DAYAG Solution to Chapter 20

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 P40.00 P40.30 P40.20***

December 1, 20 2 0x4…………………………. December 31, 20x4…………………………. March 1, 1, 20 20x5…………………………………..

Forward Rate for  3/1/20x5 Settlement (or Expiration) P40.15 (*90 days) P40.40 (**60 days)

*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 contract is  zero.

1. Not a Hedge Hedge Accounting Accounting - Importing Importing Transac Transaction tion (Exposed (Exposed Liabil Liability). ity).

a. The journal journal entries to record record the hedged item and hedging hedging instrument instrument are as follows: Gross Method Hedged Hedged Item – Importing Importing Transact Transaction ion (Exposed Liability) Transacti on Date Inventory ($1,200 x P40)…………... Accounts payable………………. To record purchase of goods on account using the spot rate on  2/1/1/x4. *XD – exchang exchange e deale dealer  r 

Hedging Hedging Instrument Instrument – Forward Forward Contracts Contracts ( Broad Broad Approach Approach or Gross Gross Position Position Account Accounting) ing) December 1, 20x4 Date of In I nception/Hedging of 90 days Forwards

48,000 48,000

FC Receivable from XD…………… Pesos Payable to XD (P40.15 x $1,200) To record forward contract to buy $12000 using forward rate.

48,180 48,180

If the financial statements are prepared on December 1, 20x4, the value of the forward contract contract is as follows: follows: Balance Sheet Presentation on 12/1/20x4 FC Rece Receiv ivab able le fro from m XD……… XD…………… ………… ………… …… P48, P48,18 180 0 Less Less:: Peso Pesoss pay payab able le to to XD…… XD………… ………… ………… …… 48,1 48,180 80 Forward Contract (f (fair value)………………. P 0 December 31, 20x4 (Balance Sheet Sheet Date an intervening intervening financial reporting date) FC Transacti on Loss Account payable……………. [P40.30 [P40.30 – P48.00) P48.00) x $1,200 $1,200 To recor record d a loss loss on the the expose exposed d liability denominated in foreign currency. *FC – foreign foreign currency currency

360 360

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

300 300

If the financial statements are prepared on December December 31, 20x4, the value of the forward contract is as follows: Balance Sheet Presentation on 12/31/20x4 FC Rece Receiva ivable ble from from XD (P40.4 (P40.40 0 x $1,2 $1,200) 00)… … P48,48 P48,480 0 Less Less:: Peso Pesoss pay payab able le to to XD (fix (fixed ed at at P40. P40.15 15)) 48,1 48,180 80

Forwa orwarrd Con Conttract ract (fa (fair valu value e – asset sset))……… ………

P

300

On March 1, 20x5 (the transaction transaction date and the settleme settlement nt date), the journal journal entries are: are: March 1, 20x5 Settlement Date/Date of Expiration of Contract

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

Accounts pa p ayable…………………… Cash (refer to note below)……… To record payment of accounts accounts payable at spot rate.

120

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

120

48,240

240 240

Peso Pesoss Pay Payab able le from from XD…… XD………… ………. …. Cash………………………………. To record record payment to exchange dealer.

48,1 48,180 80

Inve Invest stme ment nt in FC… FC……… ………… ………… ………. …. FC Receivable from XD To record receipt of foreign Currency.

48,2 48,240 40

48,180

48,240

Cash……………………………………. 48,240 I nv nvestment in in FC FC……… …… …………. 48,240 To record record conversion of US dollars dollars into into cash for payment payment of  accounts payable. 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.

48,240

These transactions can be summarized in the following table. Hedged I tem (Exposed Liabili ty)

Accounts Payable 12/1/20x4 12/31/20x4 3/1/20x5 Total gain (loss)

Balance P48,000 48,360 48,240

Hedging I nstrument (Forw ard Contract)

Transaction gain (loss) (P 360) 120 (P 240)

FC Receivable 12/1/20x4 12/31/20x4 3/1/20x5

Balance P48,180 48,480 48,240

Transaction gain (loss) P 300 (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 Hedged Item – Importing Importing Transact Transaction ion (Exposed Liability) Transacti on Date Inv Invento entory ry ($1, ($1,20 200 0 x P40) P40)…… ………… …….. .... Accounts pa payable……………….

Hedging Hedging Instrument Instrument – Forward Forward Contracts Contracts ( Net Positi Position on Accou Accountin nting) g) December 1, 20x4 Date of Incepti on/Hedging of 90 days Forw ards

48,0 48,000 00 48,000

 Memorandum  Memorandum entry only, only, No formal formal journal entry as the fair value value of forward forward

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 purchase is recorded using the spot rate on the transaction date (on December December 1, 20x3). December 31, 20x4 (Balance Sheet Date, an intervening financial financial reporting date) FC Transacti on Loss Accounts payable [P40.30 [P40.30 – P40.00) P40.00) x $1,200 $1,200 To record record a loss on the exposed exposed liability denominated in foreign currency. *FC – foreign foreign currency currency

360 360

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

300 300

If the financial statements are prepared on December December 31, 20x4, the value of the forward contract is as follows: Forward contract (debit balance – asset)……………………….

P 300

The income income statement statement would report report an exchange exchange loss of P360 and an exchange exchange gain of P250. On March 1, 20x5 (the transactio transaction n date and the settlement settlement date), the journal journal entries entries are: March 1, 20x5 Settlement Date/Date of Expiration of Contract

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

120

Accounts payable (P40.20 x $1,200) Cash (P40.20 (P40.20 x $1,200) $1,200) or * To record payment to exchange dealer (XD)

48,240

120

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

240 240

Cash………………………………….. 60 Forward Co Contract Net settlement received from from the dealer on expiration or maturity date of forward contract. contract . *(P40.15, forward forward rate on the date of inception x $1,200) + cash received from the exchange dealer dealer of P50. 48,240

Forward Contract (Asset/Liability) 12/3 12/31/ 1/x4 x4 Gain Gain… … 300 300 240… 240… …..3 …..3/1 /1/x /x5 5 Loss Loss 3/1/x5 Net…… 60 60

60

b. b.1. b.1. b.2. b.2. b.3. b.4. b.4. b.5. b.5. b.6.

P360 P360 loss loss - [(P40 [(P40.3 .30 0 – P40. P40.00 00)) x $1,2 $1,200 00]] P300 P300 gain gain - [(P4 [(P40.4 0.40 0 – P40. P40.15 15)) x $1,20 $1,200] 0] P360 P360 loss – P300 P300 gain = P60 P60 net loss loss (decre (decrease ase in net net income income)) P120 P120 gai gain n - [(P4 [(P40. 0.20 20 – P40. P40.30 30)) x $1,20 $1,200} 0} P240 P240 loss loss - [(P40 [(P40.4 .40 0 – P40. P40.20 20)) x $1,2 $1,200 00]] P240 loss – P120 gain = P120 net net loss loss (decre (decrease ase in net income income))

c. c.1. P48,360 P48,360 - [P40.30, [P40.30, spot spot rate/curren rate/currentt rate rate on on the the balance balance sheet sheet date date x $1,200 $1,200]] c.2. P48,240 P48,240 – [P40.20, [P40.20, spot spot rate rate on the date of settlement settlement x $1,200] $1,200] d. d.1. d.2. d.3. d.4.

P48,18 P48,180 0 - [P40.15 [P40.15,, origin original al (90-d (90-day) ay) forw forward ard rate on the the date date of hedg hedging ing x $1,200 $1,200]] No entry entry require required d Same amount with d.1 No entry entry require required d

e. e.1. Gross Method FC Recei vable from XD……………………… Less: Pesos payable to XD…………………… Forw ard Contract (fair value)……………….

P48,180 48,180 P 0

Net Method: Zero. No entry required. e.2. e.2. P300 asset asset Gross method FC Recei vable from XD (P40.40 x $1,200)… Less: Pesos payable to XD (fixed at P40.15) Forw ard Contract (fair value – asset)………

P48,480 48,180 P 300

Net Method: P300. Forward contract (debit balance – as asset)…

P 300

e.3. e.3. P60 P60 debi debitt balan balance ce – asse assett Gross method FC Recei vable from XD (P40.20 x $1,200)… Less: Pesos payable to XD (fixed at P40.15) Forw ard Contract (fair value – asset)………

P48,240 48,180 P 60

Net Position 12/31/x4 Gain… 3/1/x5 Net……

300 60

Forward Contract (Asset/Liability) 240… …..3/1/x5 Loss

f. P48,000 [P40, [P40, spot (current) (current) rates rates on the date of transactio transaction n x $1,200] $1,200] 2. Fair Value Hedge Hedge – Hedging Hedging an Unreco Unrecognized gnized Forei Foreign gn Currency Currency FFirm irm Commitme Commitment nt . Gross Method Method (for Net Net Position Position – same with with Exposed Exposed Liability) Liability) a. The journal journal entries to record the hedged hedged item and hedging instrume instrument nt are as follows: Hedged Hedged Item – (Unre (Unrecog cogniz nized ed Foreign Currency Firm Commitment)

Hedging Hedging Instrument Instrument – Forward Forward Contracts Contracts ( Broad Broad Approac Approach h or Gross Gross Position Position Account Accounting) ing)

December 1, 20x4

Date of Commitment (Date (Date of Issuing the Purchase Order) No journal en entry is is re required to re record the firm commitment. The forward contract is designated as a hedge of the firm commitment to purchase purchase inventory on March 1, 20x5. The hedge is accounted for as a fair value hedge.

Date of Inception/Hedging of 90 days Forwards FC Receivable fr from XD…………… Pesos Payable to XD (P40.15 x $1,200) To record forward contract to buy $1,200 using forward rate.

48,180 48,180

December 31, 20x4 (Balance Sheet Date, an intervening financial financial reporting date) FC Transaction Loss Firm Commitment [P40.40 [P40.40 – P40.15) P40.15) x $1,200 $1,200 To record record a loss loss on on firm firm commitment using the change in the forward rate. *FC – foreign foreign currenc currency y

300 300

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

300 300

Balance Sheet Presentation on 12/31/20x4 Assets Liability FC Receivable from from XD (P40.40 x $1,200)....…...P48,480 $1,200)....…...P48,480 Firm Commitment…………………………………...P 300 Less: Pesos Pesos Payable Payable to XD(fixed XD(fixed at P40.15)….… P40.15)….… 48,180 48,180 Forward Forward Contra Contract ct (fair (fair value value)… )…………… …………………P ………P 300

On March 1, 20x5 (the transaction transaction date and the settlemen settlementt date), the journal journal entries entries are: Date of of Tr Transaction an and Se Settl em ement Firm Commi tment………… FC Transaction gain……. To record a gain on fair value value of  firm commitment.

March 1, 20x5 Settl em ement Da Date/Date of of Ex Expirati on on of of Co Con tr tract

240 240

Inventory (P (P40.20 x $1,200)…………. Cash ………………………………… To record record the purchase purchase of  inventory for $1,200 at spot rate.

48,240

Firm Co Commi tment……………………. Inventory……………………………. 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

60

48,240

60

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

240 240

Peso Pesoss Pay Payab able le from from XD…… XD………… ………. …. Cash………………………………. To record record payment to exchange dealer.

48,1 48,180 80

Inve Invest stme ment nt in in FC…… FC………… ………… ………… …….. FC Receivable from XD To record receipt of foreign currency.

48,2 48,240 40

Cash……………………………………. Investment in FC……………..…... To record record conversion of US dollars dollars into cash for purchase purchase of  inventory.

48,240

48,180

48,240

48,240

commitment. This treatment is an accordance accordance with PAS 39 par. 89b. Firm Commitment 3/1/ 3/1/x5 x5 Gain Gain……. ……. 240 240 300… 300… …..1 …..12/ 2/31 31/x /x4 4 Loss Loss 60 60 3/1/x5 Net

b. b.1. b.2. b.2. b.3. b.4. b.5. b.6.

P300 loss loss - [(P40.4 [(P40.40 0 – P40.15) P40.15) x $1,200 $1,200]] P30 P300 0 gain gain - [(P4 [(P40.4 0.40 0 – P40. P40.15 15)) x $1,2 $1,200 00]] P300 loss loss – P300 P300 gain gain = P0 P240 gain - [(P40.4 [(P40.40 0 – P40.20) P40.20) x $1,200} $1,200} P240 loss loss - [(P40.4 [(P40.40 0 – P40.20) P40.20) x $1,200 $1,200]] P240 P240 loss loss – P240 P240 gain gain = P0

c. – same same with Expose Exposed d Liabili Liability ty c.1. c.1. P48,18 P48,180 0 - [P40.15 [P40.15,, origin original al (90-day (90-day)) forward forward rate rate on the the date date of hedgin hedging g x $1,200 $1,200]] c.2. c.2. No entry entry requir required ed c.3. Same amount with d.1 c.4. c.4. No entry entry requir required ed d. d.1. Zero, Zero, no entry entry require required d d.2. P300 P300 liabil liability, ity, [(P40.4 [(P40.40 0 – P40.15 P40.15)) x $1,2 $1,200] 00] d.3. P60, liability liability Firm Commitment 3/1/ 3/1/x5 x5 Gain Gain……. ……. 240 240 300… 300… …..1 …..12/ 2/31 31/x /x4 4 Loss Loss 60 3/1/x5 Net

e. Same with Exposed Liability e.1. Net Method: Zero. No entry required. Gross Method FC Recei vable from XD……………………… Less: Pesos payable to XD…………………… Forw ard Contract (fair value)……………….

P48,180 48,180 P 0

e.2. e.2. P300 asset asset Net Method: P300. Forward contract (debit balance – as asset)…

P 300

Gross method FC Recei vable from XD (P40.40 x $1,200)… Less: Pesos payable to XD (fixed at P40.15) Forw ard Contract (fair value – asset)………

P48,480 48,180 P 300

e.3. e.3. P60 debit debit balance balance – asset asset Gross method FC Recei vable from XD (P40.20 x $1,200)… Less: Pesos payable to XD (fixed at P40.15) Forw ard Contract (fair value – asset)………

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

P48,240 48,180 P 60

f. P48,240, P48,240, spot rate rate on the date of transac transaction. tion. Inventory at spot rate on the date of transaction (P40.20 x $1,200)…………….P48,240 g. P48,180, P48,180, original original (90-day) forward forward rate rate on the date of hedging hedging Inventory at spot rate on the date of transaction (P40.20 x $1,200)…………….P48,240 Less Less:: Fir Firm m Com Commi mitm tmen entt acc accou ount nt – liab liabililit ity, y, 3/1/ 3/1/20 20x5 x5…… ………… ………… ………… ………… ………… …….. 60 Inventory at original (90-day) forward rate on the date of hedging, P40.15….P48,180 3. Cash Cash Flow Hedg Hedge e - Hedge Hedge of a Forec Forecast asted ed Transa Transacti ction. on. Gross Method Method (for Net Net Position Position – same with with Exposed Exposed Liability) Liability) a. The journal entries to record the hedged item and hedging instrument are as follows: follows: Hedging Hedging Instrument Instrument – Forward Forward Contracts Contracts ( Broad Broad Approach Approach or Gross Gross Position Position Accountin Accounting) g)

Hedged Hedged Item –  Forecasted Transaction Date of o f Forecast

December 1, 20x4 Date of Inception/Hedging of 90 days Forw ards

No jour journa nall entr entry y is requ requir ired ed to reco record rd the the fore foreca cast sted ed transaction. The forward contract is designated as a hedge against the exposure to increases in the dollar   rate on March 1, 20x5.

FC Rece Receiva ivabl ble e from from XD……… XD…………… …… Pesos Payable to XD (P40.15 x $1,200) To record forward contract to buy $1,200 using forward rate.

48,1 48,180 80 48,180

December 31, 20x4 (Balance Sheet Date, an intervening financial financial reporting date) No entry required, since it is only a forecasted tran transa sact ction ion not not guar guaran ante teed ed such such as firm firm comm commitm itmen ent. t.

FC Re R ecei vable from XD OCII – Exch OC Exchan ange ge Gain Gain (B/S (B/S)) [(P40.40 [(P40.40 – P40.15) P40.15) x $1,200] $1,200] To record a gain on foreign currency to be received from FC dealer. FC – foreign foreign curre currency; ncy; OCI - Other Other Compr Comprehe ehensive nsive Income; Income; B/S – Balance Balance Sheet Sheet

300 300

Balance Sheet Presentation on 12/31/20x4 FC Rece Receiva ivable ble from from XD XD (P40 (P40.40 .40 x $1,20 $1,200) 0)… … P48,48 P48,480 0 Less: Less: Pes Pesos os pay payab able le to to XD (fix (fixed ed at P40. P40.15 15)) 48,1 48,180 80 For Forward ward Cont Contrract act (f (fair va value lue - asset sset))…..… …..….. .. P 300 300

On March 1, 2011 (the transaction date and the settlement date), date), the journal entries are: Date of Transaction and Se Settlement

March 1, 20x5 Settlement Date/Date of Expi ra rati on on of Contract OCI – Exchange Loss (B (B/S)……… FC Receivable from XD……… XD……… [(P40.40 [(P40.40 – P40.20) P40.20) x $1,200] $1,200] To record a loss on foreign currency to be received from FC dealer.

