Multiple Choice Problems

1. c
Peso Value in 3 months = 3,750 + 37.50 = 3,787.50
FC Value in 3 months = 5,000 + 87.50 = 5,087.50
Fwd rate 3,787.50 ÷ 5,087.50 = .745
2. e
11/10/x6: Original forward rate on the date of hedging..……………………….P 1.64
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6......……. 1.59
Loss on forward contract per FC………...……………………………………………P .05
Multiplied by: No. of FCs……………………………………………………………….. 100,000
Loss on forward contract..……………………………………………………………..P 5,000
3. a
10/22/x6: Original forward rate on the date of hedging..……………………….P 0.45
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6.………. 0.445
Gain on forward contract per FC…………………………………………………..P .005
Multiplied by: No. of FCs……………………………………………………………….. 100,000
Gain on forward contract.....………………………………………………………….P 500
4. c -15,000,000 x P.0092
5. b - 15,000,000 x P.0094
6. b - 15,000,000 (P.0094 - P.0092)
7. d - 15,000,000 x P.0091
8. c - 15,000,000 (P.0091 - P.0094)
9. a – forward contract is zero on the date of hedging
10. b – since it is a gain (refer to No. 11) therefore the value of forward contract is an asset
11. d - P4,500 - P0
12. c
13. c - P3,000 - P4,500
14. b - 1,000,000 x P1.116
15. d- 1,000,000 x P1.129
16. a - 1,000,000 (P1.129 - P1.116)
17. a - 1,000,000 x P1.138
18. c - 1,000,000 (P1.138 - P1.129)
19. d – forward contract is zero on the date of hedging
20. a
21. b
22. c
23. d - (P8,000 - P6,000)
24. e – there is no fair value of forward contract on the date of hedging.
25. b – (100,000 FCU x P.74, the forward rate on the date of hedging), the entry would be as follows (using the
gross or broad approach):
Forward contract receivable……………………………………………… 74,000
Pesos payable to exchange dealer……………………………. 74,000
26. d
Original value of Forward Contract Receivable-FC 100,000 x .74 = 74,000
Current (6/30) value of the Fwd Contract Rec-FC 100,000 x .75 = 75,000
Increase in value of Forward Contract Receivable 1,000
Value of Receivable, discounted at 8%, n 1 1,000 - (1,000 x [.08 ÷ 12]) = 993
Value of receivable 74,000 + 993 = 74,993
or,
FC Receivable – date of hedging, 6/1 20x4……………………………………...P 74,000
Add: Forward contract gain P1,000 x [1/1 + (8%/12 x 1 month remaining)].. 993
Forward Contract (FC) Receivable, 6/30/20x4…………………………………. P 74,993
27. d
January 1: Origininal forward rate on the date of hedging..………………..P 0.94
March 1: Spot rate…………………………………………………………………… 0.93
 Gain……………………………………………………………………………………..P 0.01
Multiplied by: No. of FCs……………………………………………………………. 100,000
FC Forward Contract Gain…………………………………………………………P 1,000
28. c
Hedging Instrument:
January 1: Origininal forward rate on the date of hedging..………………..P 0.94
March 1: Spot rate…………………………………………………………………… 0.93
Gain……………………………………………………………………………………..P 0.01
Multiplied by: No. of FCs……………………………………………………………. 100,000
FC Forward Contract Gain…………………………………………………………P 1,000
Hedged Item:
January 1: Spot rate………………………………………………..………………..P 0.945
March 1: Spot rate…………………………………………………………………… 0.930
Loss………………………………………………………………………………………P 0.015
Multiplied by: No. of FCs…………………………………………………………….. 100,000
Foregin currency exchange loss……..………………………………………….. P 1,500
Net loss………………………………………………………………………………….P 500
29. d
Hedged Item:
January 1: Spot rate………………………………………………..………………..P 0.945
March 1: Spot rate…………………………………………………………………… 0.930
Loss………………………………………………………………………………………P 0.015
Multiplied by: No. of FCs…………………………………………………………….. 100,000
Foreign currency exchange loss……..………………………………………….. P 1,500
30. c – (P.1865 – P.1850) gain x 100,000 FC = P150 gain
31. c – using spot rate

