1,200],
0], only
only hedging
hedging instru
instrumen
ment.
t.
b.3. P240 loss
c.
c.1. P48,180
P48,180 - [P40.15,
[P40.15, origina
originall (90-day)
(90-day) forward rate on the date of hedging
hedging x $1,200]
$1,200]
c.2.
c.2. No entry
entry requir
required
ed
c.3. Same amount with c.1
c.4.
c.4. No entry
entry requ
requir
ired
ed
d.
d.1.
Gross Method
d.2. P300
P300 asset
asset
Net Method: P300.
asset)… P 300
Gross method
d.3. P60 debit

debit balance
balance – asset
asset
Gross method
Net Method
12/31/x4 Gain… 300 240… …..3/1/x5 Loss
3/1/x5 Net…… 60
Problem II (Discounting the Fair Value of the Forward Contract)

1. Not a He
Hedge
dge Accounting
Accounting - Importing
Importing Transaction
Transaction (Exposed
(Exposed Liability).
Liability).
The journal entries to record the hedged item and hedging instrument are as follows:
Hedged
Importing Transact
Transaction
ion Hedging
Hedging Instrument
Forward Contracts
Contracts
(Exposed Liability) ( Broad
Broad Approach
Approach or Gross
Gross Position
Position Accounting
Accounting))
December 1, 20x4
Transaction Date Date of Inception/Hedging of 90 days Forwards
Purchases ($1,200 x P40)…………... 48,000 FC Recei vable fr

from XD
XD…………… 48,180
Accounts payable………………. 48,000 Pesos Payable to XD 48,180
To record purchase of goods on (P40.15 x $1,200)
account using the spot rate on To record forward contract to
2/1/1/x4. buy $1,000 using forward rate.
*XD – exchange
exchange dealer
dealer
If the financial
financial statements
statements are prepared
prepared on December
December 1, 20x4, the value
value of the forward

FC Rece
Receiv
ivab
able
le from
from XD………
XD…………… ……………
………… … P48,
P48,18
180
0
Less
Less:: Peso
Pesoss paya
payabl
ble
e to XD…
XD…………………
…………
………
… 48,1
48,180
80
Forw arard Contract (fair value)………………. P 0
December 31, 20x4

FC Transaction Loss 360 FC Recei vable from XD…………… 294

Account payable……………. 360 FC Transaction Gain 294
[P40.30
[P40.30 – P40.00)
P40.00) x $1,200
$1,200 To record a gain on foreign
To record
record a loss on the
the exposed
exposed currency to be received from
liability denominated in foreign FC dealer.
currency.
Note: Discounted or present
present value for hedged item is Gai n [(P40.40 – P40.15) x $1,200]............ P 300
not necessary for exposed
exposed asset or liability since spot Less
Less:: Disc
Discou
ount
nt (P300
(P300 x 12%
12% x 2/1
2/12)
2)……
………… ……… … ____
____6
6
Rate is in effect. Present value of gain*…………………………. P294
* or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2
months = 2%
If the financial statements are prepared on December 31, 20x4, the value of the forward
contract
follows:

FC Rece
Receivaivable
ble from
from XD
XD (P40.
(P40.40
40 x $1,200
$1,200)-
)- P6. P48,47
P48,474
4
Less:
Less: Pesos
Pesos payab
payablele to XD (fixe
(fixed
d at
at P40.15
P40.15)…
)… 48,180
48,180
Forw ar
ard Contract (fai r value – asset)……… P 294
On March 1, 20x5 (the transaction date and the settlement

settlement date), the journal entries are:
March 1, 20x5
Settlement D
Daate Settlement Date/Date of Expirati on of Contract
Accounts payable 120 FC Transacti on Loss 234

FC Transaction gain……. 120 FC Receivable from XD 234
[(P40.
[(P40.20
20 – P40.30
P40.30)) x $1,200
$1,200}……
}……..
.. To record
foreign
n
from 12/31/x4 to currency to be received from
3/1/x5 on liability denominated in FC dealer.
FC.
Note: Discounted or present
present value for hedged item is Over
Overal alll gain
gain (P40
(P40.2
.20
0 – P40.
P40.15
15)) x $1,2
$1,200
00 ……..
…….. P 60
not necessary for exposed asset or liability since spot Less
Less:: 12/31
12/31/2/20x
0x4
4 Gain
Gain at pre
prese
sent
nt valu
value…
e…….
…... __29
__294
4
rate is in effect. FC Transacti on loss……………………………… P234
Peso
Pesoss Paya
Payabl
ble
e from
from XD……
XD…………
……….
…. 48,1
48,180
80
Cash………………………………. 48,180
To record
record payment to
exchange dealer.
Inv
Investm
estmen
entt in
in FC……
FC…………
………… ……………….. 48,2
48,240
40
To record
Currency.
Accounts pa
p ayable…………………… 48,240 Cash……………………………………. 48,240
Cash (refer to note below)……… 48,240 I nv
nvestment in
in FC
FC………… …… ………. 48,240
accounts To record conversion of US
dollars into cash for paymen
paymentt 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.
a.
a.1. P360 loss
a.2. P294 gain
a.3. P360 loss – P294 gain = P66 net loss (decrease
(decrease in net
net income
income))
a.4. P120 gain - [(P40.2
[(P40.20
0 – P40.30)
P40.30) x $1,200}
$1,200}
a.5. P234
P234 loss
loss
a.6. P234
P234 loss
loss – P120
P120 gain
gain = P114
P114 net loss
loss (dec
(decrea
rease
se in net inco
income)
me)
b.
b.1.
Gross Method
Forw ard Contract (fai r value)………………. P 0
b.2. P294
P294 asset
asset
Gross method
FC Recei vable from XD (P40.40 x $1,200)- P6
P6. P48,474
Less: Pesos payable to XD (fixed at P40.15)… 48,180
Net Method: P294.

asset)… P 294
b.3. P60 debit

debit balance
balance – asset
asset
Gross method
Net Method
12/31/x4 Gain… 300 240… …..3/1/x5 Loss
3/1/x5 Net…… 60
2. Fair Value Hedge

Hedge – Hedging
Hedging an Unreco
Unrecognized
gnized Forei
Foreign
gn Currency Commitment .
Currency Firm Commitment
Hedged
(Unrecog
cogniz
nized
ed Hedging
Hedging Instrument
Forward Contracts
Contracts
Broad Approach
Approach or Gross
Gross Position
Position Accounting)
Accounting)
December 1, 20x4
Date of Commitment (Date
(Date of Issuing the Purchase
Order) Date of Inception/Hedging of 90 days Forwards
No journal en
entry is
is re
required to re
record the firm FC Receivable frfrom XD…………… 48,180
commitment. The forward
forward contract is designated as a Pesos Payable to XD 48,180
hedge of the firm commitment to purchase inventory (P40.15 x $1,200)
This is computed using the change in the forward rate. These entries are as follows:
December 31, 20x4

FC Transaction Loss 294 FC Receivable from XD…………… 294
Firm Commitment 294 FC Transaction Gain 294
[P40.40
[P40.40 – P40.15)
P40.15) x $1,200
$1,200 [(P40.40
[(P40.40 – P40.15)
P40.15) x $1,200]
$1,200]
To record
record a loss
loss on
on firm
firm To record a gain on foreign
Loss…………………………………..................... P 300 Gai n [(P40.40 – P40.15) x $1,200] P 300
Less
Less:: Dis
Disco
coun
untt (P3
(P300
00 x 12%
12% x 2/1
2/12)
2)……
…………
………… ____
____6
6 Less
Less:: Dis
Disco
coununtt (P3
(P300
00 x 12%
12% x 2/1
2/12)
2)……
…………
……….
…... ____
____6
6
Presen t val ue
ue of
of loss*…………………… …… ……. P294 Present va value ofof ga
gai n*
n*…………………………… P294
months = 2%

Assets Liability
FC Receivable
Receivable from
from XD (P40.40 x $1,200) - P6…P48,474 Firm Commitment…………………………………...P 294
Less: Pesos
Pesos Payable
Payable to XD(fixed
XD(fixed at P40.15)….…
P40.15)….… 48,180
48,180
Forward
Forward Contra
Contract
ct (fair
(fair value
value)…
)……………
…………………P ………P 294
On March 1, 20x5 (the transaction date and the settlement date), the journal entries are:
March 1, 20x5
Date of
of Tr
Transaction an
and Se
Settl em
ement Settl em
ement Da
Date/Date of
of Ex
Expirati on
on of
of Co
Con tr
tract
Firm Commi tment………… 234 FC Transaction Loss …………… 234

FC Transaction gain……. 234 FC ReReceivable fr from XDXD……… 234
To record a gain on fair value
value of To record
foreign
n
firm commitment. currency to be received from
exchange dealer.
Overa
verallll loss
loss (P40.
P40.2
20 – P40.
P40.15
15)) x $1,20
1,200
0 ……….
………... P 60 Overa
verallll gain (P4
(P40.20
0.20 – P40
P40.15)
.15) x $1,2
$1,200
00 ……..
…….. P 60
Less
Less:: 12/3
12/31/1/20
20x4
x4 Gai
Gainn at pre
prese
sent
nt val
value
ue……
………
… __29
__294
4 Less
Less:: 12/3
12/31/
1/20
20x4
x4 Gai
Gain n at pre
prese
sent
nt va
value…
lue…….
…... __29
__294
4
FC T ra
ransacti onon G ai
ain………… …… ………… …… ……….. P234 FC T ra
ransacti on
on l os
oss…………………… …… ………… P234
Peso
Pesoss Paya
Payabl
ble
e fro
from
m XD…
XD………
…………
…….. 48,1
48,180
80
Cash………………………………. 48,180
To record
record payment to
exchange dealer.
Inve
Invest
stme
ment
nt in
in FC……
FC…………………… ……………….. 48,2
48,240
40
currency.
Inventory (P40.20 x $1,200)…………. 48,240 Cash……………………………………. 48,240

Cash ………………………………… 48,240 Investment in FC……………..…... 48,240
To record
record the purchase
inventory for $1,200 at spot rate. dollars
purchase of
inventory.
Firm CoCommi tment……………………. 60
Inventory……………………………. 60
invent
inventory
ory that
that result
resultss from
from the
firm commitment. This treatment is
an accordance with PAS 39 par.
89b.
Firm Commitment
3/1/
3/1/x5
x5 Gain
Gain……
…….. 234
234 294…
294… …..1
…..12/
2/31
31/x
/x4
4 Loss
Loss
60 60 3/1/x5 Net
a.
a.1. P294 loss
Fore
Foreigign
n Curr
Curren
ency
cy Exch
Exchan
ange
ge Loss
Loss [(P4
[(P40.
0.40
40 – P40.
P40.15
15)) x $1,2
$1,200
00]…
]………
………
… P 300
300
Less
Less:: Disc
Discou
ount
nt (P30
(P3000 x 12%
12% x 2/12
2/12))…………
……………… ………… …………………… ………… …………
………
… ____
____6
6
Pre
Present
ent va
value
lue of
of lo
loss*…
ss*………………………………
……………… ……… …………
………………… …………… …………
……… P294
P294
a.2. P294 gain
Fore
oreign
ign Cur
Curre
renc
ncyy Exc
Excha
hannge Gain
Gain [(P40
(P40.4
.40
0 – P40.
P40.15
15)) x $1,20
1,200
0]………
]……….. P 300
300
Less
Less:: Disc
Discou
ountnt (P30
(P3000 x 12%
12% x 2/12
2/12))…………
……………… …………………… ………… ………… …………
………
… ____
____6
6
Presen t va
val ue
ue o f gain*………………… …… …………………………… …… ………… P294
a.3.
a.3. P294
P294 loss
loss(a
(a.1
.1)) – P294
P294 gain
gain (a.2
(a.2)) = P0
a.4. P234
P234 gain
gain
Overa
verallll loss
loss (P40.
P40.2
20 – P40.
P40.15
15)) x $1,20
1,200
0 …………
………………
…………
………
…………
………………
……… P 60
Less
Less:: 12/
12/3131/2
/20x
0x4
4 Gai
Gainn at
at pre
prese
sent
nt valu
value…
e………
…………
…………
…………
…………
…………
……….
…. __29
__294
4
FC Tran
Transsactaction
ion Ga
Gain……
in……… ……………
……………… ……………………
…………
…………
………
……………
…………….
…. P234
P234
a.5. P234
P234 loss
loss
Overall gain (P40.20 – P40.15) x $1,200 …….. P 60
60
Less: 12/31/20x4 Gain at present value…….. __294
FC Transaction loss……………………………… P234
a.6.
a.6. P234
P234 gain
gain (a.4)
(a.4) – P234
P234 loss
loss (a.5)
(a.5) = P0
b.
b.1. Zero, no entry
entry required
required
b.2. P294 liability
Fore
Foreigign
n Curr
Curren
ency
cy Exch
Exchanangege Loss
Loss [(P4
[(P40.
0.40
40 – P40.
P40.15
15)) x $1,2
$1,200
00]…
]………
………… P 300
300
Less
Less:: Dis
Disc
count
ount (P3
(P300
00 x 12%
12% x 2/1
2/12)……
2)……………………………… …………………… ………… …………
………
… ___
____6
Pres
Presen
entt valu
value
e of loss
loss** / Firm
Firm Comm
Commititme
ment
nt……
…………………… ………… ………… …………
……….
…. P294
P294
b.3.
b.3. P60
P60 - liab
liabililit
ity
y
Firm Commitment
3/1/
3/1/x5
x5 Gain
Gain……
…….. 234
234 294…
294… …..1
…..12/
2/31
31/x
/x4
4 Loss
Loss
60 3/1/x5 Net
c.
c.1.
Gross Method
c.2.
c.2. P294 asset
asset
Gross method
P6. P48,474
Net Method: P294.

