FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006

PROBLEM 1
Gail (Loss) on 21,00
X Trading purchases goods from Y, a company based on France for 1,200,000 Euros (€). The exchange rate at this time
forex transaction 0.00
is P1 = €12.5. X pays 22 days later when the prevailing exchange rate is P1 = €16.
How much is the foreign currency gain/loss on the books of X and Y respectively?
A. P21,000 gain; P21,000 loss PROBLEM 2
B. P21,000 gain; 0
C. P4,200,000 loss; 0 Celica Motors sold a car for P180,000 pounds (£) to a customer in London on March 16, 2013 when the spot rate was
D. P4,200,000 loss; P4,200,000 gain P68.45 = £1. On April 20, 2013, Celica received thirty percent of the selling price as partial payment. The spot rate at
that time was P67.48 = £1. The balance was paid on May 5 when the spot rate was P68.63 = £1.
(B) How much was the foreign currency gain/loss on this transaction?
For payment, the currency used is Euros. A. P29,700 loss
X Trading is the company that used foreign B. P29,700 gain
exchange. C. P142,200 loss
Whereas, Y company has been using euros as its D. P142,200 gain
currency so no forex transaction in its case. Y Company
received the payment in euros. (A)
X
Tradi Direct exchange rate:
ng Y
Spot rate
Please note that
the exchange rate
(Peso (Euros is for problem use Celica Motors (seller) 180,000.00 68.45 12,321,000.00
) ) only.
Date of Real exchange Down payment 54,000.00 67.48 3,643,920.00
purchase 96,00 1,200, rates are not taken
(1200000/12.5) 0.00 000.00 into consideration. Balance 126,000.00 68.63 8,647,380.00

Date of payment 75,00 1,200, Gain (Loss) on forex transaction (29,700.00)

(1200000/16) 0.00 000.00
It was a loss because at the time of purchase, the peso value was 12,321,000.
Forex Gain / 21,00
(Loss) 0.00 - The peso value received by the seller for down payment and balance is only 12,291,300.
Thus, there is a forex loss of
The exchange rate used herein is P29,700.
indirect. To get the direct exchange
rate: To a seller, any decline in currency value of a receivable is a loss, because he would be receiving
less.
Date of
purchase (see To a buyer, any decline in currency value of a payable is a gain, because he would be paying less.
formula) 0.08 Vice versa for an increase in currency value.

Date of payment 0.06

PROBLEM 3
Decline in rates
(Gain on the part Levin intends to sell ¥400,400 under a forward contract dated December 1. At what amount must Forward Contract
of a buyer) 0.02 Receivable and Forward Contract Payable be presented on December 31?

x Price of the 1,200, Dates Forward Rates Spot Rates

product 000.0 December 1 P 0.55 P 0.53
purchased 0 December 31 P 0.50 P 0.49
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FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006
March 22 P 0.48 P 0.46 On November 1, 2013, Word Inc. paid P45,000 to acquire call foreign exchange option for Hk$90,000. The option is
acquired to hedge the 2013 anticipated purchase of merchandise for Hk$90,000. The option expires on March 30, 2014.
FC Receivable FC Payable
A. P220,220 P200,200 11/1/2013 12/31/2013 3/31/2014
B. P200,200 P220,220 Spot rate P3.46 P3.40 P3.39
C. P212,212 P196,196 Fair value of option P45,000 P50,500 P72,000
D. P200,200 P200,200 Strike price P3.47 P3.47 P3.47

At what amount must the merchandise be presented as of December 31, 2013?

(A)
A. P3,114,000 B. P3,123,000 C. P3,060,000 D. P0
Levin is a buyer of goods, and a seller of foreign currency under a forward contract. Hedging is setting aside a fund
to a bank or financial institution that is willing to absorb any gain or loss resulting from a hedged transaction.
It is called a hedged transaction because, no matter what the spot rates are, the buyer (or seller) who made a D
hedged contract, he would be paying (or receiving) the stated amount in the hedge contract.
FC Receivable FC Payable There's that phrase "anticipated purchase". The purchase hasn't happened yet although they already acquired a
hedging instrument.
400400 x0.55 220,220.00 Since the purchase hasn't occurred yet, no merchandise would be
recorded.
400400 x 0.50 200,200.00