32. c
5/1: Original forward rate (90 days)……..……………………………….P .693
6/30: Current (remaining) forward rate (30 days)……....……………… .695
Forex gain per unit.......……………………………………………………….P .002
Multiplied by: Number of foreign currencies……………………………. 500,000
Foreign exchange gain due to hedging instrument……..……………P 1,000
Less: Discount – P1,000 x 6% x 30/360 days………………………………. 5
PV of foreign exchange gain due to hedging instrument……………P 995
Or, alternatively the computation of present value may also be presented as:
Foreign exchange gain………………………………………………...P 1,000
Divided by: [1% + (6%/12 x 1 month = equivalent to 30 days)]….. 1.005
PV of foreign exchange gain due to hedging instrument……….P 995
Note: Since, the discount rate is given it is assumed that all times present value should be computed. Present
value for hedged item is not necessary for exposed asset or liability since spot rate is in effect. Unlike, the other
types of hedging wherein, forward rates is used to determine the gain or loss on the hedged item
33. c
Foreign exchange loss due to Hedged Item:
5/1: Spot rate………………………………………………………………P .687
6/30: Spot rate……………………………………………………………… .691
Forex loss per foreign currency…….……………………………………..P .04
Multiplied by: Number of foreign currencies………………………….. 500,000
Foreign exchange loss due to hedged item ………………………..P 2,000
PV of foreign exchange gain due to hedging instrument
(forward contract – refer to No. 32).………………………......... 995
Net Income effect – decrease ………………………………………........ P 1,005

34. d
 5/1: Original forward rate (90 days)…..…………………………………….P .693
8/1: Spot rate…………………………………………………………………… .696
Forex gain per currency ……………………………………………………….P .003
Multiplied by: Number of foreign currencies……………………………….. 500,000
Total Foreign Exchange gain due to hedging instrument
(forward contract)..................................................................................P 1,500
Less: 6/30 cut-off - PV of foreign exchange gain due to hedging
instrument (forward contract – refer to No. 32)………………..... 995
August 1 - Foreign exchange gain due to hedging instrument
(forward contract)……………………………………………………….P 505
35. e
Hedging Instrument:
Origininal forward rate on the date of hedging……………………………….P 0.105
Balance Sheet date: Remaining (current) forward rate – 12/3/1/20x4…… 0.095
Loss………………………………………………………………………………………P 0.010
Multiplied by: No. of FCs……………………………………………………………. 50,000
FC Forward Contract Loss…………………………………………………………..P 500
Multiplied by: PV factor……………………………………..………………………. .98,03
Forward contract – a liability account (since it is a loss)………………………P 490.15

36. b – (forward rate > spot rate – premium) seller’s point of view considered as premium revenue since it was sold
at a higher rate.

37. b
November 1, 20x4:
Foreign Currency Receivable from
Exchange Broker (FC) 12,600
Pesos Payable to Exchange Broker 12,600
Signed 90-day forward exchange contract
to purchase 100,000 FC:
P12,600 = 100,000 FC x P.126 forward rate
38. c
December 31, 20x4
Foreign Currency Receivable from
Exchange Broker (FC) 300
Foreign Currency Transaction Gain 300
Revalue foreign currency receivable to
fair value:
P300 = 100,000 FC x (P.129 - P.126)
39. b
January 30, 20x5
Pesos Payable to Exchange Broker (Pesos) 12,600
Cash 12,600
Deliver pesos to exchange broker in
accordance with forward exchange contract:
P12,600 = 100,000 FC x P.126 contract rate
40. b
January 30, 20x5
Pesos Payable to Exchange Broker (Pesos) 12,600
Cash 12,600
Deliver pesos to exchange broker in
accordance with forward exchange contract:
P12,600 = 100,000 FC x P.126, the 90-day forward rate
41. a
 January 30, 20x5
Foreign Currency Transaction Loss 200
Foreign Currency Receivable from Exchange Broker (FC) 200
Adjust foreign currency receivable to
current peso equivalent:
P12,700 = 100,000 FC x P.127 Jan. 30 spot rate
- 12,900 = 100,000 FC x P.129 Dec. 31 forward rate
P 200 = 100,000 FC x (P.127 - P.129)
Foreign Currency Units 12,700
Foreign Currency Receivable from Exchange Broker 12,700
Receive 100,000 FC from exchange broker:
P12,700 = 100,000 FC x P.127 spot rate
42. d
PAS 32 and 39 (PFRS 9) requires the FCU payable be recorded at the forward rate on the date of hedging.

