Test Bank Aa Part 2 2015 Ed

TEST BANK
Advanced
Accountin
g
Part 2
ZEUS VERNON B. MILLAN

ALL RIGHTS RESERVED
2015
No part of this work covered by

the copyright hereon may be
reproduced or used in any form
or by any means - electronic or
mechanical, including
photocopying – without the
written permission of the
author.
ISBN 978-621-95096-5-7
Published by:
BANDOLIN ENTERPRISE
No. 100 Montebello Village, Bakakeng Sur, Baguio City 2600,
Philippines
2
TABLE OF CONTENTS
CHAPTER 13
BUSINESS COMBINATIONS (PART 1)...........1
OVERVIEW ON THE TOPIC................................................... 1
INTRODUCTION................................................................... 1
OBJECTIVE.......................................................................... 4
SCOPE............................................................................. 5
DEFINITION OF BUSINESS COMBINATION................................ 5
Essential elements in the definition of a business combination 5
ACCOUNTING FOR BUSINESS COMBINATION........................7
IDENTIFYING THE ACQUIRER............................................... 8
DETERMINING THE ACQUISITION DATE............................. 10
RECOGNIZING AND MEASURING GOODWILL......................11
Consideration transferred..........................12
Non-controlling interest.............................12
Previously held equity interest in the
acquiree13 Net identifiable assets acquired. .13
RESTRUCTURING PROVISIONS........................................... 22
SPECIFIC RECOGNITION PRINCIPLES................................. 23
1. Operating leases..................................23
2. Intangible assets..................................26
EXCEPTION TO THE RECOGNITION PRINCIPLE – CONTINGENT LIABILITIES 32
EXCEPTIONS TO BOTH THE RECOGNITION AND MEASUREMENT PRINCIPLES 34
Additional concepts on Consideration transferred 37
EXCEPTIONS TO THE MEASUREMENT PRINCIPLE................40
CHAPTER 13: SUMMARY............................................... 43
CHAPTER 13: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES).........................................................44
CHAPTER 13: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES)...................................48
CHAPTER 13: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) 55
CHAPTER 14
BUSINESS COMBINATIONS (PART 2)..........63
SHARE-FOR-SHARE EXCHANGES..................................... 63
BUSINESS COMBINATION ACHIEVED IN STAGES.................67
BUSINESS COMBINATION ACHIEVED WITHOUT TRANSFER OF CONSIDERATION 70
MEASUREMENT PERIOD.................................................... 73
DETERMINING WHAT IS PART OF THE BUSINESS COMBINATION TRANSACTION 79
Reacquired rights.....................................82
Settlement of pre-existing relationships between the
acquirer and acquiree................................82
SUBSEQUENT MEASUREMENT AND ACCOUNTING............89
DISCLOSURES................................................................ 96
CHAPTER 14: SUMMARY............................................... 96
PURPOSES).........................................................97
INSTRUCTION PURPOSES)...................................99
CHAPTER 14: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................108
CHAPTER 15
BUSINESS COMBINATIONS (PART 3)........115
SPECIAL ACCOUNTING TOPICS FOR BUSINESS
COMBINATION115 GOODWILL........................115
Due diligence.........................................116
Methods of estimating goodwill.................117
REVERSE ACQUISITIONS................................122
COMBINATION OF MUTUAL ENTITIES.............126
CHAPTER 15: SUMMARY............................................. 127
PURPOSES).......................................................127
INSTRUCTION PURPOSES).................................128
........................................................................132
CHAPTER 15: THEORY OF ACCOUNTS REVIEWER.........134
CHAPTER 15 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS
........................................................................141
CHAPTER 16
CONSOLIDATED FINANCIAL STATEMENTS (PART 1) 142
OVERVIEW ON THE TOPIC.............................................. 142
SCOPE......................................................................... 143
CONTROL.................................................................... 143
POWER........................................................................ 144
Administrative rights...............................145
Unilateral rights......................................145
Protective rights.....................................145
Substantive rights...................................146
Voting rights..........................................147
Substantive removal and other rights held by other parties
.....................................................................151
EXPOSURE OR RIGHTS TO VARIABLE RETURNS...............151
ABILITY TO USE ITS POWER TO AFFECT INVESTOR’S RETURNS 151
ACCOUNTING REQUIREMENTS........................................ 152
Uniform accounting policies......................152
Reporting date.......................................152
Consolidation period................................153
Measurement.........................................153
NON-CONTROLLING INTERESTS (NCI).....................154
PREPARING THE CONSOLIDATED FINANCIAL STATEMENTS154
CONSOLIDATION AT DATE OF ACQUISITION....................155
CONSOLIDATION SUBSEQUENT TO DATE OF ACQUISITION162
Step 1: Analysis of effects of intercompany transaction 162
Step 2: Analysis of net assets...................162
Step 3: Goodwill computation...................163
Step 4: Non-controlling interest in net
assets164 Step 5: Consolidated retained
earnings................................................164
Step 6: Consolidated profit or loss.............164
Step 7: Profit or loss attributable to owners of parent and NCI
.....................................................................165
SUBSIDIARY’S OUTSTANDING CUMULATIVE PREFERENCE SHARES 180
CHAPTER 16: SUMMARY............................................. 181
PURPOSES).......................................................184
........................................................................190
CHAPTER 17
INTERCOMPANY TRANSACTIONS...................................... 193
Intercompany sale of inventory.................203
Intercompany sale of property, plant and equipment 212
Intercompany dividends...........................220
Intercompany bond transaction.................228
CHAPTER 17: SUMMARY............................................. 235
CHAPTER 18
IMPAIRMENT OF GOODWILL........................................... 241
INTERCOMPANY ITEMS IN-TRANSIT AND RESTATEMENTS.246
CONTINUOUS ASSESSMENT.............................................. 255
Changes in ownership interest not resulting to loss of control
.....................................................................255
Loss of control........................................261
Derecognition of other comprehensive income266
IMPORTANCE OF CONSOLIDATION................................... 269
THEORIES OF CONSOLIDATION....................................... 269
Historical background..............................272
Advantages and disadvantages of the entity theory 272
ADDITIONAL ILLUSTRATIONS.......................................... 274
CONSOLIDATION OF REVERSE ACQUISITION................... 288
SPECIAL PURPOSE ENTITIES........................................... 295
CHAPTER 18: SUMMARY............................................. 296
PURPOSES).......................................................297
CHAPTER 19
COMPLEX GROUP STRUCTURES.................................... 311
Identifying the acquisition date.................312
Consolidation of a vertical group...............313
Consolidation of a D-shaped (mixed) group.
323 Complex group structure with Associate
............................................................
327
INVESTMENT IN SUBSIDIARY MEASURED AT OTHER THAN COST 333
PUSH-DOWN ACCOUNTING............................................. 338
PFRS 12 DISCLOSURE OF INTERESTS IN OTHER
ENTITIES344 CHAPTER 19: SUMMARY........................... 346
CHAPTER 19 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS
........................................................................357
CHAPTER 20
SEPARATE FINANCIAL STATEMENTS.........358
OBJECTIVE..................................................................... 358
SCOPE......................................................................... 358
DEFINITIONS................................................................. 358
PREPARATION OF SEPARATE FINANCIAL STATEMENTS......359
COST METHOD............................................................ 359
FAIR VALUE METHOD...................................................... 359
EQUITY METHOD............................................................ 360
DISCLOSURE............................................................... 361
PURPOSES).......................................................362
........................................................................363
........................................................................364
CHAPTER 21
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
.............................................................365
OBJECTIVE..................................................................... 365
Two ways of conducting foreign activities....365
Two main accounting issues......................365
SCOPE......................................................................... 366
FUNCTIONAL CURRENCY.............................................. 366
CHANGE IN FUNCTIONAL CURRENCY.............................. 368
FOREIGN CURRENCY TRANSACTIONS.............................. 369
Initial recognition....................................369
Subsequent measurement........................370
Monetary items......................................370
Direct and indirect quotation....................371
RECOGNITION OF EXCHANGE DIFFERENCES...................371
ITEMS MEASURED AT OTHER THAN HISTORICAL COST....381
SEVERAL EXCHANGE RATES.......................................... 383
EXCHANGE DIFFERENCES RECOGNIZED IN OCI...........384
FOREIGN OPERATIONS.................................................... 385
Translation to the presentation currency.....385
Translation procedures.............................386
Translation of a foreign operation..............393
Net investment in a foreign operation........401
Disposal or partial disposal of a foreign operation 413
HYPERINFLATIONARY ECONOMY..................................... 414
Translation procedures – Hyperinflationary economy 414
DISCLOSURE............................................................... 419
CHAPTER 21: SUMMARY............................................. 419
PURPOSES).......................................................420
........................................................................435
........................................................................453
CHAPTER 22
ACCOUNTING FOR DERIVATIVES AND
HEDGING TRANSACTIONS (PART 1)........454
OVERVIEW ON THE TOPIC.............................................. 454
INTRODUCTION.............................................................. 454
PURPOSE OF DERIVATIVES.............................................. 455
Risks.....................................................455
DEFINITION OF A DERIVATIVE......................................... 456
COMMON TYPES OF DERIVATIVES................................... 458
MEASUREMENT OF DERIVATIVES..................................... 461
NO HEDGING DESIGNATION........................................... 461
HEDGING.................................................................... 461
Hedging instrument.................................462
Hedged items.........................................463
HEDGE ACCOUNTING................................................... 464
Hedging relationships..............................466
FAIR VALUE HEDGES.................................................... 466
CASH FLOW HEDGES.................................................... 467
HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATION468
CHAPTER 22: SUMMARY................................................ 469
PURPOSES).......................................................470
........................................................................473
CHAPTER 23
ACCOUNTING FOR FORWARD CONTRACTS....................475
Illustration 1: Fair value hedge of a recognized asset 475
Illustration 2: No hedging designation (Held for speculation)
.....................................................................478
Illustration 3: Fair value hedge of a recognized liability 479
Illustration 4: No hedging designation (Held for speculation)
.....................................................................482
FAIR VALUE HEDGE OF AN UNRECOGNIZED FIRM COMMITMENT 482
Illustration 5: Fair value hedge of a firm sale commitment
.....................................................................483
Illustration 6: Fair value hedge of a firm purchase commitment
.....................................................................486
Illustration 7: FV hedge - firm purchase commitment
(Present value).......................................489
Illustration 8: FV hedge - firm purchase commitment
(Present value).......................................492
FAIR VALUE HEDGE VS. CASH FLOW HEDGE.................494
FIRM COMMITMENT VS. FORECAST TRANSACTION..........495
CHOICE TO DESIGNATE AS EITHER FAIR VALUE HEDGE OR CASH FLOW HEDGE
........................................................................496
SUBSEQUENT ACCOUNTING FOR ACCUMULATED OCI IN CASH FLOW HEDGE
........................................................................496
Illustration 9: Cash flow hedge – forecasted purchase transaction
.....................................................................497
Illustration 10: Cash flow hedge of a forecasted sale transaction
– Present value (Indirect quotation)..........501
Illustration 11: CF hedge of a recognized liability – Present value
.....................................................................503
PURPOSES).......................................................506
........................................................................518
CHAPTER 24
ACCOUNTING FOR FUTURES CONTRACT.........................523
Illustration 1: No hedging designation........523
Illustration 2: FV hedge of a recognized asset measured at
fair value...............................................525
Illustration 3: FV hedge of a recognized asset measured
at LOCON..............................................527
Illustration 4: Fair value hedge of a firm sale commitment
.....................................................................528
CASH FLOW HEDGE – SPECIFIC ACCOUNTING................530
Illustration 5: CF hedge – Assessment of Hedge effectiveness
.....................................................................531
ACCOUNTING FOR OPTIONS........................................... 535
Illustration 1: Fair value hedge of a recognized asset – Put option
.....................................................................535
Illustration 2: No hedging designation – Call option 537
Illustration 3: CF hedge - forecasted transaction
(Indirect quotation).................................539
ACCOUNTING FOR SWAPS............................................ 541
Illustration 1: CF hedge - variable-rate debt (Payment
at maturity)...........................................541
Illustration 2: CF hedge - variable-rate debt (Periodic payments)
.....................................................................543
FAIR VALUE HEDGE – HEDGED ITEM IS MEASURED AT AMORTIZED COST
........................................................................547
Illustration 3: Fair value hedge of a fixed-rate
debt547 CHAPTER 24: MULTIPLE CHOICE – COMPUTATIONAL (FOR
CLASSROOM INSTRUCTION PURPOSES)....................552
........................................................................560
CHAPTER 25
ACCOUNTING FOR NET INVESTMENT HEDGES.................569
Illustration: Hedge of a net investment in foreign operation
.....................................................................569
EMBEDDED DERIVATIVES............................................. 574
Hybrid contracts with financial asset hosts. .575
Separation of embedded derivative from host contract 575
ADDITIONAL ILLUSTRATIONS.......................................... 576
CHAPTER 25: SUMMARY............................................. 584
PURPOSES).......................................................585
CHAPTER 25 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS
........................................................................614
CHAPTER 26
CORPORATE LIQUIDATION AND REORGANIZATION 615
INTRODUCTION.............................................................. 615
CORPORATE LIQUIDATION............................................... 615
Measurement basis.................................615
Financial reports.....................................616
REORGANIZATION.......................................................... 642
Types of corporate reorganization..............642
CHAPTER 26: SUMMARY............................................. 643
PURPOSES).......................................................646
........................................................................658
APPENDICES
APPENDIX A....................................664
INTERMEDIATE FINANCIAL ACCOUNTING - PART 1A CONTENTS AT A
GLANCE
APPENDIX B....................................665
INTERMEDIATE FINANCIAL ACCOUNTING - PART 1B CONTENTS AT A
GLANCE
APPENDIX C....................................666
INTERMEDIATE FINANCIAL ACCOUNTING - PART 2 CONTENTS AT A
GLANCE
APPENDIX D....................................667
INTERMEDIATE FINANCIAL ACCOUNTING - PART 3 CONTENTS AT A
GLANCE
APPENDIX E....................................668
ADVANCED ACCOUNTING - PART 1 CONTENTS AT A GLANCE
REFERENCES.....................................669
10
Chapter 21
The Effects of Changes in Foreign
Exchange Rates
Chapter 21: Multiple Choice – Computational (For classroom

instruction purposes)
Foreign currency transaction – Direct quotation – Purchase
Use the following information for the next six questions:
On November 29, 20x1, ABC Co. placed a non-cancellable purchase
order for the importation of a machine with a purchase price of
€40,000 from a company based in France. The contract term is FOB
shipping point. The machine was shipped on December 1, 20x1 and
was received by ABC on December 15, 20x1. The purchase price
was settled on January 3, 20x2.
The following are the exchange rates:

November 29, 20x1............................................₱55:€1
December 1, 20x1..............................................₱58:€1
December 15, 20x1............................................₱57:€1
December 31, 20x1............................................₱60:€1
January 3, 20x2................................................₱61:€1
1. The entry on November 29, 20x1 includes

a. a debit to accounts payable for ₱2,320,000.
b. a credit to machinery for ₱2,320,000.
c. a debit to machinery for ₱2,320,000
d. none of these
2. The entry on December 1, 20x1 includes

a. a debit to accounts payable for ₱2,320,000.
b. a credit to machinery for ₱2,320,000.
c. a debit to machinery for ₱2,320,000
d. none of these
3. The total FOREX gain (loss) recognized in 20x1 is

a. 40,000 b. (80,000) c. (200,000) d. (120,000)
4. The adjustment to the machinery account on December 31, 20x1

is – increase (decrease)
a. 80,000 b. (80,000) c. 40,000 d. 0
5. The total FOREX gain (loss) recognized in 20x2 is

a. (40,000) b. (80,000) c. (200,000) d. (120,000)
6. The net adjustment to the machinery account on January 3, 20x2

a. 80,000 b. (120,000) c. (40,000) d. 0
Foreign currency transaction – Direct quotation – Sale

Use the following information for the next four questions:
On November 29, 20x1, ABC Co. received a non-cancellable sale
order for the exportation of inventories from a UK-based company.
The contract price is £40,000 (pound sterling). The contract term is
FOB shipping point. The inventories were shipped on December 1,
20x1. The sale was settled on January 3, 20x2.

