Chapter 1 Accounting for Foreign Currency Transactions tinuing growth in world trade and the significance of foreign operations to Philippine companies has resulted in increasing attention being paid to international accounting practices and problems. These problems are generally subdivided into two broad areas: Problenis-related to transactions shit give rise to.receivables and payables denominated in foreign currencies must: beim asured and Beoned cd in the. Philippine currency (Peso). 2. Problems arising from the translation of foreign currency statement into Philippine currency. This is discussed in Chapter 20. The discussion of the nature of these problem areas and the related accounting procedure focuses in et a ng principles prescribed in Philippine. Accounting the Ej Standards (PAS) No.(2J,) ‘Accountin, Changes in Foreign No. "Financial Instrument: Recogni FL Exchange Rate.” an and Measurement". Measured versus Denominated Tt is useful to have an understanding of these ‘two terms used in accounting of foreign currency transactions, re denominated inonecurrency iftheir amountis fixed intterms of that currency. However, they must be. > measured (for financial reporting purposes) ivanother currency. When a transaction is to be settled by the receipt or payment ofa specified currency, the receivable or payable is said to be denominated i rncy. Regardless of the currency i in which a transaction is denominated, the party to the transaction measures 347 TORRY pat Scanned with CamScanner348 x a \ Chapter 19 and records the transaction in the currency (local currency) in which the party is located. For example, a Phil pinedim; {mportét purchases goods.on credit fromaJU.S. exportey who is to be paid inUS dollars. The transaction lenominated in measured and recorded byt he, Philippine i importer in Philippine pesos ( P). However, the U.S. exporter’s t eden is both denc ed and rfieasured in US dollars. Conversion and Translation Itis important to know the distinction between the conversion and translation of: foreign currencies. In the case of the import example above, the! Philippin importer converts Philippine pesos on the date ofpayment into US dollars at the prevailing rate of exchange. On the other hand, the assets, liabilities, and operating items of a foreign branch or subsidiary are translated into Philippine pesos to consolidate them into the financial statements of the Philippine hi or parent company. No actual exchange of currencies is involved, anlyatrasletionintosingleouenoyt Currency Exchange Rate etween the currencies of two countries. For example, ad aper might quote-exchange rates for the US dollars ($) as follows, based on the prior day’s transactions in the Philippine Stock Exchange: Foreign Currency Pesos in in Pesos Foreign Currency United States of America USdollar) $= T5620, ls 0.01779 ‘ 5. The-first column indicates that $1 could be exchanged for approximately P56.20 (direct quotation) the second column ifdicates that P1 could be exchange for approximately . (indirect quotation). Note that the two exchaige rates arey@ciprocals .01779). , RS, BR The exchange rate illustrated above is the aera ee by théank for current sales of the foreign currency. The bank’ $ buying spotrate for the crrency usually is less than the selling spot rate; the spread betwee! ing and buying spot rates represents Inaddition to t rates, to foreign.currency transactions tobe “Forward en apply to forward exchange contracts, which are derivative instruments: isassed ina teen #20 ion of this chapter. Scanned with CamScannerAccounting For Foreign Currency Transactions 349 E ¢ fluctuations in the nation’s exchange rates includes differing global. Factors influencing fh acs of iebaton money-market variations, capital investment levels, and monetaryactions ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS A iscalleda foreign curren ransaction with a foreign company that is to be paid in Philippine peso is nota efoveign cure nnsaction Philippine company, because the amount of pesos to be received or paid to settle the account is fixed and is not affected by subsequent changes in eae) ‘Thus, a transaction of a Philippine company with a foreign company