Solution to Chapter 20

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Chapter 20

Problem I

In relation to the above data, the following relevant exchange rates are needed for further analysis in relation to hedged item and hedging instrument:

Spot Rate

Forward Rate for 3/1/20x5 Settlement

(or Expiration) December 1, 20x4………. P40.00 P40.15 (*90 days) December 31, 20x4………. P40.30 P40.40 (**60 days) March 1, 20x5……….. P40.20***

*original 90-day forward rate on 12/1/20x4 **remaining or current forward rate on 12/31/20x4

***the forward rate at expiration or maturity is equal to spot rate as the remaining period of the forward contract is zero.

1. Not a Hedge Accounting - Importing Transaction (Exposed Liability).

a. The journal entries to record the hedged item and hedging instrument are as follows: Gross Method

Hedged Item – Importing Transaction

(Exposed Liability) ( Broad Approach or Gross Position Accounting)Hedging Instrument – Forward Contracts December 1, 20x4

Transaction Date Date of Inception/Hedging of 90 days Forwards Inventory ($1,200 x P40)…………... 48,000 FC Receivable from XD……… 48,180

Accounts payable………. To record purchase of goods on account using the spot rate on 2/1/1/x4.

48,000 Pesos Payable to XD (P40.15 x $1,200)

To record forward contract to buy $12000 using forward rate.

48,180

*XD – exchange dealer

If the financial statements are prepared on December 1, 20x4, the value of the forward contract is as follows:

Balance Sheet Presentation on 12/1/20x4 FC Receivable from XD……… P48,180 Less: Pesos payable to XD……… 48,180 Forward Contract (fair value)………. P 0 December 31, 20x4

(Balance Sheet Date an intervening financial reporting date)

FC Transaction Loss 360 FC Receivable from XD……… 300 Account payable……….

[P40.30 – P48.00) x $1,200 To record a loss on the exposed liability denominated in foreign currency.

360 FC Transaction Gain [(P40.40 – P40.15) x $1,200] To record a gain on foreign currency to be received from FC dealer.

300

*FC – foreign currency

Balance Sheet Presentation on 12/31/20x4 FC Receivable from XD (P40.40 x $1,200)… P48,480 Less: Pesos payable to XD (fixed at P40.15) 48,180

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Forward Contract (fair value – asset)……… P 300 On March 1, 20x5 (the transaction date and the settlement date), the journal entries are:

March 1, 20x5

Settlement Date Settlement Date/Date of Expiration of Contract

Accounts payable 120 FC Transaction Loss 240

FC Transaction gain……. [(P40.20 – P40.30) x $1,200}…….. To record a gain from 12/31/x4 to 3/1/x5 on liability denominated in FC.

120 FC Receivable from XD [(P40.40 – P40.20) x $1,200] To record a loss on foreign currency to be received from FC dealer.

240

Pesos Payable from XD………. 48,180 Cash………. To record payment to exchange dealer. 48,180 Investment in FC………. 48,240 FC Receivable from XD

To record receipt of foreign Currency.

48,240

Accounts payable……… 48,240 Cash………. 48,240 Cash (refer to note below)………

To record payment of accounts payable at spot rate.

48,240 Investment in FC………. To record conversion of US dollars into cash for payment of accounts payable.

48,240

Note: This entry may be ignored and instead the Investment in FC will be outright credited in payment of accounts payable. For succeeding illustrations the conversion of FC to peso cash to settle items acquired will be used.

These transactions can be summarized in the following table.

Hedged Item (Exposed Liability) Hedging Instrument (Forward Contract) Accounts Payable Balance Transactiongain (loss) FC Receivable Balance Transactiongain (loss)

12/1/20x4 P48,000 12/1/20x4 P48,180

12/31/20x4 48,360 (P 360) 12/31/20x4 48,480 P 300

3/1/20x5 48,240 120 3/1/20x5 48,240 (240)

Total gain (loss) (P 240) P 60

Thus, the net effect is a P150 loss when the forward contract is used. “Net” Position Accounting

The following illustrates the effects of “net” position accounting using the same illustration above:

Hedged Item – Importing Transaction

(Exposed Liability) Hedging Instrument – Forward Contracts( Net Position Accounting) December 1, 20x4

Transaction Date Date of Inception/Hedging of 90 days Forwards Inventory ($1,200 x P40)…………... 48,000 Memorandum entry only,

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To record purchase of goods on account using the spot rate on 2/1/1/x4.

contract is zero.

It should be noted that the accounts payable for the inventory purchase is recorded using the spot rate on the transaction date (on December 1, 20x3).

December 31, 20x4

(Balance Sheet Date, an intervening financial reporting date)

FC Transaction Loss 360 Forward Contract 300

Accounts payable [P40.30 – P40.00) x $1,200 To record a loss on the exposed liability denominated in foreign currency.

300

Forward contract (debit balance – asset)………. P 300

The income statement would report an exchange loss of P360 and an exchange gain of P250.

On March 1, 20x5 (the transaction date and the settlement date), the journal entries are: March 1, 20x5

FC Transaction gain……. [(40.20 – P40.30) x $1,200}…….. To record a gain from 12/31/x4 to 3/1/x5 on liability denominated in FC.

120 Forward Contract

[(P40.40 – P40.20) x $1,200] To record a loss on foreign currency to be received from FC dealer.

240

Accounts payable (P40.20 x $1,200) 48,240 Cash……….. 60 Cash (P40.20 x $1,200) or *

To record payment to exchange dealer (XD)

48,240 Forward Contract

Net settlement received from the dealer on expiration or maturity date of forward contract.

60

*(P40.15, forward rate on the date of inception x $1,200) + cash received from the exchange dealer of P50. Forward Contract (Asset/Liability) 12/31/x4 Gain… 300 240… …..3/1/x5 Loss 3/1/x5 Net…… 60 60

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b.

b.1. P360 loss - [(P40.30 – P40.00) x $1,200] b.2. P300 gain - [(P40.40 – P40.15) x $1,200]

b.3. P360 loss – P300 gain = P60 net loss (decrease in net income) b.4. P120 gain - [(P40.20 – P40.30) x $1,200}

b.5. P240 loss - [(P40.40 – P40.20) x $1,200]

b.6. P240 loss – P120 gain = P120 net loss (decrease in net income) c.

c.1. P48,360 - [P40.30, spot rate/current rate on the balance sheet date x $1,200] c.2. P48,240 – [P40.20, spot rate on the date of settlement x $1,200]

d.

d.1. P48,180 - [P40.15, original (90-day) forward rate on the date of hedging x $1,200] d.2. No entry required

d.3. Same amount with d.1 d.4. No entry required e.

e.1.

Gross Method

FC Receivable from XD……… P48,180

Less: Pesos payable to XD……… 48,180

Forward Contract (fair value)………. P 0

Net Method: Zero. No entry required. e.2. P300 asset

Gross method

FC Receivable from XD (P40.40 x $1,200)… P48,480 Less: Pesos payable to XD (fixed at P40.15) 48,180 Forward Contract (fair value – asset)……… P 300 Net Method: P300.