November 29, 20x1............................................₱67:£1
December 1, 20x1..............................................₱68:£1
December 31, 20x1............................................₱70:£1
January 3, 20x2................................................₱71:£1
7. How much sale revenue is recognized in 20x1?

a. 2,680,000 b. 2,720,000 c. 2,800,000 d. 2,840,000
8. How much FOREX gain (loss) is recognized in 20x1?

a. 120,000 b. (120,000) c. 80,000 d. (80,000)
9. How much FOREX gain (loss) is recognized in 20x2?

a. 40,000 b. (40,000) c. 120,000 d. 160,000
10. How much is the total FOREX gain (loss) resulting from the
sale transaction?
a. 160,000 b. 120,000 c. 80,000 d. 40,000
Foreign currency transaction – Indirect quotation

Use the following information for the next two questions:
ABC Co. had the following transactions during the last month of the
current reporting period:
 Purchased raw materials from Pakistani Co., a company based in
Pakistan, for 400,000 rupees on December 17, 20x1 to be settled
on January 5, 20x2.
 Sold inventory to Swedish Co., a company based in Sweden, for
80,000 kroners on December 20, 20x1 to be settled on January
5, 20x2.
The exchange rates are as follows:

Rupee Kroner
Dec. 17, 20x1...........Php 1 : PKR 2.04
Dec. 20, 20x1..........................................Php 1 : SEK 0.1667
Dec. 31, 20x1…………Php 1: PKR 2 Php 1 : SEK 0.2000
Jan. 5, 20x2…………..Php 1: PKR 2.083 Php 1 : SEK 0.2400
11. How much are the total FOREX gains/losses recognized by

ABC Co. from the purchase and sale transactions described
above?
Purchase Sales
a. (4,048) 146,570
b. 4,048 (146,572)
c. 3,922 (66,667)
d. (3,922) 66,667
12. How much are the total FOREX gains/losses recognized by

Pakistani Co. and Swedish Co. from the purchase and sale
transactions, respectively?
Pakistani Swedish
a. (4,048) 146,572
b. 3,922 (66,667)
c. (3,922) 66,667
d. 0 0
Subsequent measurement
Use the following information for the next five questions:
On December 1, 20x1, ABC Co. acquired equipment for BRL 40,000
(Brazilian reals) when the exchange rate is ₱24:BRL1. ABC Co.
reported foreign exchange loss of ₱80,000 in its 20x1 statement of
profit or loss and a ₱20,000 foreign exchange gain of ₱20,000 in its
20x2 statement of profit or loss.
13. What is the exchange rate on December 31, 20x1?

a. ₱24:BRL1 b. ₱26:BRL1 c. ₱25.5:BRL1 d. None
of these
14. What is the exchange rate on settlement date in 20x2?

a. ₱24:BRL1 b. ₱26:BRL1 c. ₱25.5:BRL1 d. None
of these
15. What is the carrying amount of the accounts payable in the

20x1 statement of financial position?
a. 1,040,000 b. 960,000 c. 1,020,000 d. None of
these
16. How much is the cost of the equipment in the 20x1 statement
of financial position?
a. 1,040,000 b. 960,000 c. 1,020,000 d. None of
these
17. How much is the cost of the equipment in the 20x2 statement
of financial position?
a. 1,040,000 b. 960,000 c. 1,020,000 d. None of
these
Exchange rate on initial recognition

18. ABC Co. obtained a $40,000 loan at the middle of the year. At
the end of the year, the loan payable is appropriately reported at
₱2,200,000. None of the principal on the loan has been paid
during the year. There has been a 10% increase in the exchange
rate (expressed in direct quotation) from the date the loan has
been obtained to the end of reporting period. What is the
exchange rate at the date the loan has been obtained?
a. ₱55:$1 b. ₱50:$1 c. ₱45:$1 d. ₱60:$1
Loan transaction
19. On July 1, 20x1, ABC Co. obtained a $40,000 loan that bears
10% annual interest when the spot exchange rate is ₱50:$1. The
closing rate on December 31, 20x1 is ₱55:$1. No payments had
been made on the loan during the year. How much is the foreign
exchange gain (loss) to be recognized in the year-end statement
of profit or loss?
a. (200,000) b. (220,000) c. (210,000) d.
210,000
Cash account
ABC Co., a domestic corporation based in the Philippines, frequently
sells goods overseas through the internet. All online sales are on
cash basis. The movements in ABC’s US dollar account are shown
below:
Cash in bank -
U.S. dollar
$40,00
Jan. 1 (₱48:$1) 0
80,00
Sept. 30 0 20,000 Dec. 16 (₱44:$1)
(₱45:$1) $100,00
0 Dec. 31 (₱45:$1)
20. How much is the balance of cash in bank to be presented in

the year-end statement of financial position?
a. 4,640,000 b. 4,500,000 c. 100,000 d. 4,650,000
21. What is the net foreign exchange gain (loss) to be recognized

in the year-end statement of profit or loss?
a. 100,000 b. (100,000) c. (140,000) d.
140,000
Average rate
On December 15, 20x1, ABC Co. sent one of its key management
personnel to a seminar in Malaysia. ABC Co. advanced MYR 40,000
(ringgits) to the manager subject to liquidation. The exchange rate
on December 15, 20x1 is ₱14: MYR1.
The liquidation report submitted by the key manager showed the

following:
 MYR 32,000 were spent from December 15 to December 31,
20x1. The exchange rate on December 31, 20x1 is ₱13: MYR 1.
 MYR 6,000 were spent from January 1, 20x2 to January 3, 20x2.
The manager returned the MYR 2,000 excess to the cashier on
January 3, 20x2. The exchange rate on January 3, 20x2 is ₱12:
MYR 1.
22. How much is the total FOREX gain (loss) on December 31,
20x1?
a. (24,000) b. (32,000) c. 24,000 d. (38,000)
23. How much is the FOREX gain (loss) on January 3, 20x2?

a. (5,000) b. (4,000) c. (7,000) d. (2,000)
Items measured at other than historical cost

ABC Co. had the following foreign currency transactions during the
year:
 Acquired equipment on January 1, 20x1 for THB 40,000 (bahts)
from a Thailand-based company when the current exchange rate
was ₱1.2: THB 1. The equipment is depreciated over 5 years
using the straight-line method.
 Purchased inventories on December 1, 20x1 for ZAR 4,000
(rands) from a company based in South Africa when the current
exchange rate was ₱5: ZAR 1.
Both the acquisitions described above are on cash basis. At year-

end, ABC Co. determined the following:
 The equipment was found to have a recoverable amount of THB
28,000. The closing rate is ₱1.3: THB 1.
 Half of the inventories purchased remain unsold. ABC estimated
that the net realizable value of the unsold inventories is ZAR
1,200. The closing rate is ₱6.
24. How much is the impairment loss on the equipment?

a. 11,600 b. 2,000 c. 9,280 d. None
25. How much is the impairment loss on the inventory?

a. 2,800 b. 800 c. 2,240 d. None
Buying and selling rates

ABC Co. had the following foreign currency transactions on April 1,
20x1:
 Purchased goods worth CHF 40,000 (francs) from Swiss
Company, a company based in Switzerland.
 Sold goods with sale price of VEB 4,000 (bolivars) to Venezuelan
Company, a company based in Venezuela.
Both the transactions were settled on April 30, 20x1. The following
were the spot exchange rates:
Buying Selling
Swiss Francs
April 1, 20x1…………………………₱44:CHF1 ₱48:
CHF1 April 30, 20x1……………………….₱47:CHF1 ₱50:
CHF1
Bolivars
April 1, 20x1…………………………₱10:CHF1 ₱12:
CHF1 April 30, 20x1……………………….₱13:CHF1 ₱16:
CHF1
26. How much is the FOREX gain (loss) on the purchase

transaction?
a. (120,000) b. 120,000 c. 80,000 d. (80,000)
27. How much is the FOREX gain (loss) on the sale

transaction? a. 16,000 b. 12,000 c. (16,000) d.
(12,000)
Revaluation of asset
28. On January 1, 20x1, ABC Co. acquired equipment for MWK
4,000,000 (kwachas) from a company based in Malawi. The
equipment’s estimated useful life is 4 years. ABC Co. uses the
straight line method of depreciation and the revaluation model.
On December 31, 20x1, the equipment was determined to have a

net appraised value of MWK 4,800,000 (kwachas). The relevant
rates are as follows:
Jan. 1, 20x1................................................₱0.20 : MWK 1
Dec. 31, 20x1………………………………………..₱0.26 : MWK 1
How much is the revaluation surplus?

a. 648,000 b. 3,461,538 c. 448,000 d. None
Exchange difference recognized in OCI

29. ABC Co. has a wholly-owned subsidiary in Indonesia. The
following information is available about the subsidiary for the
year to December 31, 20x1:
(IDR -
Rupiahs)
400,000,00
Net assets, Jan. 1, 0
160,000,00
20x1 Profit for the year 0
Dividends -
560,000,00
Net assets, Dec. 31, 20x1 0
No goodwill arose from the business combination. The following are

the relevant exchange rates:
Jan. 1, 20x1...................................₱0.003 : IDR 1
Average for the year…………………….₱0.004 : IDR 1
Dec. 31, 20x1…………………………….₱0.005 : IDR 1
How much is the total gain (loss) on translation for the year?
a. 1,280,000 b. (1,120,000) c. 1,120,000 d.
960,000
Goodwill
On January 1, 20x1, a Philippine holding company acquired 100%
interest in a subsidiary based in Kenya for KES 40M (shillings). The
fair value of the net assets of the subsidiary at that date was KES
32 million (shillings).
The following are the relevant exchange rates:

Jan. 1, 20x1………………………………………..₱0.04 : KES 1
Dec. 31, 20x1………………………………………₱0.05 : KES 1
The group determined that there is no impairment in goodwill.
30. How much is the goodwill as of January 1, 20x1?

a. 100,000 b. 240,000 c. 320,000 d. 480,000
31. How much is the goodwill as of December 31,

20x1? a. 400,000 b. 440,000 c. 480,000 d. 560,000
Translation of a subsidiary’s financial statements

Use the following information for the next nine questions:
ABC Co. owns 80% of the ordinary shares of a foreign subsidiary,
XYZ, Inc., a company based in Korea. XYZ, Inc.'s functional
currency is won. The subsidiary was acquired at the start of the
reporting period for 6,000,000 wons, when the subsidiary's retained
earnings were 3,200,000 wons.
At the date of the acquisition the fair value of the net assets of the
subsidiary were 5,600,000 wons. This included a fair value
adjustment in respect of land.
ABC Co. elected to measure non-controlling interest at the NCI’s

proportionate share of the fair value of the subsidiary‘s net assets.
The group determined at year-end that goodwill is not impaired.
There were no changes in the share capital of the subsidiary during
the year.
The relevant exchange rates are as follows:

Date Exchange rates
Jan. 1, 20x1.......................................₱0.03: KRW 1
Average for the year………………………..₱0.04: KRW 1
Dec. 31, 20x1………………………………..₱0.05: KRW 1
A summary of the individual financial statements of the entities at

the end of reporting period are shown below:
Statements of financial position

As at December 31, 20x1
ABC Co. XYZ, Inc.
ASSETS (pesos) (wons)
Investment in subsidiary 180,000
Other assets 8,000,000 5,200,000
TOTAL ASSETS 8,180,000 5,200,000
LIABILITIES AND EQUITY

Liabilities 1,600,000 240,000
Share capital 4,000,000 800,000
Retained earnings 2,580,000 4,160,000
Total equity 6,580,000 4,960,000
TOTAL LIABILITIES AND EQUITY 8,180,000 5,200,000
Statements of profit or loss

For the year ended December 31, 20x1
ABC Co. XYZ, Inc.
(pesos) (wons)
3,600,00
2,400,000
Revenues 0
(2,160,0 (1,440,000
Expenses 00) )
1,440,0 960,00
Profit for the year 00 0
32. How much is the goodwill as of December 31,

20x1? a. 45,600 b. 76,000 c. 66,500 d. 64,500
33. How much is the non-controlling interest in the net assets of

the subsidiary (NCI) as of December 31, 20x1?
a. 39,360 b. 56,600 c. 54,360 d. 65,600
34. How much is the consolidated retained earnings as of

December 31, 20x1?
a. 2,618,400 b. 2,702,400 c. 2,672,340 d. 2,610,720
35. How much is the total translation gain (loss) to be recognized
in other comprehensive income in 20x1?
a. 152,000 b. 121,600 c. 161,600 d. 136,000
36. How much is the consolidated profit in 20x1?

a. 1,478,400 b. 1,488,000 c. 1,596,400 d. 1,696,000
37. How much is the consolidated total comprehensive income in

20x1?
a. 1,640,000 b. 1,630,400 c. 1,718,000 d. 1,832,000
38. How much is the comprehensive income attributable to

owners of the parent?
a. 1,592,320 b. 1,606,080 c. 1,598,400 d. 1,638,080
39. How much is the consolidated total assets as of December 31,

20x1?
a. 8,416,000 b. 9,680,000 c. 8,340,000 d. 9,860,000
40. How much is the equity attributable to owners of the parent

as of December 31, 20x1?
a. 6,676,320 b. 6,828,320 c. 6,738,400 d. 6,804,000
Net investment in a foreign operation

On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc., a
company situated in a foreign country. The currency of this country
is the Armenian Dram (AMD). ABC elected to measure non-
controlling interest as its proportionate share of the fair value of the
subsidiary‘s net assets.
The year-end financial statements of the combining constituents

show the following information:

As of December 31, 20x1
ABC Co. XYZ, Inc.
₱m* ADMm*
Current assets 8,000 8,800
Property, plant and equipment 12,000 7,200
TOTAL ASSETS 21,760 16,000
Current liabilities 4,000 4,000

Noncurrent liabilities 4,800 2,800
Total liabilities 8,800 6,800
Share capital 4,000 400

Share premium 2,000 800
Retained earnings 6,960 8,000
Total equity 12,960 9,200
TOTAL LIABILITIES AND EQUITY 21,760 16,000
*Amounts in millions.