to be settled in pesos is accounted for in the same manner as if the transaction had been with a company in the Philippines. Often, however, the trarisaction described are negotiated and settled in terms of the foreign company’ (local currency.unit. In such cases, the Philippine company must account for the transaction a Seon ae ante \s of Philippine pesos. This accounting, described turreucy translation, is accomplished by applying the appropriate exchange rate between the foreign currency and the Philippine pesos. Some of the more common foreign currency transactions are: 1. Importing and exporting gpods of Ge ih he recsvable or payable denominated in foreign currency. 2. Borrowing or lendi Se 3. mi Entering into a forwai nged contact. Ors foreign curency. ue eS Accounting for the above foreign currency transactions is discussed in the following sections. jo. oll 4) Importing and Exporting of Goods This is the most common form of foreign currency transaction. In each unsettled foreign currency transaction, there are three (3) issues of concem to the accountant. These issues and the appropriate exchange rate to be used in translating accounts denominated in units of foreign currency, (cep) for forward exchange contracts) are as follows: ie. reach asset, liability, revenue, gain or loss arising f fe transaction is «Lrecarded in Philippine pesos by multiplying the units of foreign currency. /y he losin exchangs erate, that is, the spatzate i in effect on a given date. , suite of FEY ey @aae ef yomarh m Lean 'dn itl Scanned with CamScanner350 5 Chapter 19 2. Ateach balance sheet date that occurs between the transaction date and the settlement date, recorded balances that are denominated in a foreign Zont \ currency are adjusted to reflect the closing exchanged rate in effect at the date of thestatement of financial position. forthe difference in the exchange rate between the transaction date and the balance _ —Sheet date. 3. Atthe settlement date, in the case of a foreign currency payable, a Philippine company must convert Philippine pesos into foreign currency units to settle the account, while foreign currency units received to settlea foreign currency receivable will be converted into pesos. Although translation is not required, a foreign exchange olen eet of pesos paid orreceived upon conversion does not equal the Value of the related payable or receivable. \\._ Importing Transactions — Purchase of Merchandise from a Foreign Supplier To illustrate a purchase of merchandise from a foreign supplier 12,2012, Manila Corporation purchased merc and openeda letter of credit with Bankof hippie sand BPD to cover the importation. Bank service charge amounted to P.1,500,The corporation’s fiscal year ends December AL. The selling spot ate issued by BPI for USS at various dates is as fgllows: Date of arrival of goods — December 15, 2012 P50.50,— Balance sheet date December 31, 2012 ae Date of receipt of importation documents and the required payment of the Letter of credit to 3 BPI—January 10, 2013 50.90~ Assuming that Manila Corporation uses the periodic inventorysystem, the journal entries to record the above transactions relating to the importation areas follows: * Illustration 19-1 2012 Nov. 15: Bank Capes 1,500 : 1,500 To second on charges ve Dec. 15: Faria 505,000 7 —=Acceptance payable 505,000 To record the receipt of goods. : $10,000 x P50.50 VAS Dee. 3) Foreign exchange loss Yow ULL 3,000 : Acceptance payable hyyehX®0U. Aayeht To adjust acceptance payable a vecognize ‘forex loss for the increase in the exchange rate. $10,000 x P50.80 ~ P50.50) 3,000 Scanned with CamScannerAccounting For Foreign Currency Transactions 351 (sim, _A€ceptance payable 508,000 \ Foreign exchange loss 1,000 ae ‘Cash if Trust KeceAPLE Payabhe 509,000 To record the payment of letter of credit (LO) to BPI, and recognition of forex loss. 10,000 x P50.90. If no payment s made by Manila Corporation to BPT upon receiptof the goods and the related importation documents, ois eceips Pap account set instead of Cash account. Later, when paymentis made, Trust Receipts Payable acsountis debited with a corresponding credit to Cash account. Marginal Deposit on Letter of Credit. Some