Forward contract (debit balance – asset)… P 300 e.3. P60 debit balance – asset

Gross method

FC Receivable from XD (P40.20 x $1,200)… P48,240 Less: Pesos payable to XD (fixed at P40.15) 48,180 Forward Contract (fair value – asset)……… P 60 Net Position

Forward Contract (Asset/Liability) 12/31/x4 Gain… 300 240… …..3/1/x5 Loss 3/1/x5 Net…… 60

f. P48,000 [P40, spot (current) rates on the date of transaction x $1,200]

2. Fair Value Hedge – Hedging an Unrecognized Foreign Currency Firm Commitment. Gross Method (for Net Position – same with Exposed Liability)

a. The journal entries to record the hedged item and hedging instrument are as follows: Hedged Item – (Unrecognized

Foreign Currency Firm Commitment) ( Broad Approach or Gross Position Accounting)Hedging Instrument – Forward Contracts December 1, 20x4

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Date of Commitment (Date of Issuing the Purchase

Order) Date of Inception/Hedging of 90 days Forwards No journal entry is required to record the firm FC Receivable from XD……… 48,180 commitment. The forward contract is designated as a

hedge of the firm commitment to purchase inventory on March 1, 20x5. The hedge is accounted for as a fair value hedge.

Pesos Payable to XD (P40.15 x $1,200)

To record forward contract to buy $1,200 using forward rate.

48,180

December 31, 20x4

FC Transaction Loss 300 FC Receivable from XD……… 300 Firm Commitment

[P40.40 – P40.15) x $1,200 To record a loss on firm

commitment using the change in the forward rate.

300

Balance Sheet Presentation on 12/31/20x4

Assets Liability

FC Receivable from XD (P40.40 x $1,200)....…...P48,480 Less: Pesos Payable to XD(fixed at P40.15)….… 48,180 Forward Contract (fair value)………P 300

Firm Commitment………...P 300

Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract

Firm Commitment………… 240 FC Transaction Loss ……… 240

FC Transaction gain……. To record a gain on fair value of firm commitment.

240 FC Receivable from XD……… [(P40.40 – P40.20) x $1,200] To record a loss on foreign currency to be received from exchange dealer.

240

To record receipt of foreign currency.

48,240

Inventory (P40.20 x $1,200)…………. 48,240 Cash………. 48,240

Cash ……… 48,240 Investment in FC………..…... 48,240 To record the purchase of

inventory for $1,200 at spot rate. To record conversion of USdollars into cash for purchase of inventory.

Firm Commitment………. 60

Inventory………. 60

To remove the carrying amount of the firm commitment from the balance sheet6 and adjust the initial carrying amount of the machine that results from the firm

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commitment. This treatment is an accordance with PAS 39 par. 89b.

Firm Commitment 3/1/x5 Gain……. 240 300… …..12/31/x4 Loss 60 60 3/1/x5 Net b. b.1. P300 loss - [(P40.40 – P40.15) x $1,200] b.2. P300 gain - [(P40.40 – P40.15) x $1,200] b.3. P300 loss – P300 gain = P0 b.4. P240 gain - [(P40.40 – P40.20) x $1,200} b.5. P240 loss - [(P40.40 – P40.20) x $1,200] b.6. P240 loss – P240 gain = P0

c. – same with Exposed Liability

c.1. P48,180 - [P40.15, original (90-day) forward rate on the date of hedging x $1,200] c.2. No entry required

c.3. Same amount with d.1 c.4. No entry required d.

d.1. Zero, no entry required

d.2. P300 liability, [(P40.40 – P40.15) x $1,200] d.3. P60, liability

Firm Commitment

3/1/x5 Gain……. 240 300… …..12/31/x4 Loss 60 3/1/x5 Net e. Same with Exposed Liability

e.1. Net Method: Zero. No entry required. Gross Method

e.2. P300 asset

Net Method: P300.

Forward contract (debit balance – asset)… P 300 Gross method

FC Receivable from XD (P40.40 x $1,200)… P48,480 Less: Pesos payable to XD (fixed at P40.15) 48,180 Forward Contract (fair value – asset)……… P 300 e.3. P60 debit balance – asset

Gross method

FC Receivable from XD (P40.20 x $1,200)… P48,240 Less: Pesos payable to XD (fixed at P40.15) 48,180 Forward Contract (fair value – asset)……… P 60 Net Method

Forward Contract (Asset/Liability)

12/31/x4 Gain… 300 240… …..3/1/x5 Loss 3/1/x5 Net…… 60

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f. P48,240, spot rate on the date of transaction.

Inventory at spot rate on the date of transaction (P40.20 x $1,200)……….P48,240 g. P48,180, original (90-day) forward rate on the date of hedging

Inventory at spot rate on the date of transaction (P40.20 x $1,200)……….P48,240 Less: Firm Commitment account – liability, 3/1/20x5………. 60 Inventory at original (90-day) forward rate on the date of hedging, P40.15….P48,180 3. Cash Flow Hedge - Hedge of a Forecasted Transaction.

Gross Method (for Net Position – same with Exposed Liability)

a. The journal entries to record the hedged item and hedging instrument are as follows: Hedged Item –

Forecasted Transaction ( Broad Approach or Gross Position Accounting)Hedging Instrument – Forward Contracts December 1, 20x4

Date of Forecast Date of Inception/Hedging of 90 days Forwards No journal entry is required to record the forecasted FC Receivable from XD……… 48,180 transaction. The forward contract is designated as a

hedge against the exposure to increases in the dollar rate on March 1, 20x5.

48,180

December 31, 20x4

No entry required, since it is only a forecasted FC Receivable from XD 300 transaction not guaranteed such as firm commitment. OCI – Exchange Gain (B/S)

[(P40.40 – P40.15) x $1,200] To record a gain on foreign currency to be received from FC dealer.

300

FC – foreign currency; OCI - Other Comprehensive Income; B/S – Balance Sheet

Balance Sheet Presentation on 12/31/20x4 FC Receivable from XD (P40.40 x $1,200)… P48,480 Less: Pesos payable to XD (fixed at P40.15) 48,180 Forward Contract (fair value - asset)…..….. P 300 On March 1, 2011 (the transaction date and the settlement date), the journal entries are:

March 1, 20x5

Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract OCI – Exchange Loss (B/S)……… 240

FC Receivable from XD……… [(P40.40 – P40.20) x $1,200] To record a loss on foreign currency to be received from FC dealer.

240

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currency.

Machinery (P40.20 x $1,200)………... 48,240 Cash………. 48,240

Cash ……… 48,240 Investment in FC………. 48,240 To record the purchase of

equipment for $1,200 at the spot rate of P40.20

To record conversion of US dollars into cash for purchase of machinery.