ABC Co. XYZ, Inc.
₱m ADMm
Revenue 16,000 32,000
Cost of sales (10,000) (16,000)
Gross profit 6,000 16,000
Operating expenses (2,000) (4,000)
Dividends received 240
Interest expense (400) (1,200)
Interest income 160 400
Profit before tax 4,000 11,200
Income tax expense (1,200) (4,000)
Profit after tax 2,800 7,200
Extraordinary item (800)
Profit for the year 2,800 6,400
The movements in retained earnings during 20x1 are shown below:

Retained earnings – Jan. 1, 20x1 4,560 4,800
Dividends paid (400) (3,200)
Profit for the year 2,800 6,400
Retained earnings – Dec. 31, 20x1 6,960 8,000
Additional information:
a) XYZ, Inc. has applied local GAAP, but has made some attempt to
adapt to IFRSs (to which PFRSs are consistent). As a result, XYZ,
Inc. has written off research previously capitalized as an
extraordinary item prior period adjustment in the sum of
ADM400 million. The remainder of the extraordinary item is the
recognition of a fall in value of some plant that was damaged
during the year.
b) The fair value of the net assets of XYZ, Inc. at acquisition was
ADM8,000 million after taking into account the removal of
capitalized research discussed above. Goodwill is unimpaired.
c) The increase in the fair value of XYZ, Inc. over carrying value is
attributable to machines which are depreciated over five years
on the straight line basis.
d) During the year, ABC Co. sold ₱120 million in goods to XYZ, Inc.
at a margin of 20%. All of the goods had been utilized in
production by year-end, but only one half of the relevant finished
goods have been sold. XYZ, Inc. received the goods on
September 1 and paid on September 21. The foreign exchange
difference remains in current liabilities.
e) ABC Co. made a loan of ₱200 million to XYZ, Inc. immediately
after the acquisition on January 1. This is still outstanding at
year- end. ABC Co. has recorded the asset in current assets. The
subsidiary has recorded the liability in noncurrent liabilities at the
rate ruling at year-start.
f) The dividends were declared by XYZ, Inc. at year-end and
received by ABC Co. on that day.
The following exchange rates are relevant:

ADM to ₱1.00
January 1.........................................................5
September 1......................................................6
September 21....................................................6.5
December 31.....................................................8
Weighted average for year....................................7
41. How much is the goodwill as of December 31, 20x1?
a. 4,000 b. 620 c. 500 d. 1,400
42. How much is the NCI in net assets as of December 31,

20x1? a. 523 b. 553 c. 624 d. 829.50
43. How much is the consolidated retained earnings as of

December 31, 20x1?
a. 7,176 b. 7,214 c. 7,245 d. 7,385
44. How much is the total translation gain (loss) to be recognized

in other comprehensive income in 20x1?
a. (1,087) b. (1,792) c. (1,903) d. (1,093)
45. How much is the consolidated profit in

20x1? a. 3,442 b. 3,483 c. 3,647
d. 3,328
46. How much is the comprehensive income attributable to

NCI? a. 36 b. 38 c. 43 d. 41
Disposal of a foreign operation

47. ABC Co. held 100% ownership interest of XYZ, Inc. but sold
the entire investment on August 1, 20x1 for ₱500,000.
The following information was determined as of this

date: 412,000
Carrying amount of XYZ’s net identifiable assets
Carrying amount of NCI (including accumulated OCI
attributable to NCI) 82,400
Goodwill 12,000
ABC Co. had previously recognized translation gains of ₱3,200 in

other comprehensive income on its investment in XYZ, Inc. How
much is the total gain to be recognized in profit or loss on disposal
date?
a. 158,400 b. 161,600 c. 155,200 d. 164,800
Translation of a foreign operation – Hyperinflationary

economy
ABC Co., a corporation based in the Philippines, has a foreign
branch that is operating in a hyperinflationary economy. The
financial statements of the branch prior to restatement and
translation are shown below:
Statement of financial position

Amounts in Angolan Kwanza (AOA)
184,000
Cash
Accounts receivable 296,000
Inventory 160,000
Building 400,000
Accumulated depreciation (80,000)
Total assets 960,000
Loan payable 120,000
Share capital 400,000

Retained earnings 440,000
Total equity 840,000
Total liabilities and
960,000
equity
Statement of profit or loss

Sales 480,000
Cost of sales:
Inventory - Jan. 1 240,000
Purchases 120,000
Total goods available for sale 360,000
Inventory - Dec. 31 (160,000) (200,000)
Gross profit 280,000
Depreciation expense (40,000)
Other operating expenses (160,000)
Profit for the year 80,000
 The building was acquired on January 1, 20x0.
 The share capital was issued on January 1, 20x0.
 Revenues were earned and expenses were incurred evenly
during the year.
 Selected values of general price indices (CPI) are shown
below: January 1, 20x0 100
Average for 20x0 110
January 1, 20x1 120
December 31, 20x1 140
 The net monetary assets as of January 1, 20x1 is ₱160,000.

 The exchange rates are as follows:
1.00 AOA : 0.45
January 1, 20x1 PHP
1.00 AOA : 0.47
Average for 20x1 PHP
1.00 AOA : 0.50
December 31, 20x1 PHP
48. How much is the gain (loss) on net monetary
position? a. (53,224) b. (51,887) c. (50,667) d.
(48,333)
49. How much is the translated total assets as of December 31,

20x1?
a. 552,400 b. 553,600 c. 554,800 d. 556,300
50. How much is the translated total equity as of December 31,

20x1?
a. 553,600 b. 489,600 c. 495,600 d. 493,600
51. How much is the translated profit (loss) for 20x1?
a. (4,461) b. 4,240 c. (4,561) d.
(4,362)
Chapter 21: Exercises (For classroom instruction purposes)

1. ABC Co. is a mining company registered in Canada whose shares
are traded in the Toronto Stock Exchange. ABC’s operating
activities take place in the gold and silver mines in the
Philippines.
Requirements:
a. What is the presentation currency of ABC Co.?
b. What is the functional currency of ABC Co.?
c. ABC acquired specialized mining equipment from Japan, invoiced
in Japanese yen. What type of currency is the Japanese yen
under PAS 21 definitions?
2. ABC Philippines Co. is a branch of ABC U.S. Co. ABC Philippines

operates in a Philippine Economic Zone Authority (PEZA) Special
Economic Zone. ABC Philippines is engaged in the apparel
business. All of its raw materials are imported from its main
office in the U.S. and all of its finished products are exported
directly to
U.S. customers. The U.S. customers remit payments to the U.S.
main office. The U.S. main office will then provide the Philippine
branch its working capital needs. None of ABC Philippines’
finished products are sold in the Philippines. The raw materials
imported and finished goods exported are denominated in U.S.
dollars.
Requirements:
a. What is ABC Philippines Co.’s functional currency?
b. What is ABC Philippines Co.’s presentation currency?
3. ABC Co. started its operations in China, where the currency is

the yuan. After several years, ABC Co. expanded and exported its
product to the Philippines, and conducted business through a
branch. The functional currency of the group was deemed to be
the yuan but by the end of 20x1, 80% of the business was
conducted in the Philippines. At the beginning of 20x1, 30% of
the business was conducted in Philippine pesos.
Question: Should the functional currency of the group remains at

yuan or changed to Philippine pesos?
4. On November 29, 20x1, ABC Co. placed a non-cancellable

purchase order for the importation of a machine with a purchase
price of €20,000 from a company based in France. The contract
term is FOB shipping point. The machine was shipped on
December 1, 20x1 and was received by ABC on December 15,
20x1. The purchase price was settled on January 3, 20x2.

November 29, 20x1............................................₱55:€1
December 1, 20x1..............................................₱58:€1
December 15, 20x1............................................₱57:€1
December 31, 20x1............................................₱60:€1
January 3, 20x2................................................₱61:€1
Requirement: Provide the journal entries.
5. On November 29, 20x1, ABC Co. received a non-cancellable sale

order for the exportation of inventories from a UK-based
company. The contract price is £40,000 (pound sterling). The
contract term is FOB shipping point. The inventories were
shipped on December 1, 20x1. The sale was settled on January
3, 20x2.

November 29, 20x1............................................₱67:£1
December 1, 20x1..............................................₱68:£1
December 31, 20x1............................................₱70:£1
January 3, 20x2................................................₱71:£1
Requirement: Provide the journal entries.
6. ABC Co. had the following transactions during the last month of
the current reporting period:
 Purchased raw materials from Pakistani Co., a company based in
Pakistan, for 200,000 rupees on December 17, 20x1 to be settled
on January 5, 20x2.
 Sold inventory to Swedish Co., a company based in Sweden, for
40,000 kroners on December 20, 20x1 to be settled on January
5, 20x2.
The exchange rates are as follows:

Rupee Kroner
Dec. 17, 20x1...........Php 1 : PKR 2.04
Dec. 20, 20x1..........................................Php 1 : SEK 0.1667
Dec. 31, 20x1…………Php 1: PKR 2 Php 1 : SEK 0.2000
Jan. 5, 20x2…………..Php 1: PKR 2.083 Php 1 : SEK 0.2400
Requirements:
a. How much are the FOREX gains/losses recognized by ABC Co.
from the purchase and sale transactions described above?
b. How much are the total FOREX gains/losses recognized by
Pakistani Co. and Swedish Co. from the purchase and sale
transactions, respectively?
7. ABC Co. is a Philippine-based company. During the year, ABC

recognized a foreign exchange gain on its $2,000 receivable and
a foreign exchange loss on its ¥200,000 payable. If exchange
rates are expressed in indirect quotations (i.e., $xx : ₱1.00 and
¥xx : ₱1.00), what would have been the movements in the
exchange rates during the period?
8. On December 1, 20x1, ABC Co. acquired equipment for BRL

20,000 (Brazilian reals) when the exchange rate is ₱24:BRL1.
ABC Co. reported foreign exchange loss of ₱40,000 in its 20x1
statement of profit or loss and a ₱10,000 foreign exchange gain
of ₱10,000 in its 20x2 statement of profit or loss.
Requirements: Compute for the following:

a. Exchange rates on December 31, 20x1 and on settlement date in
20x2.
b. Carrying amount of accounts payable in the 20x1 statement of
financial position.
c. Cost of equipment in the 20x1 and 20x2 statements of financial
position.
9. ABC Co. obtained a $40,000 loan at the middle of the year. At

the end of the year, the loan payable is appropriately
reported at
₱2,200,000. None of the principal on the loan has been paid
during the year. There has been a 10% increase in the exchange
rate (expressed in direct quotation) from the date the loan has
been obtained to the end of reporting period.
Requirement: What is the exchange rate at the date the loan has
been obtained?
10. On July 1, 20x1, ABC Co. obtained a $20,000 loan that bears
10% annual interest when the spot exchange rate is ₱50:$1. The
closing rate on December 31, 20x1 is ₱55:$1. No payments had
been made on the loan during the year.
Requirement: Compute for the foreign exchange gain/loss to be

recognized in the year-end statement of profit or loss.
11. ABC Co., a domestic corporation based in the Philippines,

frequently sells goods overseas through the internet. All online
sales are on cash basis. The movements in ABC’s US dollar
account are shown below:
Cash in bank - U.S.
dollar
Jan. 1 (₱48:$1) $20,000
10,00
Sept. 30 40,000 0 Dec. 16 (₱44:$1)
(₱45:$1) $50,00
0 Dec. 31 (₱45:$1)

a. Amount of cash in bank to be presented in the year-end
statement of financial position.
b. Net foreign exchange gain or loss to be recognized in the year-
end statement of profit or loss.
12. On December 15, 20x1, ABC Co. sent one of its key management
personnel to a seminar in Malaysia. ABC Co. advanced MYR
20,000 (ringgits) to the manager subject to liquidation. The
exchange rate on December 15, 20x1 is ₱14: MYR1.
The liquidation report submitted by the key manager showed the

following:
 MYR 16,000 were spent from December 15 to December 31,
20x1. The exchange rate on December 31, 20x1 is ₱13: MYR 1.
 MYR 3,000 were spent from January 1, 20x2 to January 3, 20x2.
The manager returned the MYR 1,000 excess to the cashier on
January 3, 20x2. The exchange rate on January 3, 20x2 is ₱12:
MYR 1.

a. FOREX gain or loss on December 31, 20x1.
b. FOREX gain or loss on January 3, 20x2.
13. ABC Co. had the following foreign currency transactions during
the year:
 Acquired equipment on January 1, 20x1 for THB 20,000 (bahts)
from a Thailand-based company when the current exchange rate
was ₱1.2: THB 1. The equipment is depreciated over 5 years
using the straight-line method.
 Purchased inventories on December 1, 20x1 for ZAR 2,000
(rands) from a company based in South Africa when the current
exchange rate was ₱5: ZAR 1.
Both the acquisitions described above are on cash basis. At year-

end, ABC Co. determined the following:
 The equipment was found to have a recoverable amount of THB
14,000. The closing rate is ₱1.3: THB 1.
 Half of the inventories purchased remain unsold. ABC estimated
that the net realizable value of the unsold inventories is ZAR 600.
The closing rate is ₱6.
Requirement: Provide the year-end adjustments.
14. ABC Co. had the following foreign currency transactions on April
1, 20x1:
 Purchased goods worth CHF 20,000 (francs) from Swiss
Company, a company based in Switzerland.
 Sold goods with sale price of VEB 2,000 (bolivars) to Venezuelan
Company, a company based in Venezuela.
Both the transactions were settled on April 30, 20x1. The following
were the spot exchange rates:
Buying Selling
Swiss Francs
April 1, 20x1…………………………₱44:CHF1 ₱48:
CHF1 April 30, 20x1……………………….₱47:CHF1 ₱50:
CHF1
Bolivars
April 1, 20x1…………………………₱10:CHF1 ₱12:
CHF1 April 30, 20x1……………………….₱13:CHF1 ₱16:
CHF1
Requirements: Compute for the FOREX gain/loss from the

transactions:
15. On January 1, 20x1, ABC Co. acquired equipment for MWK

2,000,000 (kwachas) from a company based in Malawi. The
equipment’s estimated useful life is 4 years. ABC Co. uses the
straight line method of depreciation and the revaluation model.
On December 31, 20x1, the equipment was determined to have a
net appraised value of MWK 2,400,000 (kwachas). The relevant
rates are as follows:
Jan. 1, 20x1................................................₱0.20 : MWK 1

Dec. 31, 20x1………………………………………..₱0.26 : MWK 1
Requirement: Provide the year-end entry to account for the

revaluation.
16. ABC Co. has a wholly-owned subsidiary in Indonesia. The

following information is available about the subsidiary for the
year to December 31, 20x1:
(IDR - Rupiahs)
Net assets, Jan. 1, 20x1 200,000,000
Profit for the year 80,000,000
Dividends -
Net assets, Dec. 31, 20x1 280,000,000
No goodwill arose from the business combination. The following are

the relevant exchange rates:
Jan. 1, 20x1...................................₱0.003 : IDR 1
Average for the year…………………₱0.004 : IDR 1
Dec. 31, 20x1…………………………….₱0.005 : IDR 1
Requirement: Calculate the total gain or loss on translation for

the year, analyzing it between (1) the gain or loss on re-translating
the opening net assets and (2) the gain or loss on re-translating
income and expenses.
17. On January 1, 20x1, a Philippine holding company acquired

100% interest in a subsidiary based in Kenya for KES 20M
(shillings). The fair value of the net assets of the subsidiary at
that date was KES 16 million (shillings).

