Chapter 7

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:

Forward Rate for 3/1/20x5

Settlement
Spot Rate (or Expiration)
December 1, 20x4…………………………. P40.00 P40.15 (*90 days)
December 31, 20x4…………………………. P40.30 P40.40 (**60 days)
March 1, 20x5………………………………….. P40.20***
*original 90-day forward rate on 12/1/20x4
**remaining or current forward rate on 12/31/20x4
***the forward rate at expiration or maturity is equal to spot rate as the remaining period of the forward contract is zero.

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

a. The journal entries to record the hedged item and hedging instrument are as follows:
Gross Method
Hedged Item – Importing Transaction Hedging Instrument – Forward Contracts
(Exposed Liability) ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Transaction Date Date of Inception/Hedging of 90 days Forwards

Inventory ($1,200 x P40)…………... 48,000 FC Receivable from XD…………… 48,180

Accounts payable………………. 48,000 Pesos Payable to XD 48,180
To record purchase of goods on (P40.15 x $1,200)
account using the spot rate on To record forward contract to
2/1/1/x4. buy $1,200 using forward rate.
*XD – exchange dealer

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

Balance Sheet Presentation on 12/1/20x4

FC Receivable from XD……………………… P48,180
Less: Pesos payable to XD…………………… 48,180
Forward Contract (fair value)………………. P 0

December 31, 20x4

(Balance Sheet Date an intervening financial reporting date)

FC Transaction Loss 360 FC Receivable from XD…………… 300

Account payable……………. 360 FC Transaction Gain 300
[P40.30 – P40.00) x $1,200 [(P40.40 – P40.15) x $1,200]
To record a loss on the exposed To record a gain on foreign
liability denominated in foreign currency to be received from
currency. FC dealer.
*FC – foreign currency

If the financial statements are prepared on December 31, 20x4, the value of the forward contract is as follows
Balance Sheet Presentation on 12/31/20x4
FC Receivable from XD (P40.40 x $1,200)… P48,480
Less: Pesos payable to XD (fixed at P40.15) 48,180
Forward Contract (fair value – asset)……… P 300
On March 1, 20x5 (the transaction date and the settlement date), the journal entries are:

March 1, 20x5
Settlement Date Settlement Date/Date of Expiration of Contract

Accounts payable 120 FC Transaction Loss 240

 FC Transaction gain……. 120 FC Receivable from XD 240
[(P40.20 – P40.30) x $1,200}…….. [(P40.40 – P40.20) x $1,200]
To record a gain from 12/31/x4 to To record a loss on foreign
3/1/x5 on liability denominated in currency to be received from
FC. FC dealer.

Pesos Payable from XD……………. 48,180

Cash………………………………. 48,180
To record payment to
exchange dealer.

Investment in FC……………………. 48,240

FC Receivable from XD 48,240
To record receipt of foreign
Currency.

Accounts payable…………………… 48,240 Cash……………………………………. 48,240

Cash (refer to note below)……… 48,240 Investment in FC…………………. 48,240
To record payment of accounts payable To record conversion of US dollars into
at spot rate. cash for 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.

These transactions can be summarized in the following table.

Hedged Item (Exposed Liability) Hedging Instrument (Forward Contract)

Transaction Transaction
Accounts Payable Balance gain (loss) FC Receivable Balance gain (loss)
12/1/20x4 P48,000 12/1/20x4 P48,180
12/31/20x4 48,360 (P 360) 12/31/20x4 48,480 P 300
3/1/20x5 48,240 120 3/1/20x5 48,240 (240)
Total gain (loss) (P 240) P 60

Thus, the net effect is a P150 loss when the forward contract is used.

“Net” Position Accounting

The following illustrates the effects of “net” position accounting using the same illustration above:
Hedged Item – Importing Transaction Hedging Instrument – Forward Contracts
(Exposed Liability) ( Net Position Accounting)
December 1, 20x4
Transaction Date Date of Inception/Hedging of 90 days Forwards

Inventory ($1,200 x P40)…………... 48,000 Memorandum entry only,

Accounts payable………………. 48,000 No formal journal entry as the fair value of forward contract is
To record purchase of goods on zero.
account using the spot rate on
2/1/1/x4.
It should be noted that the accounts payable for the inventory purchase is recorded using the spot rate on the
transaction date (on December 1, 20x3).

December 31, 20x4

(Balance Sheet Date, an intervening financial reporting date)

FC Transaction Loss 360 Forward Contract 300

Accounts payable 360 FC Transaction Gain 300
[P40.30 – P40.00) x $1,200 [(P40.40 – P40.15) x $1,200]
To record a loss on the exposed To record a gain on foreign
liability denominated in foreign currency to be received from
currency. FC dealer.
*FC – foreign currency
If the financial statements are prepared on December 31, 20x4, the value of the forward contract is as follows:

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

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

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

March 1, 20x5
Settlement Date Settlement Date/Date of Expiration of Contract

Accounts payable 120 FC Transaction Loss 240

FC Transaction gain……. 120 Forward Contract 240
[(40.20 – P40.30) x $1,200}…….. [(P40.40 – P40.20) x $1,200]
To record a gain from 12/31/x4 to To record a loss on foreign
3/1/x5 on liability denominated in currency to be received from
FC. FC dealer.

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

Cash (P40.20 x $1,200) or * 48,240 Forward Contract 60
To record payment to exchange Net settlement received from the dealer
dealer (XD) on expiration or maturity date of
forward contract.
*(P40.15, forward rate on the date of inception x $1,200) + cash received from the exchange dealer of P50.

Forward Contract (Asset/Liability)

12/31/x4 Gain… 300 240… …..3/1/x5 Loss
3/1/x5 Net…… 60 60
b.
b.1. P360 loss - [(P40.30 – P40.00) x $1,200]
b.2. P300 gain - [(P40.40 – P40.15) x $1,200]
b.3. P360 loss – P300 gain = P60 net loss (decrease in net income)
b.4. P120 gain - [(P40.20 – P40.30) x $1,200}
b.5. P240 loss - [(P40.40 – P40.20) x $1,200]
b.6. P240 loss – P120 gain = P120 net loss (decrease in net income)

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

d.
d.1. P48,180 - [P40.15, original (90-day) forward rate on the date of hedging x $1,200]
d.2. No entry required
d.3. Same amount with d.1
d.4. No entry required
e.
e.1.
Gross Method
FC Receivable from XD……………………… P48,180
Less: Pesos payable to XD…………………… 48,180
Forward Contract (fair value)………………. P 0

Net Method: Zero. No entry required.

e.2. P300 asset

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

Net Method: P300.

Forward contract (debit balance – asset)… P 300

e.3. P60 debit balance – asset

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

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

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

2. Fair Value Hedge – Hedging an Unrecognized Foreign Currency Firm Commitment.

Gross Method (for Net Position – same with Exposed Liability)
a. The journal entries to record the hedged item and hedging instrument are as follows:
Hedged Item – (Unrecognized Hedging Instrument – Forward Contracts
Foreign Currency Firm Commitment) ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Date of Commitment (Date of Issuing the Purchase Order)
Date of Inception/Hedging of 90 days Forwards

No journal entry is required to record the firm FC Receivable from XD…………… 48,180
commitment. The forward contract is designated as a hedge of Pesos Payable to XD 48,180
the firm commitment to purchase inventory on March 1, 20x5. (P40.15 x $1,200)
The hedge is accounted for as a fair value hedge. To record forward contract to
buy $1,200 using forward rate.

December 31, 20x4

(Balance Sheet Date, an intervening financial reporting date)

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

Firm Commitment 300 FC Transaction Gain 300
[P40.40 – P40.15) x $1,200 [(P40.40 – P40.15) x $1,200]
To record a loss on firm commitment To record a gain on foreign
using the change in the forward rate. currency to be received from
FC dealer.
*FC – foreign currency

Balance Sheet Presentation on 12/31/20x4

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

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

March 1, 20x5
Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract

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

FC Transaction gain……. 240 FC Receivable from XD……… 240
To record a gain on fair value of [(P40.40 – P40.20) x $1,200]
firm commitment. To record a loss on foreign
currency to be received from
exchange dealer.
 Pesos Payable from XD……………. 48,180
Cash………………………………. 48,180
To record payment to
exchange dealer.