OCI – Exchange Gain……….. 60 Other Comprehensive Income

Machinery……….. 60 3/1/x5 Loss 240 300… ….12/31/x4 Gain

To remove the gain recognized in 60 60 3/1/x5

OCI and adjust the carrying amount if the machine that results from the hedged transaction by this amount. Also, to record the basis adjustment of the carrying value of the equipment. This entry is recorded if PAS 39 par. 98b is adopted.

b.

b.1. Gain or loss on hedged item, 3/1/20x4: None, no entry required b.2. P300 gain, other comprehensive income - [(P40.40 – P40.15) x $1,200] b.3. None.

b.4. Gain or loss on hedged item, 3/1/20x4: None, no entry required for gain or loss. the only entry is to record the purchase of machinery.

b.5. P240 loss, other comprehensive income - [(P40.40 – P40.20) x $1,200] to be recorded on March 1, 20x5. The balance of the OCI – gain amounted to P60 computed as follows:

Other Comprehensive Income 3/1/x5 Loss 240 300… ….12/31/x4 Gain

60 3/1/x5 c. Same with Exposed Liability

c.1. Net Method: Zero. No entry required. Gross Method

c.2. P300 asset

Net Method: P300.

FC Receivable from XD (P40.40 x $1,200)… P48,480 Less: Pesos payable to XD (fixed at P40.15) 48,180 Forward Contract (fair value – asset)……… P 300 c.3. P60 debit balance – asset

Gross method

Forward Contract (Asset/Liability)

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3/1/x5 Net…… 60 4. Not a Hedge Accounting – Speculation.

Gross Method (for Net Position – same with Exposed Liability)

a. The journal entries to record the hedged item and hedging instrument are as follows: Hedged Item - Speculation ( Broad Approach or Gross Position Accounting)Hedging Instrument – Forward Contracts

December 1, 20x4

Date of Inception/Hedging of 90 days Forwards FC Receivable from XD……… 48,180

48,180

December 31, 20x4

FC Receivable from XD 300 FC Transaction Gain

300

Balance Sheet Presentation on 12/31/20x4 FC Receivable from XD (P40.40 x $1,200)… P48,480 Less: Pesos payable to XD (fixed at P40.15) 48,180 Forward Contract (fair value – asset)……… P 300 March 1, 20x5

Settlement Date/Date of Expiration of Contract FC Transaction Loss……… 240

FC Receivable from XD…………. [(P40.40 – P40.20) x $1,200] To record a loss on foreign currency to be received from FC dealer.

240

48,240

Cash………. 48,240

Investment in FC………. 48,240 To record conversion of US

dollars into cash. b.

b.1. No gain or loss, since it is the date of hedging.

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b.3. P240 loss c.

c.1. P48,180 - [P40.15, original (90-day) forward rate on the date of hedging x $1,200] c.2. No entry required

c.3. Same amount with c.1 c.4. No entry required d.

d.1.

Net Method: Zero. No entry required. Gross Method

d.2. P300 asset

Net Method: P300.

FC Receivable from XD (P40.40 x $1,200)… P48,480 Less: Pesos payable to XD (fixed at P40.15) 48,180 Forward Contract (fair value – asset)……… P 300 d.3. P60 debit balance – asset

Gross method

Problem II (Discounting the Fair Value of the Forward Contract)

1. Not a Hedge Accounting - Importing Transaction (Exposed Liability).

The journal entries to record the hedged item and hedging instrument are as follows: Hedged Item – Importing Transaction

(Exposed Liability) ( Broad Approach or Gross Position Accounting)Hedging Instrument – Forward Contracts December 1, 20x4

Transaction Date Date of Inception/Hedging of 90 days Forwards Purchases ($1,200 x P40)…………... 48,000 FC Receivable from XD……… 48,180

Accounts payable………. To record purchase of goods on account using the spot rate on 2/1/1/x4.

48,000 Pesos Payable to XD (P40.15 x $1,200)

48,180

*XD – exchange dealer

Balance Sheet Presentation on 12/1/20x4 FC Receivable from XD……… P48,180

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Less: Pesos payable to XD……… 48,180 Forward Contract (fair value)………. P 0 December 31, 20x4

FC Transaction Loss 360 FC Receivable from XD……… 294 Account payable……….

[P40.30 – P40.00) x $1,200 To record a loss on the exposed liability denominated in foreign currency.

360 FC Transaction Gain To record a gain on foreign currency to be received from FC dealer.

294

Note: Discounted or present value for hedged item is Gain [(P40.40 – P40.15) x $1,200]... P 300 not necessary for exposed asset or liability since spot Less: Discount (P300 x 12% x 2/12)……… ____6

Rate is in effect. Present value of gain*………. P294

* or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2 months = 2%

Balance Sheet Presentation on 12/31/20x4 FC Receivable from XD (P40.40 x $1,200)- P6. P48,474 Less: Pesos payable to XD (fixed at P40.15)… 48,180 Forward Contract (fair value – asset)……… P 294 On March 1, 20x5 (the transaction date and the settlement date), the journal entries are:

March 1, 20x5

FC Transaction gain……. [(P40.20 – P40.30) x $1,200}…….. To record a gain from 12/31/x4 to 3/1/x5 on liability denominated in FC.

120 FC Receivable from XD To record a loss on foreign currency to be received from FC dealer.

234

Note: Discounted or present value for hedged item is Overall gain (P40.20 – P40.15) x $1,200 …….. P 60 not necessary for exposed asset or liability since spot Less: 12/31/20x4 Gain at present value…….. __294

rate is in effect. FC Transaction loss……… P234

To record receipt of foreign Currency.

48,240

Accounts payable……… 48,240 Cash………. 48,240 Cash (refer to note below)………

48,240

Note: This entry may be ignored and instead the Investment in FC will be outright credited in payment of accounts payable. For succeeding illustrations the conversion of FC to peso cash to settle items acquired will be used.

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a.

a.1. P360 loss a.2. P294 gain

a.3. P360 loss – P294 gain = P66 net loss (decrease in net income) a.4. P120 gain - [(P40.20 – P40.30) x $1,200}

a.5. P234 loss

a.6. P234 loss – P120 gain = P114 net loss (decrease in net income) b.

b.1.

b.2. P294 asset Gross method

FC Receivable from XD (P40.40 x $1,200)- P6. P48,474 Less: Pesos payable to XD (fixed at P40.15)… 48,180 Forward Contract (fair value – asset)……… P 294 Net Method: P294.

Forward contract (debit balance – asset)… P 294 b.3. P60 debit balance – asset

Gross method

2. Fair Value Hedge – Hedging an Unrecognized Foreign Currency Firm Commitment. The journal entries to record the hedged item and hedging instrument are as follows:

Hedged Item – (Unrecognized Foreign Currency Firm Commitment)

Hedging Instrument – Forward Contracts ( Broad Approach or Gross Position Accounting) December 1, 20x4

48,180

This is computed using the change in the forward rate. These entries are as follows: December 31, 20x4

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FC Transaction Loss 294 FC Receivable from XD……… 294 Firm Commitment

commitment using the change in the forward rate.