Jan. 1, 20x1………………………………………..₱0.04 : KES 1
Dec. 31, 20x1……………………………………..₱0.05 : KES 1
The group determined that there is no impairment in goodwill.
Requirements: Compute for the goodwill to be included in the

consolidated financial statements on January 1, 20x1 and on
December 31, 20x1.
18. ABC Co. owns 80% of the ordinary shares of a foreign

subsidiary, XYZ, Inc., a company based in Korea. XYZ, Inc.'s
functional currency is won. The subsidiary was acquired at the
start of the reporting period for 3,000,000 wons, when the
subsidiary's retained earnings were 1,600,000 wons.
At the date of the acquisition the fair value of the net assets of the
subsidiary were 2,800,000 wons. This included a fair value
adjustment in respect of land.
ABC Co. elected to measure non-controlling interest at the NCI’s
proportionate share of the fair value of the subsidiary‘s net assets.
The group determined at year-end that goodwill is not impaired.
There were no changes in the share capital of the subsidiary during
the year.
The relevant exchange rates are as follows:

Date Exchange rates
Jan. 1, 20x1.......................................₱0.03: KRW 1
Average for the year…………………….₱0.04: KRW 1
Dec. 31, 20x1………………………………..₱0.05: KRW 1
A summary of the individual financial statements of the entities at
the end of reporting period are shown below:

As at December 31, 20x1
ABC Co. XYZ, Inc.
ASSETS (pesos) (wons)
Other assets 4,000,000 2,600,000
TOTAL ASSETS 4,090,000 2,600,000
LIABILITIES AND EQUITY

Liabilities 800,000 120,000
Share capital 2,000,000 400,000
Retained earnings 1,290,000 2,080,000
Total equity 3,290,000 2,480,000
TOTAL LIABILITIES AND EQUITY 4,090,000 2,600,000

ABC Co. XYZ, Inc.
(pesos) (wons)
1,800,0 1,200,0
Revenues 00 00
(1,080,0 (720,0
Expenses 00) 00)
720, 480,
Requirement: Prepare the consolidated statement of financial

position and consolidated statement of profit or loss and other
comprehensive income.
19. On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc.,
a company situated in a foreign country. The currency of this
country is the Armenian Dram (AMD). ABC elected to measure
non-controlling interest as its proportionate share of the fair
value of the subsidiary‘s net assets.
The year-end financial statements of the combining constituents

show the following information:

ABC Co. XYZ, Inc.
₱m* ADMm*
Current assets 4,000 4,400
Investment in subsidiary 880
Property, plant and equipment 6,000 3,600
TOTAL ASSETS 10,880 8,000
Current liabilities 2,000 2,000

Noncurrent liabilities 2,400 1400
Total liabilities 4,400 3,400
Share capital 2,000 200

Share premium 1000 400
Retained earnings 3,480 4,000
Total equity 6,480 4,600
TOTAL LIABILITIES AND EQUITY 10,880 8,000
*Amounts in millions.

ABC Co. XYZ, Inc.
₱m ADMm
8,00 16,00
Revenue 0 0
(5,000 (8,000
Cost of sales ) )
Gross profit 3,000 8,000
(1,000 (2,000
Operating expenses ) )
12
Dividends received 0
(200 (600
Interest expense ) )
8 20
Interest income 0 0
Profit before tax 2,000 5,600
(600 (2,000
Income tax expense ) )
1,40 3,60
Profit after tax 0 0
(400
Extraordinary item )
1,40 3,20
The movements in retained earnings during 20x1 are shown below:

2,40
2,280
Retained earnings – Jan. 1, 20x1 0

(1,600
Dividends paid (200) )
3,20
1,400
Profit for the year 0
Retained earnings – Dec. 31, 20x1 3,480 4,000
a) XYZ, Inc. has applied local GAAP, but has made some attempt to
adapt to IFRS (to which PFRSs are consistent). As a result, XYZ,
Inc. has written off research previously capitalized as an
extraordinary item prior period adjustment in the sum of
ADM200 million. The remainder of the extraordinary item is the
recognition of a fall in value of some plant that was damaged
during the year.
b) The fair value of the net assets of XYZ, Inc. at acquisition was
ADM4,000 million after taking into account the removal of
capitalized research discussed above. Goodwill is unimpaired.
c) The increase in the fair value of XYZ, Inc. over carrying value is
attributable to machines which are depreciated over five years on
the straight line basis.
d) During the year, ABC Co. sold ₱60 million in goods to XYZ, Inc.
at a margin of 20%. All of the goods had been utilized in
production by the year-end, but only one half of the relevant
finished goods have been sold. XYZ, Inc. received the goods on
September 1 and paid on September 21. The foreign exchange
difference remains in current liabilities.
e) ABC Co. made a loan of ₱100 million to XYZ, Inc. immediately
after the acquisition on January 1. This is still outstanding at
year- end. ABC Co. has recorded the asset in current assets. The
subsidiary has recorded the liability in noncurrent liabilities at the
rate ruling at year-start.
f) The dividends were declared by XYZ, Inc. at year-end and
received by ABC Co. on that day.
The following exchange rates are relevant:

ADM to ₱1.00
January 1.........................................................5
September 1......................................................6
September 21....................................................6.5
December 31.....................................................8
Weighted average for year................................7
Requirements: Compute for the following (round-off amounts to

nearest million):
a. Consolidated total assets.
b. Consolidated total liabilities.
c. Consolidated total equity.
d. Prepare the consolidation working paper for comprehensive
income.
20. ABC Co. held 100% ownership interest of XYZ, Inc. but sold the
entire investment on August 1, 20x1 for ₱250,000.
The following information was determined as of this

date: 206,000
Carrying amount of XYZ’s net identifiable assets
Carrying amount of NCI (including accumulated OCI
attributable to NCI) 41,200
Goodwill 6,000
ABC Co. had previously recognized translation gains of ₱1,600 in

other comprehensive income on its investment in XYZ, Inc.
Requirement: Compute for the total gain to be recognized in

profit or loss on disposal date.
21. ABC Co., a corporation based in the Philippines, has a foreign
branch that is operating in a hyperinflationary economy. The
financial statements of the branch prior to restatement and
translation are shown below:
Statement of financial position

Cash 92,000
Accounts receivable 148,000
Inventory 80,000
Building 200,000
Accumulated depreciation (40,000)
Total assets 480,000
Loan payable 60,000
Share capital 200,000

Retained earnings 220,000
Total equity 420,000

Total liabilities and
equity 480,000
Statement of profit or loss

Sales 240,000
Cost of sales:
Inventory - Jan. 1 120,000
Purchases 60,000
Total goods available for sale 180,000
Inventory - Dec. 31 (80,000) (100,000)
Gross profit 140,000
Depreciation expense (20,000)
Other operating expenses (80,000)
Profit for the year 40,000
 The building was acquired on January 1, 20x0.
 The share capital was issued on January 1, 20x0.
 Revenues were earned and expenses were incurred evenly
during the year.
 Selected values of general price indices (CPI) are shown
below: January 1, 20x0 100
January 1, 20x1 120
December 31, 20x1 140
 The net monetary assets as of January 1, 20x1 is ₱20,000.

 The exchange rates are as follows:
1.00 AOA : 0.45
January 1, 20x1 PHP
1.00 AOA : 0.47
Average for 20x1 PHP
1.00 AOA : 0.50
December 31, 20x1 PHP
Requirement: Prepare the translated financial statements of the
branch.
Chapter 21: Theory of Accounts Reviewer
1. The accounting for the effects of foreign currencies on financial

statements is prescribed under which standard?
a. PAS 12 b. PFRS 21 c. PFRS 9 d. PAS 21
2. Which of the following statements is correct regarding the

preparation of financial statements in accordance with PFRSs?
a. A reporting entity is encouraged under the PFRSs to identify
its functional currency when preparing financial statements.
b. A reporting entity is required under the PFRSs to identify its
functional currency when preparing financial statements only
when the entity engages in foreign activities.
c. The functional currency must be the currency of the country
in which the entity operates or is based.
d. A reporting entity must identify its functional currency when
preparing its financial statements.
3. Which of these considerations would not be relevant in

determining the entity’s functional currency?
a. The currency that influences the costs of the entity.
b. The currency in which finance is generated.
c. The currency in which receipts from operating activities are
retained.
d. The currency that is the most internationally acceptable for
trading.
(Adapted)
4. When translating foreign currency transactions in accordance

with PAS 21, if exchange rates fluctuate significantly,
a. the use of the average rate for a period is appropriate for as
long as it remains relevant all throughout the period.
b. the use of the average rate for a period is required under PAS
21 only if it can be determined without undue cost and effort.
c. the use of average rate is always appropriate
d. the use of the average rate for a period is inappropriate.
5. In preparing consolidated financial statements of a U.S. parent
company with a foreign subsidiary, the foreign subsidiary's
functional currency is the currency:
a. In which the subsidiary maintains its accounting records.
b. Of the country in which the subsidiary is located.
c. Of the country in which the parent is located.
d. Of the environment in which the subsidiary primarily
generates and expends cash.
(Adapted)
6. A foreign subsidiary's functional currency is its local currency,

which has not experienced significant inflation. The weighted
average exchange rate for the current year would be the
appropriate exchange rate for translating:
(Item #1) Sales to customers; (Item #2) Wages expense
a. No, no b. Yes, yes c. No, yes d. Yes, no
7. Monetary items are

a. Cash only.
b. Cash and bank balances.
c. Cash, short-term receivables, and marketable securities
d. Money held, assets receivable, and liabilities payable, in fixed
or determinable amount of cash or cash equivalents.
8. According to PAS 21, a foreign operation is:

a. an undertaking with foreigners
b. a branch, associate, joint venture or subsidiary, where the
activities are conducted in a different country to that of the
parent undertaking.
c. a foreign representative where the activities are not an
integral part of the parent.
d. a parent operating in foreign shores
9. The functional currency is:

a. the currency which is functioning in the country where the
parent operates.
b. the currency of the country where an entity’s operations are
based.
c. the currency of the primary economic environment in which
the undertaking operates.
d. the currency used in the group’s consolidated financial
statements.
10. The presentation currency is:

a. the local currency of a foreign operation in which it reports.
b. used in the parent’s and in the group’s consolidated financial
statements.
c. the currency which results to largest exchange gains.
d. the currency of the country where an entity’s operations are
based.
11. Exchange difference is

a. the difference between two different currencies.
b. the difference between the cost and fair value of monetary
item
c. the difference calculated from reporting the same number of
units of a foreign currency, in the presentation currency, at
different exchange rates.
d. the average difference between the exchange rate at the
beginning and end of a period.
12. The closing rate is:

a. The exchange rate at which all assets and liabilities are stated.
b. The average rate used in the year an entity closes its books.
c. The spot exchange rate at the end of reporting period.
d. The rate that is closed to the financial statements.
13. The net investment in a foreign operation is:

a. The parent’s share of the net assets of the undertaking.
b. The non-controlling interest’s share of the net assets of the
undertaking.
c. The amount invested in the undertaking stated at cost.
d. Investments less liabilities and other costs.
14. An entity has a subsidiary that operates in a foreign country. The

subsidiary issued a legal notice of a dividend to the parent of
€2.4 million, and this was recorded in the parent entity’s financial
statements. The exchange rate at that date was €2 = $1. The
functional currency of the entity is the dollar. At the date of
receipt of the dividend, the exchange rate had moved to €3 =
$1. The exchange difference arising on the dividend would be
treated in which way in the financial statements?
a. No exchange difference will arise as it will be eliminated on
consolidation.
b. An exchange difference of $400,000 will be taken to equity.
c. An exchange difference of $400,000 will be taken to the
parent entity’s income statement and the group income
statement.
d. An exchange difference of $400,000 will be taken to the
parent entity’s income statement only.
(Adapted)
15. Transactions and investments in foreign currencies:

I. Decrease business risk.
II. Increase business risk.
a. True, true b. True, false c. False, true
d. False, false
16. The foreign operation may trade profitably, but the investment
may be adversely hit by:
a. Rise in the foreign currency against that of the parent.
b. Fall in the foreign currency against that of the parent.
c. Exchange rates remaining the same.
d. a or
b
(Adapted)
17. An entity started trading in country A, whose currency was the

dollar. After several years the entity expanded and exported its
product to country B, whose currency was the euro, and
conducted business through a branch. The functional currency of
the group was deemed to be the dollar but by the end of 20X7,
80% of the business was conducted in country B using the euro.
At the end of 20X6, 30% of the business was conducted in the
euro. The functional currency should
a. Remain the dollar.
b. Change to the euro at the beginning of 20X7.
c. Change to the euro at the end of 20X7.
d. Change to the euro at the end of 20X7 if it is considered that
the underlying transactions, events, and conditions of
business have changed.
(Adapted)
18. Opportunities for performance improvement will more likely come

from:
a. A review of the realized gains and losses. c. a or b
b. A review of the unrealized gains and losses. d.
neither a nor b
19. The exchange rate on the day of the transaction is called:

a. The spot rate. c. The average rate.
b. The closing rate. d. A rate sometime in the future.
20. The date of the transaction is:

a.
The date cash is transferred.
b.
The date when the transaction is contracted or recognized.
c.
When the transaction is entered into the books of account.
d.
The date when the rights or obligations on the contract are
settled or discharged.
(Adapted)
21. If the $ (dollar) strengthens:

a. Less pesos would be received from an account receivable in $.
b. More pesos would be received from an account receivable in $.
c. Less pesos would be paid to settle an account payable in $.
d. a and
c (Adapted)
22. An entity started trading in country A, whose currency was the

dollar. After several years the entity expanded and exported its
product to country B, whose currency was the euro. The
business was conducted through a subsidiary in country B. The
subsidiary is essentially an extension of the entity’s own
business, and the directors of the two entities are common. The
functional currency of the subsidiary is
a. The dollar. b. The euro. c. a or b d.
Difficult to determine.
(Adapted)
23. An entity has a subsidiary that operates in a country where the

exchange rate fluctuates wildly and there are seasonal variations
in the income and expenditure patterns. Which of the following
rates of exchange would probably be used to translate the
foreign subsidiary’s income statement?
a. Year-end spot rate.
b. Average for the year.
c. Average of the quarter-end rates.
d. Average rates for each individual month of the
year. (Adapted)
24. If the $ falls in value against the peso, and you have net $
liabilities:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the
$. (Adapted)
25. If the $ rises in value against the peso, and you have net $
assets:
$. (Adapted)
26. If the $ falls in value against the peso, and you have net $
assets:
$. (Adapted)
27. If the $ rises in value against the peso, and you have net $
liabilities:
$. (Adapted)
28. Monetary items will be reported:

a. at the closing rate on the balance sheet date.
b. at the exchange rate of the transaction.
c. at the average rate for the year.
d. any of these
29. Non-monetary items should be reported:

a. at the closing rate on the balance sheet date.
b. at the exchange rate of the transaction.
c. at the average rate for the year.
d. any of these
30. Exchange differences on monetary items should be:

a. Recorded in equity, until the disposal of the net investment.
c. a or b
b. Recognized in the period’s income statement.
d. Ignored.
(Adapted)
31. Where a monetary item forms part of the parent’s net

investment in a foreign operation, the exchange difference
should be:
a. Recorded in equity, until the disposal of the net investment.
c. a or b
b. Recognized in the period’s income statement.
d. Ignored.
(Adapted)
32. For a Dependent Foreign Operation, each transaction is

entered at:
a. The exchange rate that would have been used in the parent’s
books – the parent’s functional currency.
b. Closing rate.
c. Average rate.
d. None of
these (Adapted)
33. For foreign operations, closing rate should be used for:

a. Income and expenses. c. Each transaction.
b. Assets and liabilities. d. all of
these (Adapted)
34. For foreign operations, the rate of the day of transactions should
be used for:
a. Income and expenses. c. Each transaction.
b. Assets and liabilities. d. all of
these (Adapted)
35. The opening net investment of the period needs to be restated

at the:
a. Closing exchange rate. c. Previous year’s opening rate.
b. Average exchange rate. d. Previous year’s closing rate.
36. Exchange differences arising from changes to equity, such as

capital increases or dividends, should:
a. Be recognized in the period’s income statement. c. a or b
b. Be transferred to equity. d.
Ignored. (Adapted)
37. Where there are minority interests relating to foreign

undertakings, their share of exchange gains (and losses) should
be:
a. Included with the parent’s share of exchange gains.
b. Added to the non-controlling interests in the consolidated
balance sheet.
c. a or b
d. Ignored.
(Adapted)
38. Inter-company balances should be:

a. Transferred to the Holding Company.
b. Eliminated in the separate financial statements
c. Ignored.
d. Agreed by each
party. (Adapted)
39. Exchange differences on most inter-company trading

transactions should be:
a. ignored. c. recognized in equity.
b. recognized in profit or loss d. a or c
40. On disposal of a foreign operation, all exchange differences