Investment in FC……………………. 48,240

FC Receivable from XD 48,240
To record receipt of foreign
currency.

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

Cash ………………………………… 48,240 Investment in FC……………..…... 48,240
To record the purchase of To record conversion of US dollars into
inventory for $1,200 at spot rate. cash for purchase of inventory.

Firm Commitment……………………. 60
Inventory……………………………. 60
To remove the carrying amount of the
firm commitment from the balance sheet6
and adjust the initial carrying amount of
the machine that results from the firm
commitment. This treatment is an
accordance with PAS 39 par. 89b.

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

b.
b.1. P300 loss - [(P40.40 – P40.15) x $1,200]
b.2. P300 gain - [(P40.40 – P40.15) x $1,200]
b.3. P300 loss – P300 gain = P0
b.4. P240 gain - [(P40.40 – P40.20) x $1,200}
b.5. P240 loss - [(P40.40 – P40.20) x $1,200]
b.6. P240 loss – P240 gain = P0
c. – same with Exposed Liability
c.1. P48,180 - [P40.15, original (90-day) forward rate on the date of hedging x $1,200]
c.2. No entry required
c.3. Same amount with d.1
c.4. No entry required
d.
d.1. Zero, no entry required
d.2. P300 liability, [(P40.40 – P40.15) x $1,200]
d.3. P60, liability
Firm Commitment
3/1/x5 Gain……. 240 300… …..12/31/x4 Loss
60 3/1/x5 Net

e. Same with Exposed Liability

e.1. Net Method: Zero. No entry required.
Gross Method
FC Receivable from XD……………………… P48,180
Less: Pesos payable to XD…………………… 48,180
Forward Contract (fair value)………………. P 0

e.2. P300 asset

Net Method: P300.
Forward contract (debit balance – asset)… P 300

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

e.3. P60 debit balance – asset

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

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

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

Inventory at spot rate on the date of transaction (P40.20 x $1,200)…………….P48,240

g. P48,180, original (90-day) forward rate on the date of hedging

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

Note:
1. The forward rate on the date of hedging is the amount of the inventory acquired (or ales, if seller)
provided the date of transaction is the same with the date of expiration of the forward contract, example
is Multiple Choice No. 48 (if buyer).

2. If the date of transaction is not the same with the date of transaction, the spot rate on the date of
transaction is the amount of the inventory acquired (or sales, if seller) adjusted with the firm
commitment balance on that date, example is Multiple Choice No. 50 (if seller) and No. 68 (if buyer).

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

Gross Method (for Net Position – same with Exposed Liability)
a. The journal entries to record the hedged item and hedging instrument are as follows:
Hedged Item – Hedging Instrument – Forward Contracts
Forecasted Transaction ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Date of Forecast Date of Inception/Hedging of 90 days Forwards

No journal entry is required to record the forecasted FC Receivable from XD…………… 48,180
transaction. The forward contract is designated as a hedge Pesos Payable to XD 48,180
against the exposure to increases in the dollar rate on March 1, (P40.15 x $1,200)
20x5. To record forward contract to
buy $1,200 using forward rate.

December 31, 20x4

(Balance Sheet Date, an intervening financial reporting date)

No entry required, since it is only a forecasted FC Receivable from XD 300

transaction not guaranteed such as firm commitment. OCI – Exchange Gain (B/S) 300
[(P40.40 – P40.15) x $1,200]
To record a gain on foreign
currency to be received from
FC dealer.
FC – foreign currency; OCI - Other Comprehensive Income; B/S – Balance Sheet

Balance Sheet Presentation on 12/31/20x4

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

March 1, 20x5
Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract

OCI – Exchange Loss (B/S)……… 240

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

Pesos Payable from XD……………. 48,180

Cash………………………………. 48,180
To record payment to
exchange dealer.

Investment in FC……………………. 48,240

FC Receivable from XD 48,240
To record receipt of foreign
currency.

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

Cash ………………………………… 48,240 Investment in FC…………………. 48,240
To record the purchase of To record conversion of US dollars into
equipment for $1,200 at the spot cash for purchase of machinery.
rate of P40.20

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

Machinery………………………….. 60 3/1/x5 Loss 240 300… ….12/31/x4 Gain
To remove the gain recognized in 60 60 3/1/x5
OCI and adjust the carrying amount if
the machine that results from the hedged
transaction by this amount. Also, to
record the basis adjustment of the
carrying value of the equipment. This
entry is recorded if PAS 39 par. 98b is
adopted.

The above entries reflect the transaction involving hedging item and hedging instrument of a FORECASTED
TRANSACTION.
b.
a.1. Gain or loss on hedged item, 12/31/20x4: None, no entry required
a.2. P300 gain, other comprehensive income - [(P40.40 – P40.15) x $1,200]
a.3. None, since no hedging effect transpires.
a.4. Gain or loss on hedged item, 3/1/20x4: None, no entry required for gain or loss. the only entry is to
record the purchase of machinery.
a.5. P240 loss, other comprehensive income - [(P40.40 – P40.20) x $1,200] to be recorded on March 1,
20x5. The balance of the OCI – gain amounted to P60 computed as follows:
Other Comprehensive Income
3/1/x5 Loss 240 300… ….12/31/x4 Gain
60 3/1/x5

c. Same with Exposed Liability

c.1. Net Method: Zero. No entry required.
Gross Method
FC Receivable from XD……………………… P48,180
Less: Pesos payable to XD…………………… 48,180
 Forward Contract (fair value)………………. P 0

c.2. P300 asset

Net Method: P300.
Forward contract (debit balance – asset)… P 300

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

c.3. P60 debit balance – asset

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

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

4. Not a Hedge Accounting – Speculation.

Gross Method (for Net Position – same with Exposed Liability)
a. The journal entries to record the hedged item and hedging instrument are as follows:
Hedging Instrument – Forward Contracts
Hedged Item - Speculation ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Date of Inception/Hedging of 90 days Forwards
FC Receivable from XD…………… 48,180
Pesos Payable to XD 48,180
(P40.15 x $1,200)
To record forward contract to
buy $1,000 using forward rate.

December 31, 20x4

(Balance Sheet Date an intervening financial reporting date)

FC Receivable from XD 300

FC Transaction Gain 300
[(P40.40 – P40.15) x $1,200]
To record a gain on foreign
currency to be received from
FC dealer.

Balance Sheet Presentation on 12/31/20x4

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

March 1, 20x5
Settlement Date/Date of Expiration of Contract

FC Transaction Loss………………… 240

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

Pesos Payable from XD……………. 48,180

Cash………………………………. 48,180
 To record payment to
exchange dealer.

Investment in FC……………………. 48,240

FC Receivable from XD 48,240
To record receipt of foreign
currency.

Cash……………………………………. 48,240
Investment in FC…………………. 48,240
To record conversion of US dollars into
cash.

b.
b.1. No gain or loss, since it is the date of hedging.
b.2. P300 gain - [(P40.40 – P40.15) x $1,200], only hedging instrument.
b.3. P240 loss

c.
c.1. P48,180 - [P40.15, original (90-day) forward rate on the date of hedging x $1,200]
c.2. No entry required
c.3. Same amount with c.1
c.4. No entry required

d.
d.1.
Net Method: Zero. No entry required.
Gross Method
FC Receivable from XD……………………… P48,180
Less: Pesos payable to XD…………………… 48,180
Forward Contract (fair value)………………. P 0
d.2. P300 asset
Net Method: P300.
Forward contract (debit balance – asset)… P 300

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

d.3. P60 debit balance – asset

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

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

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

1. Not a Hedge Accounting - Importing Transaction (Exposed Liability).
The journal entries to record the hedged item and hedging instrument are as follows:

Hedged Item – Importing Transaction Hedging Instrument – Forward Contracts

(Exposed Liability) ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Transaction Date Date of Inception/Hedging of 90 days Forwards
 Purchases ($1,200 x P40)…………... 48,000 FC Receivable from XD…………… 48,180
Accounts payable………………. 48,000 Pesos Payable to XD 48,180
To record purchase of goods on (P40.15 x $1,200)
account using the spot rate on To record forward contract to
2/1/1/x4. buy $1,000 using forward rate.
*XD – exchange dealer