Forward contract (d
(debit balance – as
asset)… P 294
c.3.
c.3. P60 debit
debit balanc
balance
e – asset
asset
Gross method
Net Method
12/31/x4 Gain… 300 240… …..3/1/x5 Loss
3/1/x5 Net…… 60
3. Cash
Cash Flow Hedg
Hedge e - Hedge
Hedge of a Forec
Forecast
asted
ed Transa
Transacti
ction.
on.
Hedged
Hedged Item
Item – Hedging
Hedging Instrument
Forward Contracts
Contracts
Broad Approac
Approach h or Gross
Gross Position
Position Account
Accounting)
ing)
December 1, 20x4
Date of
o f Forecast Date of Inception/Hedging of 90 days Forwards
No jou
journ
rnal
al entr
entry
y is req
requi
uire
red
d to rec
recor
ord
d the
the fore
foreca
cast
sted
ed FC Rece
Receiv
ivab
able
le fro
from
m XD……
XD………………… … 48,1
48,180
80
rate on March
March 1, 20x5. To record forward contract to
December 31, 20x4

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

tran
transa
sact
ction
ion not
not guar
guaran
ante
teed
ed sucsuch
h as fir
firm
m comm
commitm
itmen
ent.
t. OCII – Exch
OC Exchan
ange
ge Gai
Gainn (B/S
(B/S)…
)…..
....
.. 294
FC dealer.
Gain [(P40.40 – P4 P40.15) x $1,200] P 300
Less:
Less: Discou
Discountnt (P300
(P300 x 12%
12% x 2/12)…
2/12)……………
………….... ____6
____6
Pres
Presen
entt val
value
ue of gain*
gain*………
…………… ………… ………… …………
…… P294
P294
months = 2%

FC Receiv
Receivable
able from XD (P40.40
(P40.40 x $1,200)
$1,200)-P6
-P6 P48,474
P48,474
Less
Less:: Peso
Pesoss pay
payab
ablele to
to XD (fix
(fixed
ed at P40.
P40.15
15)) 48,1
48,180
80
Forwa
orward rd Cont
Contrract
act (f
(fair valu
value
e - asset
sset))…..…
…..…..
.. P 294
294
On March 1, 20x5 (the transaction date and the settlement date), the journal entries are:
March 1, 20x5
Date of T ra
ran sa
saction and Settlemen t Settl em
ement Da
Date/Date of Expirati on
on of
of Co
Con tr
tract
OCI – Exchange Loss (B/S)………. 234

FC ReReceivable from XD……… 234
FC dealer.
Over
Overa all gain
gain (P40
(P40.2
.20
0 – P40.
P40.15
15)) x $1,2
$1,200
00 ……..
…….. P 60
Less:
Less: 12/31/
12/31/20x
20x44 Gain
Gain at presen
presentt value
value…….
……... __294
__294
FC Tran
Transa sact
ctio
ion
n loss
loss……
………… …………………… ………………………… P234
P234
Peso
Pesoss Paya
Payabl
ble
e fro
from
m XD……
XD…………
……….
…. 48,1
48,180
80
Cash………………………………. 48,180
To record
record payment to
exchange dealer.
Inve
Invest
stme
ment
nt in
in FC……
FC…………
………… ………… …….. 48,2
48,240
40
To record
currency.
Machinery (P40.20 x $1,200)………... 48,240 Cash……………………………………. 48,240

To record
record the purchase
equipment for $1,000 at the spot dollars
purchase of
rate of P40.20
P40.20 machinery.
OCI – Ex
Exchange Gain……………….. 60 Other Comprehensive Income
Machinery………………………….. 60 3/1/x5 Loss 234 294… ….12/31/x4 Ga
Gain
OCI and adjust the carrying
amount if the machine that results
from the hedged transaction by
this amount. Also, to record the
basis adjustment of the carrying
value of the equipment. This entry
is recorded if PAS 39 par. 98b is
adopted.
a.
a.1. Gain or loss
loss on hedged item,
item, 3/1/20x4:
3/1/20x4: None, no entry
entry required.
required.
a.2. P294
P294 gain,
gain, other
other compreh
comprehens
ensive
ive incom
incomee
Fore
Foreigign
n Curr
Curren
ency
cy Exch
Exchan
ange
ge Gain
Gain [(P4
[(P40.
0.40
40 – P40.
P40.15
15)) x $1,2
$1,200
00]…
]………
…….. P 300
300
Less
Less:: Disc
Discou
ountnt (P30
(P3000 x 12%
12% x 2/12
2/12))…………
……………… …………………… ………… ………… …………
………
… ____
____6
6
Presen t va
val ue
ue o f gain*………………… …… …………………………… …… ………… P294
a.3.
a.3. No
Nonne
a.4. Gain or loss on hedged item, 3/1/20x4: None,
None, no entry required for gain or loss. The
only entry is to record the purchase of machinery.
a.4. P234
P234 gain
gain
Overa
verallll loss
loss (P40.
P40.2
20 – P40.
P40.15
15)) x $1,20
1,200
0 …………
………………
…………
………
…………
………………
……… P 60
Less
Less:: 12/
12/3131/2
/20x
0x4
4 Gai
Gainn at
at pre
prese
sent
nt valu
value…
e………
…………
…………
…………
…………
…………
……….
…. __29
__294
4
FC Tran
Transsactaction
ion Ga
Gain……
in……… ……………
……………… ……………………
…………
…………
………
……………
…………….
…. P234
P234
a.5.
a.5. P234
P234 loss
loss,, othe
otherr comp
compre
rehe
hens
nsiv
ive
e inco
income
me – {[(
{[(P40.
P40.40
40 – P40.
P40.20
20)) x $1,2
$1,200
00]] – P6}
P6} to be
record
recorded
ed on on March
March 1, 20x5.
20x5. The
The bala
balance
nce of the
the OCI
OCI – gain
gain amoun
amountedted to P60
P60
computed as follows:
Other Comprehensive Income
3/1/x5 Loss 234 294… ….12/31/x4 Ga
Gain
60 3/1/x5
b.
b.1.
Gross Method
b.2. P294
P294 asset
asset
Gross method
P6. P48,474
Net Method: P294.

Forward contract (d
(debit balance – as
asset)… P 294
b.3. P60 debit

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

Accounting – Speculation
The journal entries to record the hedged
hedged item and hedging instrument
instrument are as follows:
Hedging
Hedging Instrument
Forward Contracts
Contracts
Hedged
Hedged Item
Item - Specu
Speculat
lation
ion ( Broad
Broad Approach
Approach or Gross
Gross Position
Position Accountin
Accounting)
g)
December 1, 20x4
Date of Inception/Hedging of 90 days Forwards
FC Rece
Receiv
ivab
able
le from
from XD……
XD………………… … 48,1
48,180
80
Pesos Payable to XD 48,180
(P40.15 x $1,200)
To record forward contract to
December 31, 20x4

FC Recei vable from XD 294

FC Transaction Gain 294
FC dealer.
Gai n [(
[(P40.40 – P4
P40.15) x $1,200] P 300
Less:
Less: Discoun
Discountt (P30
(P3000 x 12% x 2/12
2/12)……
)…………….
………... ____6
____6
Pres
Presen
entt val
value
ue of gain*
gain*………………
………… ……………………
……… … P294
P294
months = 2%

FC Receiv
Receivable
able from XD (P40.40
(P40.40 x $1,200)
$1,200)-P6
-P6 P48,474
P48,474
Less
Less:: Peso
Pesoss pay
payab
able
le to
to XD (fix
(fixed
ed at P40.
P40.15
15)) 48,1
48,180
80
For
Forward
ward Cont
Contrract
act (f
(fair value
lue – asse
assett)………
……… P 294 294
March 1, 20x5
Settlement Date/Date of Expiration of Contract
FC Transacti on on Loss………………… 234

FC Receivable from XD…………. 234
To record
foreign
n
FC dealer.
Over
Overal alll gain
gain (P40
(P40.2
.20
0 – P40.
P40.15
15)) x $1,2
$1,200
00 ……..
…….. P 60
Less
Less:: 12/31
12/31/2 /20x
0x44 Gain
Gain at pre
prese
sent
nt valu
value…
e…….
…... __29
__294
4
FC Tran
Transa sact
ctio
ion
n loss
loss……
………… ………… ………… ………………………… P234
P234
Peso
Pesoss Paya
Payabl
ble
e fro
from
m XD……
XD…………
……….
…. 48,1
48,180
80
Cash………………………………. 48,180
To record
record payment to
exchange dealer.
Inv
Investm
estmen
entt in
in FC……
FC…………
………… ……………….. 40,2
40,200
00
To record
currency.
Cash
Cash……………… ………………………………
……………………
…….. 48,2
48,240
40
Investment in FC…………………. 48,240
To record
dollars
dollars into cash
cash.
a.
a.1. P294 gain
Fore
Foreigign
n Curr
Curren
ency
cy Exch
Exchan
ange
ge Gain
Gain [(P4
[(P40.
0.40
40 – P40.
P40.15
15)) x $1,2
$1,200
00]…
]………
…….. P 300
300
Less
Less:: Disc
Discou
ountnt (P30
(P3000 x 12%
12% x 2/12
2/12))…………
……………… …………………… ………… ………… …………
………
… ____
____6
6
Presen t va
val ue
ue o f gain*………………… …… …………………………… …… ………… P294
a.3.
a.3. P294
P294 gai
gain.
n.
a.5. P234
P234 loss
loss – other
other compr
comprehe
ehensi
nsive
ve income
income
Overall gain (P40.20 – P40.15) x $1,200 …….. P 60
60
Less: 12/31/20x4 Gain at present value…….. __294
FC Transaction loss……………………………… P234
b.
b.1. Zero, no entry required
b.2. P294 liability
Fore
Foreigign
n Curr
Curren
ency
cy Exch
Exchanangege Loss
Loss [(P4
[(P40.
0.40
40 – P40.
P40.15
15)) x $1,2
$1,200
00]…
]………
………… P 300
300
Less
Less:: Disc
Discou
ount
nt (P30
(P3000 x 12%
12% x 2/12
2/12))…………
……………… ……………………………… ………… …………
………
… ____
____6
6
Pres
Presen
entt valu
value
e of loss
loss** / Firm
Firm Comm
Commit itme
ment
nt……
…………………… ………… ………… …………
……….
…. P294
P294
b.3.
b.3. P60
P60 - liab
liabililit
ity
y
Firm Commitment
3/1/
3/1/x5
x5 Gain
Gain……
…….. 234
234 294…
294… …..1
…..12/
2/31
31/x
/x4
4 Loss
Loss
60 3/1/x5 Net
c.
c.1.
Gross Method
c.2.
c.2. P294 asset
asset
Gross method
P6. P48,474
Less: Pesos payable to XD (fixed at P4
P40.15)… 48,180
Net Method: P294.

asset)… P 294
c.3.
c.3. P60 debit
debit balanc
balance
e – asset
asset
Gross method
FC Recei vable from XD (P(P40.20 x $1,200)… P48,240
Net Method
12/31/x4 Gain… 300 240… …..3/1/x5 Loss
3/1/x5 Net…… 60
Problem III
The following relevant exchange rates are needed for further analysis in relation to hedged item
and hedging instrument:
Forward Rate for

8/1/20x5 Settlement
November 1, 20x4…………………. P40.60 P41.25 (*270 da
days)
December 31, 20x4…………………. P40.75 P41.00 (**210 days)
March 1, 20x5…………………………………… P40.70 P40.95 (***150 days)
Au gust 1,
1, 20
20x5……………………………….. P41.55****
*original 270-day forward
forward rate on 12/1/20x4
***remaining or current forward rate on 3/1/20x5
contract is
zero.
The journal entries to record the hedged item and hedging

hedging instrument are as follows:
Hedged
(Unrecog
cogniz
nized
ed Hedging
Hedging Instrument
Forward Contracts
Contracts
Broad Approach
Approach or Gross
Gross Position
Position Accountin
Accounting)
g)
November 1, 20x4
Date of Commitment (Date of
of Issuing the Purchase
Order) Date of I nception/Hedging of 27
270 days Forwards
No jojournal en
entry is re
required to
to re
record the fifirm FC Recei va
vable fr
from XD
XD…………… 49,500
commitment. The forward contract is designated as a Pesos Payable to XD 49,500
hedge of the firm commitment to purchase
purchase inventory (P41.25 x $1,200)
December 31, 20x4

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

FC Transaction Gain……………... 300 FC Receivable from XD………… 300
[P41.25
[P41.25 – P41.00)
P41.00) x $1,200
$1,200 (P41.25
(P41.25 – P41.00)
P41.00) x $1,200]
$1,200]
To record
record a loss
loss on firm
firm To record
foreign
n
Assets Liability
Firm
Firm Commi
Commitm
tment
ent………
………………
…………………
………………….
………...P
..P 300
300 Pesos
Pesos paya
payable
ble to XD
XD (fixed
(fixed at P41.
P41.25)
25)………
………..P..P 49,5
49,500
00
Less: FC Receiv
Receivable
able from
from XD (at
(at spot rate)
rate)….
…. 49,200
49,200
Forward Contract (fair value)………………….P 300
On March 1, 20x5 (the transaction date), the journal entries are:
March 1, 20x5
Transactio
Transaction
n Date (Exposed
(Exposed Liability)
Liability)
Inven
Invento
tory
ry (P4
(P40.
0.70
70 x $1,2
$1,200
00)…
)…………
……….. 48,8
48,840
40
Accounts payable………………. 48,840
(P40.70 x $1,200)
To record
record the purchase
purchase of
inventory for $1,200 at spot rate
and recognize accounts payable.
Inventory ……………………………… 300

Firm Commitment ……………….. 300
inventory that results from the firm
commitment. This treatment is an
accordance with PAS 39 par. 89b.
Firm Commitment
12/31/x4 Gain….. 300
3 / 1/x5 300 300
August
August 1, 20x5
20x5
Settlement D
FC Transaction Loss………………… 1,020 FC Recei vable from XD……………. 660

Accounts payable…. 1,020 FC T ra
ransacti on
on Gai n…
n……………. 660
[(P41.55
[(P41.55 – P40.70)
P40.70) x $1,200}…
$1,200}……..
….. [(P41.55
[(P41.55 – P41.00)
P41.00) x $1,200]
$1,200]
To record a loss from 3/1/x5 to To record
record a gain on foreig
foreign
n
FC. FC dealer.
Pesos
Pesos Paya
Payabl
ble
e from
from XD……
XD…………
……….
…. 49,5
49,500
00
Cash………………………………. 49,500
To record
record payment to
exchange dealer.
Inve
Invest
stme
ment
nt in
in FC……
FC…………………… ……………….. 49,8
49,860
60
To record
currency.
Accounts payable…………………… 49,860 Cash……………………………………. 49,860

Cash………………………………….
Cash…………………………… ……. 49,860 I nv
nvestment in
in FC
FC…………………. 49,860
accounts To record
dollars into
into cash for payment
payment of
accounts payable.
Problem IV
The following relevant exchange rates are needed for further analysis in relation to hedged item
and hedging instrument:
Forward Rate for

3/1/20x5 Settlement
December 1, 20x4…………………………. P40.00 P40.15 (*90 days)
December 31, 20x4…………………………. P40.30 P40.40 (**60 days)
March 1,
1, 20
20x5………………………………….. P40.20***
*original 90-day forward rate on 12/1/20x4
contract is
zero.
Hedged
Hedged Item – Hedging
Hedging Instrument
Forward Contracts
Contracts
Broad Approach
Approach or Gross
Gross Position
Position Accountin
Accounting)
g)
December 1, 20x4
Date of
o f Forecast Date of In
I ncepti on/Hedging of 90 days Forw ards
No jour
journa
nall ent
entry
ry is requ
requir
ired
ed to reco
record
rd the
the for
forec
ecas
aste
ted
d FC Rece
Receiva
ivabl
blee fro
from
m XD…
XD………
………… …… 48,1
48,180
80
rate on March 1, 20x5. To record forward contract to
December 31, 20x4

No entry required, since it is only a forecasted FC Re

R ecei vable from XD 300
tran
transa
sact
ction
ion not
not guar
guaran
ante
teed
ed sucsuch
h as firm
firm comm
commitm
itmen
ent.
t. OCII – Exch
OC Exchan
angege Gai
Gain
n (B/S
(B/S)) 300
[(P40.40
[(P40.40 – P40.15)
P40.15) x $1,200]
$1,200]
FC dealer.
FC – foreign
foreign curren
currency;
cy; OCI
OCI - Other
Other Compreh
Comprehensi
ensive
ve Income;
Income; B/S
B/S – Balance
Balance Sheet
Sheet
Notice that unlike the fair value hedge, there is no offsetting firm commitment entry since this is a
forecasted transaction. The exchange gain or loss loss is reported in comprehensive income and will
affect the income statement when the inventory is eventually sold. On the balance sheet, the
forward contrac
contractt is reported
reported as an asset at its fair value
value of P300, and
and the offsetting
offsetting amount
amount is
reported
reported in other comprehensive
comprehensive income
income (as a gain).