accumulated in a separate component of equity should be:
a. Added to the gain, or loss, on disposal in the income
statement.
b. Recognized directly in equity
c. Ignored.
d. b or c
41. In the case of a partial disposal, how much exchange
difference should be included in the income statement?
a. All. c. None.
b. Proportionate share. d. Any of these
42. An entity, whose functional currency is the dollar, has a foreign

subsidiary .The subsidiary declared a dividend to the parent of 9
million euros which was recorded in the parent’s financial
statements. The exchange rate at that date was 1.5 euros = 1
dollar. At the date of receipt of the dividend, the exchange rate
had moved to 1.6 euros = 1 dollar. The exchange difference
arising on the dividend would be treated as follows in the
financial statements:
a. an exchange difference of $375,000 will be taken to the
parent entity’s and the group’s statement of profit or loss and
other comprehensive income
b. an exchange difference of $375,000 will be taken to equity
c. no exchange difference will arise as it will be eliminated on
consolidation
d. an exchange difference of $5.6 million will be taken to the
parent entity’s income statement
(ACCA)
43. An entity, whose functional currency is the dollar, purchases

machinery from a foreign supplier for 8 million euros on 31
October 2008 when the exchange rate was 1.5 euros = 1 dollar.
At the entity’s year-end of 31 December 2008, the amount has
not been paid. The closing exchange rate was 1.25 euros = 1
dollar. Which of the following statements are correct?
a. Cost of plant $5.33million dollars, exchange loss $1.07 million,
trade payable $6.4 million
b. Cost of plant $5.33 million dollars, no exchange loss, trade
payable $5.33 million
c. Cost of plant $6.4 million dollars, no exchange gain, trade
payable $6.4 million
d. Cost of plant $6.4 million dollars, exchange gain $1.07 million,
trade payable $5.33
(ACCA)
44. When conversions due to exchange rates leads to disagreement

on the trial balance then, which account should be opened?
a. Foreign exchange account c. No account should be opened
b. Suspense account d. Difference on exchange
account (Adapted)
45. According to the relevant accounting standard, when assets are
bought by foreign branches on different dates how should we
account for changes in the exchange rates on those dates?
a. The rates on the dates of purchase should be used for each
asset bought
b. A weighted average should be used for the exchange rate
c. An average exchange rate should be used to convert
d. The exchange rate on the earliest date of purchase should be
used
(Adapted)
46. How should monetary asset and liabilities of foreign branches be

valued?
a. Using the exchange rate at the date they were incurred
b. Using an average rate for the exchange rate
c. Using the exchange rate at the date of the trial balance
d. No attempt should be made to convert liquid resources as
they will change quickly anyway
(Adapted)
47. A change in the exchange rate of two currencies may not be

known as:
a. devaluation c. depreciation.
b. amortization. d.
appreciation. (Adapted)
48. An entity will primarily generate and expend cash in one primary
economic environment. According to PAS 21 The Effects of
Changes in Foreign Exchange Rates, the correct term for
the currency of this primary economic environment is the
a. presentation currency c. reporting currency
b. functional currency d. foreign
currency (Adapted)
49. According to PAS 21 The Effects of Changes in Foreign

Exchange Rates, at which rate should an entity's non-current
assets be translated when its functional currency figures are
being translated into a different presentation currency?
a. The historical exchange rate c. The average rate
b. The closing rate d. The spot exchange
rate (Adapted)
50. According to PAS 21 The effects of changes in foreign exchange

rates, exchange differences should be recognized either in profit
or loss or in other comprehensive income. Are the following
statements about the recognition of exchange differences in
respect of foreign currency transactions reported in an entity's
functional currency true or false according to PAS 21?
I. Any exchange difference on the settlement of a monetary
item should be recognized in profit or loss.
II. Any exchange difference on the translation of a monetary
item at a rate different to that used at initial recognition
should be recognized in other comprehensive income.
a. False, False b. False, True c. True, False d. True,
True
(Adapted)
51. The central bank of Country X buys and sells its own currency to
ensure that the currency is always exchanged in a ratio of 2:1
with the currency of Country Y. What can we conclude about
these two currencies?
a. Country X is using the euro.
b. Country X has pegged its currency to the currency of Country
Y.
c. Country X has an undesirable currency.
d. Country X allows its currency to float relative to the currency
of Country Y.
(Adapted)
52. What is the proper treatment of unrealized foreign exchange

gains?
a. They should be deferred on the statement of financial position
until cash is received.
b. The principle of conservatism requires that they should never
be recognized.
c. They should not be recorded until cash is received and the
exchange transaction is completed.
d. They should be recognized in profit or loss on the date the
exchange rate changes.
(Adapted)
53. RIGHTEOUS Co., a foreign subsidiary of MORAL Co., has written

down its inventory to net realizable value under the “lower of
cost and NRV” rule. When consolidating RIGHTEOUS Co’s
statement of financial position into the group’s financial
statements, what exchange rate should be used for the
inventory?
a. historical rate c. closing rate
b. average rate d. cannot be
determined (Adapted)
54. Foreign operations that are an integral part of the operations of

the entity would have the same functional currency as the entity.
Where a foreign operation functions independently from the
parent, the functional currency will be
a. That of the parent.
b. Determined using the guidance for determining an entity’s
functional currency.
c. That of the country of incorporation.
d. The same as the presentation
currency. (Adapted)
Chapter 21 - Suggested answers to review theory questions
11 21 31 41 51
1. D . C . B . A . B . B
12 22 32 42 52
2. D . C . A . A . A . D
13 23 33 43 53
3. D . A . D . B . A . C
14 24 34 44 54
4. D . C . B . A . D . B
5. D 15 C 25 B 35 A 45 A
. . . .
16 26 36 46
6. B . B . A . B . C
17 27 37 47
7. D . D . A . B . B
18 28 38 48
8. B . B . A . D . B
19 29 39 49
9. C . A . B . B . B
10 20 30 40 50
. B . B . B . A . C
Chapter 23
Accounting for Derivatives and Hedging
Transactions (Part 2)

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

below: Dec. Jan. 15,
Dec. 15, 31, 20x2
20x1 20x1
Spot rate ₱0.48 ₱0.49 ₱0.46
Forward rate ₱0.47 ₱0.485 ₱0.46
1 The entry to record the hedging instrument on December 15,

20x1 includes
a a debit to accounts receivable for
₱1,880,000 b a credit to sales for
₱1,880,000
c both a and
b d none
2 How much is the FOREX gain (loss) on foreign currency

transaction on December 31, 20x1?
a. 40,000 b. (40,000) c. 60,0000 d. (60,000)
3 How much is the gain (loss) on change in fair value of the

derivative on December 31, 20x1?
a. 40,000 b. (40,000) c. 60,0000 d. (60,000)
4 The derivative asset (liability) to be included in the December 31,

20x1 statement of financial position is
a. 1,960,000 b. (1,920,000) c. 60,0000 d. (60,000)

transaction on January 15, 20x2?
a. 120,000 b. (120,000) c. 100,0000d.
(100,000)

derivative on January 15, 20x2?
a. 120,000 b. (120,000) c. 100,0000d.
(100,000)
7 If the forward contract is settled on a net cash basis, how much

is the net cash settlement receipt (payment)?
a. 40,000 b. (40,000) c. 100,000 d. 0
8 The total net effect of the two contracts in 20x1 and 20x2 profit
or loss is – gain (loss)
a. 40,000 b. (40,000) c. 100,000 d. 0
No hedging designation (Held for speculation)

ABC Co. expects the value of yens to decrease in the next 30 days.
Accordingly, on December 15, 20x1, ABC Co. enters into a 30-day
forward contract to sell 4,000,000 yens at the forward rate of
₱0.47. On December 31, 20x1, the forward rate was ₱0.485 and by
January 15, 20x2, the spot rate moved to ₱0.46.
9 The entry to record the forward contract on December 15, 20x1

includes
a a debit to forward contract for ₱60,000
b a credit to forward contract for
₱60,000
c a debit to loss on forward contract for
₱60,000 d none

derivative on December 31, 20x1?
a. 60,000 in profit or loss c. (60,0000) in OCI
b. (40,000) in OCI d. (60,000) in profit or loss

a. 1,960,000 b. (1,920,000) c. 60,0000 d. (60,000)

a. 120,000 b. (120,000) c. 100,000 d.
(100,000)
13 How much is the net cash settlement receipt (payment) on

January 15, 20x2?
a. 40,000 b. (40,000) c. 1,840,000 d.
(1,840,000)
Fair value hedge of a recognized liability

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

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

a. 48,000 b. 49,600 c. 50,400 d. 50,800
a. 2,400 b. (2,400) c. 1,200 d. (1,200)
16 The adjustment to the inventory account on December 31, 20x1

a. 2,400 b. (2,400) c. 1,200 d. 0

transaction on January 15, 20x2?
a. (2,400) b. (1,600) c. 1,200 d. (1,200)

a. 1,200 b. (1,200) c. 1,600 d. (1,600)
19 The total net effect of the two contracts on profit or loss in 20x2 is
– gain (loss)
a. (1,600) b. (400) c. 1,600 d. 0
20 Assuming the forward contract is settled on a net cash basis,

how much is the net cash settlement receipt (payment) on
January 15, 20x2?
a. 1,600 b. (400) c. 2,400 d. (2,400)
No hedging designation (Held for speculation)

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

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

gain (loss)
a. 2,400 b. (2,400) c. 1,200 d. (1,200)
Fair value hedge of a firm sale commitment

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

below: Dec. Jan. 15,
Dec. 15, 31, 20x1
20x1 20x1
Spot rate ₱0.48 ₱0.49 ₱0.46
Forward rate ₱0.47 ₱0.485 ₱0.46
23 The entries on December 15, 20x1 include
a a debit to accounts receivable for
₱1,880,000 b a credit to sales for
₱1,880,000
c both a and
b d none
24 The entry on December 31, 20x1 for the hedged item

includes a debit to loss on forward contract for ₱60,000
b debit to gain on forward contract for
₱60,000 c a credit to firm commitment for
₱60,000
d a debit to firm commitment for ₱60,000
25 The derivative asset (liability) on December 31, 20x1 is

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

20x1 is
a. 60% b. 80% c. 100% d. 125%
27 The entry on January 15, 20x2 pertaining to the hedged item
includes
a. a credit to sales for ₱1,880,000
b. a debit to cash (foreign currency) ₱1,880,000
c. a credit to gain for ₱100,000
d. a and b

January 15, 20x2?
a. 40,000 b. (40,000) c. 2,400 d. (2,400)
Fair value hedge of a firm purchase commitment

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

Dec. 31, Jan. 15,
Dec. 15, 20x1 20x1 20x2
Spot rate 1.20 1.26 1.30
29 The gain (loss) on the firm commitment on December 31, 20x1

is a. (2,400) b. (1,200) c. (800) d. 800
30 The derivative asset (liability) on December 31, 20x1 is

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

20x2? a. 49,600 b. 52,000 c. 50,400 d. 48,000
January 15, 20x2?
a. 4,000 b. (4,000) c. 2,400 d. (2,400)
Fair value hedge of a firm purchase commitment – Present

value
ABC Co. operates a chain of coffee shops nationally. On October 1,
20x1, ABC Co. entered into a firm commitment to purchase 4,000
kilograms of coffee beans for a contract price of ₱160 per kilogram
on March 31, 20x2.
ABC Co. expects that there is a possible decrease in the price of

coffee beans, so on this date, ABC Co. entered into a six-month
forward contract with a bank to sell 4,000 kilograms of coffee beans
at the current forward rate of ₱160 per kilogram.
Information on fair values is shown below:
Fair value
Fair of firm
Forw value of commitme
Spot a rd forward nt
Date price price contract (liability)
(asset)
Oct. 1, 20x1 155 160 - -
Dec. 31, 20x1 151 153 27,727 a (27,727)
Mar. 31, 20x2 147 147 52,000 b (52,000)
a
[(160 – 153) x 4,000] x present value factor using 4%,
assumed appropriate rate, for three months (or 0.9902427).
b
[(160 – 147) x 4,000.
33 The entry on October 1, 20x1 to record the firm purchase

commitment includes a
a debit to inventory for ₱640,000
b credit to accounts payable for
₱640,000 c both a and b
d none
34 The entries on December 31, 20x1 includes a

a a debit to loss on firm commitment for ₱27,727, recognized in
profit or loss
b a debit to loss on firm commitment for ₱27,727, recognized in
OCI
c a credit to gain on firm commitment for ₱27,727, recognized
in profit or loss
d a credit to gain on firm commitment for ₱27,727, recognized
in OCI
35 The derivative asset (liability) on December 31, 20x1

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

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

is a. (24,273) b. 24,273 c. 52,000 d. (52,000)
38 The net cash settlement receipt (payment) on the forward

contract on March 31, 20x2 is
a. 52,000 b. (52,000) c. (24,273) d. 24,273
Fair value hedge of a firm purchase commitment – Present

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

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

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

is a. 4,000 b. 164,000 c. 160,000 d. 0
40 The fair value of the firm commitment on Oct. 1, 20x1

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

is a. 38,608 b. (40,000) c. (79,608) d.
79,608
44 The net cash settlement – receipt (payment) – on March 31,

20x2 is
a. (79,608) b. 79,608 c, 40,000 d. (40,000)
Cash flow hedge of a forecasted purchase transaction

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

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

Dec. Jan. 15,
Dec. 15, 31, 20x1 20x1
20x1
Spot price 40 50 60
Forward price 45 55 60
45 The fair value of the hedging instrument on Dec. 15, 20x1

is a. 20,000 b. 180,000 c. 160,000 d. 0
46 The fair value of the hedged item on Dec. 15, 20x1

is a. 20,000 b. 180,000 c. 160,000 d. 0
47 The fair value of the hedging instrument on Dec. 31, 20x1

is a. 40,000 b. (40,000) c. 20,000 d. 0
48 The fair value of the hedged item on Dec. 31, 20x1

is a. 40,000 b. (40,000) c. 20,000 d. 0
49 The net effect of the derivative instrument on the 20x1 profit or

loss is – gain (loss)
a. 40,000 b. (40,000) c. 20,000 d. 0
50 How much is the gain (loss) on the forward contract on January

15, 20x2?
a. 20,000 profit or loss c. 20,000 OCI
b. (20,000) profit or loss d. (20,000) OCI
51 The net cash settlement – receipt (payment) – on January 15,

20x2 is
a. 60,000 b. (60,000) c. 40,000 d. (40,000)
52 Assume that all of the potatoes purchased were used to produce

potato chips at a total manufacturing cost of ₱400,000 and that
all of the potato chips were sold on February 14, 20x2 for
₱1,440,000, how much cost of goods sold is recognized on
February 14, 20x2?
a. 400,000 b. 460,000 c. 340,000 d. 420,000
Cash flow hedge of a forecasted sale transaction – Present

value (Indirect quotation)
ABC Co. produces tomato paste. On October 1, 20x1, ABC Co.
anticipates selling goods worth DOP 59,400,000 (Dominican Peso)
on April 1, 20x2. ABC Co. enters into to a six-month forward
contract to sell DOP 59,400,000 at a forward rate of ₱1:DOP 140 or
₱424,284. The appropriate discount rate is 6% per annum. The
following are the relevant exchange rates:
Date Spot rate Forward rate
Oct. 1, 20x1 ₱1 : DOP 135 ₱1 : DOP 140
Dec. 31, 20x1 ₱1 : DOP 140 ₱1 : DOP 142
Apr. 1, 20x2 ₱1 : DOP 144 ₱1 : DOP 144
53 How much is the gain (loss) on the forward contract on

December 31, 20x1?
a. 5,887 profit or loss c. (5,887) profit or loss
b. 5,887 OCI d. (5,887) OCI
54 How much is the gain (loss) on the hedged item on December