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

Balance Sheet Presentation on 12/1/20x4

FC Receivable from XD……………………… P48,180
Less: Pesos payable to XD…………………… 48,180
Forward Contract (fair value)………………. P 0

December 31, 20x4

(Balance Sheet Date an intervening financial reporting date)

FC Transaction Loss 360 FC Receivable from XD…………… 294

Account payable……………. 360 FC Transaction Gain 294
[P40.30 – P40.00) x $1,200 To record a gain on foreign
To record a loss on the exposed currency to be received from
liability denominated in foreign FC dealer.
currency.
Note: Discounted or present value for hedged item is Gain [(P40.40 – P40.15) x $1,200]............ P 300
not necessary for exposed asset or liability since spot Less: Discount (P300 x 12% x 2/12)…………… ____6
Rate is in effect. Present value of gain*…………………………. P294
* or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2
months = 2%

If the financial statements are prepared on December 31, 20x4, the value of the forward contract is as follows:

Balance Sheet Presentation on 12/31/20x4

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

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

March 1, 20x5
Settlement Date Settlement Date/Date of Expiration of Contract

Accounts payable 120 FC Transaction Loss 234

FC Transaction gain……. 120 FC Receivable from XD 234
[(P40.20 – P40.30) x $1,200}…….. To record a loss on foreign
To record a gain from 12/31/x4 to currency to be received from
3/1/x5 on liability denominated in FC dealer.
FC.
Note: Discounted or present value for hedged item is Overall gain (P40.20 – P40.15) x $1,200 …….. P 60
not necessary for exposed asset or liability since spot Less: 12/31/20x4 Gain at present value…….. __294
rate is in effect. FC Transaction loss……………………………… P234

Pesos Payable from XD……………. 48,180

Cash………………………………. 48,180
To record payment to
exchange dealer.

Investment in FC……………………. 48,240

FC Receivable from XD 48,240
To record receipt of foreign
Currency.

Accounts payable…………………… 48,240 Cash……………………………………. 48,240

Cash (refer to note below)……… 48,240 Investment in FC…………………. 48,240
To record payment of accounts payable To record conversion of US dollars into
at spot rate. cash for 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.

a.
a.1. P360 loss
a.2. P294 gain
a.3. P360 loss – P294 gain = P66 net loss (decrease in net income)
a.4. P120 gain - [(P40.20 – P40.30) x $1,200}
a.5. P234 loss
a.6. P234 loss – P120 gain = P114 net loss (decrease in net income)

b.
b.1.
Net Method: Zero. No entry required.
Gross Method
FC Receivable from XD……………………… P48,180
Less: Pesos payable to XD…………………… 48,180
Forward Contract (fair value)………………. P 0
b.2. P294 asset
Gross method
FC Receivable from XD (P40.40 x $1,200)- P6. P48,474
Less: Pesos payable to XD (fixed at P40.15)… 48,180
Forward Contract (fair value – asset)……… P 294

Net Method: P294.

Forward contract (debit balance – asset)… P 294

b.3. P60 debit balance – asset

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

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

2. Fair Value Hedge – Hedging an Unrecognized Foreign Currency Firm Commitment.

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

Hedged Item – (Unrecognized Hedging Instrument – Forward Contracts

Foreign Currency Firm Commitment) ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Date of Commitment (Date of Issuing the Purchase Order)
Date of Inception/Hedging of 90 days Forwards

No journal entry is required to record the firm FC Receivable from XD…………… 48,180
commitment. The forward contract is designated as a hedge of Pesos Payable to XD 48,180
the firm commitment to purchase inventory on March 1, 20x5. (P40.15 x $1,200)
The hedge is accounted for as a fair value hedge. To record forward contract to
buy $1,200 using forward rate.

This is computed using the change in the forward rate. These entries are as follows:

December 31, 20x4

(Balance Sheet Date, an intervening financial reporting date)
 FC Transaction Loss 294 FC Receivable from XD…………… 294
Firm Commitment 294 FC Transaction Gain 294
[P40.40 – P40.15) x $1,200 [(P40.40 – P40.15) x $1,200]
To record a loss on firm commitment To record a gain on foreign
using the change in the forward rate. currency to be received from
FC dealer.
Loss…………………………………..................... P 300 Gain [(P40.40 – P40.15) x $1,200] P 300
Less: Discount (P300 x 12% x 2/12)…………… ____6 Less: Discount (P300 x 12% x 2/12)…………….. ____6
Present value of loss*…………………………. P294 Present value of gain*…………………………… P294
* or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2
months = 2%

Balance Sheet Presentation on 12/31/20x4

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

On March 1, 20x5 (the transaction date and the settlement date), the journal entries are:
March 1, 20x5
Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract
Firm Commitment………… 234 FC Transaction Loss …………… 234
FC Transaction gain……. 234 FC Receivable from XD……… 234
To record a gain on fair value of To record a loss on foreign
firm commitment. currency to be received from
exchange dealer.
Overall loss (P40.20 – P40.15) x $1,200 ……….. P 60 Overall gain (P40.20 – P40.15) x $1,200 …….. P 60
Less: 12/31/20x4 Gain at present value……… __294 Less: 12/31/20x4 Gain at present value…….. __294
FC Transaction Gain…………………………….. P234 FC Transaction loss……………………………… P234

Pesos Payable from XD……………. 48,180

Cash………………………………. 48,180
To record payment to
exchange dealer.

Investment in FC……………………. 48,240

FC Receivable from XD 48,240
To record receipt of foreign
currency.

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

Cash ………………………………… 48,240 Investment in FC……………..…... 48,240
To record the purchase of To record conversion of US dollars into
inventory for $1,200 at spot rate. cash for purchase of inventory.
Firm Commitment……………………. 60
Inventory……………………………. 60
To remove the carrying amount of the
firm commitment from the balance sheet6
and adjust the initial carrying amount of
the inventory that results from the firm
commitment. This treatment is an
accordance with PAS 39 par. 89b.

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

a.
a.1. P294 loss
Foreign Currency Exchange Loss [(P40.40 – P40.15) x $1,200]………… P 300
Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6
Present value of loss*…………………………………………………………… P294
a.2. P294 gain
 Foreign Currency Exchange Gain [(P40.40 – P40.15) x $1,200]………. P 300
Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6
Present value of gain*………………………………………………………… P294
a.3. P294 loss(a.1) – P294 gain (a.2) = P0
a.4. P234 gain
Overall loss (P40.20 – P40.15) x $1,200 ……………………………………… P 60
Less: 12/31/20x4 Gain at present value……………………………………. __294
FC Transaction Gain……………………………………………………………. P234
a.5. P234 loss
Overall gain (P40.20 – P40.15) x $1,200 …….. P 60
Less: 12/31/20x4 Gain at present value…….. __294
FC Transaction loss……………………………… P234
a.6. P234 gain (a.4) – P234 loss (a.5) = P0
b.
b.1. Zero, no entry required
b.2. P294 liability
Foreign Currency Exchange Loss [(P40.40 – P40.15) x $1,200]………… P 300
Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6
Present value of loss* / Firm Commitment…………………………………. P294
b.3. P60 - liability
Firm Commitment
3/1/x5 Gain……. 234 294… …..12/31/x4 Loss
60 3/1/x5 Net

c.
c.1.
Net Method: Zero. No entry required.
Gross Method
FC Receivable from XD……………………… P48,180
Less: Pesos payable to XD…………………… 48,180
Forward Contract (fair value)………………. P 0

c.2. P294 asset

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

Net Method: P294.

Forward contract (debit balance – asset)… P 294

c.3. P60 debit balance – asset

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

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

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

The journal entries to record the hedged item and hedging instrument are as follows:
Hedged Item – Hedging Instrument – Forward Contracts
Forecasted Transaction ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Date of Forecast Date of Inception/Hedging of 90 days Forwards
 No journal entry is required to record the forecasted FC Receivable from XD…………… 48,180
transaction. The forward contract is designated as a hedge Pesos Payable to XD 48,180
against the exposure to increases in the dollar rate on March 1, (P40.15 x $1,200)
20x5. To record forward contract to
buy $1,200 using forward rate.

