AC 321

FOREX and Derivatives

Problem 1
On November 19, 20x1, RST Company, a Philippine company ordered merchandise from Sweden Company for 31,800 Sweden
kronor. The merchandise was delivered on December 18, 20x1. The invoice was dated December 2, 20x1, the shipping date (FOB
shipping point). RST Company paid the invoice on January 28, 20x2. The spot rates for Sweden kronor on the respective dates were:

November 19, 20x1 P76.90

December 2, 20x1 76.15
December 18, 20x1 75.75
December 31, 20x1 72.35
January 28, 20x2 73.15

What is the reportable foreign exchange gain/loss amount in RST’s 20x1 income statement?
a. P108,120 gain
b. P144,690 gain
c. P120,840 gain
d. P25,440 loss

Problem 2
On October 5, 20x1, DEF Company sold goods on account to Malaysia Corporation for 50,320 Ringgits. The date of invoice is October
29, 20x1 and payment is due on January 30, 20x2. Exchange rates were as follows:
BID rate OFFER rate
Oct. 5, 20x1 P67.50 P69.20
Oct. 29, 20x1 68.70 66.80
Dec. 31, 20x1 64.10 63.40
Jan. 30, 20x2 62.40 65.50
What is the reportable forex gain/loss amount in DEF’s 20x2 income statement?

Problem 3 (Speculation)
The following data applies to NOP Company’s purchase of 45,400 Belgium francs under a forward contract dated November 1, 20x1,
for delivery on January 31, 20x2:
11/1/11 12/31/11 1/31/12
Spot rates P55.75 P53.90 P54.50
30-day forward rate 51.30 56.15 53.20
60-day forward rate 57.65 52.30 55.75
90-day forward rate 54.25 55.45 52.10

NOP entered into the forward contract to speculate in the foreign currency.

In its income statement for the year ended December 31, 20x1, what amount of gain/loss should NOP report from this forward contract?
Journal Entries:
11/1 -no entry-
(alternative) Forward contract receivable (FCR) – variable 2,462,950
FC payable (FCP) – fixed 2,462,950

12/31 Forward contract receivable 86,260

Forex gain  86,260

1/31 FCP 2,462,950

Cash 2,462,950

Cash 2,474,300
Forex loss  74,910
FCR 2,549,210
If no entry made in
Nov. 1 Cash 2,474,300
Cash 2,462,950
 Forex gain 11,350
Problem 4 (Fair value Hedge - Sale)
M Company sold merchandise for 111,200 rupees to a customer in India on November 2, 20x1. Collection in India rupees was due on
January 31, 20x2. On the same date, to hedge this foreign currency exposure, M Company entered into a futures contract to sell
111,200 rupees to a bank for delivery on January 31, 20x2. Exchange rates for rupees on different dates are as follows:
Nov. 2 Dec. 31 Jan. 31
Strike price P81.80 P81.80 P81.80
Bid spot rate 81.90 80.70 80.10
Offer spot rate 81.70 80.50 80.30
30-day futures 82.30 80.40 83.90
60-day futures 81.80 80.30 82.60
90-day futures 80.60 81.60 83.40
120-day futures 80.10 81.40 82.80
*Receive fixed, Pay variable
Date Hedged Item (AR) Hedging Instrument (Futures)
Dr Cr Dr Cr
11/2 AR 9,107,280 FCR -fixed 8,962,720
Sales 9,107,280 FCP 8,962,720

12/31 Forex loss 133,440 FCP 22,240

AR 133,440 Forex gain 22,240

1/31 Cash 8,907,120 Cash 8,962,720

Forex loss 66,720 FCR 8,962,720
AR 8,973,840
FCP 8,940,480
Cash 8,907,120
Forex gain 33,360

1. What is the reportable sales amount in the December 31, 20x1 income statement? 9,107,280
2. How much is the foreign exchange gain or loss due to hedged item in the December 31, 20x1 profit and loss statement?
133,440 loss
3. What is the reported value of the receivable from the customer at December 31, 20x1? 8,973,840
4. How much is the foreign exchange gain or loss due to hedging instrument in the 20x2 profit and loss statement? 33,360 gain
5. What is the balance of the Forward Contract Payable account as of December 31, 20x1? 8,940,480
6. What was the net impact in M Company’s income in 20x2 as a result of this hedging activity? 33,360 loss
Problem 5 (Fair Value Hedge – Purchase)
R Company acquired machinery for 169,200 lira from a vendor in Turkey on December 1, 20x1. Payment in Turkey lira was due on
March 31, 20x2. On the same date, to hedge this foreign currency exposure, R entered into a futures contract to purchase 169,200 lira
from a bank for delivery on March 31, 20x2. Exchange rates for pounds on different dates are as follows:
Dec. 1 Dec. 31 March 31
Strike price P41.5 P41.5 P41.5
Buying spot rate 41.6 42.5 43.4
Selling spot rate 41.4 42.3 43.7
30-day futures 42.3 41.8 43.2
60-day futures 41.8 42.2 42.6
90-day futures 40.6 42.5 43.4
120-day futures 42.2 42.8 42.9