FC Rece
Receiva
ivable
ble from
from XD
XD (P40.
(P40.40
40 x $1,200
$1,200)…)… P48,48
P48,480
0
Less
Less:: Peso
Pesoss pay
payab
able
le to
to XD (fix
(fixed
ed atat P40.
P40.15
15)) 48,1
48,180
80
Fair
Fair valu
valuee of For
Forward
ward Cont
Contraract
ct,, 12/1
12/1/2
/20x
0x4.
4... P 300
300
On March 1, 2011 (the transaction date and the settlement date), the jo urnal entries are:
March 1, 20x5
rati on
on of Contract
OCI – Ex
E xchange Lo
Loss (B/S)……… 240
FC Receivable from XD………
XD……… 240
[(P40.40
[(P40.40 – P40.20)
P40.20) x $1,200]
$1,200]
FC dealer.
Pesos
Pesos Paya
Payabl
ble
e from
from XD……
XD…………
……….
…. 48,1
48,180
80
Cash………………………………. 48,180
To record
record payment to
exchange dealer.
Inve
Invest
stme
ment
nt in
in FC……
FC…………
………… ………… …….. 48,2
48,240
40
currency.
Inventory (P40.20 x $1,200)…… …... 48,240 Cash……………………………………. 48,240

To record
record the purchase
merchandise for $1,200 at the dollars
dollars into cash
cash for purchas
purchase
e of
spot rate of P40.20
P40.20 machinery.
Suppose
Suppose that in April
April 1, 20x5,
20x5, the inventory
inventory is sold
sold for P54,000
P54,000 cash.
The entries to record the sale and to reclassify the amounts from Other Comprehensive Income
(a P50 gain,
gain, includ
including
ing P250 gain
gain on Decemb
December er 31,
31, 20x4,
20x4, plus
plus the P200 loss
loss on March
March 1, 20x5)
20x5) into
into
earnings
earnings are as follows:
follows:
April
April 1, 20x5
Date of Transaction (Sale) Settlement Date/Date of Expiration of Contract
Cash………... 54,000
Sales………………………………… 54,000
To record the sale of merchandise.
merchandise.
Cost
Cost of good
goodss sol
sold…
d………………… …………
………
… 48,2
48,240
40
Inventory, at cost………………… 48,240
To record
record cost of sales.
OCI – Exchange Loss……………….. 60 Other Comprehensive Income

Cost of goods sold....................... 60 3/1/x5 Loss 240 300… ….12/31/x4 Ga
Gain
OCI and release the OCI to profit
or loss.
loss. This
This entry
entry is recorde
recorded
d in
accordan
accordance ce with
with PAS 39 par.
par. 98a
is adopted.
Problem V
1. Indi
Indire
rect
ct exc
excha
hange
nge rate
ratess for
for Aust
Austra
ralilian
an doll
dollar
arss were
were::
Decemb
December er 1, 20x4:
20x4: FC70,0
FC70,00000 / P42,000
P42,000 = 1.667
1.667 [P1
[P1 equals
equals FC 1.667]
1.667]
December
December 31, 20x4: FC70,000
FC70,000 / P41,700
P41,700 = 1.679 [P1 equals FC 1.679]
2. The balan
balance
ce in the
the accoun
accountt Foreign
Foreign Curre
Currency
ncy Payable
Payable to
to Exchange
Exchange Brok
Broker
er was
P39,900 at December 31, 20X5, computed as:
P39,900
P39,900 = FC 70,000
70,000 x P.57 Dec.
Dec. 31
31 forward
forward rate
rate
3. The
The direc
directt excha
exchange
nge rat
rate
e for
for the 60-da
60-day y forwa
forward
rd con
contr
trac
actt for the
the 70,0
70,000
00 fore
foreign
ign
curre
currency
ncy (FC)
(FC) was FC 1 = P.58.
P.58. This
This is the result
result of the followi
following
ng comput
computatio
ation:
n:
(P40,
(P40,60
600
0 / FC 70,0
70,000
00)) = P.58.
P.58.
4. P40,60
P40,600 0 is
is the
the amount
amount of Pesos
Pesos Receiv
Receivabl
able
e from
from Exchang
Exchangee Brok
Broker
er in the adjust
adjusted
ed
trial balance at December 31, 20x4. The balance in this account does not change
because
because it is denominated in Philippine
Philippine peso.
5. Indi
Indire
rect
ct spot
spot exch
exchanange
ge rate
ratess for
for FC2
FC2 were
were::
Octo
Oc tobe
berr 2: FC2
FC2 400,0
400,000
00 / P80,0
P80,000
00 = 5 [P1
[P1 equal
equalss FC2
FC2 5]
Dece
De cemb
mber er 31:
31: FC2
FC2 400,
400,00
0000 / P80,
P80,800
800 = 4.95
4.950
0 [P1
[P1 equ
equal
alss FC2
FC2 4.95
4.950]
0]
Or,
Or, 4.9
4.950
50 = FC2
FC2 1 / P.202
P.2020 0
6. The
The Peso
Pesoss Paya
Payablble
e to
to Exch
Exchang
angee Bro
Broke
kerr was
was P82,
P82,00
0000 in
in bot
both
h the
the adjus
adjusted
ted and
and
unadjusted trial balances. The entry to record the forward contract for the 400,000
FC2 on October
October 2, 20x4, appears
appears below. Note that thethe account
account Pesos Payable to
Exchange
Exchange Broker is denomina
denominated
ted in pesos and
and does not change
change as a result of
exchange rate changes.
Foreign Currency Receivable from

Exchange Broker (FC2) 82,000
Pesos Payable to Exchange Broker (P) 82,000
7. The
The direc
directt exch
exchan
ange
ge rate
rate for
for the
the 120-da
120-day
y forwar
forward
d contr
contrac
actt in FC2
FC2 on Octo
Octobe
berr 2,
20x4, was P.205. This amount
amount is is determined
determined in the following
following manner:
manner: P82,000 / FC2
400,00
400,000
0 = P.205.
P.205. The P82,00
P82,0000 isis the
the amount
amount of the pesos
pesos payable
payable to exch
exchange
ange
broker. This amount is computed by using the forward rate.
8. The accoun
accountsts payable
payable balanc
balance e was
was P80,80
P80,800
0 at Decemb
December
er 31, 20x4.
P80,80
P80,800
0 = FC2 400,00
400,000
0 x P.2020
P.2020 Dec.
Dec. 31 spot
spot rate
The entries
entries to support
support the computations
computations for
for are presented
presented below:
1. Tran
Transa
sact
ctio
ions
ns with
with Fore
Foreig
ign
n Com
Compa
pany
ny 1 (FC
(FC1)
1)
December 1, 20x4
Accounts Receivable (FC1) 42,000
Sales 42,000
P42,000
P42,000 = FC1 70,000
70,000 x (P1/
(P1/FC1
FC1 1.667)
1.667)
Pesos Re
R eceivable from Exchange Broker 40,600
Foreign Currency Payable to
P40,600
P40,600 = FC1 70,000
70,000 x P.58
P.58 Dec.
Dec. 1 forward
forward rate
rate,,
and also
also peso
peso amount
amount stated
stated in problem
problem inform
informatio
ation
n
(P.58
(P.58 = P40,6
P40,600
00 / FC1
FC1 70,0
70,000)
00)
December 31, 20x4

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

Exchange Broker 700
Foreign Currency Transaction Gain 700
P39,900
P39,900 = FC1 70,000
70,000 x P.57
P.57 Dec.
Dec. 31 forwar
forward
d rate
- 40,60
40,600
0 = FC1
FC1 70,0
70,000
00 x P.58
P.58 Dec
Dec.. 1 forwa
forward
rd rate
rate
P 700 = FC1 70,000 x (P.57 - P.58)
2. Tran
Transa
sact
ctio
ions
ns with
with Fore
Foreig
ign
n Com
Compa
pany
ny 2 (FC
(FC2)
2)
October 2, 20x4
Equipment 80,000
Accounts Payable (FC2) 80,000
P80,
P80,00
0000 = FC2
FC2 400,
400,00
000
0 x P.20
P.20

Pesos Payable to Exchange Broker 82,000
P82,000
P82,000 = FC2
FC2 400,00
400,0000 x P.2050
P.2050,, and
and the
P82,000 is presented in the problem
for the foreign currency receivable.
December 31, 20x4

Accounts Payable (FC2) 800
P80,800
P80,800 = FC2
FC2 400,00
400,000
0 x P.202
P.202 Dec.
Dec. 31 spot
spot rate
rate
- 80,0
80,000
00 = FC2
FC2 400,0
400,000
00 x P.20
P.200
0 Oct
Octob
ober
er 2 spo
spott rate
rate
P 800 = FC2 400,000 x (P.202 - P.200)
Foreign Currency Transaction Loss 1,000

Exchange Broker 1,000
P81,000
P81,000 = FC2
FC2 400,00
400,000
0 x P.2025
P.2025 Dec.
Dec. 31 forwar
forward
d rate
- 82,0
82,000
00 = FC2
FC2 400,0
400,000
00 x P.20
P.2050
50 Oct.
Oct. 2 forwa
forward
rd rate
rate
P 1,00
1,000
0 = FC2
FC2 400,
400,00
000
0 x (P.2
(P.202
0255 - P.2
P.2050)
050)
Problem VI
Based on the data given, the following situations can be derived:
Strike price Foreign

(exerc
(exercise
ise price
price Currency
Market or or option Option Element Time Intrinsic
Spot Rate price) Situation Existing Value** Value*
12/ 1/20x4 P1.20 P1.20 At-the-money TV P360 P 0
12/31/20x4 P1.28 P1.20 In-the-money TV & I V P240 P4,800
3/ 1/20x5 P1.27 P1.20 In-the-money I V*** P 0 P4,200
TV – time
time value;
value; IV
IV – intrin
intrinsic
sic valu
value.
e.
* (Market price
price less – option price)
price) x foreign
foreign currencies
currencies
** Fair value
value of option – intrinsic
intrinsic value
value
***time already expired, so need to determine time value unless It is a residual amount.
Hedged
Importing Transact
Transaction
ion
(Exposed Liabili ty) Hedging Instrument – Op
Option Contracts
December 1, 20x4
Transaction Date Date of Inception/Hedging of 90 days Fo
F orw ards
Inventory (60,000 FC x P1.2)……….. 72,000 I nvestment in FC Call Option…….. 360

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

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

Account payable………………… 4,800 FC Tr
Transaction Ga
Gain…. 4,680
[P1.28
[P1.28 – P1.20)
P1.20) x 60,000
60,000 FC (P5,04
(P5,040
0 – P360
P360 = P4,680)
P4,680)
To record
record a loss on the
the expose
exposed d To record a gain
gain on call option.
option.
liability denominated
denominated in foreign
foreign
currency.
On March 1, 20x5 (the transaction date and the settlement

settlement date), the journal entries are:
March 1, 20x5
Settlement D
Accounts payable……………. 600 FC Transacti on Loss…………………. 840

FC Transaction gain……. 600 I nv
nvestment in
in FC
FC Ca
Call Op
Opti on
on… 840
[(P1.28
[(P1.28 – P1.27)
P1.27) x 60,000
60,000 FC……..
FC…….. (P5,04
(P5,040
0 – P4,200
P4,200))
from 12/31/x4 to To recor
record
d a loss
loss on call
call option
option
3/1/x5 on liability denominated in
FC.
Accounts payable…………………… 76,200 Cash……………………………………. 4,200

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

Total Call Option (CO Premium x FCs)
Spot Fair Change in (CO)Premium Fair Value of Call Change in
Date Rate value Fair Value per FC Option Fair Value
11/20/x4 P0.20 P.002 P120
12/20/x4 P0.21 (P 600)* (P 600)** P.010*** P600 P480
* $12,000
$12,000 – $12,600
$12,600 = $(600)
$(600)..
**(P0.21
**(P0.21 – P0.20,
P0.20, spot) x 60,000
60,000 FC.
FC.
***The premium on 12/20 for an option that expires on that date is equal to the option’s intrinsic intrins ic value. Given the spot
rate on 12/20 of P.21, a call
call option with
with a strike price
price of P.20 has an intrinsic value
value of P.01 per mark.
mark.
Based on the above data, the following situations can be derived:

(exerc
(exercise
ise price
price Currency
11/20/20x4 P0.20 P0.20 At-the-money TV P120 P 0
12/20/20x4 P0.21 P0.20 In-the-money IV P 0 P 600
TV – time
time value;
value; IV
IV – intrin
intrinsic
sic valu
value.
e.
* (Market
(Market price less
less – option
option price)
price) x foreign
foreign currencie
currenciess
** Fair value
intrinsic value
value
Hedged
Importing Transact
Transaction
ion
(Fi rm Commitment) Hedging Instrument – Op
Option Contracts
November 20, 20x4
Date ofo f Commitment Date of Inception/Hedging of 90 days Forw ards
There is no entry to record

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

Date of
of Tr
Transaction an
and Se
Settlement Settlement Da
Date/Date of
of Ex
Expi ra
rati on
on of
of Co
Contract
FC Loss on Firm Commitment……… 600 I nvestment in FC Call Option…… 120

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

Cash [(P0.20 x 60,000 FC) + 12,6
12,600
00 Inv
Invest
estment
ment in FC Cal
Call Opt
Optioion
n 600
P600, proceeds from call To record
record the derecogn
derecognition
ition of
option]………………………….. call option on realization.
To record purchase of equipment
equipment
at spot rate (P.21 x 60,000 FC)
Firm Commitment …………………… 600