December 31, 20x4

(Balance Sheet Date, an intervening financial reporting date)

No entry required, since it is only a forecasted FC Receivable from XD…………… 294

transaction not guaranteed such as firm commitment. OCI – Exchange Gain (B/S)….... 294
To record a gain on foreign
currency to be received from
FC dealer.
Gain [(P40.40 – P40.15) x $1,200] P 300
Less: Discount (P300 x 12% x 2/12)…………….. ____6
Present value of gain*…………………………… P294
* or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2
months = 2%

Balance Sheet Presentation on 12/31/20x4

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

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

March 1, 20x5
Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract

OCI – Exchange Loss (B/S)………. 234

FC Receivable from XD……… 234
To record a loss on foreign
currency to be received from
FC dealer.
Overall gain (P40.20 – P40.15) x $1,200 …….. P 60
Less: 12/31/20x4 Gain at present value…….. __294
FC Transaction loss……………………………… P234
Pesos Payable from XD……………. 48,180
Cash………………………………. 48,180
To record payment to
exchange dealer.
Investment in FC……………………. 48,240
FC Receivable from XD 48,240
To record receipt of foreign
currency.

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

Cash ………………………………… 48,240 Investment in FC…………………. 48,240
To record the purchase of To record conversion of US dollars into
equipment for $1,000 at the spot cash for purchase of machinery.
rate of P40.20
OCI – Exchange Gain……………….. 60 Other Comprehensive Income
Machinery………………………….. 60 3/1/x5 Loss 234 294… ….12/31/x4 Gain
To remove the gain recognized in 60 60 3/1/x5
OCI and adjust the carrying amount if
the machine that results from the hedged
transaction by this amount. Also, to
record the basis adjustment of the
carrying value of the equipment. This
entry is recorded if PAS 39 par. 98b is
adopted.
a.
a.1. Gain or loss on hedged item, 3/1/20x4: None, no entry required.
 a.2. P294 gain, other comprehensive income
Foreign Currency Exchange Gain [(P40.40 – P40.15) x $1,200]………. P 300
Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6
Present value of gain*………………………………………………………… P294
a.3. None
a.4. Gain or loss on hedged item, 3/1/20x4: None, no entry required for gain or loss. The only entry is to
record the purchase of machinery.

a.4. P234 gain

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

a.5. P234 loss, other comprehensive income – {[(P40.40 – P40.20) x $1,200] – P6} to be recorded on
March 1, 20x5. The balance of the OCI – gain amounted to P60 computed as follows:
Other Comprehensive Income
3/1/x5 Loss 234 294… ….12/31/x4 Gain
60 3/1/x5

b.
b.1.
Net Method: Zero. No entry required.
Gross Method
FC Receivable from XD……………………… P48,180
Less: Pesos payable to XD…………………… 48,180
Forward Contract (fair value)………………. P 0

b.2. P294 asset

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

Net Method: P294.

Forward contract (debit balance – asset)… P 294

b.3. P60 debit balance – asset

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

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

4. Not a Hedge Accounting – Speculation.

The journal entries to record the hedged item and hedging instrument are as follows:
Hedging Instrument – Forward Contracts
Hedged Item - Speculation ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Date of Inception/Hedging of 90 days Forwards
FC Receivable from XD…………… 48,180
Pesos Payable to XD 48,180
(P40.15 x $1,200)
To record forward contract to
buy $1,000 using forward rate.
December 31, 20x4
(Balance Sheet Date an intervening financial reporting date)
+
 FC Receivable from XD 294
FC Transaction Gain 294
To record a gain on foreign
currency to be received from
FC dealer.
Gain [(P40.40 – P40.15) x $1,200] P 300
Less: Discount (P300 x 12% x 2/12)…………….. ____6
Present value of gain*…………………………… P294
* or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2
months = 2%
Balance Sheet Presentation on 12/31/20x4
FC Receivable from XD (P40.40 x $1,200)-P6 P48,474
Less: Pesos payable to XD (fixed at P40.15) 48,180
Forward Contract (fair value – asset)……… P 294
March 1, 20x5
Settlement Date/Date of Expiration of Contract
FC Transaction Loss………………… 234
FC Receivable from XD…………. 234
To record a loss on foreign
currency to be received from
FC dealer.
Overall gain (P40.20 – P40.15) x $1,200 …….. P 60
Less: 12/31/20x4 Gain at present value…….. __294
FC Transaction loss……………………………… P234
Pesos Payable from XD……………. 48,180
Cash………………………………. 48,180
To record payment to
exchange dealer.
Investment in FC……………………. 40,200
FC Receivable from XD 40,200
To record receipt of foreign
currency.

Cash……………………………………. 48,240
Investment in FC…………………. 48,240
To record conversion of US dollars into
cash.
a.
a.1. P294 gain
Foreign Currency Exchange Gain [(P40.40 – P40.15) x $1,200]………. P 300
Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6
Present value of gain*………………………………………………………… P294
a.3. P294 gain.
a.5. P234 loss – other comprehensive income
Overall gain (P40.20 – P40.15) x $1,200 …….. P 60
Less: 12/31/20x4 Gain at present value…….. __294
FC Transaction loss……………………………… P234
b.
b.1. Zero, no entry required
b.2. P294 liability
Foreign Currency Exchange Loss [(P40.40 – P40.15) x $1,200]………… P 300
Less: Discount (P300 x 12% x 2/12)…………………………………………… ____6
Present value of loss* / Firm Commitment…………………………………. P294
b.3. P60 - liability
Firm Commitment
3/1/x5 Gain……. 234 294… …..12/31/x4 Loss
60 3/1/x5 Net
c.
c.1.
Net Method: Zero. No entry required.
Gross Method
FC Receivable from XD……………………… P48,180
 Less: Pesos payable to XD…………………… 48,180
Forward Contract (fair value)………………. P 0
c.2. P294 asset
Gross method
FC Receivable from XD (P40.40 x $1,200)- P6. P48,474
Less: Pesos payable to XD (fixed at P40.15)… 48,180
Forward Contract (fair value – asset)……… P 294
Net Method: P294.
Forward contract (debit balance – asset)… P 294

c.3. P60 debit balance – asset

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

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

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

Forward Rate for 8/1/20x5

Settlement
Spot Rate (or Expiration)
November 1, 20x4…………………. P40.60 P41.25 (*270 days)
December 31, 20x4…………………. P40.75 P41.00 (**210 days)
March 1, 20x5…………………………………… P40.70 P40.95 (***150 days)
August 1, 20x5……………………………….. P41.55****
*original 270-day forward rate on 12/1/20x4
**remaining or current forward rate on 12/31/20x4
***remaining or current forward rate on 3/1/20x5
***the forward rate at expiration or maturity is equal to spot rate as the remaining period of the forward contract is zero.

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

Hedged Item – (Unrecognized Hedging Instrument – Forward Contracts

Foreign Currency Firm Commitment) ( Broad Approach or Gross Position Accounting)
November 1, 20x4
Date of Commitment (Date of Issuing the Purchase Order)
Date of Inception/Hedging of 270 days Forwards

No journal entry is required to record the firm FC Receivable from XD…………… 49,500
commitment. The forward contract is designated as a hedge of Pesos Payable to XD 49,500
the firm commitment to purchase inventory on March 1, 20x5. (P41.25 x $1,200)
The hedge is accounted for as a fair value hedge. To record forward contract to
buy $1,200 using forward rate.

December 31, 20x4

(Balance Sheet Date, an intervening financial reporting date)

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

FC Transaction Gain……………... 300 FC Receivable from XD………… 300
[P41.25 – P41.00) x $1,200 (P41.25 – P41.00) x $1,200]
To record a loss on firm commitment To record a loss on foreign
using the change in the forward rate. currency to be received from
FC dealer.

Assets Liability
 Firm Commitment…………………………………...P 300 Pesos payable to XD (fixed at P41.25)………..P 49,500
Less: FC Receivable from XD (at spot rate)…. 49,200
Forward Contract (fair value)………………….P 300

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

March 1, 20x5
Transaction Date (Exposed Liability)

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

Accounts payable………………. 48,840
(P40.70 x $1,200)
To record the purchase of
inventory for $1,200 at spot rate
and recognize accounts payable.