240 240

Peso Pesoss Paya Payabl ble e from from XD…… XD………… ………. …. Cash………………………………. To record record payment to exchange dealer.

48,1 48,180 80

Inve Invest stme ment nt in in FC…… FC………… ………… ………… …….. FC Receivable from XD To record receipt of foreign

48,2 48,240 40

48,180

48,240

currency. Machinery (P40.20 x $1,200)………... Cash ………………………………… To record record the purchase purchase of  equipment for $1,200 at the spot  rate of P40.20

48,240

OCI – Ex Exchange Gain……………….. Machinery………………………….. To remove the gain recognized in 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 i s adopted.

60

48,240

Cash……………………………………. Investment in FC…………………. To record record conversion of US dollars dollars into cash cash for purchas purchase e of  machinery.

60

3/1/x5

48,240 48,240

Other Comprehensive Income Loss 240 300… ….12/31/x4 Ga Gain 60 60 3/1/x5

b. b.1. b.2. b.3. b.4.

Gain or loss on hedged item, 3/1/20x4: None, no entry required P300 P300 gain, gain, other other compre comprehen hensiv sive e incom income e - [(P40.4 [(P40.40 0 – P40.15) P40.15) x $1,200 $1,200]] None. Gain or or loss on hedged hedged item, item, 3/1/20x4: 3/1/20x4: None, no no entry entry required required for for gain or loss. the only entry entry is to record record the purchas purchase e of machinery. machinery. b.5. P240 P240 loss, loss, other other comp compreh rehens ensive ive income income - [(P40.4 [(P40.40 0 – P40.20 P40.20)) x $1,200 $1,200]] to be reco recorde rded d on March March 1, 20x5. 20x5. The balance balance of of the OCI OCI – gain amounted amounted to P60 computed computed as follows: 3/1/x5

Other Comprehensive Comprehensive Income Loss 240 300… ….12/31/x4 Ga Gain 60 3/1/x5

c. Same with Exposed Liability c.1. Net Method: Zero. No entry entry required. Gross Method FC Recei vable from XD……………………… Less: Pesos payable to XD…………………… Forw ard Contract (fair value)……………….

P48,180 48,180 P 0

c.2. c.2. P300 asset asset Net Method: P300. Forward contract (debit balance – as asset)…

P 300

Gross method FC Receivable from XD (P40.40 x $1,200)… Less: Pesos payable to XD (fixed at P40.15) Forw ard Contract (fair value – asset)………

P48,480 48,180 P 300

c.3. c.3. P60 debit debit balanc balance e – asset asset Gross method FC Recei vable from XD (P40.20 x $1,200)… Less: Pesos payable to XD (fixed at P40.15) Forw ard Contract (fair value – asset)………

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

P48,240 48,180 P 60

3/1/x5

Net……

60

4. Not a Hedge Accounting Accounting – Speculation Speculation. Gross Method Method (for Net Net Position Position – same with Exposed Exposed Liability Liability)) a. The journal entries to record the hedged hedged item and hedging instrument are as follows: follows:

Hedge Hedged d Item Item - Specu Speculat lation ion

Hedging Hedging Instrument Instrument – Forward Forward Contracts Contracts ( Broad Broad Approach Approach or Gross Gross Position Position Accountin Accounting) g) December 1, 20x4 Date of Inception/Hedging of 90 days Forwards FC Rece Receiv ivab able le from from XD…… XD………… ……… … Pesos Payable to XD (P40.15 x $1,200) To record forward contract to buy $1,000 using forward rate.

48,1 48,180 80 48,180

December 31, 20x4 (Balance Sheet Date an intervening financial financial reporting date) FC Recei vable from XD FC Transaction Gain [(P40.40 [(P40.40 – P40.15) P40.15) x $1,200] $1,200] To record a gain on foreign currency to be received from FC dealer.

300 300

Balance Sheet Presentation on 12/31/20x4 FC Rece Receiva ivable ble from from XD XD (P40 (P40.40 .40 x $1,20 $1,200) 0)… … P48,48 P48,480 0 Less: Less: Pes Pesos os pay payab able le to to XD (fix (fixed ed at P40. P40.15 15)) 48,1 48,180 80 For Forward ward Cont Contrract act (fa (fair valu value e – asse assett)……… ……… P 300 300 March 1, 20x5 Settlement Date/Date of Expiration of Contract FC Transacti on on Loss………………… FC Receivable from XD…………. [(P40.40 [(P40.40 – P40.20) P40.20) x $1,200] $1,200] To record record a loss on foreig foreign n currency to be received from FC dealer.

240

Peso Pesoss Paya Payabl ble e from from XD…… XD………… ………. …. Cash………………………………. To record record payment to exchange dealer.

48,1 48,180 80

Inve Invest stme ment nt in in FC…… FC………… ………… ………… …….. FC Receivable from XD To record record receipt of foreign currency.

48,2 48,240 40

Cash Cash…… ………… ………… ………… ………… ………… ………… …….. Investment in FC…………………. To record record conversion of US dollars dollars into cash cash.

48,2 48,240 40

b. b.1. No gain or loss, since it is the date of hedging. b.2. P300 P300 gain gain - [(P40.4 [(P40.40 0 – P40.15) P40.15) x $1,20 $1,200], 0], only only hedging hedging instru instrumen ment. t.

240

48,180

48,240

48,240

b.3. P240 loss c. c.1. c.2. c.2. c.3. c.4. c.4.

P48,180 P48,180 - [P40.15, [P40.15, origina originall (90-day) (90-day) forward rate on the date of hedging hedging x $1,200] $1,200] No entry entry requir required ed Same amount with c.1 No entry entry requ requir ired ed

d. d.1. Net Method: Zero. No entry required. Gross Method FC Recei vable from XD……………………… Less: Pesos payable to XD…………………… Forw ard Contract (fair value)……………….

P48,180 48,180 P 0

d.2. P300 P300 asset asset Net Method: P300. Forward contract (debit balance – as asset)…

P 300

Gross method FC Recei vable from XD (P40.40 x $1,200)… Less: Pesos payable to XD (fixed at P40.15) Forw ard Contract (fair value – asset)………

P48,480 48,180 P 300

d.3. P60 debit debit balance balance – asset asset Gross method FC Recei vable from XD (P40.20 x $1,200)… Less: Pesos payable to XD (fixed at P40.15) Forw ard Contract (fair value – asset)………

P48,240 48,180 P 60

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

Problem II (Discounting the Fair Value of the Forward Contract) 1. Not a He Hedge dge Accounting Accounting - Importing Importing Transaction Transaction (Exposed (Exposed Liability). Liability). The journal entries to record the hedged item and hedging instrument are as follows: Hedged Hedged Item – Importing Importing Transact Transaction ion (Exposed Liability) Transaction Date Purchases ($1,200 x P40)…………... Accounts payable………………. To record purchase of goods on account using the spot rate on  2/1/1/x4. *XD – exchange exchange dealer  dealer 

Hedging Hedging Instrument Instrument – Forward Forward Contracts Contracts ( Broad Broad Approach Approach or Gross Gross Position Position Accounting Accounting)) December 1, 20x4 Date of Inception/Hedging of 90 days Forwards

48,000 48,000

FC Recei vable fr from XD XD…………… Pesos Payable to XD (P40.15 x $1,200) To record forward contract to buy $1,000 using forward rate.

48,180 48,180

If the financial financial statements statements are prepared prepared on December December 1, 20x4, the value value of the forward contract is as follows: Balance Sheet Presentation on 12/1/20x4 FC Rece Receiv ivab able le from from XD……… XD…………… …………… ………… … P48, P48,18 180 0

Less Less:: Peso Pesoss paya payabl ble e to XD… XD……… ………… ………… ……… … Forw ar ard Contract (fair value)……………….

P

48,1 48,180 80 0

December 31, 20x4 (Balance Sheet Date an intervening financial financial reporting date) FC Transaction Loss 360 FC Recei vable from XD…………… 294 Account payable……………. 360 FC Transaction Gain To record a gain on foreign [P40.30 [P40.30 – P40.00) P40.00) x $1,200 $1,200 To record record a loss on the the exposed exposed currency to be received from liability denominated in foreign FC dealer. currency. Note: Discounted or present present value for hedged item is Gai n [(P40.40 – P40.15) x $1,200]............ not necessary for exposed exposed asset or liability since spot Less Less:: Disc Discou ount nt (P300 (P300 x 12% 12% x 2/1 2/12) 2)…… ………… ……… … Rate is in effect. Present value of gain*…………………………. * or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2 months = 2%

294

P 300 ____ ____6 6 P294

If the financial statements are prepared on December 31, 20x4, the value of the forward contract contract is as follows: follows: Balance Sheet Presentation on 12/31/20x4 FC Rece Receiva ivable ble from from XD XD (P40. (P40.40 40 x $1,200 $1,200))- P6. P48,47 P48,474 4 Less: Less: Pesos Pesos payab payable le to XD (fixe (fixed d at at P40.15 P40.15)… )… 48,180 48,180 Forw ar ard Contract (fai r value – asset)……… P 294

On March 1, 20x5 (the transaction date and the settlement settlement date), the journal entries are: March 1, 20x5 Settlement Date/Date of Expirati on of Contract

Settlement D Da ate

Accounts payable 120 FC Transaction gain……. 120 [(P40. [(P40.20 20 – P40.30 P40.30)) x $1,200 $1,200}…… }…….. .. To record a gain from from 12/31/x4 to 3/1/x5 on liability denominated in FC. present value for hedged item is Note: Discounted or present not necessary for exposed asset or liability  since spot rate is in effect.

Accounts pa p ayable…………………… Cash (refer to note below)……… To record payment of accounts accounts payable at spot rate.

48,240 48,240

FC Transacti on Loss FC Receivable from XD To record record a loss on foreig foreign n currency to be received from FC dealer.

234 234

Over Overal alll gain gain (P40 (P40.2 .20 0 – P40. P40.15 15)) x $1,2 $1,200 00 …….. …….. Less Less:: 12/31 12/31/2 /20x 0x4 4 Gain Gain at pre prese sent nt valu value… e……. …... FC Transacti on loss……………………………… Peso Pesoss Paya Payabl ble e from from XD…… XD………… ………. …. Cash………………………………. To record record payment to exchange dealer.

48,1 48,180 80

Inv Investm estmen entt in in FC…… FC………… ………… ………… …….. FC Receivable from XD To record record receipt of foreign Currency.

48,2 48,240 40

P 60 __29 __294 4 P234

48,180

48,240

Cash……………………………………. 48,240 I nv nvestment in in FC FC………… …… ………. 48,240 To record conversion of US dollars dollars into cash for paymen paymentt of  accounts payable. 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.

a. a.1. a.2. a.3. a.4. a.5. a.6.

P360 loss P294 gain P360 loss – P294 gain = P66 net loss (decrease (decrease in net net income income)) P120 gain - [(P40.2 [(P40.20 0 – P40.30) P40.30) x $1,200} $1,200} P234 P234 loss loss P234 P234 loss loss – P120 P120 gain gain = P114 P114 net loss loss (dec (decrea rease se in net inco income) me)

b. b.1. Net Method: Zero. No entry required. Gross Method FC Recei vable from XD……………………… Less: Pesos payable to XD…………………… Forw ard Contract (fai r value)……………….

P48,180 48,180 P 0

b.2. P294 P294 asset asset Gross method FC Recei vable from XD (P40.40 x $1,200)- P6 P6. Less: Pesos payable to XD (fixed at P40.15)… Forw ard Contract (fair value – asset)………

P48,474 48,180 P 294

Net Method: P294. Forward contract (debit balance – as asset)…

P 294

b.3. P60 debit debit balance balance – asset asset Gross method FC Recei vable from XD (P40.20 x $1,200)… Less: Pesos payable to XD (fixed at P40.15) Forw ard Contract (fair value – asset)………

P48,240 48,180 P 60

Net Method 12/31/x4 Gain… 3/1/x5 Net……

300 60

Forward Contract (Asset/Liability) 240… …..3/1/x5 Loss

2. Fair Value Hedge Hedge – Hedging Hedging an Unreco Unrecognized gnized Forei Foreign gn Currency Currency Firm Commitment Commitment . The journal entries to record the hedged item and hedging instrument are as follows: Hedged Hedged Item – (Unre (Unrecog cogniz nized ed Foreign Currency Firm Commitment)

Hedging Hedging Instrument Instrument – Forward Forward Contracts Contracts ( Broad Broad Approach Approach or Gross Gross Position Position Accounting) Accounting)

December 1, 20x4 Date of Commitment (Date (Date of Issuing the Purchase Order) Date of Inception/Hedging of 90 days Forwards No journal en entry is is re required to re record the firm commitment. The forward 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.

FC Receivable fr from XD…………… Pesos Payable to XD (P40.15 x $1,200) To record forward contract to buy $1,200 using forward rate.

48,180

This is computed using the change in the forward rate. These entries are as follows: December 31, 20x4 (Balance Sheet Date, an intervening financial financial reporting date)

48,180

FC Transaction Loss 294 Firm Commitment [P40.40 [P40.40 – P40.15) P40.15) x $1,200 $1,200 To record record a loss loss on on firm firm commitment using the change in the forward rate. Loss…………………………………..................... Less Less:: Dis Disco coun untt (P3 (P300 00 x 12% 12% x 2/1 2/12) 2)…… ………… ……… … Presen t val ue ue of of loss*…………………… …… …….

FC Receivable from XD…………… 294 FC Transaction Gain 294 [(P40.40 [(P40.40 – P40.15) P40.15) x $1,200] $1,200] To record a gain on foreign currency to be received from FC dealer. P 300 Gai n [(P40.40 – P40.15) x $1,200] P 300 ____ ____6 6 Less Less:: Dis Disco coun untt (P3 (P300 00 x 12% 12% x 2/1 2/12) 2)…… ………… ………. …... ____ ____6 6 P294 Present va value of of ga gai n* n*…………………………… P294 * or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2 months = 2% 294

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

On March 1, 20x5 (the transaction date and the settlement date), the journal entries are: Date of of Tr Transaction an and Se Settl em ement Firm Commi tment………… FC Transaction gain……. To record a gain on fair value value of  firm commitment.

234 234

Overa verallll loss loss (P40. P40.2 20 – P40. P40.15 15)) x $1,20 1,200 0 ………. ………... Less Less:: 12/3 12/31/ 1/20 20x4 x4 Gai Gain n at pre prese sent nt val value ue…… ……… … FC T ra ransacti on on G ai ain………… …… ………… …… ………..

Inventory (P40.20 x $1,200)…………. Cash ………………………………… To record record the purchase purchase of  inventory for $1,200 at spot rate.

March 1, 20x5 Settl em ement Da Date/Date of of Ex Expirati on on of of Co Con tr tract

P 60 __29 __294 4 P234

48,240 48,240

FC Transaction Loss …………… 234 FC Re Receivable fr from XD XD……… To record record a loss on foreig foreign n currency to be received from exchange dealer. Overa verallll gain (P4 (P40.20 0.20 – P40 P40.15) .15) x $1,2 $1,200 00 …….. …….. Less Less:: 12/3 12/31/ 1/20 20x4 x4 Gai Gain n at pre prese sent nt va value… lue……. …... FC T ra ransacti on on l os oss…………………… …… ………… Peso Pesoss Paya Payabl ble e fro from m XD… XD……… ………… …….. Cash………………………………. To record record payment to exchange dealer.

48,1 48,180 80

Inve Invest stme ment nt in in FC…… FC………… ………… ………… …….. FC Receivable from XD To record receipt of foreign currency.

48,2 48,240 40

Cash……………………………………. Investment in FC……………..…... To record record conversion of US dollars dollars into cash for purchase purchase of  inventory.

48,240

234

P 60 __29 __294 4 P234

48,180

48,240

48,240

Firm Co Commi tment……………………. Inventory……………………………. To remove the carrying amount of  the firm commitment from the balance sheet6 and adjust the initial carrying amount of the invent inventory ory that that result resultss from from the firm commitment. This treatment is an accordance with PAS 39 par. 89b.

60 60

Firm Commitment 3/1/ 3/1/x5 x5 Gain Gain…… …….. 234 234 294… 294… …..1 …..12/ 2/31 31/x /x4 4 Loss Loss 60 60 3/1/x5 Net

a. a.1. P294 loss Fore Foreig ign n Curr Curren ency cy Exch Exchan ange ge Loss Loss [(P4 [(P40. 0.40 40 – P40. P40.15 15)) x $1,2 $1,200 00]… ]……… ……… … Less Less:: Disc Discou ount nt (P30 (P300 0 x 12% 12% x 2/12 2/12))………… ……………… ………… ………… ………… ………… ………… ……… … Pre Present ent va value lue of of lo loss*… ss*……… ……… ……………… ……………… ……… ………… ………………… …………… ………… ………

P 300 300 ____ ____6 6 P294 P294

a.2. P294 gain Fore oreign ign Cur Curre renc ncy y Exc Excha han nge Gain Gain [(P40 (P40.4 .40 0 – P40. P40.15 15)) x $1,20 1,200 0]……… ]……….. Less Less:: Disc Discou ount nt (P30 (P300 0 x 12% 12% x 2/12 2/12))………… ……………… ………… ………… ………… ………… ………… ……… … Presen t va val ue ue o f gain*………………… …… …………………………… …… …………

P 300 300 ____ ____6 6 P294

a.3. a.3. P294 P294 loss loss(a (a.1 .1)) – P294 P294 gain gain (a.2 (a.2)) = P0 a.4. P234 P234 gain gain Overa verallll loss loss (P40. P40.2 20 – P40. P40.15 15)) x $1,20 1,200 0 ………… ……………… ………… ……… ………… ……………… ……… Less Less:: 12/ 12/31 31/2 /20x 0x4 4 Gai Gain n at at pre prese sent nt valu value… e……… ………… ………… ………… ………… ………… ………. …. FC Tran Transsact action ion Ga Gain…… in……… …………… ……………… ………… ………… ………… ………… ……… …………… ……………. ….

