ESGUERRA, ANGELENE C.

BSA-3202

1. The following data apply to Confidence Company’s purchase of 45,400 Belgium francs under a forward
contract dated November 2, 2023, for delivery on January 31, 2024:

11/02/2023 12/31/2023 01/31/2024

Spot rate P 55.75 P53.90 P54.50
30-day forward rate P51.30 P56.15 P53.20
60-day forward rate P57.65 P52.30 P55.75
90-day forward rate P54.25 P55.45 P52.10

Confidence entered the forward contract to speculate in the foreign currency.

a. In its income statement for the year-end 2023, what is the amount of gain/loss should Confidence report
from this forward contract?

30-day forward rate (12/31/2023) P56.15

90-day forward rate (11/02/2023) (54.25)

Change in forward rate P1.9

Multiply by Belgium francs: 45,400

Gain on forward contract – 12/31/2023 P86,260

Reason: It is a gain on forward contract because Confidence Company locked-in at a lower price
compared to the 30-day forward rate at year-end. As a buyer, they are naturally interested in paying a
lower amount.

b. In its income statement for the year-end 2024, what is the amount of gain/loss should Confidence report
from this forward contract?

Spot rate (01/31/2024) P54.50

30-day forward rate (12/31/2023) (56.15)

Change in forward rate P (1.65)

Multiply by Belgium francs: 45,400

Loss on forward contract – 01/31/2024 P74,910

Reason: It is a loss on forward contract because Confidence Company assumably locked-in at a

higher price compared to the spot rate at settlement date. But as a buyer, they are naturally interested
in paying a lower amount. Hence, paying a higher amount constitutes a loss to them.

2. Ebony Jay Corporation purchased goods from Proxima Midnight Company of India for 600,000 INR. The
merchandise was received on November 1, 2023, with payment due in Indian Rupees on January 30, 2024.
Also on November 1, 2023, Ebony Jay Corporation entered into a forward contract with Land Bank to purchase
transaction. The hedge is accounted for as fair value hedge. The following direct exchange rates were
provided:

11/01/2023 12/31/2023 01/30/2024

Spot rate – selling 0.82 0.83 0.85
Spot rate – buying 0.80 0.81 0.81
90 day forward-buying 0.81 0.82 0.83
90 day forward-selling 0.823 0.82 0.83
60 day forward-buying 0.826 0.821 0.822
60 day forward-selling 0.84 0.845 0.843
30 day forward-buying 0.83 0.831 0.832
30 day forward-selling 0.844 0.829 0.846
a. What is the fair value of the forward contract on November 1, 2023?

b. How much is the gain/loss to be recognized with respect to the hedged item on December 31, 2023?

c. How much is the gain/loss to be recognized with respect to the hedging instrument on December 31, 2023?

d. How much is the gain or loss to be recognized with respect to the hedged item on January 30, 2024?
e. How much is the gain/loss to be recognized with respect to the hedging instrument on January 30, 2024?

f. What is the fair value of the forward contract on January 30, 2024?

g. What is the net impact on the company’s income in 2024 as a result of this hedge?

3. On December 1, 2023, Bricksman Co. estimates that 5,000 units of inventory will be purchased from a US
supplier on March 1, 2024 for $2,000. The transaction is probable and it is to be denominated in US
Dollars. Sales of the inventory are expected to occur within the year.

On the same date, the company entered into a 90-day forward contract to purchase $2,000 on March 1,
2024.

The exchange rates available on various dates are as follows:

12/01/2023 12/31/2023 03/01/2024

Spot rate P52.00 P52.45 P52.20
30-day forward rate 52.10 52.50 52.35
60-day forward rate 52.20 52.60 52.40
90-day forward rate 52.30 52.75 52.45

On March 1, 2024, the purchase transaction materialized. 60% of inventory items were sold for P70,000 on
June 30, 2024 while the remaining 40% were sold for P52,000 on September 30, 2024.
1. How much is the gain/loss to be recognized in the income statement with respect to the hedged item on
December 31, 2023?

2. How much is the gain/loss to be recognized in OCI with respect to the hedging instrument on December
31, 2023?

3. How much is the gain or loss to be recognized in the income statement with respect to the hedged item
on March 1, 2024?

4. How much is the gain or loss to be recognized in OCI with respect to the hedging instrument on March 1,
2024?