banks may require importers to make a marginal deposit upon opening of LC. Asan example, let us assume that BPI required Manila Corporation to give a25%marginal deposit on the $10,000etter of credit. The exchange rate given by the banibon November 15, 2013 is P50.00 to US$1. The entry to record this transaction is: 2013 Nov. 15: Marginal deposit on LC (4xpoctl ) 125,000 Cash 125,000 To record marginal deposit on LC 25% x. 37.000 ‘x P50.00). On the date of settlement of the LC, this marginal deposit is applied as payment. Two-Transaction Perspective and One-Transaction Perspective The joumal entries above reflect tonsa tsp forrecording foreign trade transaction. Under the concept, Manila’s ransaction with the US supplier basically ‘were two-separate transactions. One transaction was the plirchase of the merchandise; the second transaction was the acquigition of the foreign clirrency required to pay the LC for the merchandise purchased. Under the one-transaction perspective, Manila’s total foreign exchange loss of 24,00 000 on its purchase from the US supplic \crease the cost ofmerchandise purchased. Under the approach, Manila would no} prepa joural entry on December 31, 2012, but would prepare the following entry on January 10, 2013: a Scanned with CamScannerpeer 352 Chapter 19 23 Jan. 10: “Acceptance payable 505,000. Burchnses\ 4,000 Leash “509,000 ‘To récord payment of LC for P509,000 ($10,000 x PS0.90), and increase purchases for resulting forex loss. In effect, the one-transaction perspective considers the original amount recorded for the purchase of foreign merchandise as an estimate, subject to adjustment when the exact cash outlay required for the purchase is known. - co ~ m “ ~ ; Theguthor$ supports thi vo transac nn perspective for foreign trade transactions and for loans receivable and payable denominated in foreign currency. Exporting Transactions — Sale of Merchandise to.a Foreign Customer Assume that on November 3, 2012, Pilipino Company sold merchandise for $10,000 toaUS firm. On November 8, Bank of Philippine Island (BPI) received a confirmation of LC from the bank of the US firm to support the purchase order. On November 10, Pilipino Company availed a Packing Credit Lin 00,000 with BPI to fund his exportation against the confirmed purchase order ter of Credit. The selling spot rates issued by the bank for US dollars at various dates are as follows: Date of shipment —November 20, 2012 B50.60 , Balance sheet date ~ December 31, 2012 50.80 Date of settlement — January 25, 2013 Geis ‘The journal entries of Pilipino Company to record the above transactions relating to | exportation of goods are as follows: | Mlustration 19-2 2012 | Nov. 10: Cash 100,000 | Packing credit line 100,000 To record availment of packing credit line. | Nov. 20: Accounts receivable ' 506,000 | Sales 506,000 To record shipment of merchandise, $10,000 x P50.60. | | Scanned with CamScannerAccounting For Foreign Currency Transactions 353 Dee. 31: Accounts receivable 2,000 Foreign exchange gain 2,000 To adjust accounts receivable and recognize ‘forex gain for the increase in the exchange rate, $10,000 x (P50.80 — P50.60). 2013 Jan. 25: Cash 509,000 Accounts receivable 508,000 Foreign exchange gain 1,000 To record settlement received from BPI ‘for the LC and recognition of forex gain. 4 Loans Payable Denominated in Foreign Currency —_— Ifa Philippine Company chooses to Gorrowaa foreign currenc} purchased froma fo 1pplier, the following journal entries involve (Hkg$ is the sym pO! for the Hongkong Dollars). IMustration 19-3 2012 May 30: Purchases 580,000 Accounts payable 580,000 To record purchase from Hongkong supplier : 5 ‘for 100,000 Hkg8, converted ai gelling spot ‘rate of P5.80 to 1 Hkg8. y June 1: “Accounts payable ; 580,000 ~Notes payable 580,000 To record borrowing of 100,000 Hkg$ from bank on 30-day, 12% loa to be repaid in Hongkong Wall. ‘payment of liability to Hongkong supplier. June 30: Notes payable 580,000 Interest expense 5,880 Foreign exchange loss 8,000 Cu 593,860 * To record payment af 101,000 Hkg8 to pay 100 008 Hes, 30-day, 2% rote wogetier will Ikg$_ interest (100,000 HkgS x 12% x 30/360) at selling spot rate of 1HkgS = P5.88 (101,000 Hkg8 