P 60 __29 __294 4 P234 P234

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

P 60 60 __294 P234

a.6. a.6. P234 P234 gain gain (a.4) (a.4) – P234 P234 loss loss (a.5) (a.5) = P0 b. b.1. Zero, no entry entry required required b.2. P294 liability Fore Foreig ign n Curr Curren ency cy Exch Exchan ange ge Loss Loss [(P4 [(P40. 0.40 40 – P40. P40.15 15)) x $1,2 $1,200 00]… ]……… ……… … Less Less:: Dis Disc count ount (P3 (P300 00 x 12% 12% x 2/1 2/12)…… 2)………… ………… ………… ………… ………… ………… ………… ……… … Pres Presen entt valu value e of loss loss** / Firm Firm Comm Commit itme ment nt…… ………… ………… ………… ………… ………… ………. ….

P 300 300 ___ ____6 P294 P294

b.3. b.3. P60 P60 - liab liabililit ity y Firm Commitment 3/1/ 3/1/x5 x5 Gain Gain…… …….. 234 234 294… 294… …..1 …..12/ 2/31 31/x /x4 4 Loss Loss 60 3/1/x5 Net

c. c.1. Net Method: Zero. No entry required. Gross Method FC Recei vable from XD……………………… Less: Pesos payable to XD…………………… Forw ard Contract (fair value)……………….

c.2. c.2. P294 asset asset

P48,180 48,180 P 0

Gross method FC Recei vable from XD (P40.40 x $1,200)- P6 P6. Less: Pesos payable to XD (fixed at P40.15)… Forw ard Contract (fair value – asset)………

P48,474 48,180 P 294

Net Method: P294. Forward contract (d (debit balance – as asset)…

P 294

c.3. c.3. P60 debit debit balanc balance e – asset asset Gross method FC Recei vable from XD (P40.20 x $1,200)… Less: Pesos payable to XD (fixed at P40.15) Forw ard Contract (fair value – asset)………

P48,240 48,180 P 60

Net Method 12/31/x4 Gain… 3/1/x5 Net……

300 60

Forward Contract (Asset/Liability) 240… …..3/1/x5 Loss

3. Cash Cash Flow Hedg Hedge e - Hedge Hedge of a Forec Forecast asted ed Transa Transacti ction. on. The journal entries to record the hedged item and hedging instrument are as follows: Hedging Hedging Instrument Instrument – Forward Forward Contracts Contracts ( Broad Broad Approac Approach h or Gross Gross Position Position Account Accounting) ing)

Hedged Hedged Item Item –  Forecasted Transaction Date of o f Forecast

December 1, 20x4 Date of Inception/Hedging of 90 days Forwards

No jou journ rnal al entr entry y is req requi uire red d to rec recor ord d the the fore foreca cast sted ed transaction. The forward contract is designated as a hedge against the exposure to increases in the dollar   rate on March March 1, 20x5.

FC Rece Receiv ivab able le fro from m XD…… XD………… ……… … Pesos Payable to XD (P40.15 x $1,200) To record forward contract to buy $1,200 using forward rate.

48,1 48,180 80 48,180

December 31, 20x4 (Balance Sheet Date, an intervening financial financial reporting date) No entry required, since it is only a forecasted tran transa sact ction ion not not guar guaran ante teed ed suc such h as fir firm m comm commitm itmen ent. t.

FC Receivable from XD…………… 294 OCII – Exch OC Exchan ange ge Gai Gain n (B/S (B/S)… )….. .... .. 294 To record a gain on foreign currency to be received from FC dealer. Gain [(P40.40 – P4 P40.15) x $1,200] P 300 Less: Less: Discou Discount nt (P300 (P300 x 12% 12% x 2/12)… 2/12)…………… ………….. .. ____6 ____6 Pres Presen entt val value ue of gain* gain*……… …………… ………… ………… ………… …… P294 P294 * or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2 months = 2% Balance Sheet Presentation on 12/31/20x4 FC Receiv Receivable able from XD (P40.40 (P40.40 x $1,200) $1,200)-P6 -P6 P48,474 P48,474 Less Less:: Peso Pesoss pay payab able le to to XD (fix (fixed ed at P40. P40.15 15)) 48,1 48,180 80 Forwa orward rd Cont Contrract act (f (fair valu value e - asset sset))…..… …..….. .. P 294 294

On March 1, 20x5 (the transaction date and the settlement date), the journal entries are: Date of T ra ran sa saction and Settlemen t

March 1, 20x5 Settl em ement Da Date/Date of Expirati on on of of Co Con tr tract OCI – Exchange Loss (B/S)………. FC Re Receivable from XD………

234 234

To record a loss on foreign currency to be received from FC dealer. Over Overa all gain gain (P40 (P40.2 .20 0 – P40. P40.15 15)) x $1,2 $1,200 00 …….. …….. Less: Less: 12/31/ 12/31/20x 20x4 4 Gain Gain at presen presentt value value……. ……... FC Tran Transa sact ctio ion n loss loss…… ………… ………… ………… ………… ………… ……

Machinery (P40.20 x $1,200)………... Cash ………………………………… To record record the purchase purchase of  equipment for $1,000 at the spot  rate of P40.20 P40.20

48,240

OCI – Ex Exchange Gain……………….. Machinery………………………….. To remove the gain recognized in 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.

60

48,240

60

Peso Pesoss Paya Payabl ble e fro from m XD…… XD………… ………. …. Cash………………………………. To record record payment to exchange dealer.

48,1 48,180 80

Inve Invest stme ment nt in in FC…… FC………… ………… ………… …….. FC Receivable from XD To record record receipt of foreign currency.

48,2 48,240 40

Cash……………………………………. Investment in FC…………………. To record record conversion of US dollars dollars into cash for purchase purchase of  machinery.

48,240

3/1/x5

P 60 __294 __294 P234 P234

48,180

48,240

48,240

Other Comprehensive Income Loss 234 294… ….12/31/x4 Ga Gain 60 60 3/1/x5

a. a.1. Gain or loss loss on hedged item, item, 3/1/20x4: 3/1/20x4: None, no entry entry required. required. a.2. P294 P294 gain, gain, other other compreh comprehens ensive ive incom income e Fore Foreig ign n Curr Curren ency cy Exch Exchan ange ge Gain Gain [(P4 [(P40. 0.40 40 – P40. P40.15 15)) x $1,2 $1,200 00]… ]……… …….. Less Less:: Disc Discou ount nt (P30 (P300 0 x 12% 12% x 2/12 2/12))………… ……………… ………… ………… ………… ………… ………… ……… … Presen t va val ue ue o f gain*………………… …… …………………………… …… …………

P 300 300 ____ ____6 6 P294

a.3. a.3. No Non ne a.4. Gain or loss on hedged item, 3/1/20x4: None, None, no entry required for gain or loss. The only entry is to record the purchase of machinery. a.4. P234 P234 gain gain Overa verallll loss loss (P40. P40.2 20 – P40. P40.15 15)) x $1,20 1,200 0 ………… ……………… ………… ……… ………… ……………… ……… Less Less:: 12/ 12/31 31/2 /20x 0x4 4 Gai Gain n at at pre prese sent nt valu value… e……… ………… ………… ………… ………… ………… ………. …. FC Tran Transsact action ion Ga Gain…… in……… …………… ……………… ………… ………… ………… ………… ……… …………… ……………. ….

P 60 __29 __294 4 P234 P234

a.5. a.5. P234 P234 loss loss,, othe otherr comp compre rehe hens nsiv ive e inco income me – {[( {[(P40. P40.40 40 – P40. P40.20 20)) x $1,2 $1,200 00]] – P6} P6} to be record recorded ed on on March March 1, 20x5. 20x5. The The bala balance nce of the the OCI OCI – gain gain amoun amounted ted to P60 P60 computed as follows: 3/1/x5

b.

Other Comprehensive Income Loss 234 294… ….12/31/x4 Ga Gain 60 3/1/x5

b.1. Net Method: Zero. No entry required. Gross Method FC Recei vable from XD……………………… Less: Pesos payable to XD…………………… Forw ard Contract (fair value)……………….

P48,180 48,180 P 0

b.2. P294 P294 asset asset Gross method FC Recei vable from XD (P40.40 x $1,200)- P6 P6. Less: Pesos payable to XD (fixed at P40.15)… Forw ard Contract (fair value – asset)………

P48,474 48,180 P 294

Net Method: P294. Forward contract (d (debit balance – as asset)…

P 294

b.3. P60 debit debit balance balance – asset asset Gross method FC Recei vable from XD (P40.20 x $1,200)… Less: Pesos payable to XD (fixed at P40.15) Forw ard Contract (fair value – asset)………

P48,240 48,180 P 60

Net Method 12/31/x4 Gain… 3/1/x5 Net……

300 60

Forward Contract (Asset/Liability) 240… …..3/1/x5 Loss

4. Not a Hedge Accounting Accounting – Speculation Speculation. The journal entries to record the hedged hedged item and hedging instrument instrument are as follows: Hedged Hedged Item Item - Specu Speculat lation ion

Hedging Hedging Instrument Instrument – Forward Forward Contracts Contracts ( Broad Broad Approach Approach or Gross Gross Position Position Accountin Accounting) g) December 1, 20x4 Date of Inception/Hedging of 90 days Forwards FC Rece Receiv ivab able le from from XD…… XD………… ……… … Pesos Payable to XD (P40.15 x $1,200) To record forward contract to buy $1,000 using forward rate.

48,1 48,180 80 48,180

December 31, 20x4 (Balance Sheet Date an intervening financial financial reporting date) FC Recei vable from XD 294 FC Transaction Gain 294 To record a gain on foreign currency to be received from FC dealer. Gai n [( [(P40.40 – P4 P40.15) x $1,200] P 300 Less: Less: Discoun Discountt (P30 (P300 0 x 12% x 2/12 2/12)…… )……………. ………... ____6 ____6 Pres Presen entt val value ue of gain* gain*…… ………… ………… ………… ………… ……… … P294 P294 * or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2 months = 2% Balance Sheet Presentation on 12/31/20x4 FC Receiv Receivable able from XD (P40.40 (P40.40 x $1,200) $1,200)-P6 -P6 P48,474 P48,474 Less Less:: Peso Pesoss pay payab able le to to XD (fix (fixed ed at P40. P40.15 15)) 48,1 48,180 80 For Forward ward Cont Contrract act (f (fair value lue – asse assett)……… ……… P 294 294

March 1, 20x5 Settlement Date/Date of Expiration of Contract FC Transacti on on Loss………………… 234 FC Receivable from XD…………. To record record a loss on foreig foreign n currency to be received from FC dealer. Over Overal alll gain gain (P40 (P40.2 .20 0 – P40. P40.15 15)) x $1,2 $1,200 00 …….. …….. Less Less:: 12/31 12/31/2 /20x 0x4 4 Gain Gain at pre prese sent nt valu value… e……. …... FC Tran Transa sact ctio ion n loss loss…… ………… ………… ………… ………… ………… …… Peso Pesoss Paya Payabl ble e fro from m XD…… XD………… ………. …. Cash………………………………. To record record payment to exchange dealer.

48,1 48,180 80

Inv Investm estmen entt in in FC…… FC………… ………… ………… …….. FC Receivable from XD To record record receipt of foreign currency.

40,2 40,200 00

Cash Cash…… ………… ………… ………… ………… ………… ………… …….. Investment in FC…………………. To record record conversion of US dollars dollars into cash cash.

48,2 48,240 40

a. a.1. P294 gain Fore Foreig ign n Curr Curren ency cy Exch Exchan ange ge Gain Gain [(P4 [(P40. 0.40 40 – P40. P40.15 15)) x $1,2 $1,200 00]… ]……… …….. Less Less:: Disc Discou ount nt (P30 (P300 0 x 12% 12% x 2/12 2/12))………… ……………… ………… ………… ………… ………… ………… ……… … Presen t va val ue ue o f gain*………………… …… …………………………… …… …………

P 300 300 ____ ____6 6 P294

a.3. a.3. P294 P294 gai gain. n. a.5. P234 P234 loss loss – other other compr comprehe ehensi nsive ve income income Overall gain (P40.20 – P40.15) x $1,200 …….. Less: 12/31/20x4 Gain at present value…….. FC Transaction loss………………………………

P 60 60 __294 P234

b. b.1. Zero, no entry required b.2. P294 liability Fore Foreig ign n Curr Curren ency cy Exch Exchan ange ge Loss Loss [(P4 [(P40. 0.40 40 – P40. P40.15 15)) x $1,2 $1,200 00]… ]……… ……… … Less Less:: Disc Discou ount nt (P30 (P300 0 x 12% 12% x 2/12 2/12))………… ……………… ………… ………… ………… ………… ………… ……… … Pres Presen entt valu value e of loss loss** / Firm Firm Comm Commit itme ment nt…… ………… ………… ………… ………… ………… ………. ….

P 300 300 ____ ____6 6 P294 P294

b.3. b.3. P60 P60 - liab liabililit ity y Firm Commitment 3/1/ 3/1/x5 x5 Gain Gain…… …….. 234 234 294… 294… …..1 …..12/ 2/31 31/x /x4 4 Loss Loss 60 3/1/x5 Net

c. c.1. Net Method: Zero. No entry required. Gross Method FC Recei vable from XD……………………… Less: Pesos payable to XD…………………… Forw ard Contract (fair value)……………….

P48,180 48,180 P 0

234

P 60 __29 __294 4 P234 P234

48,180

40,200

48,240

c.2. c.2. P294 asset asset Gross method FC Recei vable from XD (P40.40 x $1,200)- P6 P6. Less: Pesos payable to XD (fixed at P4 P40.15)… Forw ard Contract (fair value – asset)………

P48,474 48,180 P 294

Net Method: P294. Forward contract (debit balance – as asset)…

P 294

c.3. c.3. P60 debit debit balanc balance e – asset asset Gross method FC Recei vable from XD (P (P40.20 x $1,200)… Less: Pesos payable to XD (fixed at P40.15) Forw ard Contract (fair value – asset)………

P48,240 48,180 P 60

Net Method 12/31/x4 Gain… 3/1/x5 Net……

300 60

Forward Contract (Asset/Liability) 240… …..3/1/x5 Loss

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

November 1, 20x4…………………. December 31, 20x4…………………. March 1, 20x5…………………………………… Au gust 1, 1, 20 20x5………………………………..

Spot Rate P40.60 P40.75 P40.70 P41.55****

Forward Rate for  8/1/20x5 Settlement (or Expiration) P41.25 (*270 da days) P41.00 (**210 days) P40.95 (***150 days)

*original 270-day forward 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 forward rate at expiration or maturity is equal to spot rate as the remaining period of the forward contract contract is  zero.

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

Hedged Hedged Item – (Unre (Unrecog cogniz nized ed Foreign Currency Firm Commitment)

November 1, 20x4 Date of Commitment (Date of of Issuing the Purchase Order) Date of I nception/Hedging of 27 270 days Forwards No jo journal en entry is re required to to re record the fifirm commitment. The forward contract is designated as a hedge of the firm commitment to purchase purchase inventory on March 1, 20x5. The hedge is accounted for as a fair value hedge.

FC Recei va vable fr from XD XD…………… Pesos Payable to XD (P41.25 x $1,200) To record forward contract to buy $1,200 using forward rate.

49,500 49,500

December 31, 20x4 (Balance Sheet Date, an intervening financial financial reporting date) Firm Commitment ……………………. FC Transaction Gain……………... [P41.25 [P41.25 – P41.00) P41.00) x $1,200 $1,200 To record record a loss loss on firm firm

300 300

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

300 300

commitment using the change in the forward rate.

currency to be received from FC dealer.

Assets Firm Firm Commi Commitm tment ent……… ……………… ………………… …………………. ………...P ..P 300 300

Liability Pesos Pesos paya payable ble to XD XD (fixed (fixed at P41. P41.25) 25)……… ………..P ..P 49,5 49,500 00 Less: FC Receiv Receivable able from from XD (at (at spot rate) rate)…. …. 49,200 49,200 Forward Contract (fair value)………………….P 300

On March 1, 20x5 (the transaction date), the journal entries are: March 1, 20x5 Transactio Transaction n Date (Exposed (Exposed Liability) Liability) Inven Invento tory ry (P4 (P40. 0.70 70 x $1,2 $1,200 00)… )………… ……….. Accounts payable………………. (P40.70 x $1,200) To record record the purchase purchase of  inventory for $1,200 at spot rate and recognize accounts payable. Inventory ……………………………… Firm Commitment ……………….. 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.