Equipment…………………………. 600
To derecognized
derecognized firm
commitment and adjust the
carrying amount of equipment.
Problem VIII
The relevant exchange rates and option premiums are as follows:
11/20/20x4 12/20/20x4
Spot rate (market price) P0.20 P0.18
Strike price (exercise price) 0.20 0.20
Fair value of call option P480 N/ A
N/A – not applic
applicab
able
le
The following table summarizes

summarizes the succeeding
succeeding journal entries in relation to hedged item and
hedging instrument:
Firm Commitment Call Option Contract

Total Call Option (CO Premium x FCs)
Spot Fair Change in (CO)Premium Fair Value of Call Change in
Date Rate value Fair Value per FC Option Fair Value
11/20/x4 P0.20 P.002 P120
12/31/x4 P0.18 P1,200* P1,200** P.000*** P 0 (P120)
* P12,
P12,00
0000 – P10,8
P10,800
00 = P1,2
P1,200
00
**(P.20
**(P.20 – P.18) x 60,000
60,000 FC
***The premium on 12/20 for an option that expires on that date is equal to the option’s intrinsicintrins ic value. Given the spot
rate on 12/20 of P.18, a call
call option with
with a strike price
price of P.20 has no
no intrinsic value
value – the premium
premium on 12/20 is is P.000.
Based on the above data, the following situations can be derived:

(exerc
(exercise
ise price
price Currency
11/20/20x4 P0.20 P0.20 In-the-money TV & I V P120 P 0
12/20/20x4 P0.18 P0.20 In-the-money IV P 0 P 0
TV – time
time value;
value; IV
IV – intrin
intrinsic
sic valu
value.
e.
* (Market price
price) x foreign
foreign currencies
currencies
** None since the option price
price is greater than the market
market price.
The journal entries to record the hedged item and hedging

hedging instrument are as follows:
Hedged
Importing Transact
Transaction
ion
(Fi rm Commitment) Hedging Instrument – Op
Option Contracts
November 20, 20x4
Date ofo f Commitment Date of Inception/Hedging of 90 days Forw ards
There is no entry to record

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

Settlement Settlement Date/Date of Ex
Expi ra
rati on
on of Contract
Firm Commitment……… 1,200 FC Transacti on Loss……….…… 120

FC Gain on Firm Commitment 1,2
1,200 Inv
Invest
estment
ment in FC Cal
Call Optio
ption
n 120
[(P0.20
[(P0.20 – P0.18)
P0.18) x 60,000
60,000 FC] (P120
(P120 – P0 = P120)
P120)
To record loss on firm commitment To record a gain
option.
based on spot rate.
Equipment…………………………….. 12,000 No entry required since the

Cash [(P0.20 x 60,000 FC) + 12,000
12,000 Investm
Investment
ent in call
call option
option has no
P0, no proceeds from call value.
option]…………………………..
To record purchase of equipment
equipment
at spot rate (P.21 x 50,000 FC)
Equipment…… ….….………… …… ……… … 1,200

Firm Commitment………………. 1,200
To derecognized
derecognized firm
commitment and adjust the
carrying amount of equipment.
Problem IX
Based on the data given in the problem, the following situations can be derived:
derived:

(exerc
(exercise
ise price
price Currency
1/ 1/20x4 P1.15 P1.14 In-the-money TV & I V P8,400 P12,000
6/30/20x4 P1.18 P1.14 In-the-money TV & I V P4,800 P48,000
12/31/20x4 P1.17 P1.14 In-the-money I V*** P 0 P36,000
TV – time
time value;
value; IV
IV – intrin
intrinsic
sic valu
value.
e.
* (Market price
price) x foreign
foreign currencies
currencies
** Fair value
intrinsic value
value
***time already expired,
expired, so need to determine time value value unless It is a residual amount.
Hedged
Importing Transact
Transaction
ion
(Forecasted Transaction) Hedging Instrument – Option Contracts
December 1, 20x4
Transaction Date Date of In
I ncepti on/Hedging of 90 days Forw ards
No jou
journ
rnal
al ent
entry
ry is req
requi
uire
red
d to
to rec
recor
ord
d the
the for
forec
ecas
aste
ted
d Inves
Investm
tmen
entt in
in FC Call
Call Opt
Optio
ion…
n…….
…... 20,4
20,400
00
transaction. The forward contract is designated as a Cash……………………………….. 20,400
hedge against the exposure to increases in the dollar To record purchase of call
rate on March 1, 20x5. option.
December 31, 20x4

No en
entry re
requi re
red, si
since itit is
is on
onl y a fo
forecasted I nv
nvestmen t in FC
FC Ca
Call Op
Option…….. 32,400
transa
transacti
ction
on not guaran
guaranteteeded such
such as firm
firm commit
commitmen
ment.
t. OCII – FC Transa
OC Transacti
ction
on Gain
Gain (B/S)
(B/S) 32,400
[P1.18
[P1.18 – P1.14) x 1,200,0
1,200,000
00 =
P52,800
P52,800 – P20,400
P20,400 = P32,400]
P32,400]
To record a gain
option.
OCI – FC T ra
ransaction Gain (B/S) 25,920
FC Transaction Gain 25,920
To reclassify 80% of OCI to
earnings (720,000
(720,000 /900,000) =
80% ; (80% × P32,400 = P25,920)
On December
December 31, 20x4 (the transactio
transaction
n date and the settlemen
settlementt date), the journal
journal entries
entries are:
December
December 31, 20x4
rati on
on of Contract
FC Tra
Trans
nsac
acti
tion
on Los
Loss…
s…………
…………… ……….…. 16,8
16,800
00
Investment in FC Call Option… 16,800
[(P1.17
[(P1.17 – P1.14) x 1,200,0
1,200,000
00
baht = P36,00
P36,0000 – P52,800]
P52,800]
To recor
record
d a loss
loss on call
call option
option
OCI – FC Tra
OCI Transac
nsacttion
ion Ga
Gain (B/S
(B/S))…. 6,48
6,480
0
FC Transaction Gain………….… 6,480
To record
record reclassify the
remaining P6,480 of FC gain
from OCI to earnings
(180,000/900,000 x P32,400).n
This entry is recorded if PAS 39
par. 98b is adopted.
Cash
Cash…………………
…………………………… ………… ……………….. 36,0
36,000
00
Investment in FC Call Option… 36,000
[(P1.17
[(P1.17 – P1.14)
P1.14) x 1,200,000
1,200,000 baht]
baht]
To record the derecognition
derecognition of
call option on realization.
Multiple Choice Problems
1. c
Peso Value in 3 months = 3,750 + 37.50 = 3,787.50
FC Value in 3 months = 5,000 + 87.50 = 5,087.50
Fwd
Fwd rate
rate 3,78 3,787.7.50
50 ÷ 5,0
5,087.
87.50 50 = .74
.7455
2. e
Pound should be FCU FCU
11/10/x6: Original forward rate on the date of hedging..……………………….P
hedging..…………… ………….P 1.64
Balanc
Balance e She
Sheetet date:
date: Rema
Remain inining
g (cu
(curr
rren
ent)
t) forwar
forward d rate
rate – 12/3
12/31/
1/20
20x6.
x6....
.....
..…….
……. 1.59
1.59
Gain on forward contract per FC………...……………… FC………...………………………………………… …………………………..P ..P .05
Multiplied
Multiplied by: No. of FCs…………………………………………………………
FCs……………………………………………………………….. …….. 100,000
100,000
Gain on forwar
forward d contrac
contract..t..……………
………………………… ……………………… ……………………………………………….P ………….P 5,000 5,000
3. a
Euro
Eur o shou
should ld be FCUFCU
hedging..…………… ………….P 0.45
Balanc
Balance e She
Sheet et dat
date:
e: Rem
Remainainin ing
g (cur
(curre
rent)
nt) forwar
forward d rate
rate – 12/3
12/31/
1/20
20x6.
x6.………
……….. 0.44
0.4455
Gain on forward contract per FC…………………………… …………………… ..P .005
Multiplied
FCs……………………………………………………………….. …….. 100,000
100,000
Gain
Gain on forw forwar ardd contr
contrac
act.t...
....
..……
………… ………… ………… ………… …………………… …………………… …………………… …….P.P 500
500
4. c -15,000,000 x P.0092
5. b - 15,000,000 x P.0094
6. b - 15,000,000 (P (P.0094 - P.0092)
7. d - 15,000,000 x P.0091
8. c - 15,000,000 (P (P.0091 - P.0094)
9. a – forw
forwar ard
d cocontra
ntract
ct is zero
zero on thethe dat
date e of
of hed
hedgi
ging
ng
10.
10. b – sinc
since e it is a gai
gain
n (refe
(referr to No.No. 11)
11) the
there
refo
fore
re the
the valu
value
e of for
forwar
wardd contr
contrac
actt is an
an asse
assett
11. d - P4
P 4,500 - P0 P0
12. c
13. c - P3,000 - P4,500
14. b - 1,000,000 x P1.116
15. d - 1,000,000 x P1.129
16. a - 1,000,000 (P (P1.129 - P1.116)
17. a - 1,000,000 x P1.138
18. c - 1,000,000 (P (P1.138 - P1.129)
19.
19. d – forw
forwar ard
d cocontra
ntract
ct is zero
zero on thethe date
date of hedg
hedgining
g
20. a
21. b
22. c
23. d - (P8,000 - P6,000)
24. e – there is no fair value of forwardforward contract
contract on the the date
date of hedging.
hedging.
25. b – (100,000
(100,000 FCU FCU x P.74,
P.74, the forward
forward rate
rate on the datedate of hedging),
hedging), the entry
entry would
would be as
follows (using the gross or broad approach):
Forward contract receivable……………………………………………… 74,000
Pesos payable to exchange dealer…………………………
dealer……………………………. …. 74,000
26. d
Original value of Forward Contract Receivable -FC 100,000 x .74 = 74,000
Current (6/30) value of the Fwd Contract Rec -FC 100,000 x .75 = 75,000
Increase in value of Forward Contract Receivable 1,000
Value of Receivable, discounted at 8%, n 1 1,000 - (1,000 x [.08 ÷ 12]) = 993
Value of receivable 74,000 + 993 = 74,993
or,
FC Receiv
Receivabl
able
e – date of hedgin
hedging,
g, 6/1 20x4……
20x4………………
…………………………………………….………...P..P 74,000
74,000
Add:
Add: For
Forwar
wardd con
contr
trac
actt gain
gain P1,0
P1,000
00 x [1/1
[1/1 + (8%
(8%/1
/12
2 x 1 mont
month
h rem
remai
aini
ning)
ng)]..
].. 993
993
Forward Contract
Contract (FC)
(FC) Receiv
Receivable,
able, 6/30/20x4…………………………
6/30/20x4…………………………………. ………. P 74,993
74,993
27. d
January 1: Origininal forward rate on the date of hedging..………………..P
hedging..…………… …..P 0.94
Marc
March h 1: Spo
Spott rate
rate……
………… …………………… ………… …………
…………………… …………………… ………… …………
………… …… 0.93
0.93
Gain……………………………………………………………………………………..P 0.01
Multipl
Multiplied
ied by:
by: No.
No. of FCs………
FCs………………… ……………………………………………… ……………………… …………………. ……. 100,00100,0000
FC For
Forwar
ward d Contr
Contrac actt Gain
Gain………
…………… ……………
……………………………………………… ……………… ……………P
……P 1,00
1,0000
28. c
Hedging Instrument:
January 1: Origininal forward rate on the date of hedging..………………..P
hedging..…………… …..P 0.94
Marc
March h 1: Spo
Spott rate
rate……
………… …………………… ………… …………
…………………… …………………… ………… …………
………… …… 0.93
0.93
Gain……………………………………………………………………………………..P 0.01
Multipl
Multiplied
ied by:
by: No.
No. of FCs………
FCs………………… ……………………………………………… ……………………… …………………. ……. 100,00100,0000
FC Forward Contract Gain………………………
Gain………………………………………………… ………………………………… ………P P 1,000
Hedged Item:
January 1: Spot rate……………………
rate……………………………………………… …………………………..………………..P ..………………..P 0.945
Marc
March h 1: Spot
Spot rate
rate……
………… …………………… ………… …………
…………………… …………………… ………… …………
………… …… 0.93
0.9300
Loss………………………………………………………………………………………P 0.015
Multipl
Multiplied
ied by: No. of FCs…………………
FCs……………………………… ………………………………
……………………………. …………... 100,00100,0000
Foregin
Foregin currency
currency exchange
exchange loss……..…………………
loss……..…………………………………………..
……………………….. P 1,500
Net loss………………………………………………………
loss………………………………………………………………………………….P ………………………….P 500
29. d
Hedged Item:
January 1: Spot rate……………………
rate……………………………………………… …………………………..………………..P ..………………..P 0.945
Marc
March h 1: Spot
Spot rate
rate……
………… …………………… ………… …………
…………………… …………………… ………… …………
………… …… 0.93
0.9300
Loss………………………………………………………………………………………P 0.015
Multipl
Multiplied
FCs……………………………… ……………………… ……………………… ………………….. …….. 100,00
100,0000
Fore
Foreign
ign curr
curren
encycy exc
exchan
hange
ge loss
loss…….
……..……
.……………
……………………………… …………… ……………
……….. .. P 1,501,5000
30. c – (P.186
(P.1865 5 – P.1850)
P.1850) gain x 100,0
100,000
00 FC
FC = P150
P150 gain
31. c – using
using spot
spot rate
rate
32. c
5/1: Original forward rate (90 days)……..………………………………
days)……..……… ……………………….P .P .693
6/30
6/30:: Curr
Currenentt (rem
(remai aini
ning)
ng) forwar
forwardd rate
rate (30
(30 days)
days)…….
……... ...……
.……………
………… … .695
.695
Forex gain per unit.......………………… ………………………… …………………………………… ………….P .P .002
Multiplied
Multiplied by: Number of foreign foreign currencies
currencies…………………………….
……………………………. 500,000 500,000
Foreign exchange gain due to hedging instrument……..……………P 1,000
Less: Discount – P1,000 x 6% x 30/360 days………………………………. ……. 5
PV of foreign exchange gain due to hedging instrument…………… P 995
Or, alternatively the computation of present value may also be presented as:
Foreign
Foreign exchan
exchange ge gain………………
gain…………………………… ……………………… …………………...………...PP 1,000
1,000
Divide
Divided d by: [1%
[1% + (6%/
(6%/12
12 x 1 month
month = equi
equival
valent
ent to
to 30 days)
days)]…..
]….. 1.005
1.005
PV of foreign
foreign exchang
exchange e gain
gain due
due to hedg
hedging
ing inst
instru
rumen
ment……….P
t……….P 995
Note: Since, the discount rate is given it is assumed that all times present value should be
computed. Present value for hedged item is not necessary for exposed asset or liability since
spot rate is in effect. Unlike, the other types of hedging wherein, forward forwa rd rates is used to
determine the gain or loss on the hedged item
33. c
Foreign exchange loss due to Hedged Item:
5/1:
5/1: Spot
pot rat
ratee…………
……………… ………… …………………………………………………… ………… ………… …………
……P P .687
.687
6/3
6/30: Spot rate…… te……… …………… ……………… ……………… ……………… ……………… ……………… …………… .691
Fore
Forexx loss
loss per
per fore
foreig
ign n curr
currenency cy…….
…….……… …………… ………… ………… …………… …………… …….. ..P
P .04
.04
Multipl
Multiplied ied by: Numb
Number er of
of foreign
foreign curren
currencie cies………
s………………………….…………………... 500,00 500,000 0
Fore
Foreig ignn exch
exchanangege los
losss due
due to hed hedge ged d item
item ……… …………… ………… …………. ……..P .P 2,00
2,000 0
PV of foreign exchange
exchange gain due to hedging instrument instrument
(for
forwar
ward contract act – refer to No No.. 32).2).………
………………… ……………… ……...... ....... 995
Nett Inco
Ne Income me effe
effect
ct – decr
decrea easese ………………
……………………… ……………… ……………… ……….. .....
.....
.... P 1,00
1,005 5
34. d
5/1: Original forward rate (90 days)…..……………………………
days)…..………… ………………… ……….P .693
8/1:
8/1: Spot
Spot raterate……
………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… …… .69
.696
Fore
Forexx gain
gain perper curr
currenc
ency y ………………
……………………… ……………… ……………… ………………… ………………. …….P P .003
.003
Multiplied
Multiplied by: Number of foreign foreign currencies
currencies………………………………..
……………………………….. 500,000 500,000
Total Foreign Exchange gain due to hedging instrument
(forward contract)....
contract)...........
...............
................
.................
................
................
..................
.................
.....................P
.............P 1,500
Less: 6/30
6/30 cut-off
cut-off - PV of foreign
foreign exchange
exchange gain due due to hedging
hedging
inst
instru
rume
mentnt (for
(forwa
ward rd cont
contra rac ct – refe
referr toto No.
No. 32)…
32)……… ………… ………. …... ....
.. 995
995
August
August 1 - Foreign
Foreign exchange
exchange gain due to to hedging instru instrument
ment
(for
(forwar
wardd cont
contrac
ract)t)………
……………… ……………… ……………… ……………… ………………… ………………. …….P P 505
505
35. e
Hedging Instrument:
Origininal forward rate on the date of hedging………………… hedging……………………………….P …………….P 0.105
Balanc
Balance e She
Sheet
et dat
date:e: Rem
Remain ainin ing
g (cur
(curre rent)
nt) forwa
forward rd rate
rate – 12/312/3/1 /1/2
/20x0x4……4…… 0.09
0.095 5
Loss………………………………………………………………………………………P 0.010
Mult
Multipl
iplie
iedd by:
by: No.
No. of FCs
FCs……………………… ……………… ……………… ……………… ……………… ……………… ……………. ……. 50,0
50,00000
FC Forward Contract Loss…………………………
Loss…………………………………………………… ………………………………..P ……..P 500
Mult
Multipl
iplie
iedd by: PV fact
factor
or………
……………… ……………… ……………… ……………. ……..… .………………………… ……………. ……. .98,0
.98,03 3
Forward contrac
contractt – a liability
liability account
account (since (since it is a loss)………………………P
loss)………………………P 490.15 490.15
36. b – (forward
(forward rate rate > spot raterate – premium)
premium) seller’ seller’ss point
point of view considered
considered as premium premium
revenue since it was sold at a higher rate.
37. b
November 1, 20x4:
Exchange Broker (FC) 12,600
Pesos Payable to Exchange Broker 12,600
Signed 90-day forward exchange contract
to purchase
purchase 100,000
100,000 FC:
P12,600
P12,600 = 100,000 FC x P.126 forward forward rate
38. c
December 31, 20x4
Exchange Broker (FC) 300
Foreign Currency Transaction Gain 300
Revalue foreign currency receivable to
fair value:
P300
P300 = 100,
100,00
0000 FC x (P.12
(P.129 9 - P.12
P.126) 6)
39. b
January 30, 20x5
Pesos Pa Payable to Exchange Broker (Pesos) 12,600
Cash 12,600
Deliver
Deliver pesos to exchange
exchange broker in
accordance with forward exchange contract:
P12,60
P12,600 0 = 100,000
100,000 FC x P.126 P.126 contrac
contractt rate rate
40. b
January 30, 20x5
Pesos Pa
Payable to Exchange Broker (Pesos) 12,600
Cash 12,600
Deliver
Deliver pesos to exchange
exchange broker in
accordance with forward exchange contract:
P12,60
P12,6000 = 100,
100,000
000 FC x P.126,
P.126, the 90-day
90-day forwar
forwardd rate
rate
41. a
January 30, 20x5
Foreign Currency Receivable from Exchange Broker (FC) 200
Adjust foreign currency receivable to
curre
current
nt peso
peso equiva
equivalen
lent:
t:
P12,70
P12,7000 = 100,000
100,000 FC x P.127
P.127 Jan. 30
30 spot
spot rate
- 12,9
12,900
00 = 100,
100,00
000
0 FC x P.129
P.129 Dec
Dec.. 31 for
forwar
wardd rate
rate
P 200 = 10 100,000 FC x (P
(P.127 - P.129)
Foreign Currency Units 12,700
Foreign Currency Receivable from Exchange Broker 12,700
Receive
Receive 100,000
100,000 FC from exchange
exchange broker:
P12,70
P12,7000 = 100,
100,000
000 FC x P.127
P.127 spot
spot rate
rate
42. d
PAS 32 and 39 (PFRS 9)9) requires
requires the FCU
FCU payable be record
recorded
ed at the forward
forward rate on the
the
date of hedging.
Letter (d) is the required