x P5.88 = P593,880) Scanned with CamScanner» 354 Chapter 19 Loan Receivable Denominated in Foreign Currency currency from the fale made to a Japanese customer (¥is the symbol for Japanese Assume’ ot ls mae ae promissorynote denominated in foreign ‘might be illustrated by the following journal entries: -Yen). This transactic Mlustration 19-4 2012 Mar. 31 Notes receivable 430,000 Sales = 430,000 To recorsalp to a Japanese customer for 60-day, 12% promissory note for ¥1,( translated at buying spot rate of ¥1 Api. 30 Notes receivable 20,000 Interest receivable (¥1,000,000 x 12% x 30/360) x P0.45 4,500 Interest income 4,500 Forex gain [¥1,000,000-x (0.45-0.43)] 20,000 To recognize forex gain for the increase in the spot rate from March 31, to-April 30 and to accrue interest on notes receivable, valued at the buying spot rate of ¥ = PO.AS. May 30 Cash (¥1,020,000 x P0.44) 3 448,800 —— Forex loss 10,100 Notes receivable fi 450,000 Interest receivable 4,500 “Tnterest income [(1,000,000 x P0.44) x 12% x 30/360] 4,400 To record receipt and conversion to pesos of ¥1,020,000 note including interest of ¥20,000 (41,000,000 x 12% x 60/360), and the recognition of forex loss of P10,100 [(#1,000,000 + ¥10,000) x (045 - P0.44)] Foreign Exchange (forex) Gains and Losses From the foregoing illustrations, it shows that increases in the selling spot rate for a foreign currency required bya Philippine Co1 idenominated in that currency generate foreign exchange (forex) losses to the Company because more Philippine peso are required to obtaih the foreign currency. Conversely, decreases in the selling spot rate produce foreign exchange (forex) gains to the company are requited to obtaiitthe foreign currency. In contrast, fora foreign currency to be received by a Philippine THe, oa Fieve, [oa Scanned with CamScannerAccounting For Foreign Currency Transactions 355 company in settlement ofa receivable denominated in that currency generate foreign exchange (forex) gains to the company; decrea: inthe buying spoCtat leproduce foreign exchange (forex) losses. These relationships are summarized below: ns Statement of FP Effect on Statement account balance ofCI affected reported effect Increase in exchange rate: Importing transactio Payable Increase Loss Exporting transaction Receivable Increase Gain Decrease in exchange rate: Importing transaction Payable Decrease Gain Exporting transaction Receivable Decrease Loss Foreign exchange gains and Jo: are inde inthe measurement oft near the accounting peri which the exchange rate (spot rate) changes (P. DERIVATIVES “(tl winds ep! £ we! ae G pat é Derivatives are financial.contracts or éther.contraat with aifehresof the following characteristics (PAS 39): = - (1) Whose value changes in response to changes in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable (sometimes called the "underlying". For example; a call option that gives the holder a right to purchase a share for a fixed price increases in value when the price of that share increases. In that case, the share price is an underlying that affects the value of the option. (2) _Itrequires no‘nitialmetinvestmentor an initial net investment that is sales than would be required for other types of contracts that would be expectedtoHave a similar response to changes in market factors. For instance, a call option on a share can usually be purchased for an amount much smaller than what be required to purchase the share itself. (3) Itis settledata-fature date. For instance, a call option on a share is settled on tn faturedatdon which the holdermayexercise the call optionto purchasethe share for@fixed price, rf Common examples of derivatives are forwardcontracts, sw Loptions. In the “” deine’ statement of financial position, derivatives are measured at faii . As a general 4° tule, changes in the fair value of a derivative ate recognized in pi However, 5 when the derivative is used to’ isk’and special liedge accountingtonditions are‘. met, some orall changes in fair value are recognizedas.a separatecomponentofequity, {/| Of Bik / ha © Scanned with CamScanner356 Chapter 19 HEDGING Hedging fsafisk The general provisions on hedging and hedge.accounting are contained in PAS % Aedging