294

Loss………... P 300 Gain [(P40.40 – P40.15) x $1,200] P 300 Less: Discount (P300 x 12% x 2/12)……… ____6 Less: Discount (P300 x 12% x 2/12)……….. ____6 Present value of loss*………. P294 Present value of gain*……… P294

* or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2 months = 2%

Balance Sheet Presentation on 12/31/20x4

FC Receivable from XD (P40.40 x $1,200) - P6…P48,474 Less: Pesos Payable to XD(fixed at P40.15)….… 48,180 Forward Contract (fair value)………P 294

Firm Commitment………...P 294

Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract

Firm Commitment………… 234 FC Transaction Loss ……… 234

FC Transaction gain……. To record a gain on fair value of firm commitment.

234 FC Receivable from XD……… To record a loss on foreign currency to be received from exchange dealer.

234

Overall loss (P40.20 – P40.15) x $1,200 ……….. P 60 Overall gain (P40.20 – P40.15) x $1,200 …….. P 60 Less: 12/31/20x4 Gain at present value……… __294 Less: 12/31/20x4 Gain at present value…….. __294 FC Transaction Gain……….. P234 FC Transaction loss……… P234

48,240

Inventory (P40.20 x $1,200)…………. 48,240 Cash………. 48,240

Cash ……… 48,240 Investment in FC………..…... 48,240 To record the purchase of

inventory for $1,200 at spot rate. To record conversion of USdollars into cash for purchase of inventory.

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Firm Commitment………. 60

Inventory………. 60

To remove the carrying amount of the firm commitment from the balance sheet6 and adjust the initial carrying amount of the inventory that results from the firm commitment. This treatment is an accordance with PAS 39 par. 89b. Firm Commitment 3/1/x5 Gain……. 234 294… …..12/31/x4 Loss 60 60 3/1/x5 Net a. a.1. P294 loss

Foreign Currency Exchange Loss [(P40.40 – P40.15) x $1,200]………… P 300 Less: Discount (P300 x 12% x 2/12)……… ____6 Present value of loss*……… P294 a.2. P294 gain

Foreign Currency Exchange Gain [(P40.40 – P40.15) x $1,200]………. P 300 Less: Discount (P300 x 12% x 2/12)……… ____6 Present value of gain*……… P294 a.3. P294 loss(a.1) – P294 gain (a.2) = P0

a.4. P234 gain

Overall loss (P40.20 – P40.15) x $1,200 ……… P 60 Less: 12/31/20x4 Gain at present value………. __294 FC Transaction Gain………. P234 a.5. P234 loss

Overall gain (P40.20 – P40.15) x $1,200 …….. P 60 Less: 12/31/20x4 Gain at present value…….. __294

FC Transaction loss……… P234

a.6. P234 gain (a.4) – P234 loss (a.5) = P0 b.

b.1. Zero, no entry required b.2. P294 liability

Foreign Currency Exchange Loss [(P40.40 – P40.15) x $1,200]………… P 300 Less: Discount (P300 x 12% x 2/12)……… ____6 Present value of loss* / Firm Commitment………. P294 b.3. P60 - liability Firm Commitment 3/1/x5 Gain……. 234 294… …..12/31/x4 Loss 60 3/1/x5 Net c. c.1.

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Gross method

Forward contract (debit balance – asset)… P 294 c.3. P60 debit balance – asset

Gross method

3. Cash Flow Hedge - Hedge of a Forecasted Transaction.

The journal entries to record the hedged item and hedging instrument are as follows: Hedged Item –

Forecasted Transaction ( Broad Approach or Gross Position Accounting)Hedging Instrument – Forward Contracts December 1, 20x4

48,180

December 31, 20x4

No entry required, since it is only a forecasted FC Receivable from XD……… 294 transaction not guaranteed such as firm commitment. OCI – Exchange Gain (B/S)…....

To record a gain on foreign currency to be received from FC dealer.

294

Gain [(P40.40 – P40.15) x $1,200] P 300 Less: Discount (P300 x 12% x 2/12)……….. ____6 Present value of gain*……… P294 * or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2

months = 2%

Balance Sheet Presentation on 12/31/20x4 FC Receivable from XD (P40.40 x $1,200)-P6 P48,474 Less: Pesos payable to XD (fixed at P40.15) 48,180 Forward Contract (fair value - asset)…..….. P 294 On March 1, 20x5 (the transaction date and the settlement date), the journal entries are:

March 1, 20x5

Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract OCI – Exchange Loss (B/S)………. 234

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To record a loss on foreign currency to be received from FC dealer.

Overall gain (P40.20 – P40.15) x $1,200 …….. P 60 Less: 12/31/20x4 Gain at present value…….. __294 FC Transaction loss……… P234 Pesos Payable from XD………. 48,180

Cash………. To record payment to exchange dealer. 48,180 Investment in FC………. 48,240 FC Receivable from XD

48,240

Machinery (P40.20 x $1,200)………... 48,240 Cash………. 48,240

equipment for $1,000 at the spot rate of P40.20

OCI – Exchange Gain……….. 60 Other Comprehensive Income

Machinery……….. 60 3/1/x5 Loss 234 294… ….12/31/x4 Gain

OCI and adjust the carrying amount if the machine that results from the hedged transaction by this amount. Also, to record the basis adjustment of the carrying value of the equipment. This entry is recorded if PAS 39 par. 98b is adopted.

a.

a.1. Gain or loss on hedged item, 3/1/20x4: None, no entry required. a.2. P294 gain, other comprehensive income

Foreign Currency Exchange Gain [(P40.40 – P40.15) x $1,200]………. P 300 Less: Discount (P300 x 12% x 2/12)……… ____6 Present value of gain*……… P294 a.3. None

a.4. Gain or loss on hedged item, 3/1/20x4: None, no entry required for gain or loss. The only entry is to record the purchase of machinery.

a.4. P234 gain

Overall loss (P40.20 – P40.15) x $1,200 ……… P 60 Less: 12/31/20x4 Gain at present value………. __294 FC Transaction Gain………. P234

a.5. P234 loss, other comprehensive income – {[(P40.40 – P40.20) x $1,200] – P6} to be recorded on March 1, 20x5. The balance of the OCI – gain amounted to P60 computed as follows:

Other Comprehensive Income 3/1/x5 Loss 234 294… ….12/31/x4 Gain

60 3/1/x5 b.

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b.1.

b.2. P294 asset Gross method

Forward contract (debit balance – asset)… P 294 b.3. P60 debit balance – asset

Gross method

4. Not a Hedge Accounting – Speculation.

The journal entries to record the hedged item and hedging instrument are as follows: Hedged Item - Speculation ( Broad Approach or Gross Position Accounting)Hedging Instrument – Forward Contracts

December 1, 20x4

Date of Inception/Hedging of 90 days Forwards FC Receivable from XD……… 48,180

48,180

December 31, 20x4

FC Receivable from XD 294 FC Transaction Gain

To record a gain on foreign currency to be received from FC dealer.

294

Gain [(P40.40 – P40.15) x $1,200] P 300 Less: Discount (P300 x 12% x 2/12)……….. ____6 Present value of gain*……… P294 * or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2 months = 2%

Balance Sheet Presentation on 12/31/20x4 FC Receivable from XD (P40.40 x $1,200)-P6 P48,474 Less: Pesos payable to XD (fixed at P40.15) 48,180 Forward Contract (fair value – asset)……… P 294

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March 1, 20x5

Settlement Date/Date of Expiration of Contract FC Transaction Loss……… 234

FC Receivable from XD…………. To record a loss on foreign currency to be received from FC dealer.