48,8 48,840 40 48,840

300 300

Firm Commitment 12/31/x4 Gain….. 300 3 / 1/x5 300 300 August August 1, 20x5 20x5 Settlement Date/Date of Expiration of Contract

Settlement D Da ate FC Transaction Loss………………… Accounts payable…. [(P41.55 [(P41.55 – P40.70) P40.70) x $1,200}… $1,200}…….. ….. To record a loss from 3/1/x5 to 8/1/x5 on liability denominated in FC.

Accounts payable…………………… Cash…………………………………. Cash…………………………… ……. To record payment of accounts accounts payable at spot rate.

Problem IV

1,020 1,020

49,860 49,860

FC Recei vable from XD……………. FC T ra ransacti on on Gai n… n……………. [(P41.55 [(P41.55 – P41.00) P41.00) x $1,200] $1,200] To record record a gain on foreig foreign n currency to be received from FC dealer.

660

Pesos Pesos Paya Payabl ble e from from XD…… XD………… ………. …. Cash………………………………. To record record payment to exchange dealer.

49,5 49,500 00

Inve Invest stme ment nt in in FC…… FC………… ………… ………… …….. FC Receivable from XD To record record receipt of foreign currency.

49,8 49,860 60

Cash……………………………………. I nv nvestment in in FC FC…………………. To record record conversion of US dollars dollars into into cash for payment payment of  accounts payable.

49,860

660

49,500

49,860

49,860

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

December 1, 20x4…………………………. December 31, 20x4…………………………. March 1, 1, 20 20x5…………………………………..

Spot Rate P40.00 P40.30 P40.20***

Forward Rate for  3/1/20x5 Settlement (or Expiration) P40.15 (*90 days) P40.40 (**60 days)

*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 contract is  zero.

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

Hedged Hedged Item –  Forecasted Transaction Date of o f Forecast

December 1, 20x4 Date of In I ncepti on/Hedging of 90 days Forw ards

No jour journa nall ent entry ry is requ requir ired ed to reco record rd the the for forec ecas aste ted d transaction. The forward contract is designated as a hedge against the exposure to increases in the dollar   rate on March 1, 20x5.

FC Rece Receiva ivabl ble e fro from m XD… XD……… ………… …… Pesos Payable to XD (P40.15 x $1,200) To record forward contract to buy $1,200 using forward rate.

48,1 48,180 80 48,180

December 31, 20x4 (Balance Sheet Date, an intervening financial financial reporting date) No entry required, since it is only a forecasted tran transa sact ction ion not not guar guaran ante teed ed suc such h as firm firm comm commitm itmen ent. t.

FC Re R ecei vable from XD OCII – Exch OC Exchan ange ge Gai Gain n (B/S (B/S)) [(P40.40 [(P40.40 – P40.15) P40.15) x $1,200] $1,200] To record a gain on foreign currency to be received from FC dealer. FC – foreign foreign curren currency; cy; OCI OCI - Other Other Compreh Comprehensi ensive ve Income; Income; B/S B/S – Balance Balance Sheet Sheet

300 300

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 loss is reported in comprehensive income and will affect the income statement when the inventory is eventually sold. On the balance sheet, the forward contrac contractt is reported reported as an asset at its fair value value of P300, and and the offsetting offsetting amount amount is reported reported in other comprehensive comprehensive income income (as a gain). Balance Sheet Presentation on 12/31/20x4 FC Rece Receiva ivable ble from from XD XD (P40. (P40.40 40 x $1,200 $1,200)… )… P48,48 P48,480 0 Less Less:: Peso Pesoss pay payab able le to to XD (fix (fixed ed at at P40. P40.15 15)) 48,1 48,180 80 Fair Fair valu value e of For Forward ward Cont Contra ract ct,, 12/1 12/1/2 /20x 0x4. 4... P 300 300

On March 1, 2011 (the transaction date and the settlement date), the jo urnal entries are: Date of Transaction and Se Settlement

March 1, 20x5 Settlement Date/Date of Expi ra rati on on of Contract OCI – Ex E xchange Lo Loss (B/S)……… FC Receivable from XD……… XD……… [(P40.40 [(P40.40 – P40.20) P40.20) x $1,200] $1,200] To record a loss on foreign

240 240

currency to be received from FC dealer.

Inventory (P40.20 x $1,200)…… …... Cash ………………………………… To record record the purchase purchase of  merchandise for $1,200 at the  spot rate of P40.20 P40.20

48,240 48,240

Pesos Pesos Paya Payabl ble e from from XD…… XD………… ………. …. Cash………………………………. To record record payment to exchange dealer.

48,1 48,180 80

Inve Invest stme ment nt in in FC…… FC………… ………… ………… …….. FC Receivable from XD To record receipt of foreign currency.

48,2 48,240 40

Cash……………………………………. Investment in FC…………………. To record record conversion of US dollars dollars into cash cash for purchas purchase e of  machinery.

48,240

48,180

48,240

48,240

Suppose Suppose that in April April 1, 20x5, 20x5, the inventory inventory is sold sold for P54,000 P54,000 cash. The entries to record the sale and to reclassify the amounts from Other Comprehensive Income (a P50 gain, gain, includ including ing P250 gain gain on Decemb December er 31, 31, 20x4, 20x4, plus plus the P200 loss loss on March March 1, 20x5) 20x5) into into earnings earnings are as follows: follows: April April 1, 20x5 Settlement Date/Date of Expiration of Contract

Date of Transaction (Sale) Cash………... Sales………………………………… To record the sale of merchandise. merchandise.

54,000

Cost Cost of good goodss sol sold… d……… ………… ………… ……… … Inventory, at cost………………… To record record cost of sales.

48,2 48,240 40

OCI – Exchange Loss……………….. Cost of goods sold....................... To remove the gain recognized in OCI and release the OCI to profit or loss. loss. This This entry entry is recorde recorded d in accordan accordance ce with with PAS 39 par. par. 98a is adopted.

60

54,000

48,240

60

3/1/x5

Other Comprehensive Income Loss 240 300… ….12/31/x4 Ga Gain 60 60 3/1/x5

Problem V 1. Indi Indire rect ct exc excha hange nge rate ratess for for Aust Austra ralilian an doll dollar arss were were:: Decemb December er 1, 20x4: 20x4: FC70,0 FC70,000 00 / P42,000 P42,000 = 1.667 1.667 [P1 [P1 equals equals FC 1.667] 1.667] December December 31, 20x4: FC70,000 FC70,000 / P41,700 P41,700 = 1.679 [P1 equals FC 1.679]

2.

The balan balance ce in the the accoun accountt Foreign Foreign Curre Currency ncy Payable Payable to to Exchange Exchange Brok Broker er was P39,900 at December 31, 20X5, computed as: P39,900 P39,900 = FC 70,000 70,000 x P.57 Dec. Dec. 31 31 forward forward rate rate

3.

The The direc directt excha exchange nge rat rate e for for the 60-da 60-day y forwa forward rd con contr trac actt for the the 70,0 70,000 00 fore foreign ign curre currency ncy (FC) (FC) was FC 1 = P.58. P.58. This This is the result result of the followi following ng comput computatio ation: n: (P40, (P40,60 600 0 / FC 70,0 70,000 00)) = P.58. P.58.

4.

P40,60 P40,600 0 is is the the amount amount of Pesos Pesos Receiv Receivabl able e from from Exchang Exchange e Brok Broker er in the adjust adjusted ed trial balance at December 31, 20x4. The balance in this account does not change because because it is denominated in Philippine Philippine peso.

5.

Indi Indire rect ct spot spot exch exchan ange ge rate ratess for for FC2 FC2 were were:: Octo Oc tobe berr 2: FC2 FC2 400,0 400,000 00 / P80,0 P80,000 00 = 5 [P1 [P1 equal equalss FC2 FC2 5] Dece De cemb mber er 31: 31: FC2 FC2 400, 400,00 000 0 / P80, P80,800 800 = 4.95 4.950 0 [P1 [P1 equ equal alss FC2 FC2 4.95 4.950] 0] Or, Or, 4.9 4.950 50 = FC2 FC2 1 / P.202 P.2020 0

6.

The The Peso Pesoss Paya Payabl ble e to to Exch Exchang ange e Bro Broke kerr was was P82, P82,00 000 0 in in bot both h the the adjus adjusted ted and and unadjusted trial balances. The entry to record the forward contract for the 400,000 FC2 on October October 2, 20x4, appears appears below. Note that the the account account Pesos Payable to Exchange Exchange Broker is denomina denominated ted in pesos and and does not change change as a result of exchange rate changes. Foreign Currency Receivable from Exchange Broker (FC2) Pesos Payable to Exchange Broker (P)

82,000 82,000

7.

The The direc directt exch exchan ange ge rate rate for for the the 120-da 120-day y forwar forward d contr contrac actt in FC2 FC2 on Octo Octobe berr 2, 20x4, was P.205. This amount amount is is determined determined in the following following manner: manner: P82,000 / FC2 400,00 400,000 0 = P.205. P.205. The P82,00 P82,000 0 is is the the amount amount of the pesos pesos payable payable to exch exchange ange broker. This amount is computed by using the forward rate.

8.

The accoun accounts ts payable payable balanc balance e was was P80,80 P80,800 0 at Decemb December er 31, 20x4. P80,80 P80,800 0 = FC2 400,00 400,000 0 x P.2020 P.2020 Dec. Dec. 31 spot spot rate The entries entries to support support the computations computations for for are presented presented below: 1. Tran Transa sact ctio ions ns with with Fore Foreig ign n Com Compa pany ny 1 (FC (FC1) 1) December 1, 20x4 Accounts Receivable (FC1) Sales P42,000 P42,000 = FC1 70,000 70,000 x (P1/ (P1/FC1 FC1 1.667) 1.667) Pesos Re R eceivable from Exchange Broker Foreign Currency Payable to Exchange Broker (FC1) P40,600 P40,600 = FC1 70,000 70,000 x P.58 P.58 Dec. Dec. 1 forward forward rate rate,, and also also peso peso amount amount stated stated in problem problem inform informatio ation n (P.58 (P.58 = P40,6 P40,600 00 / FC1 FC1 70,0 70,000) 00) December 31, 20x4 Foreign Currency Transaction Loss Accounts Receivable (FC1) P300 = change in accounts receivable (FC1) as noted in problem information. Foreign Currency Payable to Exchange Broker Foreign Currency Transaction Gain P39,900 P39,900 = FC1 70,000 70,000 x P.57 P.57 Dec. Dec. 31 forwar forward d rate

42,000 42,000

40,600 40,600

300 300

700 700

- 40,60 40,600 0 = FC1 FC1 70,0 70,000 00 x P.58 P.58 Dec Dec.. 1 forwa forward rd rate rate P 700 = FC1 70,000 x (P.57 - P.58) 2.

Tran Transa sact ctio ions ns with with Fore Foreig ign n Com Compa pany ny 2 (FC (FC2) 2) October 2, 20x4 Equipment Accounts Payable (FC2) P80, P80,00 000 0 = FC2 FC2 400, 400,00 000 0 x P.20 P.20

80,000 80,000

Foreign Currency Receivable from Exchange Broker (FC2) Pesos Payable to Exchange Broker P82,000 P82,000 = FC2 FC2 400,00 400,000 0 x P.2050 P.2050,, and and the P82,000 is presented in the problem for the foreign currency receivable.

82,000 82,000

December 31, 20x4 Foreign Currency Transaction Loss Accounts Payable (FC2) P80,800 P80,800 = FC2 FC2 400,00 400,000 0 x P.202 P.202 Dec. Dec. 31 spot spot rate rate - 80,0 80,000 00 = FC2 FC2 400,0 400,000 00 x P.20 P.200 0 Oct Octob ober er 2 spo spott rate rate P 800 = FC2 400,000 x (P.202 - P.200) Foreign Currency Transaction Loss Foreign Currency Receivable from Exchange Broker P81,000 P81,000 = FC2 FC2 400,00 400,000 0 x P.2025 P.2025 Dec. Dec. 31 forwar forward d rate - 82,0 82,000 00 = FC2 FC2 400,0 400,000 00 x P.20 P.2050 50 Oct. Oct. 2 forwa forward rd rate rate P 1,00 1,000 0 = FC2 FC2 400, 400,00 000 0 x (P.2 (P.202 025 5 - P.2 P.2050) 050)

800 800

1,000 1,000

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

12/ 1/20x4 12/31/20x4 3/ 1/20x5

Market or  Spot Rate P1.20 P1.28 P1.27

Strike price (exerc (exercise ise price price or option price) P1.20 P1.20 P1.20

Foreign Currency Option Situation At-the-money In-the-money In-the-money

Element Existing TV TV & I V I V***

Time Value** P360 P240 P 0

Intrinsic Value* P 0 P4,800 P4,200

TV – time time value; value; IV IV – intrin intrinsic sic valu value. e. * (Market price price less – option price) price) x foreign foreign currencies currencies ** Fair value value of option – intrinsic intrinsic value value ***time already expired, so need to determine time value unless It is a residual amount.

The journal entries to record the hedged item and hedging instrument are as follows: Hedged Hedged Item – Importing Importing Transact Transaction ion (Exposed Liabili ty) Transaction Date Inventory (60,000 FC x P1.2)……….. Accounts payable……………….

Hedging Instrument – Op Option Contracts December 1, 20x4 Date of Inception/Hedging of 90 days Fo F orw ards

72,000 72,000

I nvestment in FC Call Option…….. Cash………………………………..

360 360

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 (Balance Sheet Date an intervening financial financial reporting date) FC Transaction Loss………………….. Account payable………………… [P1.28 [P1.28 – P1.20) P1.20) x 60,000 60,000 FC To record record a loss on the the expose exposed d liability denominated denominated in foreign foreign currency.

4,800 4,800

I nvestment in FC Call Option…… FC Tr Transaction Ga Gain…. (P5,04 (P5,040 0 – P360 P360 = P4,680) P4,680) To record a gain gain on call option. option.

4,680 4,680

On March 1, 20x5 (the transaction date and the settlement settlement date), the journal entries are: March 1, 20x5 Settlement Date/Date of Expiration of Contract

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

600

Accounts payable…………………… Cash [(P1.20 x 60,000 FC) + P4,200, proceeds from call option]………………………….. To record payment of accounts accounts payable at spot rate.

76,200

600

76,200

FC Transacti on Loss…………………. I nv nvestment in in FC FC Ca Call Op Opti on on… (P5,04 (P5,040 0 – P4,200 P4,200)) To recor record d a loss loss on call call option option

840

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

4,200

840

4,200

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

Date 11/20/x4 12/20/x4

Firm Commitment Total Spot Fair  Change in Rate value Fair Value P0.20 P0.21 (P 600)* (P 600)**

Call Option (CO)Premium per FC P.002 P.010***

Call Option Contract (CO Premium x FCs) Fair Value of Call Option P120 P600

Change in Fair Value P480

* $12,000 $12,000 – $12,600 $12,600 = $(600) $(600).. **(P0.21 **(P0.21 – P0.20, P0.20, spot) x 60,000 60,000 FC. FC. ***The premium on 12/20 for an option that expires on that date is equal to the option’s intrinsic intrins ic value. Given the spot  rate on 12/20 of P.21, a call call option with with a strike price price of P.20 has an intrinsic value value of P.01 per mark. mark.

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

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

Market or  Spot Rate P0.20 P0.21

Strike price (exerc (exercise ise price price or option price) P0.20 P0.20

Foreign Currency Option Situation At-the-money In-the-money

TV – time time value; value; IV IV – intrin intrinsic sic valu value. e. * (Market (Market price less less – option option price) price) x foreign foreign currencie currenciess ** Fair value value of option – intrinsic intrinsic value value

Element Existing TV IV

Time Value** P120 P 0

Intrinsic Value* P 0 P 600

The journal entries to record the hedged item and hedging instrument are as follows: Hedged Hedged Item – Importing Importing Transact Transaction ion (Fi rm Commitment) Hedging Instrument – Op Option Contracts November 20, 20x4 Date of o f Commitment Date of Inception/Hedging of 90 days Forw ards

There is no entry to record record the sales agreement because it is an executory contract.

Date of of Tr Transaction an and Se Settlement FC Loss on Firm Commitment……… Firm Commitment………………… [(P.21 [(P.21 – P0.20) P0.20) x 60,000 60,000 FC] To record loss on firm commitment based on spot rate.

600

Equipment…………………………….. Cash [(P0.20 x 60,000 FC) + P600, proceeds from call option]………………………….. To record purchase of equipment equipment at spot rate (P.21 x 60,000 FC)

12,600

Firm Commitment …………………… Equipment…………………………. To derecognized derecognized firm commitment and adjust the carrying amount of equipment.

600

Investment in FC Call Option…… Cash………………………………. To record purchase of call option.

120 120

December 20, 20x4 Settlement Da Date/Date of of Ex Expi ra rati on on of of Co Contract

600

12,6 12,600 00

I nvestment in FC Call Option…… FC Transaction Gain…. (P600 (P600 – P480 P480 = P100) P100) To record a gain gain on call option. option.