relationship had two components namely: () Hedgediten. Nhedgetemisanasst aii, im commitment, fghprobabls forecast transaction, or net investment ina foreign operati: oh be desi nated asa hedged i item, the designated becped item should expose the: fat lonekofchanges i in 7. (2) Hedging instrument. A hedging instrument is a designated derivative ora designated non-derivative financial asset or non-derivative financial liability Whose fair value or cash flows are expected to offset changes in fair value or cash flows ofa designated foreignexchange fonvafd contracts, hedged item. Examples of hedging instruments are ‘eteantectspeonns 11 baneaeniassireaianse to a erent and that could affect profitot loss: Under fair value accounting, changes in the fair value of the hedging i instrument and of the hedged item are ed in 2 6 ntand the hedged item ifthe is fu ‘ally efi tive;bé Ee chaee it in fair value will offset each other. If the. hedge! is not 00 percent effective (i.e., the changes in fair value do not fully offset), such ineffectiveness is automatically.reflected in profitorloss. Cash flow hedge: This is a hedge of the exposure to variability in is attributable to particular risk associated with a recogni: et orliabiljty ora highly probable fgfecast ansactions and penltatee ~ flow hedge accoul anges inthefair value value ‘of the hr iging.instraments Th“ attributableto the! hedge risk: are deferred (rather that being reco} immediately ., iduive\ in profit or loss), The accounting for the hedged i © Heigenfonstlaiesnensttyirelsrropersteh. This is ahedge of the exposure to foreign currency exchange gains or losses on an entity's netinvestment in.a foreign operat tion (which is the amount of the entity's interest in the net asset of that operation). Hedges ofnet investments in foreign operations are accounted for like . This is discussed in the next Chapter. Scanned with CamScannercu nN Accounting For Foreign Currency Transactions cep ~ [60 357 ie 4 = ar Hedge Accounting - {* % Hedgeaccounting recognizes the (ftsetti ‘changes in the fair value of the hedging instrument ani ing period. (However, under BSP Circular 476, banks are requit rket-to-market valuation for securities at fair value through profit or loss ona daily basisatough they ee partied to do the booking every end of the month provided it has an adequate mechanism in place to determine the daily fair values of the securities) To qualify for hedge accounting, the hedging relationship should meet the following conditions: os Cy There isa fornal designation and doc{imghtation of the hedging relationship and the entity's risk manager ent objectiveand strategy for undertaking the hedge. Hedge accounting is permitted only from the date such designatior. and documentation is in place. & ene 2) Thehedgeisexpected hlyeffective in echering offsetting changes in fair value or cash flows attributable to the hedged risk. GJ The effectiveness ofthe hedge can (A) The hedge is 4ssessed'on an.angoingbasis and determined actually to have been highly effective throughout the financial reporting periods for which the hedge was designated. Re) For€ash flow hedges, a hedged forecast tr {transaction must be highly pro )bable and must present an exposure.to variatidns invcash flows that could ultimately affect profitorloss. FOREIGN CURRENCY FORWARD. D CONTRAET. ‘A foreign cuireneyfonwan contract isan agssem Erigetiee ie ncies of different countries on aspecified farure date. a dspecified rata’ a(the forward rate). The fair value of.a-foreign currency: forward rd contract i is determined by re: angi onward sats dlife The changes in the forwa may g ounted tothe z Foreign currency forward contracts are usually entered into for the following purposes: 1. A fairvaluehhedge — this includes hedges against : Areognzed feign cumeny denominator ily y * ‘An tintérognias ign.cumency/firm.cor onimiiment. 