required entry under the old practice
practice wherein the FCU
FCU payable are recorded
using the spot rate on the date of hedging.
43. b
Receivable balance: P319,500 (spot rate on the balance sheet date, P.71 x 450,000 FCU)
Gain or loss:
loss: P9,000
P9,000 loss [(P.73 – P.71) x 450,00
450,000 0 FCU]
44. c – (forward
(forward rate > spot
spot rate= premium)
premium) buyer’s
buyer’s point of view
view considered
considered as premiu
premium m
expense since it was purchase
purchase at a higher rate plus a loss on firm commitment (i.e., P1.21 –
P1.20)
45. e
Firm Commitment:
11/10
11/10/x6
/x6:: Orig
Origin
inal
al forwa
forward
rd rate
rate on
on the
the date
date of hedgi
hedging.
ng..……
.……………………………………….P ….P 1.64
1.64
Bala
Balanc
ncee Shee
Sheett date
date:: Rema
Remain inin
ing
g (cur
(currerent
nt)) forw
forwar
ardd rate
rate – 12/3
12/31/
1/20
206…
6………………. …. 1.59
1.59
Los
Loss on Forw
Forwarard
d Cont
Contrarac
ct per
per FC……
FC………… ………… …………………… …………………… ……………………………. …...
...P
.P .05
Multipl
Multiplied
ied by:
by: No.
No. of FCs……
FCs……………… ……………………… ……………………… ……………………………
……………………….. …….. 100,000
100,000
Loss
Loss on forward
forward contrac
contract…………
t…………………… …………………… ……………………………………………… ………………….P……….P 5,000 5,000
46. e
Firm Commitment:
hedging..…………… ………….P 1.64
Balanc
Balance e She
Sheet
et date:
date: Rema
Remain inin
ing
g (cu
(curr
rren
ent)
t) forwar
forwardd rate
rate – 12/3
12/31/
1/20
20x6.
x6....
.....
..…….
……. 1.59
1.59
Gain on forward
forward contract
contract per FC………...………………………………………….
FC………...…………………………………………..P .P .05
Multiplied
FCs……………………………………………………………….. …….. 100,000
100,000
Gain
Gain on forwa
forwardrd contr
contrac
act.
t..……
.…………………………… ……………… ……………… ……………………………… ……………… ……….P .P 5,00
5,0000
47. b
Firm Commitment:
hedging..…………… ………….P 0.45
Balanc
Balance e She
Sheet
et dat
date:
e: Rem
Remain
ainin
ing
g (cur
(currerent)
nt) forwar
forwardd rate
rate – 12/3
12/31/
1/20
20x6.
x6.………
……….. 0.44
0.4455
Gain on forward contract per FC…………………………… ……………………..P .005
Multiplied
FCs……………………………………………………………….. …….. 100,000
100,000
Gain
Gain on forw
forwar
ard
d con
contr
trac
act.
t...
....
..……
…………
…………
…………
…………
…………
…………
…………
…………
…………
…………
…….P
.P 500
500
48. a
December 1, 20x6: Spot rate – P1.64 x 100,000....…………............. P164,000
Less: Firm
Firm Commitment
Commitment – liability
liability (credit
(credit balance)
balance)
8/3/20x6:
8/3/20x6: Original
Original (120-day)
(120-day) forward rate…………………….P
rate…………………….P 1.60
12/1/
2/1/20
20x6
x6:: Remai
emaini
ning
ng (60-
(60-da day)
y) forw
forwar
ard
d rate
rate……
…………
…………
………
… 1.64
1.64
Loss on Firm Commitment………………
Commitment………………………………………....P ………………………....P 0.04
Multip
tiplied by:
by: No. of FCs……………………… ……………… ………………………………
…………… 100,000 4,000
Value of machine...........................……
.……………………………………… P160,000
49. c - refer to No. 48 (Note: There is no more commitment after the date of transaction which is
12/1/20x6)
50. c -
December 9, 20x6: Spot rate – P2.45 x 100,000……………………… P245,000
Add: Firm
Firm Commitmen
Commitmentt – asset (debit
(debit balance)
balance)
11/1
11/10/0/20
20x6:
x6: Orig
Origin
inal
al (90-d
(90-day)
ay) forwa
forward
rd rate
rate………
………………
…………….
…….P
P 2.44
2.44
12/9
12/9/2/20x
0x6:
6: Rema
Remaininin
ingg (30-d
30-day
ay)) for
forward
ward rate
rate……
…………
…………
………
… 2.4
2.46
Gain on Firm Commitment…………………………
Commitment………………………………………..P ……………..P 0.02
Multip
tiplied by
by: No.
No. of FC
FCs………
……………… ……………… ………………………………
…………… 100,000 2,000
Value of sales, 1 /3
/31/20x6…...............…………………………………… P243,000
51. b - refer to No.

No. 50 for computation
computation ((Note:
((Note: There is no
no more commitmen
commitmentt after the date
date of
transaction which is 12/9/20x6)
52. c - Forward
Forward contracts
contracts always have a value value of P0 at the the date
date they
they are established
established
53. a
54. a - P10,000 - P0
55. c - The forward
forward contract
contract gain
gain or loss is offset
offset by the loss
loss or gain on
on the sales commitment
commitment
56. b
57. c - P25,0
5,000 - P10,
P10,0 000
58. c - The forward
forward contract
contract gain
gain or loss
loss is offset
offset by the loss
loss or gain on the sales
sales commitm
commitmentent
59. a - (50,
(50,00
000,
0,00
000
0 x P.008
P.0088)
8) + [50
[50,0
,000
00,0
,000
00 (P.0
(P.009
0922 - P.00
P.0087)
87)]]
60. b - Forward
Forward cont
contracracts
ts always
always have
have a valu
valuee of P0 at thethe date they are
are establ
establish
ished
ed
61. c
62. d - P7,500 - P0
63. c - The forward
forward contract
contract gain
gain or loss
loss is offset
offset by the loss
loss or gain on the sales
sales commitm
commitmentent
64. d
65. b - P2,5
2,500 + P7,500
66. a - The forward contract
contract gain
gain or loss is offset
offset by the loss or gain
gain on the sales
sales commitment
commitment
67. b - (2,5
(2,500
00,0
,000
00 x P1.129
P1.129)) + [2,
[2,50
500,
0,00
0000 (P1.
(P1.13
1399 - P1.13
P1.138)
8)]]
68. b
January 31: Sp Spot rarate – P1.59 x 100,000………………………............. P159,000
Add: Firm
Firm Commitment
Commitment – asset (debit (debit balance)
balance)
11/30/20x3: Original (90-day) forward rate……………………
rate…………………….P .P 1.65
1/31/
/31/20
20x4
x4:: Remai
emaini
ning
ng (30-
(30-da
day)y) forw
forwarard
d rate
rate……
………… ………… ……… … 1.60
1.60
Gain on Firm Commitment…………………………
Commitment………………………………………..P ……………..P 0.05
Multi
Multipl
plie
ied
d by: No. of FCs……
FCs…………… ……………… ……………… ……………… ……………… ……… 100,
100,00
0000 5,00
5,000
0
Value of
of me
merchandise, 1/ 1/31/20x4……………………………………… P164,000
The entry would be as follows on 1/31/20x4:

Inventory………………………………………………………………… 164,000
Firm Commitment……………………
Commitment…………………………………………
……………………….
…. 5,000
Cash (P
(P1.59 x 100,000)………………………………………. 159,000
69. d – the original

original (30-day)
(30-day) forward
forward rate on the date
date of hedging.
hedging. Thus,
Thus,
Hedged Item (Commitment):
Foreign
Foreign currency
currency exchange
exchange loss [(P.28 – P.25) x 100,000
100,000 FC]……. 3,000
Firm Commitment…………………………
Commitment………………………………………………. ……………………. 3,000
Inventory (P.28 x 100,000 FC)……………………………………………28,000

Cash……………………………………………………………….. 28,000
Firm Commitment……………………
Commitment………………………………………………
……………………………………
………… 3,000
Inventory………………………………………………………….. 3,000
Therefore,
Therefore, inventory
inventory should
should be valued at P25,000
P25,000 (P28,000
(P28,000 – P3,000)
70. e – the inventory should be valued based on the spot rate on the
the date of transaction since
since it
was assumed that the firm commitment account will be closed through earnings account.
Normally, the firm commitment should be closed to the asset account in accordance with
PAS 39 par.98b.
71. e - the accounts

accounts payable should
should be valued
valued based on the spot
spot rate on the date of
of
transaction.
72. c
Firm Commitment:
Original forward rate on the date of hedging……………………
hedging…………………………………….P ……………….P .58
Bala
Balanc
ncee Shee
Sheett date
date:: Rema
Remain
inin
ing
g (cur
(curre
rent
nt)) forw
forwar
ard
d rate
rate – 6/30
6/30/2
/20x
0x4…
4………
……….
…. .56
.56
Loss on Firm Commitment per FC………………………………
FC…………………………………………………..P …………………..P .02
Multiplied
FCs……………………………………………………………….. …….. 200,000
200,000
Loss
Loss on firm
firm commitm
commitment ent…………
…………………………………………… ……………………… ……………………………………….P
……….P 4,000
4,000
Loss on commitment (debit) results in a credit to Firm Commitment, thus:

Loss on Firm Commitment…………………………………………… 4,000
Firm Commitment (a liability account)…………………….. 4,000
73. b
Fwd value 4/1 200,000 x 0.58 116,000
Fwd value 6/30 200,000 x 0.56 112,000
Decrease in Fair Value of Payable 4,000
PV of change: 4,000 ÷ 1.01 3,960
[n 1; i (.12 ÷ 12) = .01]
Current
Current value of fwd
fwd contract
contract = 116,000
116,000 - 3,960 = 112,040
112,040
or,
FC payable
payable – date of
of hedging,
hedging, 4/1
4/1 20x4…………
20x4…………………… ………………………
…………………….……….P P 116,00
116,000
0
Less:
Less: Forward
Forward contrac
contractt gain
gain [P4,00
[P4,000
0 x 1/1 + (8%/
(8%/12
12 x 1 month
month remain
remaining
ing)].
)]...
.. 3,960
3,960
FC payable
payable – date of hedging,
hedging, 6/30/ 20x4……………………………………….P
20x4……………………………………….P 112,040 112,040
74. c – (P2.17
(P2.17 – P2.14) x 200,000
200,000 FCs = P6,000
P6,000 loss. No need
need to compute
compute presen
presentt value
value because
because
the contract already expired.
75. b
1-Aug 30-Aug 30-Sep
Notional amount 15,000 15,000 15,000
Forward rate for remaining time 0.690 0.680 0.675
Initial forward rate 0.690 0.690
Change in original forward rate (0.010) (0.015)
Fair value
value of fwd contract in future
future pesos:
pesos:
Original forward value 10,350 10,350
Current forward value 10,200 10,125
(Gain) Loss in forward rate (150) (225)
Current present value
PV of (P150) n=1; i=0.667% (149)
PV of (P225) n=0; no discounting (225)
Prior present value 0 149
Change in present value (149) (76)
76. d
1-Aug 30-Aug 30-Sep
Notional amount 15,000 15,000 15,000
Forward rate for remaining time 0.690 0.680 0.675
Initial forward rate 0.690 0.690
Change in original forward rate (0.010) (0.015)
Fair value of fwd contract in future dollars:
Original forward value 10,350 10,350
Current forward value 10,200 10,125
(Gain) Loss in forward rate (150) (225)
Current present value
PV of (P150) n=1; i=0.667% (149)
PV of (P225) n=0; no discounting (225)
Prior present value 0 149
Change in present value (149) (76)
77. c - Forward
Forward contracts
contracts always have a value of P0 at the
the date they are
are establish
established
ed
78. a
79. d - [(P600) - P0]
80. b
81. c - [P30
P300 - (P60
P600)]
0)]
82. b - Forward
Forward contracts
contracts always have a value of P0 at the
the date they are
are establish
established
ed
83. a
84. c - [(P1,9
1,950) - P0]
P0]
85. c
86.
86. b - [P63
[P6355 - (P1,9
P1,905
05)]
)]
87. c
Cost of equipment…………………………………………………………………..P 211,000
Less: Fair
Fair value
value of the equipme
equipment……………………………
nt………………………………………………… …………………… 199,000 199,000
Impairment loss……………………………
loss………………………………………………………………………………… ……………….P 12,000
88. a – (P17
(P17,5
,500
00 – P13,
P13,20
200)
0) rec
recla
lass
ssif
ifie
ied
d to earn
earnin
ings
gs
89. e
hedging…………………………………P ……………P 1.64
Bala
Balanc
ncee She
Sheet
et date
date:: Rem
Remaiaini
ning
ng (cu
(curr
rren
ent)
t) for
forwa
ward
rd rat
rate
e – De
Dec.c. 31,
31, 20x6
20x6…
… 1.59
1.59
Loss……………………………………………………………………………………..P 0.05
Multipl
Multiplied
ied by: No. of FCs……………
FCs……………………… ……………………… ……………………… …………………… …………… … 100,00
100,000
0
FC For
Forwar
wardd Contr
Contrac
actt Loss
Loss………
……………… ……………… ……………… ……………… ……………………………… …………. …..P
.P 5,000
5,000
90. a
P400 = 10,000
10,000 foreign
foreign currency
currency units
units x (P.82 - P.78). The loss is calcul
calculated
ated using
using only forward
forward
rates. On December 31, 20x4, the loss is the difference between the 90-day future rate on
November
November 1 (P.78) and the 30-day forward rate on December December 31 (P.82).
91.
91. b - spec
specululati
ation
on (gain
(gain or loss
loss – inco
incomeme state
statemement)
nt)
hedging…………………………………P ……………P 0.033
Bala
Balanc
ncee She
Sheetet dat
date:
e: Rem
Remai aini
ning
ng (cu
(curr
rren
ent)
t) for
forwa
ward
rd rat
rate
e – De
Dec.
c. 31,
31, 20x4
20x4…
… 0.03
0.036
6
Loss……………………………………………………………………………………..P 0.003
Multipl
Multiplied
ied by:
by: No.
No. of FCs………
FCs………………… ……………………………………………… …………………………………………. ……. 100,00
100,0000
FC Forw
Forwarard
d Co
Contra
ntract
ct Loss…
oss……… ………… ………… ………… ………… …………
………… ……………………
………… ………P…P 300
300
92.
92. b - (220
(220,0
,000
00 FCUs
FCUs)x )x (P0.
(P0.68
68)) = P149
P149,6,600
00
93.
93. B - (220
(220,0
,000
00 FCUs
FCUs)x )x(P
(P.6
.688 - P.70
P.70)) = P4,4
P4,400
00 loss
loss
(To adjust the contract
contract to the 30 day futures
futures amount)
94. b
Manage an exposed position:
Value the forward exchange contract (FEC) at its fair value, measured by changes in the
forward exchange rate (FER). Note that the question asks only for the effect on income from
the forward contract transaction; thus, any effect on income from the foreign currency
denominated account payable is not included in the answer.
FER,
FER, 12/
12/12
12/x4
/x4 P.90
P.90
FER,
FER, 12/
12/31
31/x4
/x4 P.93
P.93
AJE:
Forward Contact Receivable 3,000
Foreign Exchange Gain 3,000
Revalue forward contract:
P3,000
P3,000 = 100,0
100,000
00 FCU x (P.93
(P.93 - P.90)
P.90) change
change in
in forward
forward rates
rates
Foreign Exchange Loss 10,000

Account Payable 10,000
Revalue foreign currency payable:
P10,00
P10,000
0 = 100,00
100,000
0 FCU x (P.98
(P.98 - P.88)
P.88) change
change in spot
spot rates
rates
95. b
Hedge of a Firm Commitment:
Value FEC based on changes in forward rate.
AJE:
Forward Contract Receivable 3,000
Revalue forward contract, using the forward rates.
Foreign Exchange Loss 3,000

Firm Commitment 3,000
Recognize loss on firm commitment.
Again, note that the question asks only about the effect on income from the forward
contract, not the underlying firm commitment portion of the transaction
96. b
Speculation:
Value forward exchange contract at fair value based on changes in the forward rate
AJE:
Forward Contract Receivable 3,000
97. b
Call Option:
P29.80 (Market price/Spot Price) > P27.90 (Option/Strike Price)..P1.90 in-the-money
Put Option
P14.25 (Market
(Market price/Sp
price/Spot
ot Price)
Price) > P16.40
P16.40 (Option/S
(Option/Strike
trike Price)..
Price).. 2.15 in-the-money
in-the-money
Intrinsic
Intrinsic Value…………………………………………………………………..
Value………………………………………………………………….. P4.05
98. d
January 1, 20x6
(the inception date of the 1-yr. put 1-yr. put FX FX option period)
FX Con
Contra
tract
ct Valu
Value—O e—Opti ption...
on..... ....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
....
.... 8,00
8,000
0
Cash
ash ..................................
...................................
............................ 8,000
To record cost of put option acquired.
Note: P1.40,
P1.40, OP > P1.368, Market/sp
Market/spot ot rate – In-the-money
In-the-money (put (put option)
March
March 31, 20x6 20x6
(an intervening financial reporting date)
FX Contrac
Contractt Value—O
Value—Optiption
on ......
........
.....
.....
.....
......
......
......
......
.....
.....
......
......
.....
.....
.....
.....
.....
.....
......
......
... 30,000
30,000
FX Gain (P30,000 × 300,000 FCUs/1,000,000 FCUs)............. 9,000
OCI—FX Gain (P30,000 × 70 7 00,000 FCUs/1,000,000 FCUs) 21,000
To adjust option’s carrying value to its fair
value of P106,000
P106,000 (a given
given amount).
amount). P106,000 P106,000 – P6,000 = P100,000) P100,000)
99. a
Note: P1.40,
P1.40, OP
OP > P1.368,
P1.368, Market/spo
Market/spott rate – Out-of-the-m
Out-of-the-money
oney (call
(call option).
option). Time value
value
element only, therefore any gain or loss is charged to profit and loss or current earnings, not
OCI.
100.
100. d
January 1, 20x6
(the inception date of the 1-yr. put 1-yr. put FX FX option period)
FX Contrac
Contractt Value—O
Value—Opti ption
on ......
........
.....
.....
.....
......
......
......
......
.....
.....
......
......
.....
.....
.....
.....
.....
.....
......
......
... 16,000
16,000
Cash
ash ..................................
...................................
............................ 16,000
To record cost of put option acquired.
Note: P.25, OP < P.292, Market/spot

Market/spot rate – In-the-moneyIn-the-money (Call option) option)
March
March 31, 20x6 20x6
(an intervening financial reporting date)
FX Contrac
Contractt Value—O
Value—Opti ption
on ......
........
.....
.....
.....
......
......
......
......
.....
.....
......
......
.....
.....
.....
.....
.....
.....
......
......
... 80,000
80,000
FX Gain (P80,000 × 500,000 FCUs/2,000,000 FCUs) x 50%.. 10,000
OCI—FX Gain (P80,000 – P10,000)……................................. 70,000
To adjust option’s carrying value to its fair
value of P106,00
P106,0000 (a given amount).
amount). P96,000 P96,000 – P16,000P16,000 = P80,000)P80,000)
Items
Items 101 throug
through h 107 Solu
Solutiotionn Gui
Guide de Table:
Table:
December 16 December 31 February 14
Spot rate (Market Price) ... P .16 P .15 P .147
Strike price (Option Price) P .16 P .16 .16
Notional amount (in Bolivar) 1,000,000 1,000,000 1,000,000
Intrinsic value (if Market
is < Option (Strike)*........ P 0 P 10,000 P 13,000
Time value** ........................ P 4,
4 ,000 3,300 0
Fair (Total) value of Option. P 4,000 P 13,300 P 13,000
* (Option
(Option Price – Market Price
Price ) x notional
notional amount
amount
** Fair value of option less Intrinsic Value
101.
101. d - The notional amount is the total face amount of the asset or liability that underlies the
derivative contract. A notional amount may be expressed in the number of currency units,
shares, bushels,
b ushels, pounds or other units specified in the financial instrument. Choices letter
lett er (a),
(b), and (c) are all fair value of the option contract at different dates.
102. c
On December 31, 20x4:
Fair value of Call Option…………………………………………………………..P 13,300
Intrinsic Value: ( P.16 Option price less P.15 market price,
lower
lower ifif put
put optio
option)
n) x 1,000
1,000,00
,000
0 boliv
bolivar……
ar…………………
……………………… ………………….
………. 10,000
10,000
Time Value………………………
Value…………………………………………………… ………………………………………… ………………………P
…………P 3,300
103. c (P3,300
(P3,300 – P4,000 = P700
P700 loss);
loss); refer
refer to the solution
solution guide
guide table for further
further analysis.
analysis.
104.
104. a – (P10,0
(P10,000
00 – P0 = P10,00
P10,000
0 gain);
gain); refer
refer to the solu
solutio
tion
n guide
guide table
table for furthe
furtherr analysi
analysis.
s.
105. b
Hedging Instrument/Hedging Transaction/Option Contract:
Inception
Inception date: Fair value of call option……………………......
option……………………..............
.......................P
...............P 4,000
Balance
Balance shee
sheett date:
date: Fair
Fair value
value of call
call optio
option………
n……………………
…………………….
………....... ........ 13,300
13,300
Foreig
Foreign
n exchan
exchangege gain…………
gain……………………… ……………………… ……………………
………………….
………....... ..........
.....P
.P 9,300
9,300
106. c
Foreign Currency Transaction (Hedged Item):
12/16
2/16/2
/200x4:
x4: Spot
pot rate
rate……
………… ………… ………… …………………… ……………………
…………
………… ………… ………… ………P …P .16
.16
12/3
2/31/20
/20x4:
x4: Spot rate……
te………… ……… ……………
…………… …………
………………
…………………
……………… ………….. …... .15
Forex los
losss pe
per un
unit………
……………… ……………… ……………… ………………… ………………………
……………… ………………. ……. P .01
Multiplied
Multiplied by: Number
Number of foreign currenc currencies………………
ies……………………………………
…………………… 1,000,000 1,000,000
Foreig
Foreign n exchan
exchange ge loss..
loss......
........
....………………
………………………… ………………….
……….....
.......
.......
........
............
...........
.......
.....P
.P 10,000
10,000
Incept
Inception
ion date:
date: Fair
Fair valu
value e of call
call optio
option…………
n…………………….
………….....
........
........
........
...........
...........
......P
..P 4,000
4,000
Balan
Balance
ce she
sheet
et date:
date: Fair
Fair val
value ue of
of call
call opti
option
on………
………………
…………………………………. …………... 13,3
13,300
00
Fore
Foreign
ign exch
exchanange
ge gain…
gain………… ……………… ……………… ………………………………
………………
…………………. …………... ..PP 9,30
9,3000
Nett fore
Ne foreig
ignn exch
exchanange
ge loss
loss………
…………… ………… ………… ………… …………
…………
…………
………… …………… …………. …..P .P 700
700
107. c
Foreign Currency Transaction (Hedged Item):
12/31/20x4:
12/31/20x4: Spot rate………………………………………………………………….
rate…………………………………………………………………..P .P .150
2/14
2/14/2
/20
0x5:
x5: Spot
pot rate
rate……
…………
……………………
………………………………
…………
…………
…………
…………
…………
……….
…... .147
147
Forex loss per unit…………………………
unit………………………………………………… ……………………………………… ……………… ……P .003
Multiplied
Multiplied by: Number of foreign currencies……………………………………..
currencies…………………………………….. 1,000,000 1,000,000
Foreign exchange loss..........…………… ……………………................
…………………… ................ .................. P 3,000
Balance sheet date (12/31/x4):
(12/31/x4): Fair value of call option….…………..............P
option….………….............. P 13,300
Expiration date (2/14/x5): Fair value of call option..…………………… ……….. 13,000
Foreign exchange loss………………………
loss……………………………………………… ……………………………………… ………………..P ..P 300
Total foreign exchange loss………………………… ……………………… …………..P 3,300
108. c
12/1/20x4:Spot rate……………………
rate……………………………………………………………………………………… ……………P P .92
12/31/20x4:Spot ra rate……………………………………………………… …………. .93
Forei
oreign
gn curr
curren
ency
cy gain
gain……
……………………………… ……………………………… …………
………. …. …………P
…………P .01
.01
x: No. of foreign currencies………………… ……………………………….
……………………… ………. 1,000,000
Foreig
Foreign n curre
currency
ncy gain
gain due
due to
to hedged
hedged item
item/com
/commit
mitmen
ment………
t…………...P
…...P 10,000
10,000
Less
Less:: Disc
Discou
ount
nt – P10,
P10,00
000
0 x 12%
12% x 2/12
2/12 (Jan
(Janua
uary
ry and
and Febr
Februa
uary
ry).
).….
…...
....
.....
... 200
200
PV of foreign exchange gain due to hedged item/commitment....
item/commitment... . P 9,800*
Or, alternatively the computation of present value may also be presented as:
Foreign
Foreign exchange
exchange gain
gain – equity..……………………………
equity..…………………………………………P ……………P 10,000
10,000
Divi
Divide
dedd by: [100
[100%
% + (12%
(12%/1
/12
2 x 2 month
monthss rema
remain
inin
ing)
g)]……
]………………
……………..….. 1.02
1.02
PV of foreign exchange gain due to hedged item/commitment….P 9,803*
*P3 discrepancy due to rounding-off.
109. c
12/1/20x4: Fair value of Option (P10,000 x P.009)……………………………..P
P.009)………………… …………..P 9,000
12/31/
12/31/20x
20x4:
4: Fair
Fair value
value of
of Option
Option (P10,
(P10,000
000 x P.00
P.006)……
6)…………………
……………………… ………… 6,000
6,000
Foreign currency loss on hedging transaction (option contract)…………P 3,000
110. b– refer to No. 101 for computat