31, 20x1?
a. 5,887 profit or loss c. (5,887) OCI
b. (5,887) profit or loss d. 0
55 How much sale revenue is recognized in 20x2?
a. 424,286 b. 400,716 c. 406,772 d. 412,500
56 How much is the gain (loss) on the forward contract on April 1,

20x2?
a. 5,899 profit or loss c. (5,899) profit or loss
b. 5,899 OCI d. (5,899) OCI

20x2 is
a. 60,000 b. (60,000) c. 11,786 d. (11,786)
Cash flow hedge of a recognized liability – Present value

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

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

for a. 400,000 b. 480,000 c. 496,000 d. 0
59 The FOREX gain (loss) on the hedged item on December 31,

20x1 is
a. (12,000) b. 12,000 c. 9,886 d.
60 How much is recognized in other comprehensive income on

December 31, 20x1? debit (credit)
a. 19,876 b. (19,874) c. 16,312 d. 0
61 The derivative asset (liability) recognized on December 31, 20x1

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

January 31, 20x2? debit (credit)
a. 20,126 b. (20,126) c. 18,234 d. 0

20x2 is
a. (20,130) b. 20,130 c. (24,000) d. 24,000
Chapter 24

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

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

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

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

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

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

Futures price 12,100 12,300 11,800
5. The entries on December 1, 20x1 include

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

December 31, 20x1? Increase (decrease)
a. 100,000 b. (100,000) c. 80,000 d. 0
7. How much is the derivative asset (liability) as of December 31,

20x1?
a. (100,000) b. 100,000 c. (80,000) d. 80,000
8. How much is the gain (loss) on the futures contract on February

1, 20x2?
a. 0 b. (80,000) c. (200,000) d.
200,000
9. How much is the net settlement on February 1, 20x2? – Receipt

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

measured at lower of cost or net realizable value (NRV)
On December 1, 20x1, ABC Co. has a soybean inventory of 4,000
bushels carried at a cost of ₱240 per bushel (or total cost of
₱960,000). ABC Co. measures its inventory of soybeans at the lower
of cost or net realizable value (NRV).
ABC Co. intends to sell the whole inventory by February 1, 20x1. On

December 1, 20x1, ABC Co. enters into a futures contract to sell
the whole inventory on February 1, 20x1 at a price of ₱360 per
bushel. The broker requires a deposit of ₱80,000.
Information on fair values is as follows:

Dec. 1,
20x1 Dec. 31, 20x1 Feb. 1, 20x2
Spot price 354 371 338
Futures price 360 374 338
11. How much is the adjustment to the inventory account on

December 31, 20x1? Increase (decrease)
a. 100,000 b. 68,000 c. (68,000) d. 0
12. How much is the derivative asset (liability) as of December
31, 20x1?
a. 0 b. (68,000) c. (56,000) d. 56,000
13. How much is the gain (loss) on the futures contract on

February 1, 20x2?
a. 0 b. (56,000) c. (144,000) d. 144,000
14. How much is the net settlement on the derivative instrument

on February 1, 20x2? – Receipt (payment)
a. 168,000 b. (168,000) c. 88,000 d. (88,000)
15. How much gross profit from sales is recognized on February 1,

20x2?
a. 0 b. 364,000 c. 388,000 d. 456,000
Fair value hedge of a firm sale commitment

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

Dec. 1,
20x1 Dec. 31, 20x1 Feb. 1, 20x2
Spot price 210 240 250

Futures price 200 235 250
16. How much is the firm commitment asset (liability) on

December 31, 20x1?
a. 120,000 b. (120,000) c. (140,000) d.
(100,000)
17. How much is the derivative asset (liability) on December 31,

20x1?
a. 140,000 b. (140,000) c. 120,000 d. (120,000)
18. How much is the sale revenue recognized on February 1,

20x2?
a. 1,000,000 b. 840,000 c. 800,000 d. 960,000
19. How much gain (loss) from firm commitment is recognized on

February 1, 20x2?
a. 40,000 b. (40,000) c. (60,000) d. 60,000
20. How much is the net cash settlement on the derivative

instrument on February 1, 20x2?
a. 200,000 b. (200,000) c. (320,000) d.
320,000
Cash flow hedge of a forecasted purchase transaction –

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

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

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

20x1? a. (6,160) b. 6,160 c. (5,680) d. 5,680
23. How much is the effective portion of the change in fair value
of derivative recognized in other comprehensive income on
March 31, 20x1? – Gain (loss)
a. 5,680 b. (5,680) c. 6,160 d. (6,160)
24. How much is the ineffective portion of the change in fair value
of derivative recognized in profit or loss on March 31, 20x1? –
Gain (loss)
a. 0 b. 560 c. 480 d. (480)
25. As of March 31, 20x1, the effect of the futures contract is

referred to as
a. overhedge b. underhedge c. middle hedge d. bottom
hedge
26. How much is the debit to inventory on June 30,

20x1? a. 375,280 b. 371,920 c. 384,800 d. 381,440
27. How much is the effective portion of the change in fair value
of derivative recognized in other comprehensive income on June
30, 20x1? – Gain (loss)
a. (3,840) b. 3,840 c. (4,321) d. 0
28. How much is the ineffective portion of the change in fair value
of derivative recognized in profit or loss on June 30, 20x1? –
Gain (loss)
a. (480) b. 480 c. (960) d. 960
29. How much is the net cash settlement receipt (payment) on

the derivative instrument on June 30, 20x1?
a. 3,360 b. (3,360) c. (9,520) d. 9,520
30. How much is the total net effect of the hedging instrument on
profit or loss? Favorable (unfavorable)
a. 3,840 b. (3,840) c. (9,520) d. 9,520
31. If all of the inventory purchased were sold on July 15, 20x1,
how much is the cost of goods sold?
a. 384,800 b. 375,280 c. 381,440 d. 371,920
Fair value hedge of a recognized asset – Put option

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

On April 1, 20x1, ABC Co. enters into a call option contract with an
investment banker which gives ABC Co. the option to purchase
4,000 XYZ, Inc. shares of stocks at a strike price of ₱100 per share.
The call option expires on July 1, 20x1. ABC Co. pays the
investment banker
₱2,400 for the call option. The market price of the XYZ, Inc. shares
on April 1, 20x1 is ₱100 per share.
April 1, June 30,
20x1 20x1
Market price of XYZ, Inc. shares 100/sh. 106/sh.

Time value 2,400 1,600
35. How much is the gain (loss) on the call option on June 30,
20x1 arising from change in intrinsic value?
a. 24,000 b. (24,000) c. 800 d. (800)
36. How much is the gain (loss) on the call option on June 30,
20x1 arising from change in time value?
a. 800 b. (800) c. 24,000 d. (24,000)
37. How much is the net cash settlement receipt (payment) on

the call option on July 1, 20x1?
a. 24,000 b. (24,000) c. 23,200 d. (23,200)
Cash flow hedge of a forecasted sale transaction (Indirect

quotation)
ABC Co. forecasts a sale to an Indian customer of INR 1,120,000
(Indian Rupee) in six months. On October 1, 20x1 when the spot
rate is ₱1: INR 1.40, ABC Co. obtained an option to sell INR
1,120,000 for
₱783,216 (₱1 : INR1.43). The option has a cost and fair value of
₱25,600 on inception date.
ABC Co. chose to base effectiveness on the changes in the intrinsic

value of the option, as measured by the spot rate of the currency
underlying the option (e.g., “spot” intrinsic value). Changes in the
fair value of the option other than “intrinsic value” (e.g., time value,
impact of counterparty nonperformance risk) are excluded from the
assessment of effectiveness and will be reported in profit or loss as
they occur.
The following information was

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

1, 20x1?
a. 23,664 b. (25,600) c. 25,600 d. 0
39. The hedging instrument is most likely designated as a

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

comprehensive income on December 31, 20x1 is
a. 10,802 b. 25,746 c. 13,366 d. 0
41. How much derivative asset (liability) is recognized on
December 31, 20x1?
a. 13,196 b. (24,000) c. 24,000 d. 37,196
42. The effective portion of the hedge recognized in other

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

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

maturity)
On January 1, 20x1, ABC Co. obtained a two-year, ₱4,000,000
variable-rate loan with interest payments due at each year-end
and the principal due on December 31, 20x2.
As protection from possible fluctuations in current market rates, ABC

Co. enters into an interest rate swap for the whole principal of the
loan. Under the agreement, ABC Co. shall receive variable interest
and pay fixed interest based on a fixed rate of 8%. The interest
rate swap will be settled net on maturity date.
The following are the current market rates:

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

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

December 31, 20x1?
a. 80,000 b. (72,728) c. 72,728 d. 74,074
46. How much is the derivative gain (loss) recognized in profit or

loss on December 31, 20x1?
a. 74,074 b. (72,728) c. 72,728 d. 0
47. The net cash settlement on the interest rate swap on

December 31, 20x2 is – Receipt (payment)
a. 80,000 b. (80,000) c. 72,728 d. 0
48. The interest expense recognized in profit or loss in 20x2

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

each year-end)
Use the following information for the next nine questions:
On January 1, 20x1, ABC Co. obtained a three-year, ₱4,000,000

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

Jan. 1,
20x1 9%
Jan. 1,
20x2 8%
Jan. 1,
20x3 12%
49. The net cash settlement on December 31, 20x1
is a. 40,000 b. 37,037 c.36,697 d. 0
50. The derivative asset (liability) on December 31, 20x1

is a. 37,037 b. (71,331) c. 36,697 d. 40,000
51. The net cash settlement receipt (payment) on December 31,

20x2 is
a. 36,697 b. (71,331) c. (40,000) d. 0
52. The balance of accumulated OCI recognized on the hedging

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

is a. 400,000 b. 387,542 c. 421,984 d. 0
54. The derivative asset (liability) on December 31, 20x2 is

a. 107,141 b. (107,141) c. 138,472 d. (67,140)
55. How much is the derivative gain (loss) recognized in OCI on

December 31, 20x2?
a. 138,472 b. (138,472) c. 107,141 d. (107,141)
56. The net cash settlement – receipt (payment) – on the interest

rate swap on December’ 31, 20x3 is
a. 50,000 b. 120,000 c. 80,000 d. (120,000)
57. The interest expense recognized in 20x3 is

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

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

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

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

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

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

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

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

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

or loss on December 31, 20x2 is
a. 140,352 b. (140,352) c. (168,342) d. 0

a. 400,000 b. 540,351 c. 493,867 d. 565,304
Chapter 25

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

Date of acquisition Reporting date
ABC Co. ABC Co.
XYZ, XYZ, Inc.
(in (in
Inc. (in (in AMD)
pesos pesos)
AMD)
) 56,000,00 40,000,00
40,000,00 24,000,00 0 0
Assets 0 0
Investment in
8,000,000 - 8,000,000
- subsidiary
Receivable from
- - 4,000,000
XYZ, Inc.
-
48,000,00 24,000,00 68,000,00 40,000,00
Total assets
0 0 0 0
32,000,00
Liabilities 12,000,00 32,000,00 14,000,00
0 0 0 0
Payable to ABC
- - - 7,000,000
Co.
Equity - Jan. 1, 16,000,00 12,000,00 16,000,00 12,000,00
20x1 0 0 0 0
Profit for the 20,000,00
year 7,000,000
0
Total liabilities 48,000,00 24,000,00 68,000,00 40,000,00
and equity 0 0 0 0

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

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

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

in the 20x1 consolidated financial statements? - gain (loss)
a. (2,571,429) b. 2,571,429 c. 2,428,571 d.
(2,428,571)
4. How much is the year-end consolidated total assets?

a. 76,000,000 b. 80,000,000 c. 74,362,428 d. 78,522,542
5. How much is the year-end consolidated total equity?
a. 37,571,428 b. 40,000,000 c. 37,000,000 d. 42,376,542
Case #2: With hedging instrument

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

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

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

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

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

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

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

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

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

a. 20,000,000 b. 30,000,000 c. 40,000,000 d. 50,000,000
15. If the current market price of corn is ₱260 per kilo on

December 31, 20x1, what amount of derivative asset (liability)
shall be reported in ABC Co.’s 20x1 year-end financial
statements? The appropriate discount rate is 10%.
a. 5,454,545 b. (5,454,545) c. 6,000,000 d.
(6,000,000)
16. If the current market price of corn is ₱160 per kilo on
December 31, 20x2, what amount of derivative asset (liability)
shall be reported in ABC Co.’s 20x2 year-end financial
statements? The appropriate discount rate is 10%.
a. 3,636,364 b. (3,636,364) c. 4,000,000 d.
(4,000,000)
Futures contract
17. ABC Co. has the following futures contract:
Futures Market
Qua price - price -
ntity 1/1/x1 12/31/x1
1 "Long" futures contract 2,000 1,800
to purchase gold 400
2 "Long" futures contract 1,600 1,900
to purchase silver 800
3 "Short" futures contract 4,00
250 220
to sell coffee beans 0
4 "Short" futures contract 6,00
60 75
to sell potatoes 0
How much is the total net derivative asset (liability) on December

31, 20x1?
a. 220,000 b. (220,000) c. 190,000 d.
(190,000)
Call option
On May 6, 20x1, ABC Co. entered into a firm commitment to
purchase equipment from a foreign company for FC 4,000,000
when the exchange rate was FC 40: ₱1. Payment is due on June 1,
20x1.
ABC Co. is concerned about the possible fluctuation in exchange

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

On October 1, 20x1, ABC Co. acquired for ₱40,000 a call option
which entitles ABC Co. to purchase 20,000 units of a commodity for
₱880 per unit. The option is exercisable on March 31, 20x2. The call
option was not designated as a hedging instrument. The following
are the current market prices:
88
October 1, 20x1
0
96
December 31, 20x1
0
1,0
March 31, 20x1
00
21. How much is the derivative asset (liability) on December 31,

20x1?
a. (1,600,000) b. 1,640,000 c. 1,600,000 d. (1,560,000)
22. How much is the unrealized gain (loss) on December 31,

20x1? a. (1,560,000) b. 1,560,000 c. 1,600,000
d. (1,600,000)
23. How much is the net cash settlement – receipt (payment) –

on March 31, 20x2?
a. 2,440,000 b. 2,360,000 c. (2,400,000) d. 2,400,000
24. How much is the realized gain (loss) on the call option on
March 31, 20x2?
a. 760,000 b. (840,000) c. (800,000) d.
800,000
Interest rate swap (swap payment at maturity)

Use the following fact pattern for the next four questions:
On January 1, 20x1 when the current market rate of interest was
10%, ABC Co. obtained a two-year, ₱4,000,000, variable-rate loan.
Interest payments on the loan are due every year-end.
ABC Co. was worried about future fluctuations in interest rates.