Letter (d) is the required entry under the old practice wherein the FCU payable are recorded using the spot rate
on the date of hedging.
43. b
Receivable balance: P319,500 (spot rate on the balance sheet date, P.71 x 450,000 FCU)
Gain or loss: P9,000 loss [(P.73 – P.71) x 450,000 FCU]
44. c – (forward rate > spot rate= premium) buyer’s point of view considered as premium expense since it was
purchase at a higher rate plus a loss on firm commitment (i.e., P1.21 – P1.20)
45. e
Firm Commitment:
11/10/x6: Original forward rate on the date of hedging..……………………….P 1.64
Balance Sheet date: Remaining (current) forward rate – 12/31/206…………. 1.59
Loss on Forward Contract per FC…………………………………………………....P .05
Multiplied by: No. of FCs……………………………………………………………….. 100,000
Loss on forward contract……………………………………………………………….P 5,000
46. e
Firm Commitment:
11/10/x6: Original forward rate on the date of hedging..……………………….P 1.64
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6......……. 1.59
Gain on forward contract per FC………...…………………………………………..P .05
Multiplied by: No. of FCs……………………………………………………………….. 100,000
Gain on forward contract..…………………………………………………………….P 5,000
47. b
Firm Commitment:
10/22/x6: Original forward rate on the date of hedging..……………………….P 0.45
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6.………. 0.445
Gain on forward contract per FC…………………………………………………..P .005
Multiplied by: No. of FCs……………………………………………………………….. 100,000
Gain on forward contract.....…………………………………………………………P 500

48. a
December 1, 20x6: Spot rate – P1.64 x 100,000....…………............. P164,000
Less: Firm Commitment – liability (credit balance)
8/3/20x6: Original (120-day) forward rate…………………….P 1.60
12/1/20x6: Remaining (60-day) forward rate………………… 1.64
Loss on Firm Commitment………………………………………....P 0.04
Multiplied by: No. of FCs…………………………………………… 100,000 4,000
Value of machine...........................……………………………………… P160,000

49. c - refer to No. 48 (Note: There is no more commitment after the date of transaction which is 12/1/20x6)

50. c -
 December 9, 20x6: Spot rate – P2.45 x 100,000……………………… P245,000
Add: Firm Commitment – asset (debit balance)
11/10/20x6: Original (90-day) forward rate…………………….P 2.44
12/9/20x6: Remaining (30-day) forward rate………………… 2.46
Gain on Firm Commitment………………………………………..P 0.02
Multiplied by: No. of FCs…………………………………………… 100,000 2,000
Value of sales, 1/31/20x6…...............…………………………………… P243,000

51. b - refer to No. 50 for computation ((Note: There is no more commitment after the date of transaction which is
12/9/20x6)

52. c - Forward contracts always have a value of P0 at the date they are established
53. a
54. a - P10,000 - P0
55. c - The forward contract gain or loss is offset by the loss or gain on the sales commitment
56. b
57. c - P25,000 - P10,000
58. c - The forward contract gain or loss is offset by the loss or gain on the sales commitment
59. a - (50,000,000 x P.0088) + [50,000,000 (P.0092 - P.0087)]
60. b - Forward contracts always have a value of P0 at the date they are established
61. c
62. d - P7,500 - P0
63. c - The forward contract gain or loss is offset by the loss or gain on the sales commitment
64. d
65. b - P2,500 + P7,500
66. a - The forward contract gain or loss is offset by the loss or gain on the sales commitment
67. b - (2,500,000 x P1.129) + [2,500,000 (P1.139 - P1.138)]
68. b
January 31: Spot rate – P1.59 x 100,000………………………............. P159,000
Add: Firm Commitment – asset (debit balance)
11/30/20x3: Original (90-day) forward rate…………………….P 1.65
1/31/20x4: Remaining (30-day) forward rate………………… 1.60
Gain on Firm Commitment………………………………………..P 0.05
Multiplied by: No. of FCs…………………………………………… 100,000 5,000
Value of merchandise, 1/31/20x4……………………………………… P164,000
The entry would be as follows on 1/31/20x4:
Inventory………………………………………………………………… 164,000
Firm Commitment……………………………………………. 5,000
Cash (P1.59 x 100,000)………………………………………. 159,000