computation.
ion. It is
is an asset since the counterpart
counterpart entry is a gain. Thus,
the entry should be:
Firm Commitment…………………………………………………….9, 803
Foreign Currency Gain on Hedged Item/Commitment…. 9,803
111. c
PV of foreign exchange gain due to hedged item/commitment
(refer
(refer to No.
No. 70)………………………
70)………………………………………………………………….
…………………………………………. P 9,803 9,803
Foreign currency loss on hedging transaction (option contract)
– refer to no. 71)………………………………………………
71)…………………… …………………………………………… ………………… ( 3,000)
Impact on net income
income – increase………………
increase…………………………………………………
………………………………… P 6,803
112. b
Sales (3/1/20x5 spot rate: P.90 x FC 1,000,000) ………
……………………… P900,000
Foreign exchange loss on hedged item/commitment, 3/31/20x5:
12/1/20x4 Spot rate………………………
rate…………………………………………………………………………… ..P .92
3/31/20
/20x5 Spot
pot rate
ate…………
………………………………… ………………………………
…………….……... .90
For
Foreign currency los
loss…………
…………… …………
………………………………… …….. ………
…………P .02
x: No. of foreign currencies……………………………………
currencies………… ……………………………… …… 1,000,000
Foreign currency loss for the entire hedg ed
item
item/c/com
ommimitm
tmen
ent…
t………
…………………… …………
……………………
………… …………
…… P 20,0
20,00000
Add back: PV of foreign gain due to hedged
item/commit mitment……
t……………
……………… …………………………………
………….…….… 9,80
,803 ( 29,8
9,803)
Adjustment: Firm
Firm Commitment Account balance (credit balance) –
since the P20,000 is a foreign currency loss then the firm
commitment account is a credit balance……………………… 20,000
Foreign currency gain on hedging transaction (option contract)
12/31/20x4 (inception date): Fair value of option
(P0.
(P0.00
0066 x FC 1,00
1,000,
0,00
000)
0)……
…………………… …………………… ……………………………… …… P 6,00
6,000
0
3/1/20x4 (expiration date) : Fair value of option
(P0.020 x FC
FC 1,
1,000,000)………………………………………. …….… 20,000 14,000
Impact on Net Income……………………………………………………. P904,197
113. d – (150,000
(150,000 FC x P.05 premium
premium = P7,500)
P7,500)
114.
114. a – (150,0
(150,000
00 FC x P.04
P.04 premiu
premium
m = P6,000)
P6,000)
115. b – (150,000
(150,000 FC x P.03 premiu
premiumm = P4,500)
P4,500)
116. c – (150,000
(150,000 FC x P.97 = P145,500)
P145,500)
117. a
Hedged Item/Commitment:
3/0
3/01/20
1/20x3
x3:: Spot
pot rate
rate……
…………………… ……………………………… ……………………
……….…..P
.P .095
095
12/31
/31/20x3
20x3:: Spot
pot rate…………
…………… …………
…………………
…………… …………
…………..….. .094
Fore
Foreigign
n cu
curren
rrency
cy loss
loss per
per uni
unit…
t………
…………………… …………
…………
……………….. P .001
001
x: No. of foreign currencies………………… …………………... 2,000,000
Fore
Foreigign
n cur
currerenc
ncyy loss
loss due
due to
to hed
hedged
ged item/
item/co
comm
mmit
itme
ment
nt..
..P
P 2,00
2,0000
x: PV factor of an annuity of P1 @ for 12 periods… ……..…
…… ..… .9803
PV of foreign exchange loss due to hedged item/
commitment..………. … …… ……………………………………. P 1,960.60
Hedging Instrument:
3/01/20x3:
3/01/20x3: Fair value of Option………………………………..P
Option………………………………..P 3,000
12/31/
12/31/20x3
20x3:: Fair value of Option6
Option6)………
)………………………………………….
………... .. 3,200
3,200
Foreign currency gain on hedging transaction
(opti
(option
on cont
contra
ract)
ct)………
……………… ……………………………… ………………
…………………………………
………… 200. 200.00
00
Net impact
impact on 20x3 income – loss (decre(decrease)……
ase)………………
………………..………..……P1,760.6
…P1,760.600
118. d
Sales
ales (3/
(3/1/20
1/20x4
x4 spot
pot rate
rate:: P.0
P.089 x FC 2,00
2,000, 0,0
000)
00) …………
……………… ……………… P 178,0
78,000
00..00
Adjustment: Firm Commitment Account balance
(credit
(credit balance)
balance) – since the P12,000
P12,000 is a foreign
foreign currency
currency
loss
oss then the
the firm commitment acc account is a credit bala alance 12,000.00
0.00**
Adjusted Sales……………………… ……………… …………………………………… P190,000.00
Foreign exchange loss on hedged item/
commitment, 3/31/2012:
5/01/20
/20x3:
x3: Sp
Spot rate
rate……
………… ……… ……………
…………… …………
………………P………P .095
3/01/20x4 Spot rate…………………………………………. ……. .089
For
Foreign cu currency los
loss…………
…………… …………
………………… ……………. …. ……P
……P .006
x: No. of foreign currencies…..……… ……………………. 2,000,000
Foreign currency loss for the entire hedged item
/com
/commi mitm
tmen
ent……
t…………… ……………………………… …………… ……………
………P P 12,0
12,000*
00*
Less: PV of foreign loss due to hedged item
/commitmetment……
t…………… ………………………………… …………… …………
……… 1,960.60
0.60 (10,
10,039.40
9.40))
Foreign currency gain on hedging instrument
(option contract):
12/31
12/31/2 /20x
0x3
3 (bal
(balanc
ance e shee
sheett date
date):): Fai
Fairr valu
valuee of opti
option
on.P
.P 3,200
3,200
3/01/20x4
3/01/20x4 (expiration
(expiration date) : Fair value of option
option
[(P0.95 – P.089) x FC 2,000,000)..……………………… 12,000 8,800.00
Net impact on 20x4 income – loss (decrease)……………….. P188,760.60
119. c
Nett cas
Ne cash
h inf
inflo
low
w wi
with optio
ptionn (P1
(P190
90,,000
000 – P3,0
P3,000
00)…
)………
………… ………………… … P187
P187,,000
000
Cash
ash inf
inflo
loww wi
withou
thoutt opt
optio
ion
n (at
(at spot
pot rat
rate
e of
of P.0
P.089
89 x 2,
2,000,
000,00
000
0 FC.
FC. 178,
78,000
000
Net increase in cash inflow P 9,000
120.
120. a
Note:
Note: P1.40
P1.40,, OP < P1.
P1.368
368,, Marke
Market/sp
t/spot
ot rate
rate – Out-of
Out-of-th
-the-m
e-money
oney (put
(put option
option).
). Time
Time value
value
element only, therefore any gain or loss is charged to profit and loss or current earnings, not
OCI. Refer to No. 99.
Quiz - XX
1. a – the machi
machine’
ne’ss final
final record
recorded
ed value
value should
should be the the spot
spot rate
rate on the
the date of tran
transac
sactio
tion
n
since it is hedging that involves exposed liab ility (P.00781 x 200,000,000 = P1,562,000).
P1 ,562,000).
2. c – (P.1
(P.186
865
5 – P.185
P.1850)
0) gain
gain x 100,
100,00
000
0 FC = P150
P150 gain
gain
3. usin
using
g spot
spot rate
rate
Accounts payable…………………………………………………………18,650
FC Units………………………
Units………………………………………………
…………………………………………
………………… 18,650
4. c – (P42
(P42 – P40)
P40) gain
gain x 1,0
1,000
00 FC = P2,
P2,00
000
0 gai
gain
n
5.
Accounts payable…………………………………………………………42,000
FC Units………………
……………………………………………
………………
…………… 42,000
6. b
Hedging Instrument:
Origininal forward rate on the date of hedging…………………
hedging……………………………….P …………….P 0.90
Balanc
Balance e Shee
Sheett dat
date:
e: Rema
Remain
inin
ing
g (cu
(curre
rrent)
nt) forwa
forward
rd rate
rate – 12/3
12/3/1
/1/2
/20x
0x4……
4…… 0.93
0.93
Gain
Gain……
………… …………………… ………… …………
………… ……………………………… …………
………… ……………………………… ………………..P .03
.03
Multipl
Multiplied
FCs……………………………… ……………………… …………………………………………. ……. 200,00
200,000
0
FC Forwar
Forward d Contr
Contrac
actt Gain………
Gain…………… …………………………… ………………
……………… ……………………………P……P 6,006,000
0
The entry would be as follows:

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

(P.92)…184,000
Foreign
Foreign Currency
Currency Loss – forward contract...………
contract...…………………………..
………………….. 2,000
Foreign Currency Receivable from Exchange Broker (.P93)… 186,000
8. b – refer
refer to No. 7
9. d – refe
referr to No.7
No.7
10. c
P1,000
P1,000 = 50,000
50,000 FCs x (P.7
(P.74
4 - P.72).
P.72). The loss
loss is calcul
calculate
ated
d using
using only
only forward
forward rates.
rates. On
September
September 30,
30, 20x4,
20x4, the loss is the difference
difference between
between the 60-day forward rate of of P.74 on
September
September 1 and the 30-day forward rate of P.72 on on September
September 30, 20x4.
11. d
Date of transaction: 9/1/20x4: Spot rate………………………
rate………………………………………..P
………………..P 1.46
Bala
Balanc
nce e She
Sheet
et dat
date:
e: Sep
Sept.
t. 30,
30, 20x
20x4:
4: Spo
Spott rate
rate……
…………
…………
…………
…………
…………
………
… 1.50
1.50
Gain…………………………………………………………………………………….P .04
Multipl
Multiplied
ied by: No. of FCs………………………
FCs…………………………………… ………………………
……………………
…………….
…. 250,00
250,0000
FC Transa
Transacti
ction
on Loss……….
Loss………..………
.……………………
……………………… ………………………
………………………
……………P
…P 10,000
10,000
The question refers to foreign currency transaction loss which indicates that only the exposed
liability had a loss, while the the forward contract transaction results in a gain computed as
follows:

hedging…………………………………P ……………P 1.47
Bala
Balanc
ncee She
Sheet
et dat
date:
e: Rem
Remai
aini
ning
ng (cu
(curr
rren
ent)
t) for
forwa
ward
rd rat
rate
e – Sept
Sept.. 30,
30, 20x4
20x4…
… 1.48
1.48
Gain
ain………
……………… ………………… ………………
……………… ……………………………… …………………
…………… …………
…………….P ….P .01
Multipl
Multiplied
FCs……………………………… ……………………… …………………………………………. ……. 250,00
250,0000
Gain………………………………………………… ………………………………… ………P P 2,500
If the question is the net impact on the net income the loss on exposed liability and the gain
of forward contract should be offsetted, thereby resulting a net effect of P7,500 decrease in
net income.
12. b – specul
speculatio
ation
n (gain
(gain or loss
loss – income
income stateme
statement)
nt)
hedging…………………………………P ……………P 1.47
Bala
Balanc
ncee She
Sheet
et dat
date:
e: Rem
Remaiaini
ning
ng (cu
(curr
rren
ent)
t) for
forwa
ward
rd rat
rate
e – Sept
Sept.. 30,
30, 20x4
20x4…
… 1.48
1.48
Gain…………………………………………………………………………………….P .01
Multipl
Multiplied
ied by: No. of FCs……………………
FCs……………………………… …………………… ……………………… …………………. ……. 250,00
250,0000
Gain………………………………………………… ………………………………… ………P P 2,500
13. b
Receivable balance: P162,000 (spot rate on the balance sheet date, P.81 x 200,000 FCU)
Gain or loss:
loss: P4,000
P4,000 loss [(P.83 – P.81) x 200,00
200,000
0 FCU]
14.
rate………………………………………..P
………………..P 1.16
Balanc
Balance e Shee
Sheett dat
date:
e: 4/30
4/30/2
/20x
0x4:
4: Spot
Spot rate
rate………
………………
………………
………………
………………
……… 1.20
1.20
Gain…………………………………………………………………………………….P .04
Multipl
Multiplied
FCs……………………………… ………………………
………………………
………………….
……. 300,00
300,000
0
FC Transa
Transacti
ction
on Loss……….
Loss………..………
.……………………
………………………………………………
………………………
……………P
…P 12,000
12,000
follows:

hedging…………………………………P ……………P 1.17
Bala
Balanc
nce
e She
Sheet
et dat
date:
e: Rem
Remai
aini
ning
ng (cu
(curr
rren
ent)
t) for
forwa
ward
rd rat
rate
e – Sept
Sept.. 30,
30, 20x4
20x4…
… 1.18
1.18
Gain…………………………………………………………………………………….P .01
Multipl
Multiplied
FCs………………………………
………………………
………………………
………………….
……. 300,00
300,000
0
FC Forwar
Forward d Contr
Contrac
actt Gain………
Gain……………
……………
………………
………………
………………
………………
……………P
……P 3,00
3,000
0
net income.
15. P12,000
rate………………………………………..P
………………..P 1.16
Balanc
Balance e Shee
Sheett dat
date:
e: 4/30
4/30/2
/20x
0x4:
4: Spot
Spot rate
rate………
………………
………………
………………
………………
……… 1.20
1.20
Gain…………………………………………………………………………………….P .04
Multipl
Multiplied
FCs……………………………… ………………………
………………………
………………….
……. 300,00
300,000
0
FC Transa
Transacti
ction
on Loss……….
Loss………..………
.……………………
………………………………………………
………………………
……………P
…P 12,000
12,000
follows:
Original forward rate on the date of hedging…………………………………

hedging……… ………………………… P 1.17
Bala
Balanc
ncee She
Sheet
et dat
date:
e: Rem
Remai
aini
ning
ng (cu
(curr
rren
ent)
t) for
forwa
ward
rd rat
rate
e – Sept
Sept.. 30,
30, 20x4
20x4…
… 1.18
1.18
Gain…………………………………………………………………………………….P .01
Multipl
Multiplied
FCs……………………………… ……………………… …………………………………………. ……. 300,00
300,0000
FC Forwar
Forward d Contr
Contrac
actt Gain………
Gain…………… …………………………… ………………
……………… ……………… ……………P……P 3,00
3,0000
net income.
16. P3,000
hedging…………………………………P ……………P 1.17
Bala
Balanc
ncee She
Sheet
et dat
date:
e: Rem
Remai
aini
ning
ng (cu
(curr
rren
ent)
t) for
forwa
ward
rd rat
rate
e – Sept
Sept.. 30,
30, 20x4
20x4…
… 1.18
1.18
Gain…………………………………………………………………………………….P .01
Multipl
Multiplied
FCs……………………………… ……………………… …………………………………………. ……. 300,00
300,0000
FC Forwar
Forward d Contr
Contrac
actt Gain………
Gain…………… …………………………… ………………
……………… ……………… ……………P……P 3,00
3,0000
17. d
PAS 32 and 39 requires the FCU payable be recorded at the forward rate on the date of
hedging.
Letter (d) is the required entry under the old practice wherein the FCU payable are recorded
using the spot rate on the date of hedging.
18. d – no adjus
adjustme
tment
nt requi
required
red on
on the date
date of tran
transac
saction
tion..
19. (P1.47
(P1.47 x 600,000
600,000 FC) the original
original (60-day)
(60-day) forward
forward rate on the date of hedging
hedging (i.e.,
(i.e.,
November 30, 20x4)
20. since no forward contract was entered into, the

the only effect on income statement
statement is only the
foreign currency exchange gain on exposed asset position.
Spot rate on the date of transaction: 12/16/20x4…………………………….P
12/16/20x4……… …………………….P 0.00090
Balanc
Balancee She
Sheet
et date:
date: Spot
Spot rate
rate – De
Dece
cembe
mberr 31,
31, 20x4
20x4………
……………… ……………… ……….. 0.00
0.0009
092
2
Gain……………………………………………………………………………………P 0.00002
Mult
Multip
iplilie
ed by:
by: No
No.. of
of FCs
FCs……
……………………
…………
…………
…………
…………
…………
…………
…………
…………
………
… 10 M
Fore
Foreig
ign
n Curr
Curre
ency
ncy Exc
Exchang
hange
e Gain
Gain……
…………
…………
…………
…………
…………
…………
…………
…………
…….P
.P 200
200
21. P695.0
P695.055 increa
increase
se
Hedged Item: Exposed Asset:
Spot rate on the date of transaction: 12/16/20x4…………………………….P
12/16/20x4……… …………………….P 0.00090
Balanc
Balance e She
Sheet
et date:
date: Spot
Spot rate
rate – DeDece cembe
mberr 31,
31, 20x4
20x4………
……………………………………….. 0.00
0.0009
092
2
Gain……………………………………………………………………………………P 0.00002
Mult
Multip
iplilied
ed by:
by: No
No.. of FCs…
FCs………………… ………… ………… ………… ………… ………… …………………… ……………………
…….. 10 M
Foreign Currency Exchange Gain……………………
Gain……………………………………………… ………………………….P .P 200
Hedging Instrument:
Original forward rate on the date of hedging: 12/16/20x4…………………P 0.00098
Balanc
Balance e Sheet
Sheet date
date:: Remain
Remainining
g (curre
(current) nt) for
forwar
ward d rate – 12/3
12/31/
1/20
20x4…
x4……
… 0.00
0.00093
093
Gain…………………………………………………………………………………….P .00005
Multiplied
Multiplied by:by: No. of
of FCs………………………………………………………
FCs……………………………………………………………. ……. 10,000,000
10,000,000
FC Forw
Forwar ard
d Co
Contra
ntract
ct Gain
Gain……
………… ………… ………… ………… ………… ………… …………………………………………P
……P 500
500
Mult
Multip
iplilied
ed by:
by: PV
PV ooff P 1 at 12%.
12%...
....
....
....
....
...…
.…………
…………… ………… …………………… …………………………….
…. .990
.9901
1
FC Forward
Forward Contrac
Contractt Gain…………
Gain…………………… …………………… ……………………… ……………………… ……………P …P 495.50
495.50
Nett impact
Ne impact on 20x4 20x4 inco
income
me state
stateme ment nt………
……………… ……………… ……………… …………………………..P
…..P 695.
695.05
05
22.
22. P100
P100 inc
incre reas
ase e
Hedged Item: Exposed Asset:
Balance
Balance SheetSheet date:
date: Spot
Spot rate – Decemb
December er 31, 20x4………………
20x4……………………….P……….P 0.0009
0.000922
Date
Date ofof Set
Settle
tleme
ment:
nt: Spot
Spot rate
rate – Janu
Januar
aryy 15,
15, 20x5
20x5………
………………
……………… …………… …….. 0.00
0.0009
095
5
Gain……………………………………………………………………………………P 0.00003
Mult
Multip
iplilied
ed by:
by: NoNo.. of FCs…
FCs…………………………… ………… ………… ………………………………
………… ………………………….. 10 M
Fore
Foreig
ign
n Cu Curre
rrency
ncy Exc
Exchahang
ngee Gai
Gain…n………
………… ………… ……………………………………………………
……….P
….P 300
300
Hedging Instrument:
Balance SheetSheet date: Remaining
Remaining (current)
(current) forward rate – 12/31/20x4
12/31/20x4……P
……P 0.00093
0.00093
Date
Date of expiexpiraratio
tion:
n: Spot
Spot rate
rate – Janua
Januaryry 15, 20x5
20x5………
……………………………………………………… 0.000
0.00095
95
Loss……………………………………………………………………………………..P .00002
Multiplied
FCs…………………………………………………………… … 10,000,000
10,000,000
FC Forw
Forwar ard
d Cont
Contra ract
ct Loss…
oss………
………… …………
………… ………… ……………………
……………………………………….….PP 200
200
Nett imp
Ne impac actt on
on 20x
20x5 5 inc
income
ome sta
state
teme
ment
nt……
………… ………………………………
………… …………………………...P 100
100
23. c – (forward
(forward rate
rate > spot rate – premium)
premium) buyer’s point of view
view conside
considered
red as premium
premium
expense since it was purchase
purchase at a higher rate plus a loss on firm commitment (i.e., P1.21 –
P1.20)
Theories
Completion Statements
1. hedgin
ging
2. existing
existing assets and liabilities,
liabilities, firm commitment
commitments,
s, forecasted
forecasted transactions
transactions
3. firm
firm com
commi
mitm
tmenentt
4. fore
foreca
cast
sted
ed
5. hedg
hedged ed item
item
6. hedging
hedging instru
instrumen
mentt
7. FX forw
forwards
ards,, FX
FX option
optionss
8. two-sid
two-sided,
ed, counte
counterbal
rbalanc
anced ed
9. one-si
one-sided,
ded, counter
counterbala
balancenced d
10.
10. Hedge
Hedge acco
accoun untin
ting
g
11. exchange
exchange rate, specified
specified period
period
12.
12. call
call,, put
put
13.
13. optio
option n hold
holder er
14.
14. optio
option n write
writer r
15.
15. pre
premiu
mium
16.
16. “in
“in the
the monemoney” y”
17. time value
value element,
element, intrinsic
intrinsic value
value element
element
18. exchan
exchange ge rate,
rate, futur
futuree date
19. fulfil
fulfill,
l, obligat
obligation ion
20. take
21.
21. exec
execut utorory y
22.
22. unre
unreal alizized
ed
23. the netnet posit
positionion,, setof
setofff
24. premiu
premium, m, discou
discount, nt, time
time value
value
25. premiu
premium, m, decreas
decrease e
26.
26. spli
splitt acco
accoun unti ting
ng
27. design
designated ated,, effecti
effective, ve, firm
firm
28.
28. spec
specul ulati
atingng
29. firm commitment,
commitment, forecasted forecasted transaction
transaction
30. market,
market, cred credit, it, liqui
liquidity
dity
31.
31. marke
market, t, cre
credi ditt
32.
32. marke
market, t, liquid
liquidity ity
33.
33. unli
unlimi
mite ted d
34. “on-balance-sh
“on-balance-sheet,” eet,” “off-balance-sh
“off-balance-sheet” eet”
35. rights, obligations,
obligations, assets, assets, liabilitie
liabilitiess
36.
36. fair
fair val
value uess
37. assets
assets,, liabi
liabilit
lities
ies
38. undesignated
undesignated,, fair value, value, cash flow,flow, net investme
investment
nt
39. asset, liability,
liability, firm commitment
commitment
40. foreca
forecaste sted d transact
transaction ion..
41.
41. fair
fair valu
value e
42.
42. cash
cash flowflow
43.
43. net
net inve
invest stme
ment nt
44.
44. earn
earnin ings
gs
45. other comprehens
comprehensive ive income,
income, earnings
earnings
46. earnin
earnings, gs, earnin
earnings gs
47.
47. forw
forwar ard d
48. valuin
valuing, g, reporti
reporting ng
49. hedging
hedging effect effective ivenes
nesss
50.
50. time
time valuvalue e
51.
51. inef
ineffefecti
ctiveve
True or False
52. False 68. False 84. True 100. False 116. True 132. True 148. False
53. False 69. False 85. False 101. True 117. False 133. False 149. True
54. False 70. True 86. True 102. True 118. False 134. True 150 False
55. False 71. False 87. True 103. False 119. True 135. False 151. True
56. True 72. False 88. False 104. True 120 True 136. False 152. False
57. True 73. False 89. False 105. True 121. False 137. False
58. False 74. True 90. False 106. True 122. False 138. False
59. True 75. True 91. True 107. True 123. False 139. False
60. True 76. True 92. False 108. False 124. False 140. True
61. False 77. True 93. True 109. True 125. True 141. False
62. True 78. True 94. False 110. False 126. False 142. True
63. False 79 False 95. True 111. False 127. True 143. False
64. False 80. False 96. False 112. False 128. False 144. True
65 True 81. False 97. False 113. False 129. True 145. False
66. False 82. False 98. False 114. True 130. False 146. True
67. False 83. True 99. False 115. False 131. False 147. False
Multiple
Multiple Choice Questions
Questions (theories)
153. E 161. C 171. E 181. E 191. C 201. b 211. c
154. B 162. B 172. C 182. C 192. A 202. c 212. c
155. A 163. B 173. B 183. A 193. C 203. d 213. b
156. E 164. B 174. C 184. D 194. B 204. d 204. b
157. E 165 A 175. A 185. D 195. B 205. b 215. b
158. D 166. E 176. A 186. B 196. B 206. c 216. b
159. B 167. E 177. A 187. A 197. d 207. d 217. c
160. D 168. A 178. C 188. B 198. c 208. c 218. d
169. A 179 A 189. A 199. c 209. d 219. d
170. D 180. D 190. C 200. a 210. b 220 a
Note for:
197.
197. An underl
underlyin
ying
g is
is a financ
financial
ial or phys
physica
icall varia
variable
ble..
199.
199. The
The net invest
investme
mentnt must
must be
be less
less than
than that
that requi
require
redd for
for other
other types
types..
202. Trading securities do not qualify for hedge accounting. accounting. Under PFRS 9, there is no more
classification as to trading and available-for-sale instead it is now classified either as FVTPL and
FVTOCI.

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Chapter 20

Forward Rate for

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

Balance Sheet Presentation on 12/1/20x4

December 31, 20x4

FC Transacti on Loss 360 FC Receivable from XD…………… 300

If the financial statements are prepared on December

Balance Sheet Presentation on 12/31/20x4

On March 1, 20x5 (the transaction

Accounts payable 120 FC Transaction Loss 240

These transactions can be summarized in the following table.

“Net” Position Accounting

December 31, 20x4

FC Transacti on Loss 360 Forw ard Contract 300

If the financial statements are prepared on December

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

On March 1, 20x5 (the transactio

Accounts payable 120 FC Transaction Loss 240

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

Forward Contract (Asset/Liability)

Net Method: Zero. No entry required.

Net Method: P300.

2. Fair Value Hedge

December 31, 20x4

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

Balance Sheet Presentation on 12/31/20x4

On March 1, 20x5 (the transaction

Firm Commi tment………… 240 FC Transaction Loss …………… 240

Firm CoCommi tment……………………. 60

e. Same with Exposed Liability

December 31, 20x4

No entry required, since it is only a forecasted FC Re

Balance Sheet Presentation on 12/31/20x4

On March 1, 2011 (the transaction date and the settlement date),

OCI – Exchange Loss (B (B/S)……… 240

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

c. Same with Exposed Liability

4. Not a Hedge Accounting Speculation.

December 31, 20x4

FC Recei vable from XD 300

Balance Sheet Presentation on 12/31/20x4

d.3. P60 debit

Problem II (Discounting the Fair Value of the Forward Contract)

Purchases ($1,200 x P40)…………... 48,000 FC Recei vable fr

Balance Sheet Presentation on 12/1/20x4

December 31, 20x4

FC Transaction Loss 360 FC Recei vable from XD…………… 294

Balance Sheet Presentation on 12/31/20x4

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

Accounts payable 120 FC Transacti on Loss 234

Net Method: P294.

b.3. P60 debit

2. Fair Value Hedge

December 31, 20x4

Balance Sheet Presentation on 12/31/20x4

Firm Commi tment………… 234 FC Transaction Loss …………… 234

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

Net Method: P294.

December 31, 20x4

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

Balance Sheet Presentation on 12/31/20x4

OCI – Exchange Loss (B/S)………. 234

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