PROBLEM 6
As a buyer of goods (hedged transaction), he would be recording his payable using current rates. So, on December
31, his payable is 400400 x 0.50. You use the forward rates because it was done through a forward contract. On December 12, 2013, Winning Co. entered into a forward exchange contract to purchase 225,000 euros in 90 days.
As a seller of forex (hedging instrument), he would be recording the value of the forward The relevant exchange rates are as follows:
contract at its value upon incepcion (December 1). So, it would be 400,400 x 0.55.
Spot rate Forward rate (for March 12, 2014
November 30, 2013 P0.57 P0.59
PROBLEM 4
December 12, 2013 P0.58 P0.60
On January 1, 2013 Lucky Inc. paid P9,800 to acquire a put option. This is in relation to the sale of merchandise worth December 31, 2013 P0.62 P0.63
$65,000. (Strike price = P4.965)
1/1/2013 3/31/2013 6/20/2013 The purpose of this forward contract is to hedge a purchase of inventory in November 2013, payable in March 2014.
Spot rate P4.934 P4.908 P4.75 At December 31, 2013, what amount of foreign currency transaction from this forward contract should Winning include
Fair value of option P9,800 P11,400 P13,935 in profit or loss?
How much is the foreign currency gain/loss on the intrinsic portion on March 31, 2013? A. P9,000 loss B. P6,750 gain C. 6,750 loss D. P9,000 gain

A. P1,690 B. (P1,690) C. P1,600 D. (P90) PROBLEM 7

(A) Correction on the problem: The FV of option on 6/20/2013 is 13,975. On October 1, 2013, R Corporation purchased goods from a U.S. based corporation worth $93,750. Payment is due in
120 days on January 30, 2014. In view of the transaction, R Corporation enters into a forward contract to buy $93,750
1/1 3/31 6/20 from Philippine National Bank (PNB) in 120 days. The relevant exchange rates are as follows:
Fair value of put option 9,800.00 11,400.00 13,975.00
10/01/2013 12/31/2013 1/30/2014
- Intrinsic value 2,015.00 3,705.00 13,975.00 Spot rate P43 P47 P50
Time value 7,785.00 7,695.00 - Forward rate P44 P46 P50

Which of the following is correct?

The intrinsic value may be computed as (Strike price minus spot rate) x foreign currency.
On March 31, the gain would be 3705 minus 2015 = 1690. (The intrinsic value increased, so it's a gain.)
PROBLEM 5
A. Forward Contract Receivable on Dec. 31, 2013 is P4,125,000
B. Net foreign exchange loss on settlement date is P93,750
C. Foreign exchange gain on the derivative instrument on the transaction date is P187,500
D. Foreign exchange loss on the importing transaction on year-end is P375,000

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FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006
PROBLEM 8 SBC Company bought merchandise for €625,000 from a French company on December 1, 2013. Payment in Euros was
due on February 28, 2014. On the same date, SBC entered into a 90-day futures contract to buy €625,000 from Metro
On October 31, 2013, Pointers Philippines took delivery from a British firm of inventory costing £1,450,000. Payment is bank. Exchange rates for Euros on different dates are as follows:
due on January 31, 2014. At the same time, Pointers paid P16,500 cash to acquire a 90-day call option for £1,450,000.
Dec. 1 Dec. 31 Feb. 28
10/31/2013 12/31/2013 1/31/2014 Spot rate P61.55 P62.85 P62.05
Strike Price P12.60 P12.60 P12.60 30-day futures P62.45 P62.65 P63.35
Spot rate P12.61 P12.62 P12.64 60-day futures P61.95 P62.35 P62.75
Forward rate P12.72 P12.77 P12.78 90-day futures P60.75 P62.75 P63.55
Fair Value of Call Option ? P34,000 ?
How much is the foreign exchange gain/loss on the forward contract on February 28, 2014?
Given the information above, compute for the following: A. P500,000 loss B. P187,500 loss C. P187,500 gain D. P500,000 gain
Foreign exchange gain or loss on option contract due to change in time value on December 31, 2013, and foreign
exchange gain or loss due to change in intrinsic value on January 31, 2014. PROBLEM 12
A. P3,000 gain; P29,000 gain C. P10,500 loss; P29,000 gain
B. P10,500 loss; P14,500 gain D. P3,000 gain; P14,500 gain GV Company anticipates the price of cement will increase the coming months. Therefore, it decides to purchase call
options on cement as a price-risk hedging device to hedge the expected increase in prices on a forecasted purchase of
cement. On December 1, 2013, GV purchased call options for 1,200 sacks of cement at P165 per sack at a premium of
P5 per sack, with a March 31, 2014 call date. The following is the pricing information for the term of the call:

PROBLEM 9 Date Market Price Fair Value of Option Contract

December 1, 2013 P165
Manila Company sold merchandise for 315,000 pounds to a customer in London on November 01, 2013. Collection in December 31, 2013 P168 P7,500
British pounds was due on January 30, 2014. On the same date, Manila entered into a 90-day futures contract to sell March 31, 2014 P172
315,000 pounds to a bank. Exchange rate for pound on different dates are as follows:
Nov. 1 Dec. 31 Jan. 31 On March 31, 2014, GV exercised the option and acquired 1,300 sacks of cement. On May 15, 2014, GV sold all the
Spot rate P51.3 P52.6 P51.8 sacks of cement for P176 per sack.
30-day futures P52.2 P52.4 P53.1 How much is the net income in 2014?
60-day futures P51.7 P52.1 P52.5 A. P13,600 B. P9,700 C. P7,600 D. P1,400
90-day futures P50.5 P52.5 P53.3
PROBLEM 13
How much is the net foreign exchange gain or loss on January 30, 2014? On July 1, 2013, Peru Company purchased 1,750 shares of Lima Corp. common stock at a cost of P75 per share and
A. P63,000 loss B. P31,500 loss C. P63,000 gain D. P31,500 gain classified it as an available for sale security. On October 1, Peru Company purchased an at-the –money put option on
Lima Corp. at a premium of P24,500 with a strike price P115 per share and an expiration date of April 2014. Peru
PROBLEM 10
Company specifies that only the intrinsic value of the option is to be used to measure effectiveness. The following
On November 1, S Company entered into a firm commitment to sell a machinery. Delivery and passage of title would be
shows the fair value of the hedged item and the hedging instrument.
on February 28, 2014 at the price of $15,750 Singapore dollars. On the same date, S Company entered into a 120-day
forward contract with China Bank to sell the $15,750 Singapore dollars. Exchange rate were as follows: 10/1/13 12/31/13 3/3/14 4/17/14
Lima’s share price P115 P103 P95 P95
Spot rate Forward rate Intrinsic value 0 P21,000 P35,000 P35,000
November 01, 2013 P46.25 P44.30
Time value P24,500 P15,050 P3,710 0
December 31, 2013 P47.40 P46.70 Fair value P24,500 P36,050 P38,710 P35,000
February 28, 2014 P49.50 P49.50