120

Cash……………………………….. Inv Invest estment ment in FC Cal Call Opt Optio ion n To record record the derecogn derecognition ition of  call option on realization.

600

120

600

600

Problem VIII The relevant exchange rates and option premiums are as follows:

Spot rate (market price) Strike price (exercise price) Fair value of call option

11/20/20x4 P0.20 0.20 P480

12/20/20x4 P0.18 0.20 N/ A

N/A – not applic applicab able le

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

Date 11/20/x4 12/31/x4

Firm Commitment Total Spot Fair  Change in Rate value Fair Value P0.20 P0.18 P1,200* P1,200**

Call Option Contract Call Option (CO Premium x FCs) (CO)Premium Fair Value of Call per FC Option P.002 P120 P.000*** P 0

Change in Fair Value (P120)

* P12, P12,00 000 0 – P10,8 P10,800 00 = P1,2 P1,200 00 **(P.20 **(P.20 – P.18) x 60,000 60,000 FC ***The premium on 12/20 for an option that expires on that date is equal to the option’s intrinsic intrins ic value. Given the spot  rate on 12/20 of P.18, a call call option with with a strike price price of P.20 has no no intrinsic value value – the premium premium on 12/20 is is P.000.

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

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

Market or  Spot Rate P0.20 P0.18

Strike price (exerc (exercise ise price price or option price) P0.20 P0.20

Foreign Currency Option Situation In-the-money In-the-money

Element Existing TV & I V IV

Time Value** P120 P 0

Intrinsic Value* P 0 P 0

TV – time time value; value; IV IV – intrin intrinsic sic valu value. e. * (Market price price less – option price) price) x foreign foreign currencies currencies ** None since the option price price is greater than the market market price.

The journal entries to record the hedged item and hedging hedging instrument are as follows: Hedged Hedged Item – Importing Importing Transact Transaction ion (Fi rm Commitment) Hedging Instrument – Op Option Contracts November 20, 20x4 Date of o f Commitment Date of Inception/Hedging of 90 days Forw ards

There is no entry to record record the sales agreement because it is an executory contract.

Date of Transaction and Se Settlement Firm Commitment……… FC Gain on Firm Commitment [(P0.20 [(P0.20 – P0.18) P0.18) x 60,000 60,000 FC] To record loss on firm commitment based on spot rate.

1,200

Equipment…………………………….. Cash [(P0.20 x 60,000 FC) + P0, no proceeds from call option]………………………….. To record purchase of equipment equipment at spot rate (P.21 x 50,000 FC)

12,000

Equipment…… …. ….………… …… ……… … Firm Commitment………………. To derecognized derecognized firm commitment and adjust the carrying amount of equipment.

1,200

Investment in FC Call Option…… Cash………………………………. To record purchase of call option.

120 120

December 20, 20x4 Settlement Date/Date of Ex Expi ra rati on on of Contract

1,2 1,200

12,000 12,000

FC Transacti on Loss……….…… Inv Invest estment ment in FC Cal Call Optio ption n (P120 (P120 – P0 = P120) P120) To record a gain gain on call option. option.

120 120

No entry required since the Investm Investment ent in call call option option has no value.

1,200

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

1/ 1/20x4 6/30/20x4 12/31/20x4

Market or  Spot Rate P1.15 P1.18 P1.17

Strike price (exerc (exercise ise price price or option price) P1.14 P1.14 P1.14

Foreign Currency Option Situation In-the-money In-the-money In-the-money

Element Existing TV & I V TV & I V I V***

Time Value** P8,400 P4,800 P 0

TV – time time value; value; IV IV – intrin intrinsic sic valu value. e. * (Market price price less – option price) price) x foreign foreign currencies currencies ** Fair value value of option – intrinsic intrinsic value value ***time already expired, expired, so need to determine time value value unless It is a residual amount.

Intrinsic Value* P12,000 P48,000 P36,000

The journal entries to record the hedged item and hedging instrument are as follows: Hedged Hedged Item – Importing Importing Transact Transaction ion (Forecasted Transaction) Transaction Date

Hedging Instrument – Option Contracts December 1, 20x4 Date of In I ncepti on/Hedging of 90 days Forw ards

No jou journ rnal al ent entry ry is req requi uire red d to to rec recor ord d the the for forec ecas aste ted d transaction. The forward contract is designated as a hedge against the exposure to increases in the dollar   rate on March 1, 20x5.

Inves Investm tmen entt in in FC Call Call Opt Optio ion… n……. …... Cash……………………………….. To record purchase of call option.

20,4 20,400 00 20,400

December 31, 20x4 (Balance Sheet Date an intervening financial financial reporting date) No en entry re requi re red, si since itit is is on onl y a fo forecasted transa transacti ction on not guaran guarante teed ed such such as firm firm commit commitmen ment. t.

I nv nvestmen t in FC FC Ca Call Op Option…….. OCII – FC Transa OC Transacti ction on Gain Gain (B/S) (B/S) [P1.18 [P1.18 – P1.14) x 1,200,0 1,200,000 00 = P52,800 P52,800 – P20,400 P20,400 = P32,400] P32,400] To record a gain gain on call option. option.

32,400

OCI – FC T ra ransaction Gain (B/S) FC Transaction Gain To reclassify 80% of OCI to earnings (720,000 (720,000 /900,000) = 80% ; (80% × P32,400 = P25,920)

25,920

32,400

25,920

On December December 31, 20x4 (the transactio transaction n date and the settlemen settlementt date), the journal journal entries entries are: Date of Transaction and Se Settlement

December December 31, 20x4 Settlement Date/Date of Expi ra rati on on of Contract FC Tra Trans nsac acti tion on Los Loss… s………… …………… ………. …. Investment in FC Call Option… [(P1.17 [(P1.17 – P1.14) x 1,200,0 1,200,000 00 baht = P36,00 P36,000 0 – P52,800] P52,800] To recor record d a loss loss on call call option option

16,8 16,800 00

OCI – FC Tra OCI Transac nsacttion ion Ga Gain (B/S (B/S))…. FC Transaction Gain………….… To record 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.

6,48 6,480 0

Cash Cash…… …………… ……………… …………… ………… ………… …….. Investment in FC Call Option… [(P1.17 [(P1.17 – P1.14) P1.14) x 1,200,000 1,200,000 baht] baht] To record the derecognition derecognition of  call option on realization.

36,0 36,000 00

16,800

6,480

36,000

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 Fwd rate rate 3,78 3,787. 7.50 50 ÷ 5,0 5,087. 87.50 50 = .74 .745 5 2. e Pound should be FCU FCU 11/10/x6: Original forward rate on the date of hedging..……………………….P hedging..…………… ………….P 1.64 Balanc Balance e She Sheet et date: date: Rema Remain inin ing g (cu (curr rren ent) t) forwar forward d rate rate – 12/3 12/31/ 1/20 20x6. x6.... ..... ..……. ……. 1.59 1.59 Gain on forward contract per FC………...……………… FC………...………………………………………… …………………………..P ..P .05 Multiplied Multiplied by: No. of FCs………………………………………………………… FCs……………………………………………………………….. …….. 100,000 100,000 Gain on forwar forward d contrac contract.. t..…………… ………………………… ……………………… ……………………… ……………………….P ………….P 5,000 5,000 3. a Euro Eur o shou should ld be FCU FCU 10/22/x6: Original forward rate on the date of hedging..……………………….P hedging..…………… ………….P 0.45 Balanc Balance e She Sheet et dat date: e: Rem Remain ainin ing g (cur (curre rent) nt) forwar forward d rate rate – 12/3 12/31/ 1/20 20x6. x6.……… ……….. 0.44 0.445 5 Gain on forward contract per FC…………………………… …………………… ..P .005 Multiplied Multiplied by: No. of FCs………………………………………………………… FCs……………………………………………………………….. …….. 100,000 100,000 Gain Gain on forw forwar ard d contr contrac act. t... .... ..…… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… …….P .P 500 500 4. c -15,000,000 x P.0092 5. b - 15,000,000 x P.0094 6. b - 15,000,000 (P (P.0094 - P.0092) 7. d - 15,000,000 x P.0091 8. c - 15,000,000 (P (P.0091 - P.0094) 9. a – forw forwar ard d co contra ntract ct is zero zero on the the dat date e of of hed hedgi ging ng 10. 10. b – sinc since e it is a gai gain n (refe (referr to No. No. 11) 11) the there refo fore re the the valu value e of for forwar ward d contr contrac actt is an an asse assett 11. d - P4 P 4,500 - P0 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 (P (P1.129 - P1.116) 17. a - 1,000,000 x P1.138 18. c - 1,000,000 (P (P1.138 - P1.129) 19. 19. d – forw forwar ard d co contra ntract ct is zero zero on the the date date of hedg hedgin ing g 20. a 21. b 22. c 23. d - (P8,000 - P6,000) 24. e – there is no fair value of forward forward contract contract on the the date date of hedging. hedging. 25. b – (100,000 (100,000 FCU FCU x P.74, P.74, the forward forward rate rate on the date date of hedging), hedging), the entry entry would would be as follows (using the gross or broad approach): Forward contract receivable……………………………………………… 74,000 Pesos payable to exchange dealer………………………… dealer……………………………. …. 74,000

26. d Original value of Forward Contract Receivable -FC Current (6/30) value of the Fwd Contract Rec -FC Increase in value of Forward Contract Receivable Value of Receivable, discounted at 8%, n 1 Value of receivable

100,000 x .74 = 74,000 100,000 x .75 = 75,000 1,000 1,000 - (1,000 x [.08 ÷ 12]) = 993 74,000 + 993 = 74,993

or, FC Receiv Receivabl able e – date of hedgin hedging, g, 6/1 20x4…… 20x4……………… ……………………… ……………………. ………...P ..P 74,000 74,000 Add: Add: For Forwar ward d con contr trac actt gain gain P1,0 P1,000 00 x [1/1 [1/1 + (8% (8%/1 /12 2 x 1 mont month h rem remai aini ning) ng)].. ].. 993 993 Forward Contract Contract (FC) (FC) Receiv Receivable, able, 6/30/20x4………………………… 6/30/20x4…………………………………. ………. P 74,993 74,993 27. d January 1: Origininal forward rate on the date of hedging..………………..P hedging..…………… …..P 0.94 Marc March h 1: Spo Spott rate rate…… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… …… 0.93 0.93 Gain……………………………………………………………………………………..P 0.01 Multipl Multiplied ied by: by: No. No. of FCs……… FCs………………… ……………………… ……………………… ……………………… …………………. ……. 100,00 100,000 0 FC For Forwar ward d Contr Contrac actt Gain Gain……… …………… …………… ……………… ……………… ……………… ……………… ……………P ……P 1,00 1,000 0 28. c Hedging Instrument: January 1: Origininal forward rate on the date of hedging..………………..P hedging..…………… …..P 0.94 Marc March h 1: Spo Spott rate rate…… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… …… 0.93 0.93 Gain……………………………………………………………………………………..P 0.01 Multipl Multiplied ied by: by: No. No. of FCs……… FCs………………… ……………………… ……………………… ……………………… …………………. ……. 100,00 100,000 0 FC Forward Contract Gain……………………… Gain………………………………………………… ………………………………… ………P P 1,000 Hedged Item: January 1: Spot rate…………………… rate……………………………………………… …………………………..………………..P ..………………..P 0.945 Marc March h 1: Spot Spot rate rate…… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… …… 0.93 0.930 0 Loss………………………………………………………………………………………P 0.015 Multipl Multiplied ied by: No. of FCs………………… FCs……………………………… ……………………………… ……………………………. …………... 100,00 100,000 0 Foregin Foregin currency currency exchange exchange loss……..………………… loss……..………………………………………….. ……………………….. P 1,500 Net loss……………………………………………………… loss………………………………………………………………………………….P ………………………….P 500 29. d Hedged Item: January 1: Spot rate…………………… rate……………………………………………… …………………………..………………..P ..………………..P 0.945 Marc March h 1: Spot Spot rate rate…… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… …… 0.93 0.930 0 Loss………………………………………………………………………………………P 0.015 Multipl Multiplied ied by: No. of FCs………………… FCs……………………………… ……………………… ……………………… ………………….. …….. 100,00 100,000 0 Fore Foreign ign curr curren ency cy exc exchan hange ge loss loss……. ……..…… .…………… ……………… ……………… …………… …………… ……….. .. P 1,50 1,500 0 30. c – (P.186 (P.1865 5 – P.1850) P.1850) gain x 100,0 100,000 00 FC FC = P150 P150 gain 31. c – using using spot spot rate rate 32. c 5/1: Original forward rate (90 days)……..……………………………… days)……..……… ……………………….P .P .693 6/30 6/30:: Curr Curren entt (rem (remai aini ning) ng) forwar forward d rate rate (30 (30 days) days)……. ……... ...…… .…………… ………… … .695 .695 Forex gain per unit.......………………… ………………………… …………………………………… ………….P .P .002 Multiplied Multiplied by: Number of foreign foreign currencies currencies……………………………. ……………………………. 500,000 500,000 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 Foreign exchan exchange ge gain……………… gain…………………………… ……………………… …………………... ………...P P 1,000 1,000 Divide Divided d by: [1% [1% + (6%/ (6%/12 12 x 1 month month = equi equival valent ent to to 30 days) days)]….. ]….. 1.005 1.005 PV of foreign foreign exchang exchange e gain gain due due to hedg hedging ing inst instru rumen ment……….P t……….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 forwa rd rates is used to determine the gain or loss on the hedged item 33. c Foreign exchange loss due to Hedged Item: 5/1: 5/1: Spot pot rat rate e………… ……………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ……P P .687 .687

6/3 6/30: Spot rate…… te……… …………… ……………… ……………… ……………… ……………… ……………… …………… .691 Fore Forexx loss loss per per fore foreig ign n curr curren ency cy……. …….……… …………… ………… ………… …………… …………… …….. ..P P .04 .04 Multipl Multiplied ied by: Numb Number er of of foreign foreign curren currencie cies……… s…………………………. …………………... 500,00 500,000 0 Fore Foreig ign n exch exchan ange ge los losss due due to hed hedge ged d item item ……… …………… ………… …………. ……..P .P 2,00 2,000 0 PV of foreign exchange exchange gain due to hedging instrument instrument (for forwar ward contract act – refer to No No.. 32). 2).……… ………………… ……………… ……...... ....... 995 Nett Inco Ne Income me effe effect ct – decr decrea ease se ……………… ……………………… ……………… ……………… ……….. ..... ..... .... P 1,00 1,005 5 34. d 5/1: Original forward rate (90 days)…..…………………………… days)…..………… ………………… ……….P .693 8/1: 8/1: Spot Spot rate rate…… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… …… .69 .696 Fore Forexx gain gain per per curr currenc ency y ……………… ……………………… ……………… ……………… ………………… ………………. …….P P .003 .003 Multiplied Multiplied by: Number of foreign foreign currencies currencies……………………………….. ……………………………….. 500,000 500,000 Total Foreign Exchange gain due to hedging instrument (forward contract).... contract)........... ............... ................ ................. ................ ................ .................. ................. .....................P .............P 1,500 Less: 6/30 6/30 cut-off cut-off - PV of foreign foreign exchange exchange gain due due to hedging hedging inst instru rume ment nt (for (forwa ward rd cont contra rac ct – refe referr to to No. No. 32)… 32)……… ………… ………. …... .... .. 995 995 August August 1 - Foreign Foreign exchange exchange gain due to to hedging instru instrument ment (for (forwar ward d cont contrac ract) t)……… ……………… ……………… ……………… ……………… ………………… ………………. …….P P 505 505 35. e Hedging Instrument: Origininal forward rate on the date of hedging………………… hedging……………………………….P …………….P 0.105 Balanc Balance e She Sheet et dat date: e: Rem Remain ainin ing g (cur (curre rent) nt) forwa forward rd rate rate – 12/3 12/3/1 /1/2 /20x 0x4…… 4…… 0.09 0.095 5 Loss………………………………………………………………………………………P 0.010 Mult Multipl iplie ied d by: by: No. No. of FCs FCs……… ……………… ……………… ……………… ……………… ……………… ……………… ……………. ……. 50,0 50,000 00 FC Forward Contract Loss………………………… Loss…………………………………………………… ………………………………..P ……..P 500 Mult Multipl iplie ied d by: PV fact factor or……… ……………… ……………… ……………… ……………. ……..… .………… ……………… ……………. ……. .98,0 .98,03 3 Forward contrac contractt – a liability liability account account (since (since it is a loss)………………………P loss)………………………P 490.15 490.15 36. b – (forward (forward rate rate > spot rate rate – premium) premium) seller’ seller’ss point point of view considered considered as premium premium revenue since it was sold at a higher rate. 37. b November 1, 20x4: Foreign Currency Receivable from Exchange Broker (FC) 12,600 Pesos Payable to Exchange Broker 12,600 Signed 90-day forward exchange contract to purchase purchase 100,000 100,000 FC: P12,600 P12,600 = 100,000 FC x P.126 forward forward rate 38. c December 31, 20x4 Foreign Currency Receivable from Exchange Broker (FC) 300 Foreign Currency Transaction Gain 300 Revalue foreign currency receivable to fair value: P300 P300 = 100, 100,00 000 0 FC x (P.12 (P.129 9 - P.12 P.126) 6) 39. b January 30, 20x5 Pesos Pa Payable to Exchange Broker (Pesos) 12,600 Cash 12,600 Deliver Deliver pesos to exchange exchange broker in accordance with forward exchange contract: P12,60 P12,600 0 = 100,000 100,000 FC x P.126 P.126 contrac contractt rate rate