234

Overall gain (P40.20 – P40.15) x $1,200 …….. P 60 Less: 12/31/20x4 Gain at present value…….. __294 FC Transaction loss……… P234 Pesos Payable from XD………. 48,180

Cash………. To record payment to exchange dealer. 48,180 Investment in FC………. 40,200 FC Receivable from XD

40,200

Cash………. 48,240

Investment in FC………. 48,240 To record conversion of US

dollars into cash. a.

a.1. P294 gain

Foreign Currency Exchange Gain [(P40.40 – P40.15) x $1,200]………. P 300 Less: Discount (P300 x 12% x 2/12)……… ____6 Present value of gain*……… P294 a.3. P294 gain.

a.5. P234 loss – other comprehensive income

Overall gain (P40.20 – P40.15) x $1,200 …….. P 60 Less: 12/31/20x4 Gain at present value…….. __294

FC Transaction loss……… P234

b.

b.1. Zero, no entry required b.2. P294 liability

Foreign Currency Exchange Loss [(P40.40 – P40.15) x $1,200]………… P 300 Less: Discount (P300 x 12% x 2/12)……… ____6 Present value of loss* / Firm Commitment………. P294 b.3. P60 - liability Firm Commitment 3/1/x5 Gain……. 234 294… …..12/31/x4 Loss 60 3/1/x5 Net c. c.1.

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c.2. P294 asset Gross method

Forward contract (debit balance – asset)… P 294 c.3. P60 debit balance – asset

Gross method

Problem III

The following relevant exchange rates are needed for further analysis in relation to hedged item and hedging instrument:

Spot Rate

Forward Rate for 8/1/20x5 Settlement (or Expiration) November 1, 20x4………. P40.60 P41.25 (*270 days) December 31, 20x4………. P40.75 P41.00 (**210 days) March 1, 20x5……… P40.70 P40.95 (***150 days) August 1, 20x5……….. P41.55****

*original 270-day forward rate on 12/1/20x4 **remaining or current forward rate on 12/31/20x4 ***remaining or current forward rate on 3/1/20x5

The journal entries to record the hedged item and hedging instrument are as follows: Hedged Item – (Unrecognized

Foreign Currency Firm Commitment) ( Broad Approach or Gross Position Accounting)Hedging Instrument – Forward Contracts November 1, 20x4

49,500

December 31, 20x4

Firm Commitment ………. 300 FC Transaction Loss……….. 300 FC Transaction Gain………...

300 FC Receivable from XD………… (P41.25 – P41.00) x $1,200] To record a loss on foreign

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commitment using the change in

the forward rate. currency to be received fromFC dealer.

Firm Commitment………...P 300 Pesos payable to XD (fixed at P41.25)………..P 49,500 Less: FC Receivable from XD (at spot rate)…. 49,200 Forward Contract (fair value)……….P 300 On March 1, 20x5 (the transaction date), the journal entries are:

March 1, 20x5 Transaction Date (Exposed Liability)

Inventory (P40.70 x $1,200)…………. 48,840 Accounts payable……….

(P40.70 x $1,200) 48,840

To record the purchase of inventory for $1,200 at spot rate and recognize accounts payable.

Inventory ……… 300

Firm Commitment ……….. 300 To remove the carrying amount of

the firm commitment from the balance sheet6 and adjust the initial carrying amount of the inventory that results from the firm commitment. This treatment is an accordance with PAS 39 par. 89b.

Firm Commitment 12/31/x4 Gain….. 300

3 / 1/x5 300 300

August 1, 20x5

Settlement Date Settlement Date/Date of Expiration of Contract FC Transaction Loss……… 1,020 FC Receivable from XD………. 660

Accounts payable….

[(P41.55 – P40.70) x $1,200}…….. To record a loss from 3/1/x5 to 8/1/x5 on liability denominated in FC.

1,020 FC Transaction Gain………. [(P41.55 – P41.00) x $1,200] To record a gain on foreign currency to be received from FC dealer.

660

49,860

Accounts payable……… 49,860 Cash………. 49,860 Cash……….

49,860

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The following relevant exchange rates are needed for further analysis in relation to hedged item and hedging instrument:

Spot Rate

Forward Rate for 3/1/20x5 Settlement

(or Expiration) December 1, 20x4………. P40.00 P40.15 (*90 days) December 31, 20x4………. P40.30 P40.40 (**60 days) March 1, 20x5……….. P40.20***

*original 90-day forward rate on 12/1/20x4 **remaining or current forward rate on 12/31/20x4

The journal entries to record the hedged item and hedging instrument are as follows: Hedged Item –

Forecasted Transaction

Hedging Instrument – Forward Contracts ( Broad Approach or Gross Position Accounting) December 1, 20x4

48,180

December 31, 20x4

No entry required, since it is only a forecasted FC Receivable from XD 300 transaction not guaranteed such as firm commitment. OCI – Exchange Gain (B/S)

300

FC – foreign currency; OCI - Other Comprehensive Income; B/S – Balance Sheet

Notice that unlike the fair value hedge, there is no offsetting firm commitment entry since this is a forecasted transaction. The exchange gain or loss is reported in comprehensive income and will affect the income statement when the inventory is eventually sold. On the balance sheet, the forward contract is reported as an asset at its fair value of P300, and the offsetting amount is reported in other comprehensive income (as a gain).

Balance Sheet Presentation on 12/31/20x4 FC Receivable from XD (P40.40 x $1,200)… P48,480 Less: Pesos payable to XD (fixed at P40.15) 48,180 Fair value of Forward Contract, 12/1/20x4.. P 300 On March 1, 2011 (the transaction date and the settlement date), the journal entries are:

March 1, 20x5

Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract OCI – Exchange Loss (B/S)……… 240

FC Receivable from XD……… [(P40.40 – P40.20) x $1,200] To record a loss on foreign

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currency to be received from FC dealer.

48,240

Inventory (P40.20 x $1,200)………... 48,240 Cash………. 48,240

merchandise for $1,200 at the spot rate of P40.20

Suppose that in April 1, 20x5, the inventory is sold for P54,000 cash.

The entries to record the sale and to reclassify the amounts from Other Comprehensive Income (a P50 gain, including P250 gain on December 31, 20x4, plus the P200 loss on March 1, 20x5) into earnings are as follows:

April 1, 20x5

Date of Transaction (Sale) Settlement Date/Date of Expiration of Contract

Cash………... 54,000

Sales……… 54,000

To record the sale of merchandise.

Cost of goods sold……… 48,240

Inventory, at cost……… 48,240 To record cost of sales.

OCI – Exchange Loss……….. 60 Other Comprehensive Income

Cost of goods sold... 60 3/1/x5 Loss 240 300… ….12/31/x4 Gain

OCI and release the OCI to profit or loss. This entry is recorded in accordance with PAS 39 par. 98a is adopted.

