Problem I

On December 1, 2014, VENEZUELA COMPANY expects to purchase a machine for FC

1,200 from a foreign country on March 1, 2015. The transaction is probable but there is
no binding agreement for this purchase and is to be denominated in FC. Thus,
transaction and settlement for the purchase of the machine is March 1, 2015. Also on
December 1, 2014, the company entered into a forward contract to purchase FC 1,200
on March 1, 2015 for 40.15. The company designates the forward contract as a hedging
instrument in a cash flow hedge of the exposure to increases in FC rate. Prepare entries
to record the above hedging item and instrument transactions.

12/1/14 12/31/14 3/1/15

Spot rate P40.00 P40.30 P40.2
30-day forward rate 40.05 40.45 40.40
60-day forward rate 40.1 40.4 40.5
90-day forward rate 40.15 40.45 40.6

Problem II

On June 2, 2014, REPUBLICA DOMINICANA INC. ordered merchandise from a foreign

supplier for FC 350,000. Delivery was scheduled for August 1, 2014 with payment to be
made in full on delivery. Upon placing the order, the company immediately entered into
a 60-day forward contract with its bank to purchase FC 350,000 on August 1 at the
forward rate of P1.28 per FC. The year-end is June 30.On August 1, the merchandise
was received and REPUBLICA DOMINICANA purchased the FC from the bank and
paid its supplier. The relevant exchange rates are as follows:

6/2/2014 6/30/2014 8/1/2014

Spot rate P1.26 P1.268 P1.272
30-day forward rate 1.27 1.275 1.276
60-day forward rate 1.28 1.279 1.278
Prepare all the journal entries pertaining to the hedged item and hedging instrument
assuming the following:

a. Fair value Hedge Designation

b. Cash Flow Hedge Designation
c. Hedging- not a hedge accounting

Problem III

On December 1, 2014, PUERTO RICO CORPORATION paid cash to purchase a 90-

day “at-the-money” call option for 60,000 Thailand Baht. The option’s purpose is to
protect an exposed liability of 60,000 Thailand Baht relating to an inventory purchase
received on December 1, 2014 and to be paid on March 1, 2015.

12/1/14 12/31/14 3/1/15

Spot rate P1.2 P1.28 P1.27
Strike Price 1.2 1.2 1.2
Fair value of call P360 P5,040 P4,200
option
Prepare entries to record the above hedged item and instrument transactions.
Problem IV

COLOMBIA COMPANY entered into a forward contract for speculative purposes in

anticipation for a gain, and enters into a contract on December 1, 2014 to acquire FC
1,000 on March 1, 2015 for 40.15. Relevant rates follow:

Spot rate Forward rate

12/1/14 P40.00 P40.15
12/31/14 40.3 40.4
1/1/15 40.2 40.2
Prepare all the entries necessary with respect to the above transactions.

Problem V

EL SALVADOR INC. ordered equipment from foreign supplier on November 20, 2014 at
a price of 50,000 FC when the spot rate was P0.20 per FC. Delivery and payment were
scheduled for December 20, 2014. On November 20, 2014, the company acquired a 30-
day call option on 50,000 FC at a strike price of P0.20 paying a premium of P100.00. It
designates the option as fair value hedge of a foreign currency firm commitment. The
fair value of the firm commitment is measured by referring to changes in spot rate. The
part arrived and the company makes payment accordingly. The relevant rates and
option premium are as follows:

11/20/14 12/20/14
Spot rate P0.20 P0.21
Strike Price 0.20 0.20
Fair value of the option P100 P500
Prepare all the entries in the books of the company for the above transactions.