Inventory ……………………………… 300

Firm Commitment ……………….. 300
To remove the carrying amount of the
firm commitment from the balance sheet6
and adjust the initial carrying amount of
the inventory that results from the firm
commitment. This treatment is an
accordance with PAS 39 par. 89b.

Firm Commitment
12/31/x4 Gain….. 300
3 / 1/x5 300 300

August 1, 20x5
Settlement Date Settlement Date/Date of Expiration of Contract

FC Transaction Loss………………… 1,020 FC Receivable from XD……………. 660

Accounts payable…. 1,020 FC Transaction Gain……………. 660
[(P41.55 – P40.70) x $1,200}…….. [(P41.55 – P41.00) x $1,200]
To record a loss from 3/1/x5 to To record a gain on foreign
8/1/x5 on liability denominated in currency to be received from
FC. FC dealer.

Pesos Payable from XD……………. 49,500

Cash………………………………. 49,500
To record payment to
exchange dealer.

Investment in FC……………………. 49,860

FC Receivable from XD 49,860
To record receipt of foreign
currency.

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

Cash…………………………………. 49,860 Investment in FC…………………. 49,860
To record payment of accounts payable To record conversion of US dollars into
at spot rate. cash for payment of accounts payable.

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

Forward Rate for 3/1/20x5

 Settlement
Spot Rate (or Expiration)
December 1, 20x4…………………………. P40.00 P40.15 (*90 days)
December 31, 20x4…………………………. P40.30 P40.40 (**60 days)
March 1, 20x5………………………………….. P40.20***
*original 90-day forward rate on 12/1/20x4
**remaining or current forward rate on 12/31/20x4
***the forward rate at expiration or maturity is equal to spot rate as the remaining period of the forward contract is zero.

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

Hedged Item – Hedging Instrument – Forward Contracts

Forecasted Transaction ( Broad Approach or Gross Position Accounting)
December 1, 20x4
Date of Forecast Date of Inception/Hedging of 90 days Forwards

No journal entry is required to record the forecasted FC Receivable from XD…………… 48,180
transaction. The forward contract is designated as a hedge Pesos Payable to XD 48,180
against the exposure to increases in the dollar rate on March 1, (P40.15 x $1,200)
20x5. To record forward contract to
buy $1,200 using forward rate.

December 31, 20x4

(Balance Sheet Date, an intervening financial reporting date)

No entry required, since it is only a forecasted FC Receivable from XD 300

transaction not guaranteed such as firm commitment. OCI – Exchange Gain (B/S) 300
[(P40.40 – P40.15) x $1,200]
To record a gain on foreign
currency to be received from
FC dealer.
FC – foreign currency; OCI - Other Comprehensive Income; B/S – Balance Sheet

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

Balance Sheet Presentation on 12/31/20x4

FC Receivable from XD (P40.40 x $1,200)… P48,480
Less: Pesos payable to XD (fixed at P40.15) 48,180
Fair value of Forward Contract, 12/1/20x4.. P 300

On March 1, 2011 (the transaction date and the settlement date), the journal entries are:

March 1, 20x5
Date of Transaction and Settlement Settlement Date/Date of Expiration of Contract

OCI – Exchange Loss (B/S)……… 240

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

Pesos Payable from XD……………. 48,180

Cash………………………………. 48,180
To record payment to
exchange dealer.

Investment in FC……………………. 48,240

FC Receivable from XD 48,240
To record receipt of foreign
 currency.

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

Cash ………………………………… 48,240 Investment in FC…………………. 48,240
To record the purchase of To record conversion of US dollars into
merchandise for $1,200 at the cash for purchase of machinery.
spot rate of P40.20

Suppose that in April 1, 20x5, the inventory is sold for P54,000 cash.
The entries to record the sale and to reclassify the amounts from Other Comprehensive Income (a P50 gain,
including P250 gain on December 31, 20x4, plus the P200 loss on March 1, 20x5) into earnings are as follows:
April 1, 20x5
Date of Transaction (Sale) Settlement Date/Date of Expiration of Contract
Cash………... 54,000
Sales………………………………… 54,000
To record the sale of merchandise.

Cost of goods sold…………………… 48,240

Inventory, at cost………………… 48,240

To record cost of sales.

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

Cost of goods sold....................... 60 3/1/x5 Loss 240 300… ….12/31/x4 Gain
To remove the gain recognized in 60 60 3/1/x5
OCI and release the OCI to profit or
loss. This entry is recorded in
accordance with PAS 39 par. 98a is
adopted.

Problem V
1. Indirect exchange rates for Australian dollars were:

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

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

2. The balance in the account Foreign Currency Payable to Exchange Broker was P39,900 at
December 31, 20X5, computed as:
P39,900 = FC 70,000 x P.57 Dec. 31 forward rate

3. The direct exchange rate for the 60-day forward contract for the 70,000 foreign currency (FC) was
FC 1 = P.58. This is the result of the following computation:
(P40,600 / FC 70,000) = P.58.

4. P40,600 is the amount of Pesos Receivable from Exchange Broker in the adjusted trial balance at
December 31, 20x4. The balance in this account does not change because it is denominated in
Philippine peso.
5. Indirect spot exchange rates for FC2 were:

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

December 31: FC2 400,000 / P80,800 = 4.950 [P1 equals FC2 4.950]

Or, 4.950 = FC2 1 / P.2020

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

Foreign Currency Receivable from

Exchange Broker (FC2) 82,000

Pesos Payable to Exchange Broker (P) 82,000

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

8. The accounts payable balance was P80,800 at December 31, 20x4.

P80,800 = FC2 400,000 x P.2020 Dec. 31 spot rate

The entries to support the computations for are presented below:

1. Transactions with Foreign Company 1 (FC1)

December 1, 20x4

Accounts Receivable (FC1) 42,000

Sales 42,000

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

Pesos Receivable from Exchange Broker 40,600

 Foreign Currency Payable to

Exchange Broker (FC1) 40,600

P40,600 = FC1 70,000 x P.58 Dec. 1 forward rate,

and also peso amount stated in problem information

(P.58 = P40,600 / FC1 70,000)

December 31, 20x4

Foreign Currency Transaction Loss 300

Accounts Receivable (FC1) 300

P300 = change in accounts receivable (FC1) as noted

in problem information.

Foreign Currency Payable to

Exchange Broker 700

Foreign Currency Transaction Gain 700

P39,900 = FC1 70,000 x P.57 Dec. 31 forward rate

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

P 700 = FC1 70,000 x (P.57 - P.58)

2. Transactions with Foreign Company 2 (FC2)

October 2, 20x4

Equipment 80,000

Accounts Payable (FC2) 80,000

P80,000 = FC2 400,000 x P.20

 Foreign Currency Receivable from

Exchange Broker (FC2) 82,000

Pesos Payable to Exchange Broker 82,000

P82,000 = FC2 400,000 x P.2050, and the

P82,000 is presented in the problem

for the foreign currency receivable.

December 31, 20x4

Foreign Currency Transaction Loss 800

Accounts Payable (FC2) 800

P80,800 = FC2 400,000 x P.202 Dec. 31 spot rate

- 80,000 = FC2 400,000 x P.200 October 2 spot rate

P 800 = FC2 400,000 x (P.202 - P.200)

Foreign Currency Transaction Loss 1,000

Foreign Currency Receivable from

Exchange Broker 1,000

P81,000 = FC2 400,000 x P.2025 Dec. 31 forward rate

- 82,000 = FC2 400,000 x P.2050 Oct. 2 forward rate

P 1,000 = FC2 400,000 x (P.2025 - P.2050)

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

Strike price Foreign Currency

(exercise price Option
Market or or option price) Situation Element Time Intrinsic
Spot Rate Existing Value** Value*
12/ 1/20x4 P1.20 P1.20 At-the-money TV P360 P 0
12/31/20x4 P1.28 P1.20 In-the-money TV & P240 P4,800
 IV
3/ 1/20x5 P1.27 P1.20 In-the-money IV** P 0 P4,200
*
TV – time value; IV – intrinsic value.
* (Market price less – option price) x foreign currencies
** Fair value of option – intrinsic value
***time already expired, so need to determine time value unless It is a residual amount.