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

Inventory (P.28 x 100,000 FC)……………………………………………28,000

Cash……………………………………………………………….. 28,000

Firm Commitment………………………………………………………… 3,000

Inventory………………………………………………………….. 3,000
Therefore, inventory should be valued at P25,000 (P28,000 – P3,000)
70. e – the inventory should be valued based on the spot rate on the date of transaction since it was assumed that the
firm commitment account will be closed through earnings account. Normally, the firm commitment should be
closed to the asset account in accordance with PAS 39 par.98b.
71. e - the accounts payable should be valued based on the spot rate on the date of transaction.
72. c
Firm Commitment:
Original forward rate on the date of hedging…………………………………….P .58
Balance Sheet date: Remaining (current) forward rate – 6/30/20x4…………. .56
Loss on Firm Commitment per FC…………………………………………………..P .02
Multiplied by: No. of FCs……………………………………………………………….. 200,000
Loss on firm commitment……………………………………………………………….P 4,000
Loss on commitment (debit) results in a credit to Firm Commitment, thus:
Loss on Firm Commitment…………………………………………… 4,000
Firm Commitment (a liability account)…………………….. 4,000

73. b
Fwd value 4/1 200,000 x 0.58 116,000
Fwd value 6/30 200,000 x 0.56 112,000
Decrease in Fair Value of Payable 4,000
PV of change: 4,000 ÷ 1.01 3,960
[n 1; i (.12 ÷ 12) = .01]

Current value of fwd contract = 116,000 - 3,960 = 112,040

or,
FC payable – date of hedging, 4/1 20x4………………………………………….P 116,000
Less: Forward contract gain [P4,000 x 1/1 + (8%/12 x 1 month remaining)]... 3,960
FC payable – date of hedging, 6/30/ 20x4……………………………………….P 112,040

74. c – (P2.17 – P2.14) x 200,000 FCs = P6,000 loss. No need to compute present value because the contract
already expired.

75. b
1-Aug 30-Aug 30-Sep
Notional amount 15,000 15,000 15,000
Forward rate for remaining time 0.690 0.680 0.675
Initial forward rate 0.690 0.690
Change in original forward rate (0.010) (0.015)
Fair value of fwd contract in future pesos:
Original forward value 10,350 10,350
Current forward value 10,200 10,125
(Gain) Loss in forward rate (150) (225)
Current present value
PV of (P150) n=1; i=0.667% (149)
PV of (P225) n=0; no discounting (225)
Prior present value 0 149
Change in present value (149) (76)
76. d
1-Aug 30-Aug 30-Sep
Notional amount 15,000 15,000 15,000
Forward rate for remaining time 0.690 0.680 0.675
Initial forward rate 0.690 0.690
Change in original forward rate (0.010) (0.015)
Fair value of fwd contract in future dollars:
Original forward value 10,350 10,350
 Current forward value 10,200 10,125
(Gain) Loss in forward rate (150) (225)
Current present value
PV of (P150) n=1; i=0.667% (149)
PV of (P225) n=0; no discounting (225)
Prior present value 0 149
Change in present value (149) (76)
77. c - Forward contracts always have a value of P0 at the date they are established
78. a
79. d - [(P600) - P0]
80. b
81. c - [P300 - (P600)]
82. b - Forward contracts always have a value of P0 at the date they are established
83. a
84. c - [(P1,950) - P0]
85. c
86. b - [P635 - (P1,905)]
87. c
Cost of equipment…………………………………………………………………..P 211,000
Less: Fair value of the equipment………………………………………………… 199,000
Impairment loss……………………………………………………………………….P 12,000

