EFFECTS OF CHANGES IN FC EXCHANGE RATES

STRAIGHT PROBLEMS

A. FOREIGN CURRENCY TRANSACTIONS

Exercise 1 (Importing transaction) Required: Reconstruct all journal entries for the foreign
On November 1, 2019, AIRAMATIC ENTERPRISES, whose currency transaction and the forward contract in the
functional currency is Philippine pesos, purchases a books of ILOCANDIA.
special equipment from a United Arab Emirates exporter.
AIRAMATIC will pay 120,000 dirhams at this date when Exercise 5 – Hedge of a FCT (Purchase) by a
the spot rate is P12.3263 per dirham. As is customary in derivative Forward Contract. (Net Method)
the industry, the foreign seller does not require BICOLANDIA COMPANY purchased merchandise from a
immediate payment and allows AIRAMATIC foreign vendor for FC 100,000. The merchandise is
ENTERPRISES 90 days to pay for its purchases. received on November 1, 2018, payment is due on
January 31, 2019. Also, on November 1, 2018,
The following are relevant spot rates at pertinent dates: BICOLANDIA enters into a 90-day forward contract for
November 30, 2019, P12.3288; December 31, 2019, the purchase of FC 100,000 for delivery on January 31,
P12.3300; January 30, 2020, P12.3416, and February 2019, as a hedge of the foreign currency transaction.
28, 2020, P12.3425. Assume the payment in dirham was Relevant exchange rates for the foreign currency follow:
paid by AIRAMATIC at due date. 11/01/18 12/31/18 1/31/19
Spot rate P.55 P.56 P.55
Required: Prepare journal entries in the books of 30-day forward .56 .58 .57
AIRAMATIC for the above foreign currency transaction. 60-day forward .56 .59 .58
90-day forward .57 .58 .59
Exercise 2 (Exporting transaction)
On 10 December 2019, MARKETWISE CORPORATION, A Required: Prepare all journal entries for the hedged item
Philippine company, and the Philippine peso its functional and the forward contract, based on the above
currency, sold merchandise to a Danish importer invoiced information. Ignore discounting for simplicity.
at 95,000 kroners to be settled on 28 February 2020.
The following exchange rates are relevant: Exercise 6
PHILCO ENTERPRISES, a Philippine company, sells and
10 December 2019 P 8.3098 delivers goods to a foreign buyer for FC 1,000,000 on
31 December 2019 8.3365 December 1, 2018. Payment is due on March 1, 2019. As
28 February 2020 8.2615 PHILCO predicts the peso would strengthen against the
foreign currency, to mitigate any huge losses, it enters
Assume the foreign currency transaction was settled by into a forward contract to sell FC 1,000,000. The sales
the foreign buyer at due date. forward contract has exactly the same covering period as
the hedged foreign currency receivable to assure that it
Required: Prepare journal entries in the books of will be fully effective.
MARKETWISE CORPORATION for the above transaction PHILCO’s incremental borrowing rate is 12% per year.
in foreign currency Other relevant data regarding spot and forward rates
follow:
B. FOREIGN CURRENCY HEDGES Date Spot rate Forward rate
12/01/18 P 0.320 P0.305 to 3/01/19
Exercise 3. On December 1, 2018, Kyrie Company 12/31/18 0.330 0.316 to 3/01/19
enters into contract to sell US$20,000 to its bank on 03/01/19 0.300 0.300 to 3/01/19
March 1, 2019 at the market rate for a 90-day forward
contract US$1 : PP54.00. On December 31, 2018, Required: Prepare all the journal entries in the books of
Kyries’s year-end, the 60-day forward rate to sell US PHILCO ENTERPRISES for
dollars on March 1 has changed to PP53.80. On March 1, 1. The foreign currency sales transaction,
2019, the currencies are exchanged when the spot rate is 2. The sales forward contract assuming a fair-value-
PP53.70. hedge designation, and
Required: Prepare journal entries to account for the
3. The sales forward contract assuming a cash-flow-
above information, using the gross and the net methods.
hedge designation.