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

Hedged Item – Importing Transaction

(Exposed Liability) Hedging Instrument – Option Contracts
December 1, 20x4
Transaction Date Date of Inception/Hedging of 90 days Forwards

Inventory (60,000 FC x P1.2)……….. 72,000 Investment in FC Call Option…….. 360

Accounts payable………………. 72,000 Cash……………………………….. 360
To record purchase of goods on To record purchase of call
account using the spot rate on option.
12/1/1/x4.

December 31, 20x4

(Balance Sheet Date an intervening financial reporting date)

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

Account payable………………… 4,800 FC Transaction Gain…. 4,680
[P1.28 – P1.20) x 60,000 FC (P5,040 – P360 = P4,680)
To record a loss on the exposed liability To record a gain on call option.
denominated in foreign currency.

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

March 1, 20x5
Settlement Date Settlement Date/Date of Expiration of Contract

Accounts payable……………. 600 FC Transaction Loss…………………. 840

FC Transaction gain……. 600 Investment in FC Call Option… 840
[(P1.28 – P1.27) x 60,000 FC…….. (P5,040 – P4,200)
To record a gain from 12/31/x4 to To record a loss on call option
3/1/x5 on liability denominated in
FC.

Accounts payable…………………… 76,200 Cash……………………………………. 4,200

Cash [(P1.20 x 60,000 FC) + Investment in FC Call Option… 4,200
P4,200, proceeds from call To record the derecognition of call
option]………………………….. 76,200 option on realization.
To record payment of accounts payable
at spot rate.

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

Firm Commitment Call Option Contract

Total Call Option (CO Premium x FCs)
Spot Fair value Change in (CO)Premium Fair Value of Call Option Change in
Date Rate Fair Value per FC Fair Value
11/20/x4 P0.20 P.002 P120
12/20/x4 P0.21 (P 600)* (P 600)** P.010*** P600 P480
* $12,000 – $12,600 = $(600).
**(P0.21 – P0.20, spot) x 60,000 FC.
***The premium on 12/20 for an option that expires on that date is equal to the option’s intrinsic value. Given the spot rate on 12/20 of P.21, a
call option with a strike price of P.20 has an intrinsic value of P.01 per mark.
Based on the above data, the following situations can be derived:

Strike price Foreign Currency

(exercise price Option
Market or or option price) Situation Element Time Intrinsic
Spot Rate Existing Value** Value*
11/20/20x4 P0.20 P0.20 At-the-money TV P120 P 0
12/20/20x4 P0.21 P0.20 In-the-money IV P 0 P 600
TV – time value; IV – intrinsic value.
* (Market price less – option price) x foreign currencies
** Fair value of option – intrinsic value

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

Hedged Item – Importing Transaction

(Firm Commitment) Hedging Instrument – Option Contracts
November 20, 20x4
Date of Commitment Date of Inception/Hedging of 90 days Forwards

There is no entry to record the sales agreement because it Investment in FC Call Option…… 120
is an executory contract. Cash………………………………. 120
To record purchase of call
option.

December 20, 20x4

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

FC Loss on Firm Commitment……… 600 Investment in FC Call Option…… 120

Firm Commitment………………… 600 FC Transaction Gain…. 120
[(P.21 – P0.20) x 60,000 FC] (P600 – P480 = P100)
To record loss on firm commitment To record a gain on call option.
based on spot rate.

Equipment…………………………….. 12,600 Cash……………………………….. 600

Cash [(P0.20 x 60,000 FC) + 12,600 Investment in FC Call Option 600
P600, proceeds from call To record the derecognition of call
option]………………………….. option on realization.
To record purchase of equipment at spot
rate (P.21 x 60,000 FC)
Firm Commitment …………………… 600
Equipment…………………………. 600
To derecognized firm commitment and
adjust the carrying amount of equipment.

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

11/20/20x4 12/20/20x4
Spot rate (market price) P0.20 P0.18
Strike price (exercise price) 0.20 0.20
Fair value of call option P480 N/A
N/A – not applicable

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

Firm Commitment Call Option Contract

Total Call Option (CO Premium x FCs)
Spot Fair value Change in (CO)Premium Fair Value of Call Option Change in
Date Rate Fair Value per FC Fair Value
11/20/x4 P0.20 P.002 P120
12/31/x4 P0.18 P1,200* P1,200** P.000*** P 0 (P120)
* P12,000 – P10,800 = P1,200
**(P.20 – P.18) x 60,000 FC
***The premium on 12/20 for an option that expires on that date is equal to the option’s intrinsic value. Given the spot rate on 12/20 of P.18, a
call option with a strike price of P.20 has no intrinsic value – the premium on 12/20 is P.000.

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

Strike price Foreign Currency

(exercise price Option
Market or or option price) Situation Element Time Intrinsic
Spot Rate Existing Value** Value*
11/20/20x4 P0.20 P0.20 In-the-money TV & P120 P 0
IV
12/20/20x4 P0.18 P0.20 In-the-money IV P 0 P 0
TV – time value; IV – intrinsic value.
* (Market price less – option price) x foreign currencies
** None since the option price is greater than the market price.

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

Hedged Item – Importing Transaction

(Firm Commitment) Hedging Instrument – Option Contracts
November 20, 20x4
Date of Commitment Date of Inception/Hedging of 90 days Forwards

There is no entry to record the sales agreement because it Investment in FC Call Option…… 120
is an executory contract. Cash………………………………. 120
To record purchase of call
option.

December 20, 20x4

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

Firm Commitment……… 1,200 FC Transaction Loss……….…… 120

FC Gain on Firm Commitment 1,200 Investment in FC Call Option 120
[(P0.20 – P0.18) x 60,000 FC] (P120 – P0 = P120)
To record loss on firm commitment To record a gain on call option.
based on spot rate.

Equipment…………………………….. 12,000 No entry required since the

Cash [(P0.20 x 60,000 FC) + 12,000 Investment in call option has no value
P0, no proceeds from call
option]…………………………..
To record purchase of equipment at spot
rate (P.21 x 50,000 FC)

Equipment……….…………………… 1,200
Firm Commitment………………. 1,200
To derecognized firm commitment and
adjust the carrying amount of equipment.

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

Strike price Foreign Currency

(exercise price Option
Market or or option price) Situation Element Time Intrinsic
Spot Rate Existing Value** Value*
1/ 1/20x4 P1.15 P1.14 In-the-money TV & P8,400 P12,000
IV
6/30/20x4 P1.18 P1.14 In-the-money TV & P4,800 P48,000
IV
 12/31/20x4 P1.17 P1.14 In-the-money IV** P 0 P36,000
*
TV – time value; IV – intrinsic value.
* (Market price less – option price) x foreign currencies
** Fair value of option – intrinsic value
***time already expired, so need to determine time value unless It is a residual amount.

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

Hedged Item – Importing Transaction

(Forecasted Transaction) Hedging Instrument – Option Contracts
December 1, 20x4
Transaction Date Date of Inception/Hedging of 90 days Forwards

No journal entry is required to record the forecasted Investment in FC Call Option…….. 20,400
transaction. The forward contract is designated as a hedge Cash……………………………….. 20,400
against the exposure to increases in the dollar rate on March 1, To record purchase of call
20x5. option.

December 31, 20x4

(Balance Sheet Date an intervening financial reporting date)

No entry required, since it is only a forecasted Investment in FC Call Option…….. 32,400

transaction not guaranteed such as firm commitment. OCI – FC Transaction Gain (B/S) 32,400
[P1.18 – P1.14) x 1,200,000 =
P52,800 – P20,400 = P32,400]
To record a gain on call option.

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

FC Transaction Gain 25,920
To reclassify 80% of OCI to earnings
(720,000 /900,000) = 80% ; (80% ×
P32,400 = P25,920)

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

December 31, 20x4

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

FC Transaction Loss…………………. 16,800

Investment in FC Call Option… 16,800
[(P1.17 – P1.14) x 1,200,000
baht = P36,000 – P52,800]
To record a loss on call option

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

FC Transaction Gain………….… 6,480
To record reclassify the remaining
P6,480 of FC gain from OCI to
earnings (180,000/900,000 x
P32,400).n This entry is recorded if
PAS 39 par. 98b is adopted.
Cash……………………………………. 36,000
Investment in FC Call Option… 36,000
[(P1.17 – P1.14) x 1,200,000 baht]
To record the derecognition of call
option on realization.