88. a – (P17,500 – P13,200) reclassified to earnings

89. e
Original forward rate on the date of hedging…………………………………P 1.64
Balance Sheet date: Remaining (current) forward rate – Dec. 31, 20x6… 1.59
Loss……………………………………………………………………………………..P 0.05
Multiplied by: No. of FCs…………………………………………………………… 100,000
FC Forward Contract Loss…………………………………………………………..P 5,000
90. a
P400 = 10,000 foreign currency units x (P.82 - P.78). The loss is calculated using only forward rates. On
December 31, 20x4, the loss is the difference between the 90-day future rate on November 1 (P.78) and the 30-
day forward rate on December 31 (P.82).

91. b - speculation (gain or loss – income statement)

Original forward rate on the date of hedging…………………………………P 0.033
Balance Sheet date: Remaining (current) forward rate – Dec. 31, 20x4… 0.036
Loss…………………………………………………………………………………….. P 0.003
Multiplied by: No. of FCs……………………………………………………………. 100,000
FC Forward Contract Loss………………………………………………………….. P 300
92. b - (220,000 FCUs)x (P0.68) = P149,600
93. B - (220,000 FCUs)x(P.68 - P.70) = P4,400 loss
(To adjust the contract to the 30 day futures amount)
94. b
Manage an exposed position:
Value the forward exchange contract (FEC) at its fair value, measured by changes in the forward exchange rate
(FER). Note that the question asks only for the effect on income from the forward contract transaction; thus,
any effect on income from the foreign currency denominated account payable is not included in the answer.

FER, 12/12/x4 P.90

FER, 12/31/x4 P.93
AJE:
Forward Contact Receivable 3,000
Foreign Exchange Gain 3,000
 Revalue forward contract:
P3,000 = 100,000 FCU x (P.93 - P.90) change in forward rates

Foreign Exchange Loss 10,000

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

Foreign Exchange Loss 3,000

Firm Commitment 3,000
Recognize loss on firm commitment.

Again, note that the question asks only about the effect on income from the forward contract, not the underlying
firm commitment portion of the transaction

96. b
Speculation:
Value forward exchange contract at fair value based on changes in the forward rate
AJE:
Forward Contract Receivable 3,000
Foreign Exchange Gain 3,000

97. b
Call Option:
P29.80 (Market price/Spot Price) > P27.90 (Option/Strike Price)..P1.90 in-the-money
Put Option
P14.25 (Market price/Spot Price) > P16.40 (Option/Strike Price).. 2.15 in-the-money
Intrinsic Value………………………………………………………………….. P4.05

98. d
January 1, 20x6
(the inception date of the 1-yr. put FX option period)
FX Contract Value—Option........................................................................ 8,000
       Cash.................................................................................................... 8,000
  To record cost of put option acquired.

Note: P1.40, OP > P1.368, Market/spot rate – In-the-money (put option)

March 31, 20x6
(an intervening financial reporting date)
FX Contract Value—Option........................................................................ 30,000
       FX Gain (P30,000 × 300,000 FCUs/1,000,000 FCUs)...................... 9,000
       OCI—FX Gain (P30,000 × 700,000 FCUs/1,000,000 FCUs) ...... 21,000
  To adjust option’s carrying value to its fair
   value of P106,000 (a given amount). P106,000 – P6,000 = P100,000)
99. a
Note: P1.40, OP > P1.368, Market/spot rate – Out-of-the-money (call option). Time value element only,
therefore any gain or loss is charged to profit and loss or current earnings, not OCI.

100. d
January 1, 20x6
(the inception date of the 1-yr. put FX option period)
FX Contract Value—Option........................................................................ 16,000
       Cash.................................................................................................... 16,000
  To record cost of put option acquired.

