Part CPA REVIEW SCHOOL OF f PHILIPPINES vanced Financ’ Accounting Guerrero/German/DeJesus/Lim/Ferrer/Laco/Valix heory of Accounts PAS 39 enumerated the following three types of hedging relationships, except a. Fair value hedge: a hedge of the exposure to changes in fair value of a recognized asset (AFS Securities) or liability or an unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss. b. Cash flow hedge: a hedge of the exposure to variability in cash flows that (1) is attributable to a particular risk associated with a recognized asset or liability (such as all or some future interest Payments on variable rate debt) or (2) a highly probable forecast transaction and (2) could affect profit or loss, ¢. Hedge of a net investment in foreign operation which is the hedge of the amount of the reporting entity’s interest in the net assets of the operation d. Undesignated hedge such as hedge of foreign currency denominated payable or _ receivable. In case of hedging transaction designated as fair value hedge, which of the following statements is correct? a. The gain or loss from remeasuring the hedging instrument/derivative designated as fair value hedge shall be recognized in profit or loss. b. The gain or loss on the changes in fair value of hedged item/(AFS Securities) attributable to the hedged risk shall adjust the carrying amount of the hedged item and be recognized in profit or loss. c. Both A and B.— d. Neither A nor B. In case of hedging transaction designated as cash flow hedge, which of the following statements is correct? a. The portion of the gain or loss on the hedging instrument/derivative designated as cash flow hedge that is determined to be an effective hedge or the change in intrinsic value of the derivative designated as cash flow hedge shall be recognized in other comprehensive income. b. The ineffective portion of the gain or loss on the hedging instrument/derivative designated as cash flow hedge or the change in time value of the derivative designated as cash flow hedge shall be recognized in profit or loss. ; c. The cumulative other comprehensive income recognized in equity arising from cumulative changes in intrinsic value of derivatives designated as cash flow hedge shall be reclassified from equity/cumulative OCI to profit or loss as a reclassification adjustment in the same period during which the hedged forecast cash flows affects profit or loss. 4. Allof the above. | In case of hedging transaction designated as hedge of net investment in a foreign operation, which of the following statements is correct? ; ion of the gain or loss on the hedging instrument/derivative designated as hedge of net * ape foreign operation that is determined to be an effective hedge shal be recognized in other comprehensive income. 8 b.. The ineffective portion of the gain or loss on the hedging instrument/derivative designated as hedge of net investment in foreign shall be recognized in profit or loss. c (Baten. | 4. Neither A nor B 8718Page 2 5. In case of hedging transaction considered as “undesignated hedge” such as hedge of foreign currency denominated accounts payable or foreign currency denominated accounts receivable, which of the following statements is correct? a. The exchange differences arising from the changes in measurement of hedged item or foreign currency denominated accounts payable/receivable shall be recognized in profit or loss. b. The exchange differences arising from the changes in measurement of hedging instruments/derivatives shall be recognized in profit or loss. Gs y d. Neither A nor B. 6. How shall an entity account for hedging transaction classified as hedge of firm commitment? a. Cash flow hedge only b. Fair value hedge only c. Undesignated = only , d It refers to the degree to v ee ee tg ces tharare subuaet 8hedged kaso by sheng ao occa owe ofthe beng instrument. 7, 7 <1. PORE aaaainy OL Ge 1p a1, On November 1, 2020, an entity acquired on account goods from a foreign supplier at a Cost of $1,000. The accounts payable are paid on January 30, 2021 On December 1, 2020, an entity sold on account the said goods to a foreign customer at a selling Price of $1,500. The accounts receivable are collected on February 28, 2021 pa entity is operating in Philippine economy wherein the functional currency is the Philippine "eS0. The following direct exchange rates are provided: Buying spot rate Selling spot rate November 1, 2020 P40 P42 December 1, 2020 39 40 December 31, 2020 45 47 1. What is the sales revenue for 2020? 