40. b January 30, 20x5 Pesos Pa Payable to Exchange Broker (Pesos) 12,600 Cash 12,600 Deliver Deliver pesos to exchange exchange broker in accordance with forward exchange contract: P12,60 P12,600 0 = 100, 100,000 000 FC x P.126, P.126, the 90-day 90-day forwar forward d rate rate 41. a January 30, 20x5 Foreign Currency Transaction Loss 200 Foreign Currency Receivable from Exchange Broker (FC) 200 Adjust foreign currency receivable to curre current nt peso peso equiva equivalen lent: t: P12,70 P12,700 0 = 100,000 100,000 FC x P.127 P.127 Jan. 30 30 spot spot rate - 12,9 12,900 00 = 100, 100,00 000 0 FC x P.129 P.129 Dec Dec.. 31 for forwar ward d rate rate P 200 = 10 100,000 FC x (P (P.127 - P.129) Foreign Currency Units 12,700 Foreign Currency Receivable from Exchange Broker 12,700 Receive Receive 100,000 100,000 FC from exchange exchange broker: P12,70 P12,700 0 = 100, 100,000 000 FC x P.127 P.127 spot spot rate rate 42. d PAS 32 and 39 (PFRS 9) 9) requires requires the FCU FCU payable be record recorded ed at the forward forward rate on the the date of hedging. Letter (d) is the required required entry under the old practice practice wherein the FCU 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: loss: P9,000 P9,000 loss [(P.73 – P.71) x 450,00 450,000 0 FCU] 44. c – (forward (forward rate > spot spot rate= premium) premium) buyer’s buyer’s point of view view considered considered as premiu premium m expense since it was purchase purchase at a higher rate plus a loss on firm commitment (i.e., P1.21 –  P1.20) 45. e Firm Commitment: 11/10 11/10/x6 /x6:: Orig Origin inal al forwa forward rd rate rate on on the the date date of hedgi hedging. ng..…… .…………… ……………… ………….P ….P 1.64 1.64 Bala Balanc nce e Shee Sheett date date:: Rema Remain inin ing g (cur (curre rent nt)) forw forwar ard d rate rate – 12/3 12/31/ 1/20 206… 6……… ………. …. 1.59 1.59 Los Loss on Forw Forwar ard d Cont Contra rac ct per per FC…… FC………… ………… ………… ………… ………… ………… ………… ………… ………. …... ...P .P .05 Multipl Multiplied ied by: by: No. No. of FCs…… FCs……………… ……………………… ……………………… …………………………… ……………………….. …….. 100,000 100,000 Loss Loss on forward forward contrac contract………… t…………………… …………………… ……………………… ……………………… ………………….P ……….P 5,000 5,000 46. e Firm Commitment: 11/10/x6: Original forward rate on the date of hedging..……………………….P hedging..…………… ………….P 1.64 Balanc Balance e She Sheet et date: date: Rema Remain inin ing g (cu (curr rren ent) t) forwar forward d rate rate – 12/3 12/31/ 1/20 20x6. x6.... ..... ..……. ……. 1.59 1.59 Gain on forward forward contract contract per FC………...…………………………………………. FC………...…………………………………………..P .P .05 Multiplied Multiplied by: No. of FCs………………………………………………………… FCs……………………………………………………………….. …….. 100,000 100,000 Gain Gain on forwa forward rd contr contrac act. t..…… .…………… ……………… ……………… ……………… ……………… ……………… ……………… ……….P .P 5,00 5,000 0 47. b Firm Commitment: 10/22/x6: Original forward rate on the date of hedging..……………………….P hedging..…………… ………….P 0.45 Balanc Balance e She Sheet et dat date: e: Rem Remain ainin ing g (cur (curre rent) nt) forwar forward d rate rate – 12/3 12/31/ 1/20 20x6. x6.……… ……….. 0.44 0.445 5 Gain on forward contract per FC…………………………… ……………………..P .005 Multiplied Multiplied by: No. of FCs………………………………………………………… FCs……………………………………………………………….. …….. 100,000 100,000

Gain Gain on forw forwar ard d con contr trac act. t... .... ..…… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… …….P .P 48. a December 1, 20x6: Spot rate – P1.64 x 100,000....…………............. Less: Firm Firm Commitment Commitment – liability liability (credit (credit balance) balance) 8/3/20x6: 8/3/20x6: Original Original (120-day) (120-day) forward rate…………………….P rate…………………….P 12/1/ 2/1/20 20x6 x6:: Remai emaini ning ng (60(60-da day) y) forw forwar ard d rate rate…… ………… ………… ……… … Loss on Firm Commitment……………… Commitment………………………………………....P ………………………....P Multip tiplied by: by: No. of FCs……… ……………… ……………… ……………… ……………… …………… Value of machine...........................…… .………………………………………

500 500

P164,000 1.60 1.64 1.64 0.04 100,000

4,000 P160,000

49. c - refer to No. 48 (Note: There is no more commitment after the date of transaction which is 12/1/20x6) 50. c December 9, 20x6: Spot rate – P2.45 x 100,000……………………… P245,000 Add: Firm Firm Commitmen Commitmentt – asset (debit (debit balance) balance) 11/1 11/10/ 0/20 20x6: x6: Orig Origin inal al (90-d (90-day) ay) forwa forward rd rate rate……… ……………… ……………. …….P P 2.44 2.44 12/9 12/9/2 /20x 0x6: 6: Rema Remain inin ing g (30-d 30-day ay)) for forward ward rate rate…… ………… ………… ……… … 2.4 2.46 Gain on Firm Commitment………………………… Commitment………………………………………..P ……………..P 0.02 Multip tiplied by by: No. No. of FC FCs……… ……………… ……………… ……………… ……………… …………… 100,000 2,000 Value of sales, 1 /3 /31/20x6…...............…………………………………… P243,000 51. b - refer to No. No. 50 for computation computation ((Note: ((Note: There is no no more commitmen commitmentt after the date date of transaction which is 12/9/20x6) 52. c - Forward Forward contracts contracts always have a value value of P0 at the the date date they they are established established 53. a 54. a - P10,000 - P0 55. c - The forward forward contract contract gain gain or loss is offset offset by the loss loss or gain on on the sales commitment commitment 56. b 57. c - P25,0 5,000 - P10, P10,0 000 58. c - The forward forward contract contract gain gain or loss loss is offset offset by the loss loss or gain on the sales sales commitm commitment ent 59. a - (50, (50,00 000, 0,00 000 0 x P.008 P.0088) 8) + [50 [50,0 ,000 00,0 ,000 00 (P.0 (P.009 092 2 - P.00 P.0087) 87)]] 60. b - Forward Forward cont contrac racts ts always always have have a valu value e of P0 at the the date they are are establ establish ished ed 61. c 62. d - P7,500 - P0 63. c - The forward forward contract contract gain gain or loss loss is offset offset by the loss loss or gain on the sales sales commitm commitment ent 64. d 65. b - P2,5 2,500 + P7,500 66. a - The forward contract contract gain gain or loss is offset offset by the loss or gain gain on the sales sales commitment commitment 67. b - (2,5 (2,500 00,0 ,000 00 x P1.129 P1.129)) + [2, [2,50 500, 0,00 000 0 (P1. (P1.13 139 9 - P1.13 P1.138) 8)]] 68. b January 31: Sp Spot ra rate – P1.59 x 100,000………………………............. P159,000 Add: Firm Firm Commitment Commitment – asset (debit (debit balance) balance) 11/30/20x3: Original (90-day) forward rate…………………… rate…………………….P .P 1.65 1/31/ /31/20 20x4 x4:: Remai emaini ning ng (30(30-da day) y) forw forwar ard d rate rate…… ………… ………… ……… … 1.60 1.60 Gain on Firm Commitment………………………… Commitment………………………………………..P ……………..P 0.05 Multi Multipl plie ied d by: No. of FCs…… FCs…………… ……………… ……………… ……………… ……………… ……… 100, 100,00 000 0 5,00 5,000 0 Value of of me merchandise, 1/ 1/31/20x4……………………………………… P164,000 The entry would be as follows on 1/31/20x4:

Inventory………………………………………………………………… 164,000 Firm Commitment…………………… Commitment………………………………………… ………………………. …. 5,000 Cash (P (P1.59 x 100,000)………………………………………. 159,000 69. d – the original original (30-day) (30-day) forward forward rate on the date date of hedging. hedging. Thus, Thus, Hedged Item (Commitment): Foreign Foreign currency currency exchange exchange loss [(P.28 – P.25) x 100,000 100,000 FC]……. 3,000 Firm Commitment………………………… Commitment………………………………………………. ……………………. 3,000 Inventory (P.28 x 100,000 FC)……………………………………………28,000 Cash……………………………………………………………….. 28,000 Firm Commitment…………………… Commitment……………………………………………… …………………………………… ………… 3,000 Inventory…………………………………………………………..

3,000

Therefore, Therefore, inventory inventory should should be valued at P25,000 P25,000 (P28,000 (P28,000 – P3,000) 70. e – the inventory should be valued based on the spot rate on the the date of transaction since since it was assumed that the firm commitment account will be closed through earnings account. Normally, the firm commitment should be closed to the asset account in accordance with PAS 39 par.98b. 71. e - the accounts accounts payable should should be valued valued based on the spot spot rate on the date of of transaction. 72. c Firm Commitment: Original forward rate on the date of hedging…………………… hedging…………………………………….P ……………….P .58 Bala Balanc nce e Shee Sheett date date:: Rema Remain inin ing g (cur (curre rent nt)) forw forwar ard d rate rate – 6/30 6/30/2 /20x 0x4… 4……… ………. …. .56 .56 Loss on Firm Commitment per FC……………………………… FC…………………………………………………..P …………………..P .02 Multiplied Multiplied by: No. of FCs………………………………………………………… FCs……………………………………………………………….. …….. 200,000 200,000 Loss Loss on firm firm commitm commitment ent………… …………………… ……………………… ……………………… …………………… ………………….P ……….P 4,000 4,000 Loss on commitment (debit) results in a credit to Firm Commitment, thus: Loss on Firm Commitment…………………………………………… 4,000 Firm Commitment (a liability account)…………………….. 4,000 73. b Fwd value 4/1 Fwd value 6/30 Decrease in Fair Value of Payable PV of change: 4,000 ÷ 1.01 [n 1; i (.12 ÷ 12) = .01]

200,000 x 0.58 200,000 x 0.56

116,000 112,000 4,000 3,960

Current Current value of fwd fwd contract contract = 116,000 116,000 - 3,960 = 112,040 112,040 or, FC payable payable – date of of hedging, hedging, 4/1 4/1 20x4………… 20x4…………………… ……………………… ……………………. ……….P P 116,00 116,000 0 Less: Less: Forward Forward contrac contractt gain gain [P4,00 [P4,000 0 x 1/1 + (8%/ (8%/12 12 x 1 month month remain remaining ing)]. )]... .. 3,960 3,960 FC payable payable – date of hedging, hedging, 6/30/ 20x4……………………………………….P 20x4……………………………………….P 112,040 112,040

74. c – (P2.17 (P2.17 – P2.14) x 200,000 200,000 FCs = P6,000 P6,000 loss. No need need to compute compute presen presentt value value because because the contract already expired. 75. b Notional amount Forward rate for remaining time Initial forward rate Change in original forward rate Fair value value of fwd contract in future future pesos: pesos: Original forward value Current forward value (Gain) Loss in forward rate Current present value PV of (P150) n=1; i=0.667% PV of (P225) n=0; no discounting Prior present value Change in present value

1-Aug 15,000 0.690

30-Aug 15,000 0.680 0.690 (0.010)

30-Sep 15,000 0.675 0.690 (0.015)

10,350 10,200 (150)

10,350 10,125 (225)

(149) 0 (149)

(225) 149 (76)

76. d Notional amount Forward rate for remaining time Initial forward rate Change in original forward rate Fair value of fwd contract in future dollars: Original forward value Current forward value (Gain) Loss in forward rate Current present value PV of (P150) n=1; i=0.667% PV of (P225) n=0; no discounting Prior present value Change in present value

1-Aug 15,000 0.690

30-Aug 15,000 0.680 0.690 (0.010)

30-Sep 15,000 0.675 0.690 (0.015)

10,350 10,200 (150)

10,350 10,125 (225)

(149) 0 (149)

(225) 149 (76)

77. c - Forward Forward contracts contracts always have a value of P0 at the the date they are are establish established ed 78. a 79. d - [(P600) - P0] 80. b 81. c - [P30 P300 - (P60 P600)] 0)] 82. b - Forward Forward contracts contracts always have a value of P0 at the the date they are are establish established ed 83. a 84. c - [(P1,9 1,950) - P0] P0] 85. c 86. 86. b - [P63 [P635 5 - (P1,9 P1,905 05)] )] 87. c Cost of equipment…………………………………………………………………..P 211,000 Less: Fair Fair value value of the equipme equipment…………………………… nt………………………………………………… …………………… 199,000 199,000 Impairment loss…………………………… loss……………………………………………………… ………………………… ……………….P 12,000 88. a – (P17 (P17,5 ,500 00 – P13, P13,20 200) 0) rec recla lass ssif ifie ied d to earn earnin ings gs

89. e Original forward rate on the date of hedging…………………… hedging…………………………………P ……………P 1.64 Bala Balanc nce e She Sheet et date date:: Rem Remai aini ning ng (cu (curr rren ent) t) for forwa ward rd rat rate e – De Dec. c. 31, 31, 20x6 20x6… … 1.59 1.59 Loss……………………………………………………………………………………..P 0.05 Multipl Multiplied ied by: No. of FCs…………… FCs……………………… ……………………… ……………………… …………………… …………… … 100,00 100,000 0 FC For Forwar ward d Contr Contrac actt Loss Loss……… ……………… ……………… ……………… ……………… ……………… ……………… …………. …..P .P 5,000 5,000 90. a P400 = 10,000 10,000 foreign foreign currency currency units units x (P.82 - P.78). The loss is calcul calculated ated using using only forward forward rates. On December 31, 20x4, the loss is the difference between the 90-day future rate on November November 1 (P.78) and the 30-day forward rate on December December 31 (P.82). 91. 91. b - spec specul ulati ation on (gain (gain or loss loss – inco income me state stateme ment) nt) Original forward rate on the date of hedging…………………… hedging…………………………………P ……………P 0.033 Bala Balanc nce e She Sheet et dat date: e: Rem Remai aini ning ng (cu (curr rren ent) t) for forwa ward rd rat rate e – De Dec. c. 31, 31, 20x4 20x4… … 0.03 0.036 6 Loss……………………………………………………………………………………..P 0.003 Multipl Multiplied ied by: by: No. No. of FCs……… FCs………………… ……………………… ……………………… ……………………… …………………. ……. 100,00 100,000 0 FC Forw Forwar ard d Co Contra ntract ct Loss… oss……… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………P …P 300 300 92. 92. b - (220 (220,0 ,000 00 FCUs FCUs)x )x (P0. (P0.68 68)) = P149 P149,6 ,600 00 93. 93. B - (220 (220,0 ,000 00 FCUs FCUs)x )x(P (P.6 .68 8 - P.70 P.70)) = P4,4 P4,400 00 loss loss (To adjust the contract contract to the 30 day futures futures amount) 94. b Manage an exposed position: Value the forward exchange contract (FEC) at its fair value, measured by changes in the forward exchange rate (FER). Note that the question asks only for the effect on income from the forward contract transaction; thus, any effect on income from the foreign currency denominated account payable is not included in the answer. FER, FER, 12/ 12/12 12/x4 /x4 P.90 P.90 FER, FER, 12/ 12/31 31/x4 /x4 P.93 P.93 AJE: Forward Contact Receivable Foreign Exchange Gain Revalue forward contract: P3,000 P3,000 = 100,0 100,000 00 FCU x (P.93 (P.93 - P.90) P.90) change change in in forward forward rates rates Foreign Exchange Loss Account Payable Revalue foreign currency payable: P10,00 P10,000 0 = 100,00 100,000 0 FCU x (P.98 (P.98 - P.88) P.88) change change in spot spot rates rates 95. b Hedge of a Firm Commitment: Value FEC based on changes in forward rate. AJE: Forward Contract Receivable Foreign Exchange Gain Revalue forward contract, using the forward rates. Foreign Exchange Loss Firm Commitment Recognize loss on firm commitment.