Note: P.25, OP < P.292, Market/spot rate – In-the-money (Call option)

March 31, 20x6
(an intervening financial reporting date)
FX Contract Value—Option........................................................................ 80,000
       FX Gain (P80,000 × 500,000 FCUs/2,000,000 FCUs) x 50%.. ....... 10,000
       OCI—FX Gain (P80,000 – P10,000)……......................................... 70,000
  To adjust option’s carrying value to its fair
   value of P106,000 (a given amount). P96,000 – P16,000 = P80,000)

Items 101 through 107 Solution Guide Table:

December 16 December 31 February 14
Spot rate (Market Price)........... P .16 P .15 P .147
Strike price (Option Price)....... P .16 P .16 .16
Notional amount (in Bolivar)... 1,000,000 1,000,000 1,000,000
Intrinsic value (if Market
is < Option (Strike)*........... P 0 P 10,000 P 13,000
Time value**............................ P 4,000 3,300.. 0
Fair (Total) value of Option.. .P 4,000 P 13,300 P 13,000
* (Option Price – Market Price ) x notional amount
** Fair value of option less Intrinsic Value

101. d - The notional amount is the total face amount of the asset or liability that underlies the derivative contract.
A notional amount may be expressed in the number of currency units, shares, bushels, pounds or other units
specified in the financial instrument. Choices letter (a), (b), and (c) are all fair value of the option contract at
different dates.

102. c
On December 31, 20x4:
Fair value of Call Option…………………………………………………………..P 13,300
Intrinsic Value: ( P.16 Option price less P.15 market price,
lower if put option) x 1,000,000 bolivar……………………………………. 10,000
Time Value……………………………………………………………………………P 3,300

103. c (P3,300 – P4,000 = P700 loss); refer to the solution guide table for further analysis.

104. a – (P10,000 – P0 = P10,000 gain); refer to the solution guide table for further analysis.

105. b
Hedging Instrument/Hedging Transaction/Option Contract:
Inception date: Fair value of call option…………………….............................P 4,000
Balance sheet date: Fair value of call option……………………………......... 13,300
 Foreign exchange gain…………………………………………………….............P 9,300

106. c
Foreign Currency Transaction (Hedged Item):
12/16/20x4: Spot rate…………………………………………………………………P .16
12/31/20x4: Spot rate………………………………………………………………... .15
Forex loss per unit……………………………………………………………………. P .01
Multiplied by: Number of foreign currencies…………………………………… 1,000,000
Foreign exchange loss..........…………………………………................................P 10,000
Hedging Instrument/Hedging Transaction/Option Contract:
Inception date: Fair value of call option……………………..............................P 4,000
Balance sheet date: Fair value of call option………………………………….. 13,300
Foreign exchange gain……………………………………………………………...P 9,300
Net foreign exchange loss……………………………………………………………….P 700

107. c
Foreign Currency Transaction (Hedged Item):
12/31/20x4: Spot rate…………………………………………………………………..P .150
2/14/20x5: Spot rate………………………………………………………………….. .147
Forex loss per unit………………………………………………………………………P .003
Multiplied by: Number of foreign currencies…………………………………….. 1,000,000
Foreign exchange loss..........…………………………………..................................P 3,000
Hedging Instrument/Hedging Transaction/Option Contract:
Balance sheet date (12/31/x4): Fair value of call option….…………..............P 13,300
Expiration date (2/14/x5): Fair value of call option..…………………………….. 13,000
Foreign exchange loss………………………………………………………………….P 300
Total foreign exchange loss………………………………………………………………P 3,300

108. c
12/1/20x4:Spot rate……………………………………………………………P .92
12/31/20x4:Spot rate…………………………………………………………. .93
Foreign currency gain……………………………………………. …………P .01
x: No. of foreign currencies…………………………………………………. 1,000,000
Foreign currency gain due to hedged item/commitment…………...P 10,000
Less: Discount – P10,000 x 12% x 2/12 (January and February).…........ 200
PV of foreign exchange gain due to hedged item/commitment.... P 9,800*

Or, alternatively the computation of present value may also be presented as:
Foreign exchange gain – equity..…………………………………………P10,000
Divided by: [100% + (12%/12 x 2 months remaining)]………………….. 1.02
PV of foreign exchange gain due to hedged item/commitment….P 9,803*
*P3 discrepancy due to rounding-off.