Multiple Choice Problems

1. c
Peso Value in 3 months = 3,750 + 37.50 = 3,787.50
FC Value in 3 months = 5,000 + 87.50 = 5,087.50
Fwd rate 3,787.50 ÷ 5,087.50 = .745
2. e
11/10/x6: Original forward rate on the date of hedging..……………………….P 1.64
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6......……. 1.59
Loss on forward contract per FC………...……………………………………………P .05
Multiplied by: No. of FCs……………………………………………………………….. 100,000
Loss on forward contract..……………………………………………………………..P 5,000
3. a
10/22/x6: Original forward rate on the date of hedging..……………………….P 0.45
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6.………. 0.445
Gain on forward contract per FC…………………………………………………..P .005
Multiplied by: No. of FCs……………………………………………………………….. 100,000
Gain on forward contract.....………………………………………………………….P 500
4. c -15,000,000 x P.0092
5. b - 15,000,000 x P.0094
6. b - 15,000,000 (P.0094 - P.0092)
7. d - 15,000,000 x P.0091
8. c - 15,000,000 (P.0091 - P.0094)
9. a – forward contract is zero on the date of hedging
10. b – since it is a gain (refer to No. 11) therefore the value of forward contract is an asset
11. d - P4,500 - P0
12. c
13. c - P3,000 - P4,500
14. b - 1,000,000 x P1.116
15. d- 1,000,000 x P1.129
16. a - 1,000,000 (P1.129 - P1.116)
17. a - 1,000,000 x P1.138
18. c - 1,000,000 (P1.138 - P1.129)
19. d – forward contract is zero on the date of hedging
20. a
21. b
22. c
23. d - (P8,000 - P6,000)
24. e – there is no fair value of forward contract on the date of hedging.
25. b – (100,000 FCU x P.74, the forward rate on the date of hedging), the entry would be as follows (using the
gross or broad approach):
Forward contract receivable……………………………………………… 74,000
Pesos payable to exchange dealer……………………………. 74,000
26. d
Original value of Forward Contract Receivable-FC 100,000 x .74 = 74,000
Current (6/30) value of the Fwd Contract Rec-FC 100,000 x .75 = 75,000
Increase in value of Forward Contract Receivable 1,000
Value of Receivable, discounted at 8%, n 1 1,000 - (1,000 x [.08 ÷ 12]) = 993
Value of receivable 74,000 + 993 = 74,993
or,
FC Receivable – date of hedging, 6/1 20x4……………………………………...P 74,000
Add: Forward contract gain P1,000 x [1/1 + (8%/12 x 1 month remaining)].. 993
Forward Contract (FC) Receivable, 6/30/20x4…………………………………. P 74,993
27. d
January 1: Origininal forward rate on the date of hedging..………………..P 0.94
March 1: Spot rate…………………………………………………………………… 0.93
Gain……………………………………………………………………………………..P 0.01
Multiplied by: No. of FCs……………………………………………………………. 100,000
FC Forward Contract Gain…………………………………………………………P 1,000
28. c
Hedging Instrument:
 January 1: Origininal forward rate on the date of hedging..………………..P 0.94
March 1: Spot rate…………………………………………………………………… 0.93
Gain……………………………………………………………………………………..P 0.01
Multiplied by: No. of FCs……………………………………………………………. 100,000
FC Forward Contract Gain…………………………………………………………P 1,000
Hedged Item:
January 1: Spot rate………………………………………………..………………..P 0.945
March 1: Spot rate…………………………………………………………………… 0.930
Loss………………………………………………………………………………………P 0.015
Multiplied by: No. of FCs…………………………………………………………….. 100,000
Foregin currency exchange loss……..………………………………………….. P 1,500
Net loss………………………………………………………………………………….P 500
29. d
Hedged Item:
January 1: Spot rate………………………………………………..………………..P 0.945
March 1: Spot rate…………………………………………………………………… 0.930
Loss………………………………………………………………………………………P 0.015
Multiplied by: No. of FCs…………………………………………………………….. 100,000
Foreign currency exchange loss……..………………………………………….. P 1,500
30. c – (P.1865 – P.1850) gain x 100,000 FC = P150 gain
31. c – using spot rate

32. c
5/1: Original forward rate (90 days)……..……………………………….P .693
6/30: Current (remaining) forward rate (30 days)……....……………… .695
Forex gain per unit.......……………………………………………………….P .002
Multiplied by: Number of foreign currencies……………………………. 500,000
Foreign exchange gain due to hedging instrument……..……………P 1,000
Less: Discount – P1,000 x 6% x 30/360 days………………………………. 5
PV of foreign exchange gain due to hedging instrument……………P 995
Or, alternatively the computation of present value may also be presented as:
Foreign exchange gain………………………………………………...P 1,000
Divided by: [1% + (6%/12 x 1 month = equivalent to 30 days)]….. 1.005
PV of foreign exchange gain due to hedging instrument……….P 995
Note: Since, the discount rate is given it is assumed that all times present value should be computed. Present
value for hedged item is not necessary for exposed asset or liability since spot rate is in effect. Unlike, the other
types of hedging wherein, forward rates is used to determine the gain or loss on the hedged item
33. c
Foreign exchange loss due to Hedged Item:
5/1: Spot rate………………………………………………………………P .687
6/30: Spot rate……………………………………………………………… .691
Forex loss per foreign currency…….……………………………………..P .04
Multiplied by: Number of foreign currencies………………………….. 500,000
Foreign exchange loss due to hedged item ………………………..P 2,000
PV of foreign exchange gain due to hedging instrument
(forward contract – refer to No. 32).………………………......... 995
Net Income effect – decrease ………………………………………........ P 1,005

34. d
5/1: Original forward rate (90 days)…..…………………………………….P .693
8/1: Spot rate…………………………………………………………………… .696
Forex gain per currency ……………………………………………………….P .003
Multiplied by: Number of foreign currencies……………………………….. 500,000
Total Foreign Exchange gain due to hedging instrument
 (forward contract)..................................................................................P 1,500
Less: 6/30 cut-off - PV of foreign exchange gain due to hedging
instrument (forward contract – refer to No. 32)………………..... 995
August 1 - Foreign exchange gain due to hedging instrument
(forward contract)……………………………………………………….P 505
35. e
Hedging Instrument:
Origininal forward rate on the date of hedging……………………………….P 0.105
Balance Sheet date: Remaining (current) forward rate – 12/3/1/20x4…… 0.095
Loss………………………………………………………………………………………P 0.010
Multiplied by: No. of FCs……………………………………………………………. 50,000
FC Forward Contract Loss…………………………………………………………..P 500
Multiplied by: PV factor……………………………………..………………………. .98,03
Forward contract – a liability account (since it is a loss)………………………P 490.15

36. b – (forward rate > spot rate – premium) seller’s point of view considered as premium revenue since it was sold
at a higher rate.

37. b
November 1, 20x4:

Foreign Currency Receivable from

Exchange Broker (FC) 12,600
Pesos Payable to Exchange Broker 12,600
Signed 90-day forward exchange contract
to purchase 100,000 FC:
P12,600 = 100,000 FC x P.126 forward rate
38. c
December 31, 20x4

Foreign Currency Receivable from

Exchange Broker (FC) 300
Foreign Currency Transaction Gain 300
Revalue foreign currency receivable to
fair value:
P300 = 100,000 FC x (P.129 - P.126)
39. b
January 30, 20x5

Pesos Payable to Exchange Broker (Pesos) 12,600

Cash 12,600
Deliver pesos to exchange broker in
accordance with forward exchange contract:
P12,600 = 100,000 FC x P.126 contract rate
40. b
January 30, 20x5
Pesos Payable to Exchange Broker (Pesos) 12,600
Cash 12,600
Deliver pesos to exchange broker in
accordance with forward exchange contract:
P12,600 = 100,000 FC x P.126, the 90-day forward rate
41. a
January 30, 20x5
Foreign Currency Transaction Loss 200
 Foreign Currency Receivable from Exchange Broker (FC) 200
Adjust foreign currency receivable to
current peso equivalent:
P12,700 = 100,000 FC x P.127 Jan. 30 spot rate
- 12,900 = 100,000 FC x P.129 Dec. 31 forward rate
P 200 = 100,000 FC x (P.127 - P.129)
Foreign Currency Units 12,700
Foreign Currency Receivable from Exchange Broker 12,700
Receive 100,000 FC from exchange broker:
P12,700 = 100,000 FC x P.127 spot rate
42. d
PAS 32 and 39 (PFRS 9) requires the FCU payable be recorded at the forward rate on the date of hedging.