58500 Fiotbs, b. 60,000 ¢. 67,500 d. 72,000 2. What is the carrying amount of accounts receivable on December 31, 2020? a 58,500 b. 60,000 4 f ign x 945 Wet et cxrryineessien acetal aeeaT a 40,000 i r z Fim x #4 =p BaePage 4 3. Uragon Company sold warehouse facilities for $8,340,000 to a customer in Oregon, USA on November 02, 2020. Collection in US dollars was due on January 31, 2021. On the same date, to hedge this foreign currency exposure, Uragon Company entered into a forward contract to sell’ $8,340,000 to Export bank for delivery on January 31, 2021. Indirect exchange rates on different dates were as follows: Nov.2 Dec.31 Jan. 31 ‘Spot rate 02387 02457 02494 30-day futures 02364 02475 02278 60-day futures 0239202481 02437 90-day futures 02463 02403 02304 1. How much is the effect on earnings due to hedged item in the December 31, 2020 profit and loss statement? ‘ a. (10,008,000) p20} eee b.¢ 5,838) I / = c. 10,008,000 da 5,838 2. How much is the effect on earnings due to hedging instrument in the 2021 profit and loss statement? b 1,585 Ms (2,502,000) a? De (1,585) . Barako acquired a heavy equipment for $14,100 from a supplier in Detroit, USA on December 1, 2020, Payment in US dollars was due on March 31, 2021. On the same date, o hedge this foreign currency exposure, Barako entered into a forward contract to purchase $14,100 from Citibank for delivery on March 31, 2021. Direct exchange rates for dollars on different dates were as follows: December 1, 2020 ‘December 31, 2020 : March 31,2021 437 os pied pose (ee susea Hem instramenty Page 5 5. On November 2, 2020, p Corp entered into a firm commitment with Japa fi ¢ r cent with Japanese firm to acquire date to reise tvery and passage of ttle on March 31, 2021, ata price of 4,375 yen, On the ns cee wddge against unfavorable changes in the exchange rate of the yen, P Corp. entered into a 'y forward contract with BPI for 4,375 yen. The relevant exchange rates were as follows: 11/2/2020 12/31/2020 3/31/2021 Spot Rate P37 P38. 35 Forward Rate P40. P33 P35 oi ‘What is the foreign currency gain/(loss) due to the change in the fair value of the underlying purchase commitment on December 31, 2020? a 30,625 gain b. 30,625 loss C4o © 4375 gain d 4375 loss ) x GFIS = 40,026 Gain 2. What is the amount debited to the equipment account? 161,875 on 11/2/2020 175,000 on 11/2/2020 4AFS x YO= IT 153,125 on 3/31/2021 = 175,000 on 3/31/2021 aes 6. On November 1, 2020, 7D Co. entered into a firm commitment with Toki-Toki Japanese Company for the export of dried mangoes with a contract price of 10,000 Yen. The goods will be delivered by 7D Co. on January 30, 2021. On the same day, in order to protect itself from the risk of changes in fair value of the firm commitment due to changes in underlying foreign currency, 7D Co. entered into a forward contract with BDO for the sale of 10,000 Yen at the forward rate on November 1, 2020. IAS 39 provides that hedge of the foreign currency risk of a firm commitment may be accounted for as either fair value hedge or cash flow hedge. 7D Co. elected to account for the hedge of the firm commitment using fair value hedge. The following direct exchange rates are provided: November 1, 2020 December 31,2020 January 30, 2021 Buying spot rate P10 P13 PI2 Selling spot rate P13 PIS P16 Forward buying 90-days PIL Pid PIS Forward selling 90-days P13 P16 PI7 Forward buying 60-days P14 P17 P16 Forward selling 60-days PIS PIs Pi4 Forward buying 30-days PII PIS P12 Forward selling 30-days P13 PIL Pl4 1. What is the foreign currency gain/(loss) due to hedged item for the year ended December 31, 2020? a. Caloueaiae (15-11) % 10,0 = Yo, gain 'b. 20,000 loss cc. 30,000 gain d. 10,000 loss 2. What is the foreign currency gain/(loss) due to hedging instrument for the year ended December 31, 2021? 50,000 lose (5-412) x 10 ~ 20,0 b, 30,000 gain | cab cc. 20,000 gain d. 20,000 loss END