How much is the foreign exchange gain or loss recognized by S Company on the firm commitment on December 31, What is the cumulative effect on retained earnings of the hedge and sale?
2013? A. P10,500 B. P70,000 C. P45,500 D. P80,500
A. P18,112.50 gain B. P18,112.50 loss C. P37,800 loss D. P37,800 gain PROBLEM 14
PROBLEM 11 TRANS Corp. owns a subsidiary in Singapore whose statement of financial position in Singapore Dollars for the last
two years follow:
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FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006
December 31, 2012 December 31, 2013  GX and JQ each used their own equipment and employees in the construction activity
Assets  GX constructed three bridges needed to cross rivers on the route at a cost of P48 million
Cash and cash equivalents S$ 450,000 S$ 375,000  JQ constructed all of the other elements of the motorway at a cost of P60 million.
Receivables 1,837,000 2,212,500  GX and JQ shares equally in the P144 million jointly invoiced to and received from the government.
Inventory 2,400,000 2,550,000
PPE, net 3,825,000 3,450,000 1. What is the gross profit of the joint arrangement?
Total Assets S$ 8,512,500 S$ 8,587,500 A. P48 million
Liabilities and Equity B. P84 million
Accounts Payable S$ 825,000 S$ 1,125,000 C. P36 million
Long-term debt 4,837,500 4,275,000 D. P24 million
Common stock 1,725,000 1,725,000
Retained earnings 1,125,000 1,462,500 2. What is the gross profit earned by GX in 2013?
Total Liabilities and Equity S$ 8,512,500 S$ 8,587,500 A. P36 million
B. P84 million
Relevant exchange rates are: C. P24 million
January 1, 2012 S$ 1 = P 45 D. P12 million
December 31, 2012 S$ 1 = P 42.50
December 31, 2013 S$ 1 = P 47.50 PROBLEM 2
Average 2012 S$ 1 = P 43.75
September 12, 2012 S$ 1 = P40 Two real estate companies, RK Developers and SV Holdings set up a separate vehicle (entity DP) for the purpose of
acquiring and operating a shopping centre. The contractual arrangement between the parties establishes joint control of
TRANS Corp. formed the subsidiary on January 1, 2012. Income of the subsidiary was earned evenly throughout the the activities that are conducted by entity DP. The main feature of entity DP’s legal form is that the entity, not the
years and the subsidiary declared dividends worth S$75,000 on September 12, 2012 and none were declared during parties, has rights to the assets and obligations for the liabilities relating to the arrangement. These activities include the
2013. rental of the retail units, managing the car park, maintaining the centre and its equipment, such as lifts, and building the
How much is the cumulative translation adjustment for 2013? reputation and customer base for the centre as a whole.
A. P9,093,750 B. P8,531,250 C. P15,093,750 D. P13,125,000
The terms of the contractual arrangement are such that:

JOINT ARRANGEMENTS (IFRS 11)
PROBLEM 1
GX Builders Corp. and JQ Progress Co. are two companies whose business are the construction of many types of public
and private construction services. They set up a contractual arrangement to work together for the purpose of fulfilling a
contract with the government for the construction of a motorway between two cities for P144 million fixed price
contract.
The contractual arrangement determines the participation shares of GX and JQ and establishes:
 Joint control of the arrangement
 The rights to all assets needed to undertake the activities of the arrangement are shared by the parties on the basis of
their participation shares in the arrangement.
 The parties have joint responsibility for all operating and financial obligations relating to the activities of the
arrangement on the basis of their participation shares in the arrangement; and
 The profit and loss resulting from the activities of the arrangement is shared by GX and JQ on the basis of their
participation shares in the arrangement.
In 2013, in accordance with the agreement between GX and JQ:
 Entity DP owns the shopping centre. The contractual arrangement does not specify that the parties have rights to
the shopping centre.
 The parties are not liable in respect of the liabilities of entity DP. If entity DP is unable to pay any of its liabilities,
the liability of each to any third party will be limited to the parties unpaid contribution.
 The parties have the right to sell or pledge their interests in entity DP
 Each party receives a share of the income from the shopping centre (rental income net of operating costs) in
accordance with its interests in entity DP.
Transactions of the contractual arrangement for 2012 and 2013 follow:
2012
 RK and SV contributed P60 million each for a ½ interest in the net assets of Entity DP.
 Organization expenses incurred amounts to P600,000.
 Entity DP acquired land at a cost of P12 million.
 Constructed a building (shopping centre) at a cost of P90 million.
 Operating expenses for the year amounts to P6 million.
 Rental income collected from the tenants, P60 million
 Net income or loss is distributed to the venturers in accordance with their interest.
2013

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FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006
 Operating expenses (including depreciation) incurred for the year, P21 million
 Rental income collected for the year, P72 million
 Each venture receives a share of the income or loss from rental income net of the operating expenses.

1. What is the interest of RK Developers in the joint venture as of December 31, 2012?
A. P84 million
B. P86.7 million
C. P90 million
D. P120 million
2. What is the net income (loss) of entity DP on December 31, 2013?
A. P51 million
B. P72 million
C. P93 million
D. P63 million
3. What is the interest of SV Holdings in the joint arrangement as of December 31, 2013?
A. P112.2 million
B. P87 million
C. P60 million
D. P84 million

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