2. Acute this includes hedges against he change incash flows associated Scanned with CamScannerwe 358 : Chapter 19, ma Wary AN ACU ‘ \ A foreign cumency exposed uel set posiionisthe ces} of assets denominated in’ foreign currency over the liabilities denominated in the same foreign currency and translated at the current rate. A foreign currency expdsed! net liability position is the excess of liabilities denominated in a foreign currency over assets denominated in that foreign currency and translated at the qurrent ate Fair Value Hedge of an Exposed Net Asset or Net Liability Position _Companies enter into forward contracts to limit the amount of gains or losses from the delayed settlement of foreign-currency-denominated accounts receivable and payables. A forward contract to hedge an exposed asset or liability position may be used by either importer to hedge accounts payable, i.e., acompany enters into a forward contract to purchase foreign currency and by exporters to hedge accounts receivable, i.e., a company enters into a forward contract to sell foreign currency for future delivery. When the exposed asse bility position is completely’ hedged onet forex gaindor losses is to be recognized. Forex gains and the offsetting losses are to be recognized in the computation: ofcomprehensivei income and of the carrying value of the hedge items. = Normally, banks set the forward rate at an amount different from the spot rate dfithe contract date. The difference between these rates represents the c stotavoiding the risk of exchangé rate flu . ; ho Illustration of Hedging an Exposed-Net Liability. _Assume that on October 1, 2012, Manila-Corporatior goods on account from Crown Company of Japan for 500,000 yen. No let edit is required by ing date. forthe sales December 1, 2012, and the payment nary 30,2013. In view of the sale, Manila Corporation buy500.000 yen from Philippine National Bank ange rates are as follows: at Forward Rate for ~ Date Remaining Term of Contract December 1,2012. Wh P¥ens Bods. < ————> Gyen=P930) = 1 EHO" December 31,2012 1Yen=P0.48 + “FYen=P0.S1 January 30, 2013 ‘ 1Yen=P0.49 L¥en=P049) The change in the value of the forward contract is not discounted. Scanned with CamScanner359 Accounting For Foreign Currency Transactions The journal entries on the books of Manila Corporation to record the purchase (importation), the forward contract, year-end adjusting entries, and the final L settlement are as follows a inventory system is used): Mlustration 19-5 y Relating to Importing Transactions December 1, 2012: coe /e Relating to Forward Contract Inventory 225,000 Forward Contract Receivable-EC 250,000 Accounts payable FC. 225,000 Forward Contract Payable 250,000 Purchase of inventory Purchase of forward contract = (500,000 yen x P0.45) (500,000 Yen x PO.50)* December 31, 2012: Forex loss 15,000 Forward Contract Receivable-FC 5,000 Accounts payable ~ FC 15,000 Gain on forward contract To adjust accounts payable to To record increase in value of the Year-end spot rate: Forward contract (500,000 Yen x PO.03) (500,000 Yen x P0.01) January 30, 2013: a Accounts payable-FC 240,000 Eaoreign currency) 245,000 5.000 Lairon-Forward Contract 19,000 245,000 ~~} “Recei 255,000 To record receivable of $00,000 Yen According to the forward contract. Fores loss Ges coy Be leet of the Accounts payable at P0.49 “Forward Contract Payable-P 250,000. > Cash ‘To Yecord settlement. rik be 9 ef pheke Alternative entries: a. Analtemative for this entry would balan ein describe the executor contract. This treatment is acceptable since the forward contract has a fair valu sleepin thatdate. However, recognizing the forward contract with entries helps in understanding the relationships in using forward contracts. If no entry were made at inception, subsequent changes in the value of the forward contract (hedging instrument) would still be recognized by either debiting or crediting the forward contract receivable in the case of unrealized gainvor loss, respectively. b. — Ifamemo entry was initially used to record the forward contract, the settlement of the contract would be recorded as follows: MI ae aot ee eee ae Receivable - FC ma i Cash. > my if FMB = cham in anhup std Usain rel g zidicte il pele as abagaln tos a Scanned with CamScanner‘tiny ie be tg Ect eal ae Sete Rie tian Sa coming iran poten list {Eitonarwnehnge swale Searles Tien {pine berm i Manas aera ce noe an 0 Siaeacavsenectia ‘sin soccer Resume” Bas Eierdcdetows econ legacy en san Savanna ae ecaneres Toa wane ee hes