Thus, on January 1, 20x1, ABC Co. entered into an interest rate
swap wherein ABC Co. shall receive interest at whatever the current
market rate of interest is at the beginning of the year and pay fixed
interest at 10%. Swap payment shall be made only at maturity
date.
Case #1:
25. If the current market rate of interest on January 1, 20x3 is 8%,
how much is the net cash settlement at maturity date? – Receipt
(Payment)
a. (80,000) b. 80,000 c. (30,000) d. 0
26. If the current market rate of interest on December 31, 20x2 is

8%, how much is the fair value of the interest rate swap? - Asset
(Liability)
a. (74,072) b. 74,072 c. (80,000) d. (72,727)
Case #2:
27. If the current market rate of interest on January 1, 20x3 is
12%, how much is the net cash settlement at maturity date? –
Receipt (Payment)
a. (80,000) b. 80,000 c. (30,000) d. 0
28. If the current market rate of interest on December 31, 20x2 is

12%, how much is the fair value of the interest rate swap? – Asset
(Liability)
a. (71,432) b. 71,432 c. 80,000 d. 72,727
Interest rate swap (periodic swap payments)

On January 1, 20x1, ABC Co. obtained a five-year, ₱4,000,000

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

Jan. 1,
20x1 8%
Jan. 1,
20x2 9%
Jan. 1,
20x3 12%
29. What is the “notional” amount of the interest rate swap

agreement?
a. 4,000,000 b. 320,000 c. 4,320,000 d. 0
30. How much is the fair value of the interest rate swap on
December 31, 20x1? – Asset (Liability)
a. 40,000 b. (36,697) c. 36,697 d. 129,589
31. How much is the fair value of the interest rate swap on
December 31, 20x2? – Asset (Liability)
a. 384,292 b. 202,806 c. 143,234 d. 36,697
Chapter 25: Theory of Accounts Reviewer
1. In accordance with PFRS 7, which of the following best describes
the risk that an entity will encounter if it has difficulty in meeting
obligations associated with its financial liabilities?
a. Liquidity risk b. Credit risk c. Financial risk d.
Payment risk
(Adapted)
2. In accordance with PFRS 7, which of the following best describes

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

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

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

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

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

of some other underlying asset
a. FVPL b. FVOCI c. Amortized cost d. Derivative
8. When an entity is unable to separate an embedded derivative
from its host contract, the entity should classify the hybrid
instrument as
a. FVPL b. FVOCI c. Amortized cost d. a or b
9. If a company having a floating-rate debt is concerned that

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

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

foreign operation, of a Philippine company, to be a hedged item
for hedge accounting purposes?
a. fish ball and kikyam operations in the US
b. investment in associate on a company operating in Canada
c. joint venture with McDonalds to sell Mcbalut in retail stores all
over the world
d. investment in subsidiary on a domestic corporation selling e-
load and auto load only within the Philippines.
13. To be considered highly effective, actual results of the hedge

should
a. be 100% effective c. result to no gain or loss
b. be within a range of 80 to 125% d. be documented properly
14. Which of the following is not a derivative?

a. Equity contracts c. Option Contract
b. Futures contract d. Swap
contracts (Adapted)
15. An interest rate swap in which company has fixed rate of

interest and pays a variable rate is called a :
a. cash flow hedge
b. fair value hedge
c. deferred hedge
d. hedge of foreign currency exposure of net investment in
foreign operations
(Adapted)
16. A derivative may be:
a. an asset account c. an equity account
b. a liability account d. either an asset or liability
account
(Adapted)
17. The PFRSs require a company to recognize in its current net

income any gain or loss from a change in the fair value of the
derivative for a: (Item #1) Fair Value Hedge; (Item #2) Cash
Flow Hedge
a. Yes, Yes b. Yes, No c. No, No d. No, Yes
(Adapted)
18. Uncertainty about the future market value of an asset is

referred to as
a. price risk. c. interest rate risk.
b. credit risk. d. exchange rate
risk. (Adapted)
19. Uncertainty that the party on the other side of an agreement

will abide by the terms of the agreement is referred to as
a. price risk. c. interest rate risk.
b. credit risk. d. exchange rate
risk. (Adapted)
20. A contract, traded on an exchange, that allows a company to

buy a specified quantity of a commodity or a financial security at
a specified price on a specified future date is referred to as a(n)
a. interest rate swap. c. futures contract.
b. forward contract. d.
option. (Adapted)
21. An agreement between two parties to exchange a specified
amount of a commodity, security, or foreign currency at a
specified date in the future with the price or exchange rate being
set now is referred to as a(n)
option. (Adapted)
22. If a cannery wanted to lock in the price they would pay for
peaches in August four months before harvest (in April of the
same year), they would be most likely to enter into which kind of
agreement?
a. Interest rate swap c. Futures contract
b. Fixed commodities contract d. Option
(Adapted)
23. A contract giving the owner the right, but not the obligation,
to buy or sell an asset at a specified price any time during a
specified period in the future is referred to as a(n)
option. (Adapted)
24. In exchange for the rights inherent in an option contract, the

owner of the option will typically pay a price
a. only when a call option is exercised.
b. only when a put option is exercised.
c. when either a call option or a put option is exercised.
d. at the time the option is received regardless of whether the
option is exercised or not.
(Adapted)
25. Which type of contract is unique in that it protects the owner

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

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

commitment to purchase specialized equipment from the Okazaki
Trading Company for ¥80,000,000 on April 1. Shoemaker would
like to reduce the exchange rate risk that could increase the cost
of the equipment in U.S. dollars by April 1, but Shoemaker is not
sure which direction the exchange rate may move. What type of
contract would protect Shoemaker from an unfavorable
movement in the exchange rate while allowing them to benefit
from a favorable movement in the exchange rate?
a. Interest rate swap c. Call option
b. Forward contract d. Put
option (Adapted)
30. A company enters into a futures contract with the intent of

hedging an account payable of DM400,000 due on December 31.
The contract requires that if the U.S. dollar value of DM400,000
is greater than $200,000 on December 31, the company will be
required to pay the difference. Alternatively, if the U.S. dollar
value is less than $200,000, the company will receive the
difference. Which of the following statements is correct regarding
this contract?
a. The Deutsche mark futures contract effectively hedges
against the effect of exchange rate changes on the U.S. dollar
value of the Deutsche mark payable.
b. The futures contract is a contract to buy Deutsche marks at a
fixed price.
c. The futures contract is a contract to sell Deutsche marks at a
fixed price.
d. The contract obligates the company to pay if the value of the
U.S. dollar
increases. (Adapted)
31. A company enters into a futures contract with the intent of

hedging an expected purchase of some equipment from a
German company for DM400,000 on December 31. The contract
requires that if the U.S. dollar value of DM800,000 is greater
than
$400,000 on December 31, the company will receive the
difference. Alternatively, if the U.S. dollar value is less than
$400,000, the company will pay the difference. Which of the
following statements is correct regarding this contract?
a. The Deutsche mark futures contract effectively hedges
against the effect of exchange rate changes on the U.S. dollar
value of the Deutsche mark commitment.
b. The futures contract exceeds the amount of the commitment
and thus hedges movements in the Deutsche mark exchange
rate.
c. The futures contract is a contract to sell Deutsche marks at a
fixed price.
d. The extra DM400,000 would be accounted for as a speculative
investment.
(Adapted)
32. A company enters into an interest rate swap in order to hedge

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

Fact pattern
Hall, Inc., enters into a call option contract with Bennett Investment
Co. on January 2, 2002. This contract gives Hall the option to
purchase 1,000 shares of WSM stock at $100 per share. The option
expires on April 30, 2002. WSM shares are trading at $100 per
share on January 2, 2002, at which time Hall pays $100 for the call
option.
33. The call option would be recorded in the accounts of Hall as

a.an asset.
b.a liability.
c.a gain.
d.would not be recorded in the accounts (memorandum entry
only).
(Adapted)
34. Assume that the price of the WSM shares has risen to $120
per share on March 31, 2002, and the Hall is preparing financial
statements for the quarter ending March 31. As regards this
option, Hall, Inc., would report which of the following?
a. A $20,000 realized gain.
b. A $20,000 unrealized gain.
c. a description of the change in price would be disclosed in the
notes to the financial statements, but would not be reflected
in the financial statements.
d. Nothing would be reported in the financial statements or the
notes thereto.
(Adapted)
35. The 1,000 shares of WSM stock in this contract is referred to as

a. the collateral. c. the option premium.
b. the notional amount. d. the
derivative. (Adapted)
36. The $400 paid by Hall, Inc., to Baird Investment is referred to
as
a. the option premium. c. the strike price.
b. the notional amount. d. the intrinsic
value. (Adapted)
37. Assume that the price per share of WSM stock is $120 on
April 30, 2002, and that the time value of the option has not
changed. In order to settle the option contract, Hall, Inc., would
most likely
a. pay Baird Investment $20,000.
b. purchase the shares of WSM at $100 per share and sell the
shares at $120 per share to Baird.
c. receive $20,000 from Baird Investment.
d. receive $400 from Baird
Investment. (Adapted)
38. Alpha Company purchases a call option to hedge an

investment in 20,000 shares of Beta Company stock. The option
agreement provides that if the prices of a share of Beta
Company stock is greater than $30 on October 25, Alpha
receives the difference (multiplied by 20,000 shares).
Alternatively, if the price of the stock is less than $30, the option
is worthless and will be allowed to expire. Which of the following
statements regarding this call option is correct?
a. The call option effectively hedges the investment in the
shares of Beta stock.
b. The call option is an option to sell Beta Company stock at a
fixed price.
c. The call option represents a speculative option rather than a
hedge.
d. Alpha could have purchased a put option or a call option to
effectively hedge the investment in the shares of Beta stock.
(Adapted)
39. Which of the following statements about options and their

underlying assets is FALSE?
a. The value of an option, in comparison to its underlying asset,
has the potential of creating an arbitrage opportunity.
b. The owner of the option is legally required to engage in a
transaction involving the asset.
c. The holder of a long position on an option is the only party
with the right to initiate a transaction involving the asset.
d. The seller of the option is legally required to engage in a
transaction involving the asset.
(Adapted)
40. Which of the following statements about forward and future

contracts is FALSE?
a. A future requires the contract purchaser to receive delivery of
the good at a specified time.
b. A predetermined price to be paid for a good is a necessary
requirement in the terms of a forward contract.
c. The future value of a financial derivative depends on the
value of its underlying asset.
d. The primary difference between forwards and futures is that
only futures are considered financial derivatives.
(Adapted)
41. Futures contracts differ from forward contracts in which of the

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

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

a. a short position in the underlying future.
b. an option to purchase the underlying future.
c. the physical good.
d. a long position in the underlying future and a cash
payment. (Adapted)
44. Which of the following statements about swap agreements is
FALSE?
a. They are standardized agreements, similar to futures.
b. Counterparties are the principles who engage in a swap
agreement.
c. They allow for the exchange of different sets of future cash
flows.
d. Interest rate and currency are common types of
swaps. (Adapted)
45. Which of the following requires the purchase of the

underlying asset at a specified price?
a. Purchasing a call option. c. Writing a call option.
b. Writing a put option. d. Purchasing a put
option. (Adapted)
46. Frank Jameson is a portfolio manager with 90 percent of the

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

a. Although forwards have terms that are not standardized, the
clearinghouse of that exchange still takes the opposite
position of each trade, thereby protecting the counterparties
from default risk.
b. Although minimal, arbitragers face the risk of the market
value of the underlying asset declining by an amount greater
then what was protected with the hedge.
c. When a call option on a future is exercised, the seller receives
a short position in the underlying future plus pays cash to the
holder of the option.
d. The market value of a financial derivative is primarily a
function of the relative demand and supply for that contract.
(Adapted)
49. If an oil wholesaler expects to buy some gasoline for his

customers in the future and wants to hedge his risk, he needs
to:
a. sell gasoline now. c. do nothing.
b. sell crude oil futures contract. d. buy crude oil futures
contract. (Adapted)
50. Which of the following statements about forward contracts is
CORRECT? A long trader agrees to:
a. take delivery, and a short trader agrees to take delivery
b. take delivery, and a short trader agrees to make delivery.
c. take delivery, and a short trader agrees to make delivery.
d. make delivery, and a short trader agrees to take
delivery. (Adapted)
51. If a farmer expects to sell his wheat in anticipation of a

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

hedgers in the futures market is TRUE?
a. Hedging can allow a business to guard against a price
increase in a commodity without sacrificing profit if the
commodity price decreases.
b. A speculator would use futures to take a long position in a
commodity if its price is expected to decrease.
c. A speculator would use futures to take a short position in a
commodity if its price is expected to increase.
d. Hedgers guard against market price changes that would cause
a reduction in their operating profit.
(Adapted)
53. Standardized futures contracts are an aid to increased market
liquidity because:
a. standardization results in less trading activity.
b. uniformity of the contract terms broadens the market for the
futures by appealing to a greater number of traders.
c. standardization of the futures contract stabilizes the market
price of the underlying commodity.
d. non-standardized forward contracts are not allowed to
trade. (Adapted)
54. Futures have greater market liquidity than forward contracts,

because futures are:
a. developed with specific characteristics to meet the needs of
the buyer.
b. standardized contracts.
c. sold only for widely traded commodities, unlike forwards.
d. written for shorter periods of
time. (Adapted)
55. Standardization features of futures contracts do not include

the:
a. quality of the good that can be delivered.
b. delivery time.
c. quantity of the good to be delivered.
d. delivery price of the
commodity. (Adapted)
56. What is the primary difference between an American and a
European option?
a. American and European options are never written on the
same underlying asset.
b. The European option can only be traded on overseas markets.
c. The American option can be exercised at any time on or
before its expiration date.
d. American and European options always have different strike
prices when written on the same underlying asset.
(Adapted)
57. American options are worth no less than European options

with the same maturity, exercise price, and underlying stock
because:
a. purchasers of American options receive stock dividends, while
purchasers of European options do not.
b. American options are traded in U.S. exchanges where trading
costs are less than in European exchanges.
c. all of these choices are correct.
d. American options can be exercised before maturity, while
European options can be exercised only at maturity.
(Adapted)
58. Which of the following statements about European and
American options is FALSE?
a. European options offer more flexible trading opportunities for
speculators.
b. American options can be exercised at any time on or before
the expiration date.
c. European options are easier to analyze and value than
American options.
d. American options are far more common than European
options.
(Adapted)
59. Which of the following statements regarding options is TRUE?

a. An American option is worth no less than a European option
with the same maturity, exercise price, and underlying stock.
b. European options are always worth the same as American
options with the same maturity, exercise price, and underlying
stock.
c. European options are always worth more than American
options with the same maturity, exercise price, and underlying
stock.
d. All of these choices are
correct. (Adapted)
60. The writer of the put option has the:

a. obligation to sell the underlying asset in the future under
certain conditions.
b. right to buy the underlying asset in the future under certain
conditions.
c. right to sell the underlying asset in the future under certain
conditions.
d. obligation to buy the underlying asset in the future under
certain conditions.
(Adapted)
61. The writer of an option has:
a. neither the right nor obligation. c. the right.
b. both the right and obligation. d. the
obligation. (Adapted)
62. John Elam has a position in an option in which Elam pays an

upfront fee to receive payments if the value of a stock is below
$18 at expiration. If the stock is not below $18 at expiration, Elam
receives nothing. Elam’s position in the option is:
a. short a put option. c. long a call option.
b. short a call option. d. long a put
option. (Adapted)
63. James Anthony has a short position in a put option with a

strike price of $94. If the stock price is below $94 at expiration,
what will happen to Anthony’s short position in the option?
a. The person who is long the put option will not exercise the
put option.
b. He will have the option exercised against him at $94 by the
person who is long the put option.
c. He will exercise the option at $94.
d. He will let the option
expire. (Adapted)
64. Which of the following represents a long position in an option?