Problem V

1. Indirect exchange rates for Australian dollars were:

December 1, 20x4: FC70,000 / P42,000 = 1.667 [P1 equals FC 1.667] December 31, 20x4: FC70,000 / P41,700 = 1.679 [P1 equals FC 1.679]

2. The balance in the account Foreign Currency Payable to Exchange Broker was P39,900 at December 31, 20X5, computed as:

P39,900 = FC 70,000 x P.57 Dec. 31 forward rate

3. The direct exchange rate for the 60-day forward contract for the 70,000 foreign currency (FC) was FC 1 = P.58. This is the result of the following computation:

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4. P40,600 is the amount of Pesos Receivable from Exchange Broker in the adjusted trial balance at December 31, 20x4. The balance in this account does not change because it is denominated in Philippine peso.

5. Indirect spot exchange rates for FC2 were:

October 2: FC2 400,000 / P80,000 = 5 [P1 equals FC2 5]

December 31: FC2 400,000 / P80,800 = 4.950 [P1 equals FC2 4.950] Or, 4.950 = FC2 1 / P.2020

6. The Pesos Payable to Exchange Broker was P82,000 in both the adjusted and unadjusted trial balances. The entry to record the forward contract for the 400,000 FC2 on October 2, 20x4, appears below. Note that the account Pesos Payable to Exchange Broker is denominated in pesos and does not change as a result of exchange rate changes.

Foreign Currency Receivable from

Exchange Broker (FC2) 82,000

Pesos Payable to Exchange Broker (P) 82,000

7. The direct exchange rate for the 120-day forward contract in FC2 on October 2, 20x4, was P.205. This amount is determined in the following manner: P82,000 / FC2 400,000 = P.205. The P82,000 is the amount of the pesos payable to exchange broker. This amount is computed by using the forward rate.

8. The accounts payable balance was P80,800 at December 31, 20x4. P80,800 = FC2 400,000 x P.2020 Dec. 31 spot rate

The entries to support the computations for are presented below: 1. Transactions with Foreign Company 1 (FC1)

December 1, 20x4

Accounts Receivable (FC1) 42,000

Sales 42,000

P42,000 = FC1 70,000 x (P1/FC1 1.667)

Pesos Receivable from Exchange Broker 40,600

Foreign Currency Payable to

P40,600 = FC1 70,000 x P.58 Dec. 1 forward rate, and also peso amount stated in problem information (P.58 = P40,600 / FC1 70,000)

December 31, 20x4

Foreign Currency Transaction Loss 300

Accounts Receivable (FC1) 300

P300 = change in accounts receivable (FC1) as noted in problem information.

Foreign Currency Payable to

Exchange Broker 700

Foreign Currency Transaction Gain 700

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- 40,600 = FC1 70,000 x P.58 Dec. 1 forward rate P 700 = FC1 70,000 x (P.57 - P.58)

2. Transactions with Foreign Company 2 (FC2) October 2, 20x4

Equipment 80,000

Accounts Payable (FC2) 80,000

P80,000 = FC2 400,000 x P.20 Foreign Currency Receivable from

Pesos Payable to Exchange Broker 82,000

P82,000 = FC2 400,000 x P.2050, and the P82,000 is presented in the problem for the foreign currency receivable. December 31, 20x4

Accounts Payable (FC2) 800

P80,800 = FC2 400,000 x P.202 Dec. 31 spot rate - 80,000 = FC2 400,000 x P.200 October 2 spot rate P 800 = FC2 400,000 x (P.202 - P.200)

Foreign Currency Transaction Loss 1,000

Exchange Broker 1,000

P81,000 = FC2 400,000 x P.2025 Dec. 31 forward rate - 82,000 = FC2 400,000 x P.2050 Oct. 2 forward rate P 1,000 = FC2 400,000 x (P.2025 - P.2050)

Problem VI

Based on the data given, the following situations can be derived:

Market or Spot Rate Strike price (exercise price or option price) Foreign Currency Option

Situation ElementExisting Value**Time IntrinsicValue*

12/ 1/20x4 P1.20 P1.20 At-the-money TV P360 P 0

12/31/20x4 P1.28 P1.20 In-the-money TV & IV P240 P4,800

3/ 1/20x5 P1.27 P1.20 In-the-money IV*** P 0 P4,200

TV – time value; IV – intrinsic value.

* (Market price less – option price) x foreign currencies ** Fair value of option – intrinsic value

***time already expired, so need to determine time value unless It is a residual amount.

(Exposed Liability) Hedging Instrument – Option Contracts December 1, 20x4

Transaction Date Date of Inception/Hedging of 90 days Forwards Inventory (60,000 FC x P1.2)……….. 72,000 Investment in FC Call Option…….. 360

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To record purchase of goods on account using the spot rate on 12/1/1/x4.

To record purchase of call option.

December 31, 20x4

FC Transaction Loss……….. 4,800 Investment in FC Call Option…… 4,680 Account payable………

[P1.28 – P1.20) x 60,000 FC To record a loss on the exposed liability denominated in foreign currency.

4,800 FC Transaction Gain…. (P5,040 – P360 = P4,680) To record a gain on call option.

4,680

Settlement Date Settlement Date/Date of Expiration of Contract Accounts payable………. 600 FC Transaction Loss………. 840

FC Transaction gain……. [(P1.28 – P1.27) x 60,000 FC…….. To record a gain from 12/31/x4 to 3/1/x5 on liability denominated in FC.

600 Investment in FC Call Option… (P5,040 – P4,200)

To record a loss on call option

840

Accounts payable……… 76,200 Cash………. 4,200 Cash [(P1.20 x 60,000 FC) +

P4,200, proceeds from call option]……….. To record payment of accounts

payable at spot rate.

76,200

Investment in FC Call Option… To record the derecognition of call option on realization.

4,200

Problem VII

The following table summarizes the succeeding journal entries in relation to hedged item and hedging instrument:

Firm Commitment Call Option Contract

Date SpotRate

Total Fair

value Change inFair Value

Call Option (CO)Premium

per FC

(CO Premium x FCs) Fair Value of Call

Option Change inFair Value

11/20/x4 P0.20 P.002 P120

12/20/x4 P0.21 (P 600)* (P 600)** P.010*** P600 P480

* $12,000 – $12,600 = $(600). **(P0.21 – P0.20, spot) x 60,000 FC.

***The premium on 12/20 for an option that expires on that date is equal to the option’s intrinsic value. Given the spot rate on 12/20 of P.21, a call option with a strike price of P.20 has an intrinsic value of P.01 per mark.

Based on the above data, the following situations can be derived:

Situation ElementExisting Value**Time IntrinsicValue*

11/20/20x4 P0.20 P0.20 At-the-money TV P120 P 0

12/20/20x4 P0.21 P0.20 In-the-money IV P 0 P 600

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(Firm Commitment) Hedging Instrument – Option Contracts November 20, 20x4

Date of Commitment Date of Inception/Hedging of 90 days Forwards There is no entry to record the sales agreement

because it is an executory contract. Investment in FC Call Option……Cash………. To record purchase of call option.