Exercise 4 – Hedge of a FCT ( sale) by a non- Exercise 7 (Hedge of foreign currency risk on asset
derivative Forward Contract. (Gross Method) exposure by a derivative Option Contract.
ILOCANDIA CORPORATION, a Filipino company, enters On December 1, 2018, LUZON CORPORATION delivers
into a forward exchange contract on October 1, 2018 to merchandise to a foreign buyer which agreed to pay FC
hedge a foreign currency risk in US dollars. The contract 800,000 on March 1, 2019. To hedge the foreign
is for the sale of $80,000 to the international bank for currency risk against unfavorable exchange rate changes
delivery on March 31, 2019. The company anticipates the during the 90-day period, LUZON enters into a derivative
dollar will weaken against the peso. option contract to sell FC 800,000 for delivery on March
1, 2019.
Relevant exchange rates for the US dollars are as
follows: LUZON CORPORATION pays a premium of P0.009 per FC
10/01/18 12/31/19 03/31/19 unit. Hence, the purchase price for the option is P7,200,
Spot rate P46.35 P46.00 P45.60 i.e. FC 800,000 x P0.009.
30-day forward 46.25 45.50 46.00
90-day forward 46.28 45.80 45.60 Relevant market price (spot rate) and strike price at
180-day forward 46.30 43.60 45.00 relevant dates follow:
12/01/18 12/31/18 03/01/19
Market price (spot
3
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 rate) P1.32 P1.33 P1.30 Depreciation expense (80,000)
Strike price (exercise Amortization expense ( 8,000)
price) 1.32 1.32 1.32 Other expenses ( 176,000)
Income before tax 536,000
Required: Prepare journal entries in the books of LUZON Income taxes ( 160,000)
CORPORATION if the hedge is designated as a FAIR Net income FC 376,000
VALUE HEDGE.
*Cost of Goods Sold Statement for year ended 2019.
Exercise 8 (Hedge of unrecognized foreign currency
Inventory, Jan 1, 2019 FC 120,000
firm commitment by a derivative forward contract).
Purchases in 2019, evenly thruout
VISAYAS CORPORATION, on December 1, 2019, receives
the year 2,600,000
and approves an order from a foreign buyer to deliver
Inventory, Dec 31 (evenly thruout
merchandise on March 1, 2020 at an agreed price of
the 4th Qtr of 2019 ( 320,000)
FC1,000,000. Although this time the firm commitment is
Total FC 2,400,000
just an executory contract it can be recognized if hedged
by a derivative financial instrument to achieve the
Statement of Retained Earnings for year ended
objectives of hedge accounting.
December 31, 2019
The other relevant data follows: Retained earnings, 1/1/19 FC -
DATE SPOT RATE FORWARD RATE Net income for 2019 376,000
12/01/19 P1.32 P1.305 to 3/1/20 Dividends, 10/1/19 ( 120,000)
12/31/19 1.33 1.316 to 3/1/20 Retained earnings, 12/31/19 256,000
03/01/20 1.30 1.300 spot rate
Balance Sheet, as of December 31, 2019
Visaya’s incremental borrowing rate is 12% per year. Cash FC 104,000 Accounts
payable FC 480,000
Required: Prepare journal entries in the books of
Accounts Long-term-
VISAYAS CORPORATION assuming:
receivable 160,000 debt 200,000
(a) a FAIR VALUE hedge designation Inventory 320,000 Common
(b) a CASH FOW hedge designation stock 80,000
Property and APIC 320,000
equipment net
C. FOREIGN CURRENCY FS TRANSLATIONS 720,000
Exercise 9 Patents, net 32,000 Retained 256,000
KAPATID CORPORATION, a Philippine company, forms a earnings
wholly-owned subsidiary in a foreign country (FOREIGN Total FC1,336,000 Total FC1,336,000
COMPANY) on December 31, 2018. On that date,
KAPATID invested P240,000 in exchange for all of the The relevant exchange rates in Philippine pesos are as
subsidiary’s common stock. The exchange rate on this follows:
date is P0.60 per the foreign currency (FC) unit; the January 1, 2019 P0.60
initial capital investment was FC400,000, of which Average for 2019 0.65
FC120,000 was immediately invested in inventory and March 15,2019 (Date when property and
the remainder held in cash. The balance sheet of equipment was acquired and long-term-
FOREIGN (whose functional currency is the FC) when it debt was incurred 0.61
began operations on January 1, 2019 follows: April 10, 2019 (Date when patent was
acquired) 0.62
Cash FC 280,000 Common stock FC 80,000
October 1, 2019 (Date when dividends were
Inventory 120,000 APIC 320,000
Total FC 400,000 Total FC400,000
declared) 0.67
4th Qtr of 2019 average 0.68
During 2018, FOREIGN generated income after taxes of December 31, 2019 0.70
FC 376,000 and declared dividends of FC 120,000 on
October 1, 2019. Required:
1. Assuming the functional currency of Foreign
The financial statements of FOREIGN for 2019 are as Subsidiary is the local currency, translate its financial
follows: statements into the peso functional and presentation
Income Statement for year ended December 31, 2019 currency of the parent company.
2. Assuming the functional currency of Foreign
Sales FC 3,200,000 Subsidiary is the Philippine peso, re-measure its
Cost of goods sold (2,400,000)* financial statements into its functional currency.
Gross profit 800,000