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

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

a. there are no net profits or losses in the market.
b. the profits from the buyer and seller of a call option together
are always zero.
c. all of these choices are correct.
d. profits come only at the expense of another
trader. (Adapted)
67. Which of the following statements regarding buyers of call

and put options is TRUE?
a. Buyers of calls anticipate the value of the underlying asset to
decrease, while the buyers of puts anticipate the value of the
underlying asset to increase.
b. Buyers of calls anticipate the value of the underlying asset to
decrease, and buyers of puts also anticipate the value of the
underlying asset to decrease.
c. Buyers of calls anticipate the value of the underlying asset to
increase, and buyers of puts also anticipate the value of the
underlying asset to increase.
d. Buyers of calls anticipate the value of the underlying asset to
increase, while the buyers of puts anticipate the value of the
underlying asset to decrease.
(Adapted)
68. Which of the following is a reason to use the swaps market

rather than the futures market? To:
a. maintain the firm's privacy.
b. increase the liquidity of the contract.
c. reduce the credit risk involved with the contract.
d. provide for a standardized
contract. (Adapted)
69. Which of the following statements about notional principal in

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

a. dealers. b. agents. c. counterparties. d. swap
facilitators.
(Adapted)
71. Consider a commercial bank that is about to make a large
variable-rate loan. Which of the following would be an
appropriate position for the bank to hedge its risk with this loan?
Pay:
a. variable to a currency swap counterparty and receive fixed.
b. variable to an interest rate swap counterparty and receive
fixed.
c. fixed to an interest rate swap counterparty and receive
variable.
d. fixed to a currency swap counterparty and receive
variable. (Adapted)
72. Consider a commercial bank that has many floating-rate

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

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

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

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

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

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

accounting purposes, the financial instrument must:
I. Have one or more underlyings.
II. Require an initial net investment.
(AICPA)
79. The determination of the value or settlement amount of a

derivative involves a calculation which uses:
I. An underlying.
II. A notional amount.
(AICPA)
80. On December 31, 199X, the end of its fiscal year, Smarti
Company held a derivative instrument which it had acquired for
speculative purposes during November, 199X. Since its
acquisition the fair value of the derivative had increased
materially. On December 31, how should the increase in fair
value of the derivative instrument be reported by Smarti in its
financial statements?
a. Recognized as a deferred credit until the instrument is settled.
b. Recognized in current net income for 199X.
c. Recognized as a component of other comprehensive income
for 199X.
d. Disregarded until the instrument is
settled. (AICPA)
81. Gains and losses from changes in the fair value of a derivative
designated and qualified as a fair value hedge should be:
a. Disregarded until the derivative is settled.
b. Recognized as a deferred debit or deferred credit in the
balance sheet until the derivative is settled.
c. Recognized in current net income in the period in which the
fair value of the derivative changes.
d. Recognized as a component of other comprehensive income
in the period in which the fair value of the derivative changes.
(AICPA)
82. Qualified derivatives may be used to hedge the cash flow

associated with an/a: (Item #1) Forecasted; (Item #2) Asset
transaction
a. Yes Yes b. Yes No c. No Yes d. No No
(AICPA)
83. A change in the fair value of a derivative qualified as a cash

flow hedge is determined to be either effective in offsetting a
change in the hedged item or ineffective in offsetting such a
change. How should the effective and ineffective portions of the
change in value of a derivative which qualifies as a cash flow
hedge be reported in financial statements?
Effective portion in Ineffective portion in
a. Current income Current income
b. Current income Other comprehensive income
c. Other comprehensive income Current income
d. Other comprehensive income Other comprehensive
income
(AICPA)
84. Which of the following risks are inherent in an interest rate

swap agreement?
I. The risk of exchanging a lower interest rate for a higher
interest rate.
II. The risk of nonperformance by the counterparty to the
agreement.
(AICPA)
85. Which of the following financial instruments is not considered

a derivative financial instrument?
a. Interest-rate swaps. c. Stock-index options.
b. Currency futures. d. Bank certificates of
deposit. (AICPA)
86. Derivatives that are not hedging instruments are always

classified in which category of financial instruments?
a. Financial assets or liabilities with fair values through profit or
loss
b. Held-to-maturity investments.
c. Loans and receivables originated by the enterprise.
d. Available-for-sale financial assets.
(AICPA)
87. Which of the following is the best description of a financial

instrument?
a. Any monetary contract denominated in a foreign currency.
b. Cash, an investment in equities, and any contract to receive
or pay cash.
c. Any form of a company’s own capital stock.
d. Any transaction with a bank or other financial
institution. (Adapted)
88. On November 1, Year One, the Jeter Company signs a

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

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

month financial instruments that qualify as derivatives. Financial
instrument A was bought to serve as a fair value hedge. Financial
instrument B was bought to serve as a cash flow hedge. By the
end of Year One, both of these financial instruments have
increased in value by $1,000. How should these gains in value be
reported by the company on the Year One financial statements?
a. Both gains are reported within net income.
b. Both gains are reported within accumulated other
comprehensive income.
c. The gain on the fair value hedge is reported within net income
whereas the gain on the cash flow hedge is reported within
accumulated other comprehensive income.
d. The gain on the fair value hedge is reported within
accumulated other comprehensive income whereas the gain
on the cash flow hedge is reported within net income.
(Adapted)
91. Some financial instruments qualify as derivatives. Which of

the following is the best description of a derivative?
a. A contract denominated in two different currencies.
b. A contract that derives its value from some other index, item,
or security.
c. A contract that may happen but is not guaranteed to happen.
d. A contract made by two parties but which directly impacts a
third party.
(Adapted)
92. The functional currency of Nash, Inc.’s subsidiary is the

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

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

goods resulted in a receivable denominated in Japanese yen, and
a purchase of goods resulted in a payable denominated in euros.
Shore recorded a foreign exchange transaction gain on collection
of the receivable and an exchange transaction loss on settlement
of the payable. The exchange rates are expressed as so many
units of foreign currency to one dollar. Did the number of foreign
currency units exchangeable for a dollar increase or decrease
between the contract and settlement dates?
(Item #1) Yen exchangeable for ₱1; (Item #2) Euros exchangeable
for ₱1
a. Increase Increase c. Decrease Increase
b. Decrease Decrease d. Increase
Decrease (AICPA)
95. On October 1, 2003, Mild Co., a US company, purchased

machinery from Grund, a German company, with payment due
on April 1, 2004. If Mild’s 2003 operating income included no
foreign exchange transaction gain or loss, then the transaction
could have
a. Resulted in an extraordinary gain.
b. Been denominated in US dollars.
c. Caused a foreign currency gain to be reported as a contra
account against machinery.
d. Caused a foreign currency translation gain to be reported as
other comprehensive income.
(AICPA)
96. On October 1, 2003, Velec Co., a US company, contracted to

purchase foreign goods requiring payment in Qatari rials, one
month after their receipt at Velec’s factory. Title to the goods
passed on December 15, 2003. The goods were still in transit on
December 31, 2003. Exchange rates were one dollar to twenty-
two rials, twenty rials, and twenty-one rials on October 1,
December 15, and December 31, 2003, respectively. Velec should
account for the exchange rate fluctuation in 2003 as
a. A loss included in net income c. An extraordinary gain.
b. A gain included in net income d. An extraordinary
loss. (AICPA)
97. Derivatives are financial instruments that derive their value

from changes in a benchmark based on any of the following
except
a. Stock prices. c. Commodity prices.
b. Mortgage and currency rates. d. Discounts on accounts
receivable.
(AICPA)
98. Derivative instruments are financial instruments or other

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

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

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

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

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

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

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

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

a. Futures contracts. c. Interest rate swaps.
b. Credit indexed contracts. d. Variable annuity contracts.
(AICPA)
108. Which of the following criteria must be met for bifurcation to

occur?
a. The embedded derivative meets the definition of a derivative
instrument.
b. The hybrid instrument is regularly recorded at fair value.
c. Economic characteristics and risks of the embedded
instrument are “clearly and closely” related to those of the
host contract.
d. All of the
above. (AICPA)
109. Financial instruments sometimes contain features that

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

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

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

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

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

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

instrument will be recognized in current earnings in each
reporting period for which of the following? (Item #1) Fair
value hedge; (Item #2) Cash flow hedge
a. Yes No b. Yes Yes c. No No d. No Yes
(AICPA)
117. Which of the following risks are inherent in an interest rate

swap agreement?
I. The risk of exchanging a lower interest rate for a higher
interest rate.
II. The risk of nonperformance by the counterparty to the
agreement.
(AICPA)
118. Which of the following meet the definition of assets and/or

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

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

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

a. Financial instruments recognized as assets entailing
conditional rights that result in a loss greater than the amount
recognized in the balance sheet.
b. Financial instruments not recognized as either assets or
liabilities yet still expose the entity to risk of accounting loss.
c. Financial instruments recognized as assets or liabilities where
the amount recognized reflects the risk of accounting loss to
the entity.
d. Financial instruments recognized as liabilities that result in an
ultimate obligation that is greater than the amount recognized
in the balance sheet.
(AICPA)
122. Are there any circumstances when a contract that is not a

financial instrument would be accounted for as a financial
instrument under PAS 32 and PAS 39 (and PFRS 9)?
a. No. Only financial instruments are accounted for as financial
instruments.
b. Yes. Gold, silver, and other precious metals that are readily
convertible to cash are accounted for as financial instruments.
c. Yes. A contract for the future purchase or delivery of a
commodity or other nonfinancial item (e.g., gold, electricity,
or gas) generally is accounted for as a financial instrument if
the contract can be settled net.
d. Yes. An entity may designate any nonfinancial asset that can
be readily convertible to cash as a financial instrument.
(Adapted)
123. All of the following are characteristics of a derivative except:
a. It is acquired or incurred by the entity for the purpose of
generating a profit from short-term fluctuations in market
factors.
b. Its value changes in response to the change in a specified
underlying (e.g., interest rate, financial instrument price,
commodity price, foreign exchange rate, etc.).
c. It requires no initial investment or an initial net investment
that is smaller than would be required for other types of
contracts that would be expected to have a similar response
to changes in market factors.
d. It is settled at a future
date. (Adapted)
124. Is a derivative (e.g., an equity conversion option) that is

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

a. Formal designation and documentation of the hedging
relationship and the entity’s risk management objective and
strategy for undertaking the hedge at inception of the
hedging relationship.
b. The hedge is expected to be highly effective in achieving
offsetting changes in fair value or cash flows attributable to
the hedged risk, the effectiveness of the hedge can be reliably
measured, and the hedge is assessed on an ongoing basis
and determined actually to have been effective.
c. For cash flow hedges, a forecast transaction must be highly
probable and must present an exposure to variations in cash
flows that could ultimately affect profit or loss.
d. The hedge is expected to reduce the entity’s net exposure to
the hedged risk, and the hedge is determined actually to have
reduced the net entity-wide exposure to the hedged risk.
(Adapted)
126. What is the accounting treatment of the hedging instrument

and the hedged item under fair value hedge accounting?
a. The hedging instrument is measured at fair value, and the
hedged item is measured at fair value with respect to the
hedged risk. Changes in fair value are recognized in profit or
loss.
b. The hedging instrument is measured at fair value, and the
hedged item is measured at fair value with respect to the
hedged risk. Changes in fair value are recognized directly in
equity to the extent the hedge is effective.
c. The hedging instrument is measured at fair value with
changes in fair value recognized directly in equity to the
extent the hedge is effective. The accounting for the hedged
item is not adjusted.
d. The hedging instrument is accounted for in accordance with
the accounting requirements for the hedged item (i.e., at fair
value, cost or amortized cost, as applicable), if the hedge is
effective.
(Adapted)
127. What is the accounting treatment of the hedging instrument

and the hedged item under cash flow hedge accounting?
a. The hedged item and hedging instrument are both measured
at fair value with respect to the hedged risk, and changes in
fair value are recognized in profit or loss.
b. The hedged item and hedging instrument are both measured
at fair value with respect to the hedged risk, and changes in
fair value are recognized directly in equity.
c. The hedging instrument is measured at fair value, with
changes in fair value recognized directly in equity to the
extent the hedge is effective. The accounting for the hedged
item is not adjusted.
d. The hedging instrument is accounted for in accordance with
the accounting requirements for the hedged item (i.e., at fair
value, cost or amortized cost, as applicable), if the hedge is
effective.
(Adapted)
Chapter 25 - Suggested answers to theory of

accounts questions
1. A 21. B 41. B 61. D 81. C 101. D 121. C
2. A 22. C 42. C 62. D 82. A 102. B 122. C
3. C 23. D 43. D 63. B 83. C 103. B 123. A
4. B 24. D 44. A 64. D 84. C 104. A 124. D
5. A 25. D 45. B 65. A 85. D 105. D 125. D
6. A 26. A 46. C 66. C 86. A 106. B 126. A
7. D 27. B 47. B 67. D 87. B 107. D 127. C
8. A 28. C 48. C 68. A 88. D 108. A
9. B 29. C 49. D 69. D 89. A 109. C
10. C 30. C 50. B 70. C 90. C 110. D
11. D 31. D 51. D 71. B 91. B 111. A
12. A 32. C 52. D 72. D 92. A 112. A
13. B 33. A 53. B 73. C 93. C 113. D
14. A 34. C 54. B 74. A 94. B 114. A
15. B 35. B 55. D 75. C 95. B 115. A
16. D 36. A 56. C 76. C 96. B 116. A
17. B 37. C 57. D 77. C 97. D 117. C
18. A 38. C 58. A 78. A 98. B 118. A
19. B 39. B 59. A 79. C 99. D 119. C
20. C 40. D 60. D 80. B 100. C 120. C

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TEST BANK

ZEUS VERNON B. MILLAN

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Chapter 21: Multiple Choice – Computational (For classroom

The following are the exchange rates:

1. The entry on November 29, 20x1 includes

2. The entry on December 1, 20x1 includes

3. The total FOREX gain (loss) recognized in 20x1 is

4. The adjustment to the machinery account on December 31, 20x1

5. The total FOREX gain (loss) recognized in 20x2 is

6. The net adjustment to the machinery account on January 3, 20x2

Foreign currency transaction – Direct quotation – Sale

The following are the exchange rates:

7. How much sale revenue is recognized in 20x1?

8. How much FOREX gain (loss) is recognized in 20x1?

9. How much FOREX gain (loss) is recognized in 20x2?

Foreign currency transaction – Indirect quotation

The exchange rates are as follows:

11. How much are the total FOREX gains/losses recognized by

12. How much are the total FOREX gains/losses recognized by

13. What is the exchange rate on December 31, 20x1?

14. What is the exchange rate on settlement date in 20x2?

15. What is the carrying amount of the accounts payable in the

Exchange rate on initial recognition

20. How much is the balance of cash in bank to be presented in

21. What is the net foreign exchange gain (loss) to be recognized

The liquidation report submitted by the key manager showed the

23. How much is the FOREX gain (loss) on January 3, 20x2?

Items measured at other than historical cost

Both the acquisitions described above are on cash basis. At year-

24. How much is the impairment loss on the equipment?

25. How much is the impairment loss on the inventory?

Buying and selling rates

26. How much is the FOREX gain (loss) on the purchase

27. How much is the FOREX gain (loss) on the sale

On December 31, 20x1, the equipment was determined to have a

How much is the revaluation surplus?

Exchange difference recognized in OCI

No goodwill arose from the business combination. The following are

The following are the relevant exchange rates:

The group determined that there is no impairment in goodwill.

30. How much is the goodwill as of January 1, 20x1?

31. How much is the goodwill as of December 31,

Translation of a subsidiary’s financial statements

ABC Co. elected to measure non-controlling interest at the NCI’s

The relevant exchange rates are as follows:

A summary of the individual financial statements of the entities at

Statements of financial position

LIABILITIES AND EQUITY

Statements of profit or loss

32. How much is the goodwill as of December 31,

33. How much is the non-controlling interest in the net assets of

34. How much is the consolidated retained earnings as of

36. How much is the consolidated profit in 20x1?

37. How much is the consolidated total comprehensive income in

38. How much is the comprehensive income attributable to

39. How much is the consolidated total assets as of December 31,

40. How much is the equity attributable to owners of the parent

Net investment in a foreign operation

The year-end financial statements of the combining constituents

Statements of financial position

Current liabilities 4,000 4,000

Share capital 4,000 400

Statements of profit or loss