120

December 20, 20x4

Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract FC Loss on Firm Commitment……… 600 Investment in FC Call Option…… 120

Firm Commitment……… [(P.21 – P0.20) x 60,000 FC] To record loss on firm commitment based on spot rate.

600 FC Transaction Gain…. (P600 – P480 = P100)

To record a gain on call option.

120

Equipment……….. 12,600 Cash……….. 600

Cash [(P0.20 x 60,000 FC) + P600, proceeds from call

option]……….. To record purchase of equipment at spot rate (P.21 x 60,000 FC)

12,600 Investment in FC Call Option To record the derecognition of call option on realization.

600

Firm Commitment ……… 600 Equipment……….

To derecognized firm commitment and adjust the carrying amount of equipment.

600

Problem VIII

The relevant exchange rates and option premiums are as follows:

11/20/20x4 12/20/20x4

Spot rate (market price) P0.20 P0.18

Strike price (exercise price) 0.20 0.20

Fair value of call option P480 N/A

N/A – not applicable

The following table summarizes the succeeding journal entries in relation to hedged item and hedging instrument:

Firm Commitment Call Option Contract

Date SpotRate

Total Fair

value Change inFair Value

Call Option (CO)Premium

per FC

(CO Premium x FCs) Fair Value of Call

Option Change inFair Value

11/20/x4 P0.20 P.002 P120

12/31/x4 P0.18 P1,200* P1,200** P.000*** P 0 (P120)

* P12,000 – P10,800 = P1,200 **(P.20 – P.18) x 60,000 FC

***The premium on 12/20 for an option that expires on that date is equal to the option’s intrinsic value. Given the spot rate on 12/20 of P.18, a call option with a strike price of P.20 has no intrinsic value – the premium on 12/20 is P.000. Based on the above data, the following situations can be derived:

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Situation ElementExisting Value**Time IntrinsicValue* 11/20/20x4 P0.20 P0.20 In-the-money TV & IV P120 P 0

12/20/20x4 P0.18 P0.20 In-the-money IV P 0 P 0

* (Market price less – option price) x foreign currencies

** None since the option price is greater than the market price.

(Firm Commitment) Hedging Instrument – Option Contracts November 20, 20x4

Date of Commitment Date of Inception/Hedging of 90 days Forwards There is no entry to record the sales agreement

because it is an executory contract. Investment in FC Call Option……Cash………. To record purchase of call option.

120

December 20, 20x4

Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract Firm Commitment……… 1,200 FC Transaction Loss……….…… 120

FC Gain on Firm Commitment [(P0.20 – P0.18) x 60,000 FC] To record loss on firm commitment based on spot rate.

1,200 Investment in FC Call Option (P120 – P0 = P120)

To record a gain on call option.

120

Equipment……….. 12,000 No entry required since the Cash [(P0.20 x 60,000 FC) +

P0, no proceeds from call option]……….. To record purchase of equipment at spot rate (P.21 x 50,000 FC)

12,000 Investment in call option has no value.

Equipment……….……… 1,200 Firm Commitment……….

To derecognized firm commitment and adjust the carrying amount of equipment.

1,200

Problem IX

Based on the data given in the problem, the following situations can be derived:

Situation ElementExisting Value**Time IntrinsicValue* 1/ 1/20x4 P1.15 P1.14 In-the-money TV & IV P8,400 P12,000 6/30/20x4 P1.18 P1.14 In-the-money TV & IV P4,800 P48,000 12/31/20x4 P1.17 P1.14 In-the-money IV*** P 0 P36,000 TV – time value; IV – intrinsic value.

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(Forecasted Transaction) Hedging Instrument – Option Contracts December 1, 20x4

Transaction Date Date of Inception/Hedging of 90 days Forwards No journal entry is required to record the forecasted Investment in FC Call Option…….. 20,400 transaction. The forward contract is designated as a

Cash……….. To record purchase of call option.

20,400

December 31, 20x4

No entry required, since it is only a forecasted Investment in FC Call Option…….. 32,400 transaction not guaranteed such as firm commitment. OCI – FC Transaction Gain (B/S)

[P1.18 – P1.14) x 1,200,000 = P52,800 – P20,400 = P32,400] To record a gain on call option.

32,400

OCI – FC Transaction Gain (B/S) 25,920 FC Transaction Gain

To reclassify 80% of OCI to earnings (720,000 /900,000) = 80% ; (80% × P32,400 = P25,920)

25,920

On December 31, 20x4 (the transaction date and the settlement date), the journal entries are: December 31, 20x4

Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract FC Transaction Loss………. 16,800

Investment in FC Call Option… [(P1.17 – P1.14) x 1,200,000

baht = P36,000 – P52,800] To record a loss on call option

16,800

OCI – FC Transaction Gain (B/S)…. 6,480 FC Transaction Gain………….…

To record reclassify the remaining P6,480 of FC gain from OCI to earnings (180,000/900,000 x P32,400).n This entry is recorded if PAS 39 par. 98b is adopted.

6,480

Cash………. 36,000 Investment in FC Call Option…

[(P1.17 – P1.14) x 1,200,000 baht] To record the derecognition of call option on realization.

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Multiple Choice Problems 1. c

Peso Value in 3 months = 3,750 + 37.50 = 3,787.50 FC Value in 3 months = 5,000 + 87.50 = 5,087.50

Fwd rate 3,787.50 ÷ 5,087.50 = .745 2. e

Pound should be FCU

11/10/x6: Original forward rate on the date of hedging..……….P 1.64 Balance Sheet date: Remaining (current) forward rate – 12/31/20x6...……. 1.59 Gain on forward contract per FC………...………..P .05 Multiplied by: No. of FCs……….. 100,000 Gain on forward contract..……….P 5,000 3. a

Euro should be FCU

10/22/x6: Original forward rate on the date of hedging..……….P 0.45 Balance Sheet date: Remaining (current) forward rate – 12/31/20x6.………. 0.445 Gain on forward contract per FC………..P .005 Multiplied by: No. of FCs……….. 100,000

Gain on forward contract...……….P 500

4. c -15,000,000 x P.0092 5. b - 15,000,000 x P.0094

6. b - 15,000,000 (P.0094 - P.0092) 7. d - 15,000,000 x P.0091

8. c - 15,000,000 (P.0091 - P.0094)

9. a – forward contract is zero on the date of hedging

10. b – since it is a gain (refer to No. 11) therefore the value of forward contract is an asset 11. d - P4,500 - P0 12. c 13. c - P3,000 - P4,500 14. b - 1,000,000 x P1.116 15. d - 1,000,000 x P1.129 16. a - 1,000,000 (P1.129 - P1.116) 17. a - 1,000,000 x P1.138 18. c - 1,000,000 (P1.138 - P1.129)

19. d – forward contract is zero on the date of hedging

20. a

21. b

22. c

23. d - (P8,000 - P6,000)

24. e – there is no fair value of forward contract on the date of hedging.