109. c
12/1/20x4: Fair value of Option (P10,000 x P.009)……………………………..P 9,000
12/31/20x4: Fair value of Option (P10,000 x P.006)…………………………… 6,000
Foreign currency loss on hedging transaction (option contract)…………P 3,000

110. b– refer to No. 101 for computation. It is an asset since the counterpart entry is a gain. Thus, the entry should
be:
Firm Commitment…………………………………………………….9, 803
Foreign Currency Gain on Hedged Item/Commitment…. 9,803

111. c
 PV of foreign exchange gain due to hedged item/commitment
(refer to No. 70)…………………………………………………………………. P 9,803
Foreign currency loss on hedging transaction (option contract)
– refer to no. 71)………………………………………………………………… ( 3,000)
Impact on net income – increase………………………………………………… P 6,803

112. b
Sales (3/1/20x5 spot rate: P.90 x FC 1,000,000) ……………………… P900,000
Foreign exchange loss on hedged item/commitment, 3/31/20x5:
12/1/20x4 Spot rate…………………………………………………..P .92
3/31/20x5 Spot rate…………………………………………………... .90
Foreign currency loss……………………………………. …………P .02
x: No. of foreign currencies………………………………………… 1,000,000
Foreign currency loss for the entire hedged
item/commitment…………………………………………… P 20,000
Add back: PV of foreign gain due to hedged
item/commitment………………………………………….… 9,803 ( 29,803)
Adjustment: Firm Commitment Account balance (credit balance) –
since the P20,000 is a foreign currency loss then the firm
commitment account is a credit balance……………………… 20,000
Foreign currency gain on hedging transaction (option contract)
12/31/20x4 (inception date): Fair value of option
(P0.006 x FC 1,000,000)………………………………………… P 6,000
3/1/20x4 (expiration date) : Fair value of option
(P0.020 x FC 1,000,000)……………………………………….… 20,000 14,000
Impact on Net Income……………………………………………………. P904,197

113. d – (150,000 FC x P.05 premium = P7,500)

114. a – (150,000 FC x P.04 premium = P6,000)

115. b – (150,000 FC x P.03 premium = P4,500)

116. c – (150,000 FC x P.97 = P145,500)
117. a
Hedged Item/Commitment:
3/01/20x3: Spot rate……………………………………………..P .095
12/31/20x3: Spot rate…………………………………………….. .094
Foreign currency loss per unit…………………………………. P .001
x: No. of foreign currencies……………………………………... 2,000,000
Foreign currency loss due to hedged item/commitment..P 2,000
x: PV factor of an annuity of P1 @ for 12 periods………..… .9803
PV of foreign exchange loss due to hedged item/
commitment..………. ………………………………………. P 1,960.60
Hedging Instrument:
3/01/20x3: Fair value of Option………………………………..P 3,000
12/31/20x3: Fair value of Option6)……………………………... 3,200
Foreign currency gain on hedging transaction
(option contract)………………………………………………………… 200.00
Net impact on 20x3 income – loss (decrease)……………………..……P1,760.60

118. d
Sales (3/1/20x4 spot rate: P.089 x FC 2,000,000) …………………… P 178,000.00
Adjustment: Firm Commitment Account balance
(credit balance) – since the P12,000 is a foreign currency
loss then the firm commitment account is a credit balance 12,000.00*
Adjusted Sales…………………………………………………………… P190,000.00
Foreign exchange loss on hedged item/
 commitment, 3/31/2012:
5/01/20x3: Spot rate…………………………………………P .095
3/01/20x4 Spot rate…………………………………………. .089
Foreign currency loss…………………………………. ……P .006
x: No. of foreign currencies…..……………………………. 2,000,000
Foreign currency loss for the entire hedged item
/commitment…………………………………………P 12,000*
Less: PV of foreign loss due to hedged item
/commitment………………………………………… 1,960.60 (10,039.40)
Foreign currency gain on hedging instrument
(option contract):
12/31/20x3 (balance sheet date): Fair value of option.P 3,200
3/01/20x4 (expiration date) : Fair value of option
[(P0.95 – P.089) x FC 2,000,000)..……………………… 12,000 8,800.00
Net impact on 20x4 income – loss (decrease)……………….. P 188,760.60