3,000 3,000

10,000 10,000

3,000 3,000

3,000 3,000

Again, note that the question asks only about the effect on income from the forward contract, not the underlying firm commitment portion of the transaction

96. b Speculation: Value forward exchange contract at fair value based on changes in the forward rate AJE: Forward Contract Receivable 3,000 Foreign Exchange Gain 3,000 97. b Call Option: P29.80 (Market price/Spot Price) > P27.90 (Option/Strike Price)..P1.90 in-the-money Put Option P14.25 (Market (Market price/Sp price/Spot ot Price) Price) > P16.40 P16.40 (Option/S (Option/Strike trike Price).. Price).. 2.15 in-the-money in-the-money Intrinsic Intrinsic Value………………………………………………………………….. Value………………………………………………………………….. P4.05 98. d January 1, 20x6 (the inception date of the 1-yr. put  1-yr.  put FX FX option period) FX Con Contra tract ct Valu Value—O e—Opti ption... on..... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... 8,00 8,000 0 Cash ash .................................. ................................... ............................ To record cost of put option acquired. Note: P1.40, P1.40, OP > P1.368, Market/sp Market/spot ot rate – In-the-money In-the-money (put (put option) March March 31, 20x6 20x6 (an intervening financial reporting date) FX Contrac Contractt Value—O Value—Opti ption on ...... ........ ..... ..... ..... ...... ...... ...... ...... ..... ..... ...... ...... ..... ..... ..... ..... ..... ..... ...... ...... ... 30,000 30,000 FX Gain (P30,000 × 300,000 FCUs/1,000,000 FCUs)............. OCI—FX Gain (P30,000 × 70 7 00,000 FCUs/1,000,000 FCUs) To adjust option’s carrying value to its fair  value of P106,000 P106,000 (a given given amount). amount). P106,000 P106,000 – P6,000 = P100,000) P100,000)

8,000

9,000 21,000

99. a Note: P1.40, P1.40, OP OP > P1.368, P1.368, Market/spo Market/spott rate – Out-of-the-m Out-of-the-money oney (call (call option). option). Time value value element only, therefore any gain or loss is charged to profit and loss or current earnings, not  OCI. 100. 100. d January 1, 20x6 (the inception date of the 1-yr. put  1-yr.  put FX FX option period) FX Contrac Contractt Value—O Value—Opti ption on ...... ........ ..... ..... ..... ...... ...... ...... ...... ..... ..... ...... ...... ..... ..... ..... ..... ..... ..... ...... ...... ... 16,000 16,000 Cash ash .................................. ................................... ............................ To record cost of put option acquired. Note: P.25, OP < P.292, Market/spot Market/spot rate – In-the-money In-the-money (Call option) option) March March 31, 20x6 20x6 (an intervening financial reporting date) FX Contrac Contractt Value—O Value—Opti ption on ...... ........ ..... ..... ..... ...... ...... ...... ...... ..... ..... ...... ...... ..... ..... ..... ..... ..... ..... ...... ...... ... 80,000 80,000 FX Gain (P80,000 × 500,000 FCUs/2,000,000 FCUs) x 50%.. OCI—FX Gain (P80,000 – P10,000)……................................. To adjust option’s carrying value to its fair  value of P106,00 P106,000 0 (a given amount). amount). P96,000 P96,000 – P16,000 P16,000 = P80,000) P80,000)

16,000

10,000 70,000

Items Items 101 throug through h 107 Solu Solutio tion n Gui Guide de Table: Table: December 16 Spot rate (Market Price) ... P .16 Strike price (Option Price) P .16 Notional amount (in Bolivar) 1,000,000 Intrinsic value (if Market is < Option (Strike)*........ P 0 Time value** ........................ P 4, 4 ,000 Fair (Total) value of Option. P 4,000

December 31 P .15 P .16 1,000,000 P 10,000 3,300 P 13,300

February 14 P .147 .16 1,000,000 P 13,000 0 P 13,000

* (Option (Option Price – Market Price Price ) x notional notional amount  amount  ** Fair value of option less Intrinsic Value

101. 101. d - The notional amount  is the total face amount of the asset or liability that underlies the derivative contract. A notional amount may be expressed in the number of currency units,  shares, bushels, b ushels, pounds or other units specified in the financial instrument. Choices letter lett er (a), (b), and (c) are all fair value of the option contract at different dates. 102. c On December 31, 20x4: Fair value of Call Option…………………………………………………………..P 13,300 Intrinsic Value: ( P.16 Option price less P.15 market price, lower lower ifif put put optio option) n) x 1,000 1,000,00 ,000 0 boliv bolivar…… ar………………… ……………………… …………………. ………. 10,000 10,000 Time Value……………………… Value…………………………………………………… ………………………………………… ………………………P …………P 3,300 103. c (P3,300 (P3,300 – P4,000 = P700 P700 loss); loss); refer refer to the solution solution guide guide table for further further analysis. analysis. 104. 104. a – (P10,0 (P10,000 00 – P0 = P10,00 P10,000 0 gain); gain); refer refer to the solu solutio tion n guide guide table table for furthe furtherr analysi analysis. s. 105. b Hedging Instrument/Hedging Transaction/Option Contract: Inception Inception date: Fair value of call option……………………...... option…………………….............. .......................P ...............P 4,000 Balance Balance shee sheett date: date: Fair Fair value value of call call optio option……… n…………………… ……………………. ………....... ........ 13,300 13,300 Foreig Foreign n exchan exchange ge gain………… gain……………………… ……………………… …………………… …………………. ………....... .......... .....P .P 9,300 9,300 106. c Foreign Currency Transaction (Hedged Item): 12/16 2/16/2 /20 0x4: x4: Spot pot rate rate…… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………P …P .16 .16 12/3 2/31/20 /20x4: x4: Spot rate…… te………… ……… …………… …………… ………… ……………… ………………… ……………… ………….. …... .15 Forex los losss pe per un unit……… ……………… ……………… ……………… ………………… …………… ………… ……………… ………………. ……. P .01 Multiplied Multiplied by: Number Number of foreign currenc currencies……………… ies…………………………………… …………………… 1,000,000 1,000,000 Foreig Foreign n exchan exchange ge loss.. loss...... ........ ....……………… ………………………… …………………. ………..... ....... ....... ........ ............ ........... ....... .....P .P 10,000 10,000 Hedging Instrument/Hedging Transaction/Option Contract: Incept Inception ion date: date: Fair Fair valu value e of call call optio option………… n……………………. …………..... ........ ........ ........ ........... ........... ......P ..P 4,000 4,000 Balan Balance ce she sheet et date: date: Fair Fair val value ue of of call call opti option on……… ……………… ……………… …………………. …………... 13,3 13,300 00 Fore Foreign ign exch exchan ange ge gain… gain………… ……………… ……………… ……………… ……………… ……………… …………………. …………... ..P P 9,30 9,300 0 Nett fore Ne foreig ign n exch exchan ange ge loss loss……… …………… ………… ………… ………… ………… ………… ………… ………… …………… …………. …..P .P 700 700 107. c Foreign Currency Transaction (Hedged Item): 12/31/20x4: 12/31/20x4: Spot rate…………………………………………………………………. rate…………………………………………………………………..P .P 2/14 2/14/2 /20 0x5: x5: Spot pot rate rate…… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………. …...

.150 .147 147

Forex loss per unit………………………… unit………………………………………………… ……………………………………… ……………… ……P .003 Multiplied Multiplied by: Number of foreign currencies…………………………………….. currencies…………………………………….. 1,000,000 1,000,000 Foreign exchange loss..........…………… ……………………................ …………………… ................ .................. P 3,000 Hedging Instrument/Hedging Transaction/Option Contract: Balance sheet date (12/31/x4): (12/31/x4): Fair value of call option….…………..............P option….………….............. P 13,300 Expiration date (2/14/x5): Fair value of call option..…………………… ……….. 13,000 Foreign exchange loss……………………… loss……………………………………………… ……………………………………… ………………..P ..P 300 Total foreign exchange loss………………………… ……………………… …………..P 3,300 108. c 12/1/20x4:Spot rate…………………… rate……………………………………………… ……………………………………… ……………P P .92 12/31/20x4:Spot ra rate……………………………………………………… …………. .93 Forei oreign gn curr curren ency cy gain gain…… ………… ………… ………… ………… ………… ………… ………… ………. …. …………P …………P .01 .01  x: No. of foreign currencies………………… ………………………………. ……………………… ………. 1,000,000 Foreig Foreign n curre currency ncy gain gain due due to to hedged hedged item item/com /commit mitmen ment……… t…………...P …...P 10,000 10,000 Less Less:: Disc Discou ount nt – P10, P10,00 000 0 x 12% 12% x 2/12 2/12 (Jan (Janua uary ry and and Febr Februa uary ry). ).…. …... .... ..... ... 200 200 PV of foreign exchange gain due to hedged item/commitment.... item/commitment... . P 9,800* Or, alternatively the computation of present value may also be presented as: Foreign Foreign exchange exchange gain gain – equity..…………………………… equity..…………………………………………P ……………P 10,000 10,000 Divi Divide ded d by: [100 [100% % + (12% (12%/1 /12 2 x 2 month monthss rema remain inin ing) g)]…… ]……………… …………….. ….. 1.02 1.02 PV of foreign exchange gain due to hedged item/commitment….P 9,803* *P3 discrepancy due to rounding-off.

109. c 12/1/20x4: Fair value of Option (P10,000 x P.009)……………………………..P P.009)………………… …………..P 9,000 12/31/ 12/31/20x 20x4: 4: Fair Fair value value of of Option Option (P10, (P10,000 000 x P.00 P.006)…… 6)………………… ……………………… ………… 6,000 6,000 Foreign currency loss on hedging transaction (option contract)…………P 3,000 110. b– refer to No. 101 for computat computation. ion. It is is an asset since the counterpart counterpart entry is a gain. Thus, the entry should be: Firm Commitment…………………………………………………….9, 803 Foreign Currency Gain on Hedged Item/Commitment…. 9,803 111. c PV of foreign exchange gain due to hedged item/commitment (refer (refer to No. No. 70)……………………… 70)…………………………………………………………………. …………………………………………. P 9,803 9,803 Foreign currency loss on hedging transaction (option contract)  – refer to no. 71)……………………………………………… 71)…………………… …………………………………………… ………………… ( 3,000) Impact on net income income – increase……………… increase………………………………………………… ………………………………… P 6,803 112. b Sales (3/1/20x5 spot rate: P.90 x FC 1,000,000) ……… ……………………… P900,000 Foreign exchange loss on hedged item/commitment, 3/31/20x5: 12/1/20x4 Spot rate……………………… rate………………………………………………… ………………………… ..P .92 3/31/20 /20x5 Spot pot rate ate………… ………………… ……………… ……………… ……………… ……………. ……... .90 For Foreign currency los loss………… …………… ………… ………………… ……………… …….. ……… …………P .02  x: No. of foreign currencies…………………………………… currencies………… ……………………………… …… 1,000,000 Foreign currency loss for the entire hedg ed item item/c /com ommi mitm tmen ent… t……… ………… ………… ………… ………… ………… ………… ………… …… P 20,0 20,000 00 Add back: PV of foreign gain due to hedged item/commit mitment…… t…………… ……………… ………………… ……………… ………….… ….… 9,80 ,803 ( 29,8 9,803)

Adjustment: Firm Firm Commitment Account balance (credit balance) –  since the P20,000 is a foreign currency loss then the firm commitment account is a credit balance……………………… Foreign currency gain on hedging transaction (option contract) 12/31/20x4 (inception date): Fair value of option (P0. (P0.00 006 6 x FC 1,00 1,000, 0,00 000) 0)…… ………… ………… ………… ………… ………… ………… ………… …… P 6,00 6,000 0 3/1/20x4 (expiration date) : Fair value of option (P0.020 x FC FC 1, 1,000,000)………………………………………. …….… 20,000 Impact on Net Income…………………………………………………….

20,000

14,000 P904,197

113. d – (150,000 (150,000 FC x P.05 premium premium = P7,500) P7,500) 114. 114. a – (150,0 (150,000 00 FC x P.04 P.04 premiu premium m = P6,000) P6,000) 115. b – (150,000 (150,000 FC x P.03 premiu premium m = P4,500) P4,500) 116. c – (150,000 (150,000 FC x P.97 = P145,500) P145,500) 117. a Hedged Item/Commitment: 3/0 3/01/20 1/20x3 x3:: Spot pot rate rate…… ………… ………… ………… ………… ………… ………… ………… ………. …..P .P .095 095 12/31 /31/20x3 20x3:: Spot pot rate………… …………… ………… ………………… …………… ………… ………….. ….. .094 Fore Foreig ign n cu curren rrency cy loss loss per per uni unit… t……… ………… ………… ………… ………… ………… …….. P .001 001  x: No. of foreign currencies………………… …………………... 2,000,000 Fore Foreig ign n cur curre renc ncy y loss loss due due to to hed hedged ged item/ item/co comm mmit itme ment nt.. ..P P 2,00 2,000 0  x: PV factor of an annuity of P1 @ for 12 periods… ……..… …… ..… .9803 PV of foreign exchange loss due to hedged item/ commitment..………. … …… ……………………………………. P 1,960.60 Hedging Instrument: 3/01/20x3: 3/01/20x3: Fair value of Option………………………………..P Option………………………………..P 3,000 12/31/ 12/31/20x3 20x3:: Fair value of Option6 Option6)……… )…………………… ……………………. ………... .. 3,200 3,200 Foreign currency gain on hedging transaction (opti (option on cont contra ract) ct)……… ……………… ……………… ……………… ……………… ……………… ………………… ………… 200. 200.00 00 Net impact impact on 20x3 income – loss (decre (decrease)…… ase)……………… ………………..… ……..……P1,760.6 …P1,760.60 0 118. d Sales ales (3/ (3/1/20 1/20x4 x4 spot pot rate rate:: P.0 P.089 x FC 2,00 2,000, 0,0 000) 00) ………… ……………… ………… …… P 178,0 78,000 00..00 Adjustment: Firm Commitment Account balance (credit (credit balance) balance) – since the P12,000 P12,000 is a foreign foreign currency currency loss oss then the the firm commitment acc account is a credit bala alance 12,000.00 0.00** Adjusted Sales……………………… ……………… …………………………………… P190,000.00 Foreign exchange loss on hedged item/ commitment, 3/31/2012: 5/01/20 /20x3: x3: Sp Spot rate rate…… ………… ……… …………… …………… ………… ………………P ………P .095 3/01/20x4 Spot rate…………………………………………. ……. .089 For Foreign cu currency los loss………… …………… ………… ………………… ……………. …. ……P ……P .006  x: No. of foreign currencies…..……… ……………………. 2,000,000 Foreign currency loss for the entire hedged item /com /commi mitm tmen ent…… t…………… ……………… ……………… …………… …………… ………P P 12,0 12,000* 00* Less: PV of foreign loss due to hedged item /commitme tment…… t…………… ……………… ………………… …………… ………… ……… 1,960.60 0.60 (10, 10,039.40 9.40)) Foreign currency gain on hedging instrument (option contract): 12/31 12/31/2 /20x 0x3 3 (bal (balanc ance e shee sheett date date): ): Fai Fairr valu value e of opti option on.P .P 3,200 3,200 3/01/20x4 3/01/20x4 (expiration (expiration date) : Fair value of option option

[(P0.95 – P.089) x FC 2,000,000)..……………………… Net impact on 20x4 income – loss (decrease)………………..

12,000

119. c Nett cas Ne cash h inf inflo low w wi with optio ption n (P1 (P190 90,,000 000 – P3,0 P3,000 00)… )……… ………… ………… ……… … Cash ash inf inflo low w wi withou thoutt opt optio ion n (at (at spot pot rat rate e of of P.0 P.089 89 x 2, 2,000, 000,00 000 0 FC. FC. Net increase in cash inflow

8,800.00 P188,760.60

P187 P187,,000 000 178, 78,000 000 P 9,000

120. 120. a Note: Note: P1.40 P1.40,, OP < P1. P1.368 368,, Marke Market/sp t/spot ot rate rate – Out-of Out-of-th -the-m e-money oney (put (put option option). ). Time Time value value element only, therefore any gain or loss is charged to profit and loss or current earnings, not  OCI. Refer to No. 99. Quiz - XX 1. a – the machi machine’ ne’ss final final record recorded ed value value should should be the the spot spot rate rate on the the date of tran transac sactio tion n since it is hedging that involves exposed liab ility (P.00781 x 200,000,000 = P1,562,000). P1 ,562,000).

