EXAMINATION about INVESTMENT 21

General Rule: Read the following carefully and answer it wisely. All solutions are needed, so put it in the last
page. (10 Points)

1. STI Company has an investment in equity instrument classified as an available for sale investment with a
historical cost of P500,000. On November 1, 2011, STI Company entered into a derivative futures contract to
hedge the fair value of the investment. All the conditions for hedge accounting are met, and the hedge qualifies as
a fair value hedge because it is a hedge of an exposure to changes in the fair value of recognized asset. On
December 31, 2011, the fair value of the hedge item was P460,000, based on quoted market bid prices and the fair
value of the derivative(hedging instrument was P36,000).
Question 1: What should be charged against income, STI recognized in 2011 related to the hedge item (investment in
available for sale)?
a. None c. P36,000
b. P4,000 d. P40,000
Answer: D
FV of the hedge item P460,000
Less: historical cost P500,000
Loss P 40,000

Question 2: What amount should be credited to income of STI Company recognized in 2011 related to the hedging
instrument?
a. None c. P36,000
b. P4,000 d. P40,000
Answer: C

2. Exodus Company and its subsidiary, Genesis Company, both use the Philippine Peso as their functional currency.
Exodus Company wants to limit the effect of currency fluctuations in its group accounts in the next quarter, by
hedging forecasted Yen denominated sales by Genesis. Exodus Company expects Genesis Company to sell
Y12,000,000 of goods on June 30, 2011. Therefore, on January 1, 2011, it enters into a 6-months forward
contract to sell Y12,000,000 and received P450,000 on June 30, 2011 (at a forward rate of 0.357 for a Y1) The
following table summarizes the following information:
Date Spot rate Forward rate
Jan 1, 2011 P1 = Y0.370 P1 = Y0.375
Mar 31, 2011 P1 = Y0.375 P1 = Y0.380
Jun 30, 2011 P1 – Y0.385 P1 = Y0.385

Market rate of interest for similar transaction is 5% per annum. What amount related to the forward contract should be
reported in the shareholders’ equity for the quarter ended March 31, 2011 interim financial statement?
c. None c. P 6,089
d. P5,911 d. P12,000
Answer: B