cae spook cient peensoternav arin imaga ‘pectin yt nt eget eet EXaiemwetaeenmcrlMsmeiass | yeikersecencouoigia ieee ERG Ea casa meres | Sa i a Tuterpnctoindedetalatontevilteerone | Rete eden natu ty ona , Baa {contract This is because the undertying lability is _dpibe hedge: Usually the ats friar soot eux in bed E ie Seca tect a Ss ea tctomn feel pea armani sil acl Sabeepcwaeaasknetnms | Sirubasiaineess ete nas Fecieacucciwmetaiensinawcame | Scuinenidonmen ndercheraecren eraateees Peepers =e ere See Ree ‘Same ier nga otioner cnc ae Brey eis eet “intnipigieenseeag demectreetneeae: ee a ocean Ta 5s 751 ‘fa company enters a forward contrad for foreign currency units in excess of the {scgncueney unread teapot eet nity potn evden 2s el conpuoathe date ‘Stoners een teeta Te ta Dibedizece inde cps ite alot mauyeandecagei ae 4 ge fas at Cope ccs gots inthe amnoantoe | thou a Biota Sancane cnt tonaeonncrs aro esas = acronis drop FAO al shel eee eve arltpetandbsover betel Scanned with CamScannergd Ae ott “ = ee acim =) seamen = — comigrated cot Oe deran cot eran ety, ae Bere tnt SS Hive oeoe iene meme nate a Saocnelanie 7 eseniel pea a ieee pas mt eS ae eee i eee =. = nt Ea fratney ae ‘ey Otueretion fram the Abo Enis ‘pC cenit no reread te sont te cemce ed reg Ee ear eet a ‘Ticsinonsiea Coirpis estar bene Sates i yes Ema ffst Deewana tae sense = ps Srvhatadeasecistenel ah EO ences E /emtamanmiugy ame Sincuige ae psemngte nso ttay ec ee conuerancat z Ses Edin re aimee sande toe opens eR ees eer 2s dcietalemotestnltSansoey tne aati tee Do peda 5 ‘Beco PlpnoCorporion ad aquired Saad one forte sae amon aie ae Ssiprcateny eth tein min sect eetgeas pmareaeay Sa WS hpeneed aahaiiecticcanes merase ‘ieyen hr decom cd tot pase 1000 ae ‘te iipine psn anno few cont. shisbttnbestsrniaag ang tnt ‘Tipo sanalet Pos, Scanned with CamScannercacti - | ee ape = none, ne ee Ppt A ie “hat ston earn sng ates eee nso suring he puase was made ‘Sonera 0000 FC and eien epee ePS Ia poche inne aaa Fe corfnte, 8000 ay Tomer ic bee OCT Cree Gate Scanned with CamScannerScanned with CamScanner“Tekno eine tron cntate 1. 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Ihe does hel pay the option seller ego and rose soc tt can sl roy Pee 000 (0 sere Feo) He ee P2000 68,00 P60} option ree) {oral os of P00 bedaotexercse bel int rec 4 tated man sot ata 6 te tie Teesen Dorreilaseryaaccceopon saan ta omeie no Fe Ce Poa a cae FOREIGN CURRENCY OPTION USED TONEDGE ni wt [SFOREIGN CURRENCY DENOMINATED ASSETS Searing cuba Angina sl 0 hres foP17 Secrpomatantiee ke cpon bag th on Soest: 1. Recpiobgewipy be opionseterte pian fP2,00(,00%72.00) 2 atdeetot3 ends te sucicded PLL 4 Teapot wicca 100 hres om hate for 1000 (1. shes Pi), ive sols toto sles, and ene? 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Therefore, it decides to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 2012, Mega purchases call options for 10,000 barrels of oil at P30 per barrel at a premium of P2 per barrel, with a March 1, 2013, call date. The following is the pricing information for the term of the call: Futures Price Spot (for March 1, 2011, Date Price delivery) November 30, 2012 P30 P31 December 31, 2012 31 32. March 1, 2013 3B ‘The information for the change in the fair value of the options follows: Date Time Value __Intrinsic Value Total Value November 30, 2012 20,000 P -0- 20,000 December 31,2012 6,000 10,000 16,000 March 1, 2013 30,000 30,000 On March 1, 2013, Mega sells the options at their value on that date and acquires 10,000 barrels of oil at the spot price. On June 1, 2013, Mega sells the oil for P34 per barrel. Required: a. _ Prepare the journal entry required on November 30, 2012, to record the purchase of the call options. b. Prepare the adjusting journal entry required on December 31, 2012, to record the change in time and intrinsic value of the options. c. Prepare the entries required on March 1, 2013, to record the expiration of the time value of the options, the sale of the options, and the purchase of the 10,000 barrels of oil. . d. Prepare the entries required on June 1, 2013, to record the sale of the oil and any other entries required as a result of the option. Scanned with CamScanner