1. What amount is the capitalizable cost of the machinery? 7,004,880

2. How much is the foreign exchange gain/loss due to hedged item in the 20x2 profit and loss statement? 236,880 loss
3. What is the reported value of the payable to the vendor at December 31, 20x1? 7,157,160
4. How much is the foreign exchange gain/loss due to hedging instrument in the December 31, 20x1 profit and loss statement?
50,760 gain
5. What is the balance of the Forward Contract Receivable account as of December 31, 20x1? 7,191,000
6. What was the net impact in R Company’s income in 20x1 as a result of this hedging activity? 101,520 loss

Date Hedged Item (AP) Hedging Instrument (Futures)

Dr Cr Dr Cr
12/1/x1 Purchases 7,004,880 FCR 7,140,240
AP 7,004,880 FCP 7,140,240

12/31/x1 Forex loss 152,280 FCR 50,760

AP 152,280 Forex gain 50,760

3/31/x2 AP 7,157,160 FCP 7,140,240

Forex loss 236,880 Cash 7,140,240
Cash 7,394,040
Cash 7,394,040
FCR 7,191,000
Forex gain 203,040
Problem 6
On November 1, S Company entered into a firm commitment to acquire a machinery from United Arab Emirates Company. Delivery
and passage of title would be on February 28, 20x2 at the price of 37,800 dirhams, accounted for as fair value hedge. On the same
date, to hedge against unfavorable changes in the exchange rate, S entered into a 120-day forward contract with a bank for 37,800
dirhams. Exchange rate were as follows:
Spot rate Forward rate
Nov. 1. 20x1 P96.50 P94.30
Dec. 31, 20x1 97.25 96.50
Feb. 28, 20x2 99.70 99.70

1. The December 31, 20x1 foreign exchange gain/loss on the hedging instrument amounted to?
2. The firm commitment account balance as shown in the December 31, 20x1 statement of financial position amount to?
Date Hedged Item (Firm Commitment) Hedging Instrument (Forward)
Dr Cr Dr Cr
Nov.1 -No entry FCR 3,564,540
FCP “fixed” 3,564,540

Dec.31 Forex loss 83,160 FCR 83,160

Firm commitment 83,160 Forex gain 83,160

Feb. 28 Forex loss 120,960 FCP 3,564,540

Firm commitment 120,960 Cash 3,564,540

Machinery 3,564,540 Cash 3,768,660

Firm commitment 204,120 FCR 3,647,700
Cash 3,768,660 Forex gain 120,960

Problem 7
Call Option – Fair value hedge
On October 1, 20x1, HIJ Philippines took delivery from Bahrain firm of inventory costing 1,140,000 dinar. Payment is due on January
30, 20x2. Concurrently, HIJ Philippines paid P15,700 cash to acquire an at-the-money call option for 1,140,000 Bahrain Dinar. Strike
price is P12.40.
10/1/20x1 12/31/20x1 1/30/20x2
Market price P12.40 P12.423 P12.427
Fair value of call option P28,200 P30,780
“split accounting”

10/1 12/31 1/30

FV of option P15,700 P28,200 P30,780
Effective (intrinsic “true”) 0 26,220 30,780
Ineffective (time) 15,700 1,980 0

Date Hedged Item Hedging Inst. (Call Option)

Dr Cr Dr Cr
10/1 Purchases 14,136,000 Call option 15,700
AP 14,136,000 Cash 15,700

12/31 Forex loss 26,220 Effective portion:

AP 26,220 Call option 26,220
Gain on Derivative 26,220
Ineffective:
Loss on der. 13,720
Call option 13,720

1/30 Effective portion:

Call option 4,560
Gain 4,560
Ineffective:
Loss 1,980
Call option 1,980
1/30 AP 14,162,220 Cash 14,166,780
Forex loss 4,560 Cash 14,136,000
Cash 14,166,780 Call option 30,780