119. c
Net cash inflow with option (P190,000 – P3,000)…………………… P 187,000
Cash inflow without option (at spot rate of P.089 x 2,000,000 FC. 178,000
Net increase in cash inflow P 9,000

120. a
Note: P1.40, OP < P1.368, Market/spot rate – Out-of-the-money (put option). Time value element only,
therefore any gain or loss is charged to profit and loss or current earnings, not OCI. Refer to No. 99.

Theories
Completion Statements
1. hedging
2. existing assets and liabilities, firm commitments, forecasted transactions
3. firm commitment
4. forecasted
5. hedged item
6. hedging instrument
7. FX forwards, FX options
8. two-sided, counterbalanced
9. one-sided, counterbalanced
10. Hedge accounting
11. exchange rate, specified period
12. call, put
13. option holder
14. option writer
15. premium
16. “in the money”
17. time value element, intrinsic value element
18. exchange rate, future date
19. fulfill, obligation
20. take
21. executory
22. unrealized
23. the net position, setoff
24. premium, discount, time value
25. premium, decrease
26. split accounting
27. designated, effective, firm
28. speculating
 29. firm commitment, forecasted transaction
30. market, credit, liquidity
31. market, credit
32. market, liquidity
33. unlimited
34. “on-balance-sheet,” “off-balance-sheet”
35. rights, obligations, assets, liabilities
36. fair values
37. assets, liabilities
38. undesignated, fair value, cash flow, net investment
39. asset, liability, firm commitment
40. forecasted transaction.
41. fair value
42. cash flow
43. net investment
44. earnings
45. other comprehensive income, earnings
46. earnings, earnings
47. forward
48. valuing, reporting
49. hedging effectiveness
50. time value
51. ineffective

True or False
52. False 68. False 84. True 100. False 116. True 132. True 148. False
53. False 69. False 85. False 101. True 117. False 133. False 149. True
54. False 70. True 86. True 102. True 118. False 134. True 150 False
55. False 71. False 87. True 103. False 119. True 135. False 151. True
56. True 72. False 88. False 104. True 120 True 136. False 152. False
57. True 73. False 89. False 105. True 121. False 137. False
58. False 74. True 90. False 106. True 122. False 138. False
59. True 75. True 91. True 107. True 123. False 139. False
60. True 76. True 92. False 108. False 124. False 140. True
61. False 77. True 93. True 109. True 125. True 141. False
62. True 78. True 94. False 110. False 126. False 142. True
63. False 79 False 95. True 111. False 127. True 143. False
64. False 80. False 96. False 112. False 128. False 144. True
65 True 81. False 97. False 113. False 129. True 145. False
66. False 82. False 98. False 114. True 130. False 146. True
67. False 83. True 99. False 115. False 131. False 147. False

Multiple Choice Questions (theories)

153. e 161. c 171. e 181. E 191. C 201. b 211. c
154. b 162. b 172. c 182. C 192. A 202. c 212. c
155. a 163. b 173. b 183. A 193. C 203. d 213. b
156. e 164. b 174. c 184. D 194. B 204. d 204. b
157. e 165 a 175. a 185. D 195. B 205. b 215. b
158. d 166. e 176. a 186. B 196. B 206. c 216. b
159. b 167. e 177. a 187. A 197. d 207. d 217. c
160. d 168. a 178. c 188. B 198. c 208. c 218. d
169. a 179 a 189. A 199. c 209. d 219. d
170. d 180. d 190. C 200. a 210. b 220 a
Note for:
197. An underlying is a financial or physical variable.
199. The net investment must be less than that required for other types.
202. Trading securities do not qualify for hedge accounting. Under PFRS 9, there is no more classification as to
trading and available-for-sale instead it is now classified either as FVTPL and FVTOCI.