25. b – (100,000 FCU x P.74, the forward rate on the date of hedging), the entry would be as follows (using the gross or broad approach):

Forward contract receivable……… 74,000 Pesos payable to exchange dealer………. 74,000 26. d

Original value of Forward Contract Receivable-FC 100,000 x .74 = 74,000 Current (6/30) value of the Fwd Contract Rec-FC 100,000 x .75 = 75,000

Increase in value of Forward Contract Receivable 1,000

Value of Receivable, discounted at 8%, n 1 1,000 - (1,000 x [.08 ÷ 12]) = 993

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or,

FC Receivable – date of hedging, 6/1 20x4………...P 74,000 Add: Forward contract gain P1,000 x [1/1 + (8%/12 x 1 month remaining)].. 993 Forward Contract (FC) Receivable, 6/30/20x4………. P 74,993 27. d

January 1: Origininal forward rate on the date of hedging..………..P 0.94

March 1: Spot rate……… 0.93

Gain………..P 0.01 Multiplied by: No. of FCs………. 100,000

FC Forward Contract Gain………P 1,000

28. c

Hedging Instrument:

January 1: Origininal forward rate on the date of hedging..………..P 0.94

Gain………..P 0.01 Multiplied by: No. of FCs………. 100,000 FC Forward Contract Gain………P 1,000 Hedged Item:

January 1: Spot rate………..………..P 0.945

Loss………P 0.015 Multiplied by: No. of FCs……….. 100,000 Foregin currency exchange loss……..……….. P 1,500 Net loss……….P 500 29. d

Hedged Item:

January 1: Spot rate………..………..P 0.945

Loss………P 0.015 Multiplied by: No. of FCs……….. 100,000

Foreign currency exchange loss……..……….. P 1,500

30. c – (P.1865 – P.1850) gain x 100,000 FC = P150 gain 31. c – using spot rate

32. c

5/1: Original forward rate (90 days)……..……….P .693 6/30: Current (remaining) forward rate (30 days)……....……… .695 Forex gain per unit...……….P .002 Multiplied by: Number of foreign currencies………. 500,000 Foreign exchange gain due to hedging instrument……..………P 1,000

Less: Discount – P1,000 x 6% x 30/360 days………. 5

PV of foreign exchange gain due to hedging instrument………P 995 Or, alternatively the computation of present value may also be presented as:

Foreign exchange gain………...P 1,000 Divided by: [1% + (6%/12 x 1 month = equivalent to 30 days)]….. 1.005 PV of foreign exchange gain due to hedging instrument……….P 995

Note: Since, the discount rate is given it is assumed that all times present value should be

computed. Present value for hedged item is not necessary for exposed asset or liability since spot rate is in effect. Unlike, the other types of hedging wherein, forward rates is used to determine the gain or loss on the hedged item

33. c

Foreign exchange loss due to Hedged Item:

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6/30: Spot rate……… .691

Forex loss per foreign currency…….………..P .04

Multiplied by: Number of foreign currencies……….. 500,000

Foreign exchange loss due to hedged item ………..P 2,000

PV of foreign exchange gain due to hedging instrument

(forward contract – refer to No. 32).………... 995

Net Income effect – decrease ………... P 1,005

34. d

5/1: Original forward rate (90 days)…..……….P .693

8/1: Spot rate……… .696

Forex gain per currency ……….P .003

Multiplied by: Number of foreign currencies……….. 500,000 Total Foreign Exchange gain due to hedging instrument

(forward contract)... ...P 1,500 Less: 6/30 cut-off - PV of foreign exchange gain due to hedging

instrument (forward contract – refer to No. 32)………... 995 August 1 - Foreign exchange gain due to hedging instrument

(forward contract)……….P 505

35. e

Hedging Instrument:

Origininal forward rate on the date of hedging……….P 0.105 Balance Sheet date: Remaining (current) forward rate – 12/3/1/20x4…… 0.095 Loss………P 0.010

Multiplied by: No. of FCs………. 50,000

FC Forward Contract Loss………..P 500

Multiplied by: PV factor………..………. .98,03

Forward contract – a liability account (since it is a loss)………P 490.15 36. b – (forward rate > spot rate – premium) seller’s point of view considered as premium

revenue since it was sold at a higher rate. 37. b

November 1, 20x4:

Exchange Broker (FC) 12,600

Pesos Payable to Exchange Broker 12,600

Signed 90-day forward exchange contract to purchase 100,000 FC:

P12,600 = 100,000 FC x P.126 forward rate 38. c

December 31, 20x4

Exchange Broker (FC) 300

Foreign Currency Transaction Gain 300

Revalue foreign currency receivable to fair value:

P300 = 100,000 FC x (P.129 - P.126) 39. b

January 30, 20x5

Pesos Payable to Exchange Broker (Pesos) 12,600

Cash 12,600

Deliver pesos to exchange broker in

accordance with forward exchange contract: P12,600 = 100,000 FC x P.126 contract rate

(32)

40. b

January 30, 20x5

Pesos Payable to Exchange Broker (Pesos) 12,600

Cash 12,600

Deliver pesos to exchange broker in

accordance with forward exchange contract: P12,600 = 100,000 FC x P.126, the 90-day forward rate 41. a

January 30, 20x5

Foreign Currency Receivable from Exchange Broker (FC) 200

Adjust foreign currency receivable to current peso equivalent:

P12,700 = 100,000 FC x P.127 Jan. 30 spot rate - 12,900 = 100,000 FC x P.129 Dec. 31 forward rate P 200 = 100,000 FC x (P.127 - P.129)

Foreign Currency Units 12,700

Foreign Currency Receivable from Exchange Broker 12,700

Receive 100,000 FC from exchange broker: P12,700 = 100,000 FC x P.127 spot rate 42. d

PAS 32 and 39 (PFRS 9) requires the FCU payable be recorded at the forward rate on the date of hedging.

Letter (d) is the required entry under the old practice wherein the FCU payable are recorded using the spot rate on the date of hedging.

43. b

Receivable balance: P319,500 (spot rate on the balance sheet date, P.71 x 450,000 FCU) Gain or loss: P9,000 loss [(P.73 – P.71) x 450,000 FCU]

44. c – (forward rate > spot rate= premium) buyer’s point of view considered as premium expense since it was purchase at a higher rate plus a loss on firm commitment (i.e., P1.21 – P1.20)

45. e

Firm Commitment:

11/10/x6: Original forward rate on the date of hedging..……….P 1.64 Balance Sheet date: Remaining (current) forward rate – 12/31/206…………. 1.59

Loss on Forward Contract per FC………....P .05

Multiplied by: No. of FCs……….. 100,000 Loss on forward contract……….P 5,000 46. e

Firm Commitment:

11/10/x6: Original forward rate on the date of hedging..……….P 1.64 Balance Sheet date: Remaining (current) forward rate – 12/31/20x6...……. 1.59 Gain on forward contract per FC………...………..P .05 Multiplied by: No. of FCs……….. 100,000 Gain on forward contract..……….P 5,000 47. b

Firm Commitment:

10/22/x6: Original forward rate on the date of hedging..……….P 0.45 Balance Sheet date: Remaining (current) forward rate – 12/31/20x6.………. 0.445 Gain on forward contract per FC………..P .005 Multiplied by: No. of FCs……….. 100,000