MULTIPLE CHOICE

1. CEBUANA COMPANY, a Philippine Corporation, bought
inventory from a supplier in Japan on November 2,
2018 for 50,000 yen, when the spot rate was P.4245.
On December 31, 2018, the spot rate was P.4295. On
January 15, 2019, CEBUANA bought 50,000 yen at a
spot rate of P.4250 and paid the invoice. How much
should CEBUANA report in its income statements for
(1) 2018 and (2) 2019 as foreign exchange gain or
(loss)
a. (1) P250; (2) (P225) c. (1) P0; (2) (P225)
b. (1) (P250); (2) P225 d. (1) P0; (2) P220
2. On October 1, 2018, ILOCANDIA COMPANY. acquired
goods from USA Company for $10,000 payable in US
dollars on April 1, 2019. Spot rates on various dates
follow:
Transaction date P1 = $0.018
Balance sheet date, 12/31/18 P1 = $0.017
Settlement date P1 = $0.020
As a result of this transaction, ILOCANDIA COMPANY
has a foreign exchange gain or loss in 2018 and 2019,
respectively of (rounded)
a. P(32,680) and P88,235 c. P(100) and P300

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 b. P32,680 and P(88,235) d. P( 10 )and P 30 Assuming the retained earnings of the subsidiary on
December 31, 2018 translated to Philippine pesos is
3. On July 1, 2018, SOUTHERN TAGALOG COMPANY lent P92,000 what amount of cumulative translation
P308,000 to a US supplier, evidenced by an interest- adjustment is to be reported in the consolidated
bearing-note due on July 1, 2019. The note is balance sheet on December 31, 2018?
equivalent to $8,000 on the loan date. The note a. P25,000 gain c. P25,000 loss
principal was appropriately included at P328,000 in b. P20,000 gain d. P22,000 loss
SOUTHERN TAGALOG’S December 31, 2018 balance
sheet. The note was repaid to SOUTHERN TAGALOG on 7. BUKIDNON ENTERPRISES, A Philippine importer,
July 1, 2019 due date when the exchange rate was purchased merchandise from the Star Company of
P39 to $1. In its income statement for the year ended Thailand for 100,000 Baht on March 1, 2018, when the
December 31, 2019 what amount should SOUTHERN spot rate for a Baht was P1.630. The accounts payable
TAGALOG include as a foreign currency transaction denominated in bath was not due until May 30, 2018
gain or loss? so BUKIDNON immediately entered into a 90-day
a. P0 c. P16,000 gain forward contract to hedge the transaction against
b. P26,000 gain d. P16,000 loss exchange rate changes. The contract was made at
forward exchange rate of P1.650. BUKIDNON settled
4. Certain balance sheet accounts of a foreign subsidiary the forward contract and the account payable on May
in Japan of METRO MANILA, INC. at December 31, 30, when the spot rate for Bath was P1.600. On the
2018 have been translated into Philippine pesos as settlement of the forward contract on May 30, 2018,
follows: BUKIDNON should record a forex gain or (loss) of:
Current rate Historical a. P5,000 c. P2,000
Rate b. P(5,000) d. P(2,000)
Accounts receivable P120,000 P100,000
8. GENSAN CORPORATION purchases merchandise from
Prepaid insurance 55,000 50,000
Lacoste Company of France for 1,000,000 Francs. The
Copyright 75,000 85,000
merchandise is received on December 1, 2018, with
payment due in 60 days on January 30, 2019. Also on
What was the total amount included in METRO
December 1, 2018, GENSAN enters into a 60-day
MANILA’s December 31, 2018 consolidated balance
forward contract with the Bank to purchase 1,000,000
sheet for the above accounts?
francs. The relevant rates for Franc on selected dates
a. P255,000 c. P240,000
are as follows:
b. P235,000 d. P250,000
12/1/18 12/31/18 1/30/19
Spot rate P6.01 P6.16 P6.01
5. A wholly-owned subsidiary in Hongkong of PANAY
30-day futures 6.05 6.07 6.07
CORPORATION. has certain expense accounts for the
60-day futures 6.06 6.08 6.08
year ended December 31, 2018 stated in Hongkong
What is the net forex gain (loss from this transaction
dollars, as follows:
and hedge that will be reported on GENSAN’s 2018
Depreciation (related assets were
income statement?
purchased on January 1, 2013) 120,000HK$
a. P(130,000) c. P20,000
Provision for doubtful accounts 80,000
b. P130,000 d. P(140,000)
Rent 200,000
The functional currency of PANAY CORPORATION and 9. BENGUET COMPANY, a money changer, speculates in
its Hongkong subsidiary is the Phil. Peso foreign currency as its business. On October 1, 2018,
BENGUET bought a 180-day forward contract to
The exchange rates for HK$ at various dates were as purchase 5, 000 FC at a forward rate of FC1= P56.50
follows: when the spot rate was P56.00. Other exchange rates
December 31, 2018 P5.40 were as follows:
Average for the year ended Spot Rate Forward Rate for
December 31, 2018 5.44 March 31, 2019
January 1, 2013 5.50 Dec. 31, 2018 P56.30 P56.60
Mar. 31, 2019 56.32
What total peso amount should be included in PANAY
CORPORATION’s 2018 consolidated income statement The forex gain (loss) recognized by BENGUET from this
to reflect these expenses? forward contract is:
a. P2,176,000 c. P2,180,000 a. P1,500 c. P500
b. P2,183,200 d. P2,132,000 b. P(900) d. P(10,000)