2. c – (P.1 (P.186 865 5 – P.185 P.1850) 0) gain gain x 100, 100,00 000 0 FC = P150 P150 gain gain 3. usin using g spot spot rate rate Accounts payable…………………………………………………………18,650 FC Units……………………… Units……………………………………………… ………………………………………… ………………… 18,650 4. c – (P42 (P42 – P40) P40) gain gain x 1,0 1,000 00 FC = P2, P2,00 000 0 gai gain n 5. Accounts payable…………………………………………………………42,000 FC Units……………… …………………………………………… ……………… …………… 42,000 6. b Hedging Instrument: Origininal forward rate on the date of hedging………………… hedging……………………………….P …………….P 0.90 Balanc Balance e Shee Sheett dat date: e: Rema Remain inin ing g (cu (curre rrent) nt) forwa forward rd rate rate – 12/3 12/3/1 /1/2 /20x 0x4…… 4…… 0.93 0.93 Gain Gain…… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ……..P .03 .03 Multipl Multiplied ied by: No. of FCs………………… FCs……………………………… ……………………… ……………………… …………………. ……. 200,00 200,000 0 FC Forwar Forward d Contr Contrac actt Gain……… Gain…………… …………… ……………… ……………… ……………… ……………… ……………P ……P 6,00 6,000 0

The entry would be as follows: Foreign Currency Receivable from Exchange Broker………………6,000 Foreign Currency Gain…………………… Gain…………………………………………… ………………………… … 6,000 7. a The entry on the date of expiration of the contract: Pesos Payable to Exchange Broker (P.90 x 200,000 FC)……………..180,000 Cash…………………………………………………………………….. 180,000 Foreign Currency Units or Investment in Foreign Currency (P.92)…184,000 (P.92)…184,000 Foreign Foreign Currency Currency Loss – forward contract...……… contract...………………………….. ………………….. 2,000 Foreign Currency Receivable from Exchange Broker (.P93)… 186,000 8. b – refer refer to No. 7 9. d – refe referr to No.7 No.7

10. c P1,000 P1,000 = 50,000 50,000 FCs x (P.7 (P.74 4 - P.72). P.72). The loss loss is calcul calculate ated d using using only only forward forward rates. rates. On September September 30, 30, 20x4, 20x4, the loss is the difference difference between between the 60-day forward rate of of P.74 on September September 1 and the 30-day forward rate of P.72 on on September September 30, 20x4. 11. d Date of transaction: 9/1/20x4: Spot rate……………………… rate………………………………………..P ………………..P 1.46 Bala Balanc nce e She Sheet et dat date: e: Sep Sept. t. 30, 30, 20x 20x4: 4: Spo Spott rate rate…… ………… ………… ………… ………… ………… ……… … 1.50 1.50 Gain…………………………………………………………………………………….P .04 Multipl Multiplied ied by: No. of FCs……………………… FCs…………………………………… ……………………… …………………… ……………. …. 250,00 250,000 0 FC Transa Transacti ction on Loss………. Loss………..……… .…………………… ……………………… ……………………… ……………………… ……………P …P 10,000 10,000 The question refers to foreign currency transaction loss which indicates that only the exposed liability had a loss, while the the forward contract transaction results in a gain computed as follows: Original forward rate on the date of hedging…………………… hedging…………………………………P ……………P 1.47 Bala Balanc nce e She Sheet et dat date: e: Rem Remai aini ning ng (cu (curr rren ent) t) for forwa ward rd rat rate e – Sept Sept.. 30, 30, 20x4 20x4… … 1.48 1.48 Gain ain……… ……………… ………………… ……………… ……………… ……………… ……………… ………………… …………… ………… …………….P ….P .01 Multipl Multiplied ied by: No. of FCs………………… FCs……………………………… ……………………… ……………………… …………………. ……. 250,00 250,000 0 FC Forward Contract Gain……………………… Gain………………………………………………… ………………………………… ………P P 2,500 If the question is the net impact on the net income the loss on exposed liability and the gain of forward contract should be offsetted, thereby resulting a net effect of P7,500 decrease in net income. 12. b – specul speculatio ation n (gain (gain or loss loss – income income stateme statement) nt) Original forward rate on the date of hedging…………………… hedging…………………………………P ……………P 1.47 Bala Balanc nce e She Sheet et dat date: e: Rem Remai aini ning ng (cu (curr rren ent) t) for forwa ward rd rat rate e – Sept Sept.. 30, 30, 20x4 20x4… … 1.48 1.48 Gain…………………………………………………………………………………….P .01 Multipl Multiplied ied by: No. of FCs…………………… FCs……………………………… …………………… ……………………… …………………. ……. 250,00 250,000 0 FC Forward Contract Gain……………………… Gain………………………………………………… ………………………………… ………P P 2,500 13. b Receivable balance: P162,000 (spot rate on the balance sheet date, P.81 x 200,000 FCU) Gain or loss: loss: P4,000 P4,000 loss [(P.83 – P.81) x 200,00 200,000 0 FCU] 14. Date of transaction: 8/1/20x4: Spot rate……………………… rate………………………………………..P ………………..P 1.16 Balanc Balance e Shee Sheett dat date: e: 4/30 4/30/2 /20x 0x4: 4: Spot Spot rate rate……… ……………… ……………… ……………… ……………… ……… 1.20 1.20 Gain…………………………………………………………………………………….P .04 Multipl Multiplied ied by: No. of FCs………………… FCs……………………………… ……………………… ……………………… …………………. ……. 300,00 300,000 0 FC Transa Transacti ction on Loss………. Loss………..……… .…………………… ……………………… ……………………… ……………………… ……………P …P 12,000 12,000 The question refers to foreign currency transaction loss which indicates that only the exposed liability had a loss, while the the forward contract transaction results in a gain computed as follows: Original forward rate on the date of hedging…………………… hedging…………………………………P ……………P Bala Balanc nce e She Sheet et dat date: e: Rem Remai aini ning ng (cu (curr rren ent) t) for forwa ward rd rat rate e – Sept Sept.. 30, 30, 20x4 20x4… … Gain…………………………………………………………………………………….P

1.17 1.18 1.18 .01

Multipl Multiplied ied by: No. of FCs………………… FCs……………………………… ……………………… ……………………… …………………. ……. 300,00 300,000 0 FC Forwar Forward d Contr Contrac actt Gain……… Gain…………… …………… ……………… ……………… ……………… ……………… ……………P ……P 3,00 3,000 0 If the question is the net impact on the net income the loss on exposed liability and the gain of forward contract should be offsetted, thereby resulting a net effect of P9,000 decrease in net income. 15. P12,000 Date of transaction: 8/1/20x4: Spot rate……………………… rate………………………………………..P ………………..P 1.16 Balanc Balance e Shee Sheett dat date: e: 4/30 4/30/2 /20x 0x4: 4: Spot Spot rate rate……… ……………… ……………… ……………… ……………… ……… 1.20 1.20 Gain…………………………………………………………………………………….P .04 Multipl Multiplied ied by: No. of FCs………………… FCs……………………………… ……………………… ……………………… …………………. ……. 300,00 300,000 0 FC Transa Transacti ction on Loss………. Loss………..……… .…………………… ……………………… ……………………… ……………………… ……………P …P 12,000 12,000 The question refers to foreign currency transaction loss which indicates that only the exposed liability had a loss, while the the forward contract transaction results in a gain computed as follows: Original forward rate on the date of hedging………………………………… hedging……… ………………………… P 1.17 Bala Balanc nce e She Sheet et dat date: e: Rem Remai aini ning ng (cu (curr rren ent) t) for forwa ward rd rat rate e – Sept Sept.. 30, 30, 20x4 20x4… … 1.18 1.18 Gain…………………………………………………………………………………….P .01 Multipl Multiplied ied by: No. of FCs………………… FCs……………………………… ……………………… ……………………… …………………. ……. 300,00 300,000 0 FC Forwar Forward d Contr Contrac actt Gain……… Gain…………… …………… ……………… ……………… ……………… ……………… ……………P ……P 3,00 3,000 0 If the question is the net impact on the net income the loss on exposed liability and the gain of forward contract should be offsetted, thereby resulting a net effect of P9,000 decrease in net income. 16. P3,000 Original forward rate on the date of hedging…………………… hedging…………………………………P ……………P 1.17 Bala Balanc nce e She Sheet et dat date: e: Rem Remai aini ning ng (cu (curr rren ent) t) for forwa ward rd rat rate e – Sept Sept.. 30, 30, 20x4 20x4… … 1.18 1.18 Gain…………………………………………………………………………………….P .01 Multipl Multiplied ied by: No. of FCs………………… FCs……………………………… ……………………… ……………………… …………………. ……. 300,00 300,000 0 FC Forwar Forward d Contr Contrac actt Gain……… Gain…………… …………… ……………… ……………… ……………… ……………… ……………P ……P 3,00 3,000 0 17. d PAS 32 and 39 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. 18. d – no adjus adjustme tment nt requi required red on on the date date of tran transac saction tion.. 19. (P1.47 (P1.47 x 600,000 600,000 FC) the original original (60-day) (60-day) forward forward rate on the date of hedging hedging (i.e., (i.e., November 30, 20x4) 20. since no forward contract was entered into, the the only effect on income statement statement is only the foreign currency exchange gain on exposed asset position. Spot rate on the date of transaction: 12/16/20x4…………………………….P 12/16/20x4……… …………………….P 0.00090 Balanc Balance e She Sheet et date: date: Spot Spot rate rate – De Dece cembe mberr 31, 31, 20x4 20x4……… ……………… ……………… ……….. 0.00 0.0009 092 2 Gain……………………………………………………………………………………P 0.00002

Mult Multip iplilie ed by: by: No No.. of of FCs FCs…… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… ……… … Fore Foreig ign n Curr Curre ency ncy Exc Exchang hange e Gain Gain…… ………… ………… ………… ………… ………… ………… ………… ………… …….P .P

10 M 200 200

21. P695.0 P695.05 5 increa increase se Hedged Item: Exposed Asset: Spot rate on the date of transaction: 12/16/20x4…………………………….P 12/16/20x4……… …………………….P 0.00090 Balanc Balance e She Sheet et date: date: Spot Spot rate rate – De Dece cembe mberr 31, 31, 20x4 20x4……… ……………… ……………… ……….. 0.00 0.0009 092 2 Gain……………………………………………………………………………………P 0.00002 Mult Multip iplilied ed by: by: No No.. of FCs… FCs……… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… …….. 10 M Foreign Currency Exchange Gain…………………… Gain……………………………………………… ………………………….P .P 200 Hedging Instrument: Original forward rate on the date of hedging: 12/16/20x4…………………P 0.00098 Balanc Balance e Sheet Sheet date date:: Remain Remainin ing g (curre (current) nt) for forwar ward d rate – 12/3 12/31/ 1/20 20x4… x4…… … 0.00 0.00093 093 Gain…………………………………………………………………………………….P .00005 Multiplied Multiplied by: by: No. of of FCs……………………………………………………… FCs……………………………………………………………. ……. 10,000,000 10,000,000 FC Forw Forwar ard d Co Contra ntract ct Gain Gain…… ………… ………… ………… ………… ………… ………… ………… ………… ………… …………P ……P 500 500 Mult Multip iplilied ed by: by: PV PV o off P 1 at 12%. 12%... .... .... .... .... ...… .………… …………… ………… ………… ………… ………… ………… ………. …. .990 .9901 1 FC Forward Forward Contrac Contractt Gain………… Gain…………………… …………………… ……………………… ……………………… ……………P …P 495.50 495.50 Nett impact Ne impact on 20x4 20x4 inco income me state stateme ment nt……… ……………… ……………… ……………… ……………… …………..P …..P 695. 695.05 05 22. 22. P100 P100 inc incre reas ase e Hedged Item: Exposed Asset: Balance Balance Sheet Sheet date: date: Spot Spot rate – Decemb December er 31, 20x4……………… 20x4……………………….P ……….P 0.0009 0.00092 2 Date Date of of Set Settle tleme ment: nt: Spot Spot rate rate – Janu Januar ary y 15, 15, 20x5 20x5……… ……………… ……………… …………… …….. 0.00 0.0009 095 5 Gain……………………………………………………………………………………P 0.00003 Mult Multip iplilied ed by: by: No No.. of FCs… FCs……… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………… …….. 10 M Fore Foreig ign n Cu Curre rrency ncy Exc Excha hang nge e Gai Gain… n……… ………… ………… ………… ………… ………… ………… ………… ……….P ….P 300 300 Hedging Instrument: Balance Sheet Sheet date: Remaining Remaining (current) (current) forward rate – 12/31/20x4 12/31/20x4……P ……P 0.00093 0.00093 Date Date of expi expira ratio tion: n: Spot Spot rate rate – Janua January ry 15, 20x5 20x5……… ……………… ……………… ……………… ……… 0.000 0.00095 95 Loss……………………………………………………………………………………..P .00002 Multiplied Multiplied by: No. of FCs………………………………………………………… FCs…………………………………………………………… … 10,000,000 10,000,000 FC Forw Forwar ard d Cont Contra ract ct Loss… oss……… ………… ………… ………… ………… ………… ………… ………… ………… ………… ………. ….P P 200 200 Nett imp Ne impac actt on on 20x 20x5 5 inc income ome sta state teme ment nt…… ………… ………… ………… ………… ………… ………… ………… ……...P 100 100 23. c – (forward (forward rate rate > spot rate – premium) premium) buyer’s point of view view conside considered red as premium premium expense since it was purchase purchase at a higher rate plus a loss on firm commitment (i.e., P1.21 –  P1.20) Theories Completion Statements 1. hedgin ging 2. existing existing assets and liabilities, liabilities, firm commitment commitments, s, forecasted forecasted transactions transactions 3. firm firm com commi mitm tmen entt 4. fore foreca cast sted ed 5. hedg hedged ed item item 6. hedging hedging instru instrumen mentt 7. FX forw forwards ards,, FX FX option optionss 8. two-sid two-sided, ed, counte counterbal rbalanc anced ed 9. one-si one-sided, ded, counter counterbala balance nced d 10. 10. Hedge Hedge acco accoun untin ting g 11. exchange exchange rate, specified specified period period

12. 12. 13. 13. 14. 14. 15. 15. 16. 16. 17. 18. 19. 20. 21. 21. 22. 22. 23. 24. 25. 26. 26. 27. 28. 28. 29. 30. 31. 31. 32. 32. 33. 33. 34. 35. 36. 36. 37. 38. 39. 40. 41. 41. 42. 42. 43. 43. 44. 44. 45. 46. 47. 47. 48. 49. 50. 50. 51. 51.

call call,, put put optio option n hold holder  er  optio option n write writer  r  pre premiu mium “in “in the the mone money” y” time value value element, element, intrinsic intrinsic value value element element exchan exchange ge rate, rate, futur future e date fulfil fulfill, l, obligat obligation ion take exec execut utor ory y unre unreal aliz ized ed the net net posit position ion,, setof setofff premiu premium, m, discou discount, nt, time time value value premiu premium, m, decreas decrease e spli splitt acco accoun unti ting ng design designated ated,, effecti effective, ve, firm firm spec specul ulati ating ng firm commitment, commitment, forecasted forecasted transaction transaction market, market, cred credit, it, liqui liquidity dity marke market, t, cre credi ditt marke market, t, liquid liquidity ity unli unlimi mite ted d “on-balance-sh “on-balance-sheet,” eet,” “off-balance-sh “off-balance-sheet” eet” rights, obligations, obligations, assets, assets, liabilitie liabilitiess fair fair val value uess assets assets,, liabi liabilit lities ies undesignated undesignated,, fair value, value, cash flow, flow, net investme investment nt asset, liability, liability, firm commitment commitment foreca forecaste sted d transact transaction ion.. fair fair valu value e cash cash flow flow net net inve invest stme ment nt earn earnin ings gs other comprehens comprehensive ive income, income, earnings earnings earnin earnings, gs, earnin earnings gs forw forwar ard d valuin valuing, g, reporti reporting ng hedging hedging effect effective ivenes nesss time time valu value e inef ineffe fecti ctive ve

True or False 52. False 53. False 54. False 55. False 56. True 57. True 58. False 59. True 60. True 61. False

68. 69. 70. 71. 72. 73. 74. 75. 76. 77.

False False True False False False True True True True

84. 85. 86. 87. 88. 89. 90. 91. 92. 93.

True False True True False False False True False True

100. 101. 102. 103. 104. 105. 106. 107. 108. 109.

False True True False True True True True False True

116. 117. 118. 119. 120 121. 122. 123. 124. 125.

True False False True True False False False False True

132. 133. 134. 135. 136. 137. 138. 139. 140. 141.

True False True False False False False False True False

148. 149. 150 151. 152.

False True False True False

62. 63. 64. 65 66. 67.

True False False True False False

78. 79 80. 81. 82. 83.

True False False False False True

94. 95. 96. 97. 98. 99.

False True False False False False

Multiple Multiple Choice Questions Questions (theories) 153. E 161. C 171. 154. B 162. B 172. 155. A 163. B 173. 156. E 164. B 174. 157. E 165 A 175. 158. D 166. E 176. 159. B 167. E 177. 160. D 168. A 178. 169. A 179 170. D 180.

E C B C A A A C A D

110. 111. 112. 113. 114. 115.

181. 182. 183. 184. 185. 186. 187. 188. 189. 190.

False False False False True False

E C A D D B A B A C

126. 127. 128. 129. 130. 131.

191. 192. 193. 194. 195. 196. 197. 198. 199. 200.

False True False True False False

C A C B B B d c c a

142. 143. 144. 145. 146. 147.

201. 202. 203. 204. 205. 206. 207. 208. 209. 210.

True False True False True False

b c d d b c d c d b

Note for: 197. 197. 199. 199.  202.

An underl underlyin ying g is is a financ financial ial or phys physica icall varia variable ble.. The The net invest investme ment nt must must be be less less than than that that requi require red d for for other other types types.. Trading securities do not qualify for hedge accounting. accounting. Under PFRS 9, there is no more classification as to trading and available-for-sale instead it is now classified either as FVTPL and FVTOCI.

211. 212. 213. 204. 215. 216. 217. 218. 219. 220

c c b b b b c d d a