1. The foreign exchange gain/loss on hedging instrument due to change in the ineffective portion (time value) on December 31,
20x1 if changes in the time value will be excluded from the assessment of hedge effectiveness should be? 13,720 loss
2. The foreign exchange gain/loss on hedging instrument due to change in the effective portion (Intrinsic value) on Jan. 30, 20x2
if changes in the time value will be excluded from the assessment of hedge effectiveness should be? 4,560 gain
3. The December 31, 20x1 net foreign exchange gain/loss in the hedging activity amounted to? 13,720 loss
4. The foreign exchange gain/loss on hedging instrument in 20x2 if changes in the time value will be included “non-split acctg”
from the assessment of hedge effectiveness should be? 2,580 gain

Problem 8
Put Option – Fair value hedge
On December 1, 20x1, KLM Corporation acquired 4,600 shares of QRS Company at a cost of P28 per share. KLM classifies them as
available-for-sale securities. On this same date, KLM decides to hedge against a possible decline in the value of the securities by
purchasing, at a cost of P11,900, an at-the-money put option to sell the 4,600 shares. The option expires on April 1, 20x2. The fair
values of the investment and the options follow:
12/1/11 12/31/11 4/1/12
QRS Company
shares:
Per share P28 P26.50 P23.50
Put option (4,600
shares)
Market value P15,400 P20,700

1. The foreign exchange gain/loss on option contract due to change in time value on December 31, 20x1 if split accounting is
used in the assessment of hedge effectiveness should be?
2. The foreign exchange gain/loss on option contract due to change in intrinsic value in 20x2 if split accounting is used in the
assessment of hedge effectiveness should be?
3. The 20x2 net foreign exchange gain/loss in the hedging activity amounted to?
4. The foreign exchange gain/loss on option contract on December 31, 20x1 if non-split accounting is used in the assessment of
hedge effectiveness should be?

Problem 9
Call Option – Cash flow hedge
On August 1, EFG Company “forecasted” the purchase of 60,000 units of inventory from Bangladesh Company. The purchase would
probably occur on November 2 and require the payment of 2,340,000 taka. It is anticipated that the inventory could be further
processed and delivered to customers by early December. On August 1, the company purchased a call option to buy 2,340,000 taka at
a strike price of 1FC = P7.95. An option premium of P8,850 was paid. Changes in the value of the option will be excluded from the
assessment of hedge effectiveness.

Spot rates and option values are as follows:

Aug 1 Aug 31 September 30 November 2
Spot rate (Market price) P7.93 P7.952 P7.963 P7.97
Fair value of call option P8,850 P15,690 P34,410 P46,800

On November 2, EFG Company purchased 60,000 units of inventory at a cost of 2,376,000 taka. The option was settled/sold on
November 2 at its fair value. After incurring further processing costs of P240,000, the inventory was sold for P29,400,000 on December
7.

8/1 8/31 9/30 11/2

FV of option 8,850 P15,690 P34,410 P46,800
Effective (intrinsic “true”) 0 4,680 30,420 46,800
– OCI “UR gain/loss
Ineffective (time) – P/L 8,850 11,010 3,990 0

1. The foreign exchange gain/loss on option contract on August 31 that would affect earnings? 2,160 gain
2. The foreign exchange gain/loss on option contract on September 30 as presented in OCI? 30,420 Unrealized Gain
3. The forex gain/loss on option contract on November 2 that would affect earnings? 3,990 loss
4. What is the net income effect of the above transactions? Increase of? P10,261,230

COGS:
Purchase at 11/2 (2,376,000 x 7.97) 18,936,720
Further processing cost 240,000
Realized Gain (46,800)
19,129,120

To close the Unrealized gain (OCI) to COGS upon exercise of option:

Unrealized gain 46,800
COGS or Realized gain 46,800

Problem 10
On January 1, 20x1, GBM, Inc. paid P110,000 cash to acquire a put foreign exchange option for 2,750,000 rupee with an
expiration date of December 31, 20x1. The option hedges 20x1’s “forecasted” exporting sales of 2,750,000 rupee. GBM’s fiscal
year end June 30.

Jan 1, 20x1 June 30, 20x1 Dec 31, 20x1

Spot rate 3.48 3.42 3.45
Strike price 3.49
Fair value of put option 556,875

Which of the following is true?

a. The forex gain or loss on option contract on June 30, 20x1 should be P446,875 if the time value element is included in
assessing the hedge effectiveness.
b. The forex loss to be presented in the income statement on December 31, 20x1 amounted to P364,375, if the time value
element is included in the assessment of the hedge effectiveness.
c. The intrinsic and time value of option on January 1, 20x1 were 0 and P110,000 respectively.
d. The forex gain to be presented in the stockholders’ equity on June 30, 20x1 is P192,500, if the time value element is excluded
from the assessment of hedge effectiveness.