6. On December 31, 2018 a foreign subsidiary of a NCR 10. The following information applies to BOHOL
CORPORATION submitted the following balance sheet CORPORATION’s sales of 10,000 foreign currency units
in foreign currency. under a forward contract dated November 1, 2018, for
FC delivery on January 31, 2019:
Total assets 100,000 November 1, December 31,
Total liabilities 20,000 2018 2018
Common Stocks 50,000 Spot rate P0.80 P0.83
Retained Earnings, 12/31/18 30,000 30-day futures 0.79 0.82
90-day futures 0.78 0.81
The exchange rates for 1FC are as follows:
Current rate P3.40 BOHOL entered into a contract to speculate in the
Historical rate 3.10 foreign currency. In BOHOL’s income statement for the
Weighted average rate 3.00 the year ended December 31, 2018, what amount of
foreign exchange gain (loss) should be reported from
this forward contract?
a. P100 c. P200

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 b. P300 d. P(400) 13. At the March 1, 2020 expiration date, the net foreign
exchange gain of (loss) on the hedging relationship is:
On December 1, 2019, MISAMIS, INC. paid P3,000 to a. P 0 c. P(2,000)
purchase a 90-day call option for 500,000 Thailand baht. b. P2,000 d. P5,000
The option’s purpose is to protect an exposed liability of
500,000 baht relating to a purchase of merchandise 14. At the March 1, 2020 expiration date, the intrinsic
received on December 1, 2019 and to be paid on March 1, component of the Currency contract Option is
2020. Relevant rates and market values at different dates a. P3,000 c. P39,000
are as follows: b. P35,000 d. P42,000
12/01/19 12/31/19 03/01/20
Spot rate (market 15. Calculate the option’s time value at December 1, 2019
price) P1.20 P1.28 P1.27 a. P3,000 c. P40,000
Strike price b. P35,000 d. P42,000
(exercise price) 1.20 1.20 1.20
Fair value of call 16. Calculate the option’s intrinsic value at December 31,
option P ? P ? P ? 2019.
a. P3,000 c. P40,000
11. On December 31, 2019, the accounts payable b. P35,000 d. P42,000
amounted to
a. P600,000 c. P635,000 17. Calculate the option’s (1) time value and (2) intrinsic
b. P640,000 d. P 0 value at March 1, 2020 just before the cash
settlement.
12. On December 31, 2019, the fair value of the Contract a. (1) P 3,000 and (2) P35,000
Option is b. (1) P 4,000 and (2) P39,000
a. P3,000 c. P35,000 c. (1) P 0 and (2) P35,000
b. P42,000 d. P39,000 d. (1) P35,000 and (2) P 0

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