Letter (d) is the required entry under the old practice wherein the FCU payable are recorded using the spot rate
on the date of hedging.
43. b
Receivable balance: P319,500 (spot rate on the balance sheet date, P.71 x 450,000 FCU)
Gain or loss: P9,000 loss [(P.73 – P.71) x 450,000 FCU]
44. c – (forward rate > spot rate= premium) buyer’s point of view considered as premium expense since it was
purchase at a higher rate plus a loss on firm commitment (i.e., P1.21 – P1.20)
45. e
Firm Commitment:
11/10/x6: Original forward rate on the date of hedging..……………………….P 1.64
Balance Sheet date: Remaining (current) forward rate – 12/31/206…………. 1.59
Loss on Forward Contract per FC…………………………………………………....P .05
Multiplied by: No. of FCs……………………………………………………………….. 100,000
Loss on forward contract……………………………………………………………….P 5,000
46. e
Firm Commitment:
11/10/x6: Original forward rate on the date of hedging..……………………….P 1.64
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6......……. 1.59
Gain on forward contract per FC………...…………………………………………..P .05
Multiplied by: No. of FCs……………………………………………………………….. 100,000
Gain on forward contract..…………………………………………………………….P 5,000
47. b
Firm Commitment:
10/22/x6: Original forward rate on the date of hedging..……………………….P 0.45
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6.………. 0.445
Gain on forward contract per FC…………………………………………………..P .005
Multiplied by: No. of FCs……………………………………………………………….. 100,000
Gain on forward contract.....…………………………………………………………P 500

48. a
December 1, 20x6: Spot rate – P1.64 x 100,000....…………............. P164,000
Less: Firm Commitment – liability (credit balance)
8/3/20x6: Original (120-day) forward rate…………………….P 1.60
12/1/20x6: Remaining (60-day) forward rate………………… 1.64
Loss on Firm Commitment………………………………………....P 0.04
Multiplied by: No. of FCs…………………………………………… 100,000 4,000
Value of machine...........................……………………………………… 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 Commitment – asset (debit balance)
 11/10/20x6: Original (90-day) forward rate…………………….P 2.44
12/9/20x6: Remaining (30-day) forward rate………………… 2.46
Gain on Firm Commitment………………………………………..P 0.02
Multiplied by: No. of FCs…………………………………………… 100,000 2,000
Value of sales, 1/31/20x6…...............…………………………………… P243,000

51. b - refer to No. 50 for computation ((Note: There is no more commitment after the date of transaction which is
12/9/20x6)

52. c - Forward contracts always have a value of P0 at the date they are established
53. a
54. a - P10,000 - P0
55. c - The forward contract gain or loss is offset by the loss or gain on the sales commitment
56. b
57. c - P25,000 - P10,000
58. c - The forward contract gain or loss is offset by the loss or gain on the sales commitment
59. a - (50,000,000 x P.0088) + [50,000,000 (P.0092 - P.0087)]
60. b - Forward contracts always have a value of P0 at the date they are established
61. c
62. d - P7,500 - P0
63. c - The forward contract gain or loss is offset by the loss or gain on the sales commitment
64. d
65. b - P2,500 + P7,500
66. a - The forward contract gain or loss is offset by the loss or gain on the sales commitment
67. b - (2,500,000 x P1.129) + [2,500,000 (P1.139 - P1.138)]
68. b
January 31: Spot rate – P1.59 x 100,000………………………............. P159,000
Add: Firm Commitment – asset (debit balance)
11/30/20x3: Original (90-day) forward rate…………………….P 1.65
1/31/20x4: Remaining (30-day) forward rate………………… 1.60
Gain on Firm Commitment………………………………………..P 0.05
Multiplied by: No. of FCs…………………………………………… 100,000 5,000
Value of merchandise, 1/31/20x4……………………………………… P164,000
The entry would be as follows on 1/31/20x4:
Inventory………………………………………………………………… 164,000
Firm Commitment……………………………………………. 5,000
Cash (P1.59 x 100,000)………………………………………. 159,000

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

Inventory (P.28 x 100,000 FC)……………………………………………28,000

Cash……………………………………………………………….. 28,000

Firm Commitment………………………………………………………… 3,000

Inventory………………………………………………………….. 3,000
Therefore, inventory should be valued at P25,000 (P28,000 – P3,000)
70. e – the inventory should be valued based on the spot rate on the date of transaction 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 payable should be valued based on the spot rate on the date of transaction.
72. c
Firm Commitment:
Original forward rate on the date of hedging…………………………………….P .58
Balance Sheet date: Remaining (current) forward rate – 6/30/20x4…………. .56
Loss on Firm Commitment per FC…………………………………………………..P .02
Multiplied by: No. of FCs……………………………………………………………….. 200,000
Loss on firm commitment……………………………………………………………….P 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 4/1 200,000 x 0.58 116,000
Fwd value 6/30 200,000 x 0.56 112,000
Decrease in Fair Value of Payable 4,000
PV of change: 4,000 ÷ 1.01 3,960
[n 1; i (.12 ÷ 12) = .01]

Current value of fwd contract = 116,000 - 3,960 = 112,040

or,
FC payable – date of hedging, 4/1 20x4………………………………………….P 116,000
Less: Forward contract gain [P4,000 x 1/1 + (8%/12 x 1 month remaining)]... 3,960
FC payable – date of hedging, 6/30/ 20x4……………………………………….P 112,040

74. c – (P2.17 – P2.14) x 200,000 FCs = P6,000 loss. No need to compute present value because the contract
already expired.

75. b
1-Aug 30-Aug 30-Sep
Notional amount 15,000 15,000 15,000
Forward rate for remaining time 0.690 0.680 0.675
Initial forward rate 0.690 0.690
Change in original forward rate (0.010) (0.015)
Fair value of fwd contract in future pesos:
Original forward value 10,350 10,350
Current forward value 10,200 10,125
(Gain) Loss in forward rate (150) (225)
Current present value
PV of (P150) n=1; i=0.667% (149)
PV of (P225) n=0; no discounting (225)
Prior present value 0 149
Change in present value (149) (76)
76. d
1-Aug 30-Aug 30-Sep
Notional amount 15,000 15,000 15,000
Forward rate for remaining time 0.690 0.680 0.675
Initial forward rate 0.690 0.690
Change in original forward rate (0.010) (0.015)
Fair value of fwd contract in future dollars:
Original forward value 10,350 10,350
Current forward value 10,200 10,125
(Gain) Loss in forward rate (150) (225)
 Current present value
PV of (P150) n=1; i=0.667% (149)
PV of (P225) n=0; no discounting (225)
Prior present value 0 149
Change in present value (149) (76)
77. c - Forward contracts always have a value of P0 at the date they are established
78. a
79. d - [(P600) - P0]
80. b
81. c - [P300 - (P600)]
82. b - Forward contracts always have a value of P0 at the date they are established
83. a
84. c - [(P1,950) - P0]
85. c
86. b - [P635 - (P1,905)]
87. c
Cost of equipment…………………………………………………………………..P 211,000
Less: Fair value of the equipment………………………………………………… 199,000
Impairment loss……………………………………………………………………….P 12,000

88. a – (P17,500 – P13,200) reclassified to earnings

89. e
Original forward rate on the date of hedging…………………………………P 1.64
Balance Sheet date: Remaining (current) forward rate – Dec. 31, 20x6… 1.59
Loss……………………………………………………………………………………..P 0.05
Multiplied by: No. of FCs…………………………………………………………… 100,000
FC Forward Contract Loss…………………………………………………………..P 5,000
90. a
P400 = 10,000 foreign currency units x (P.82 - P.78). The loss is calculated using only forward rates. On
December 31, 20x4, the loss is the difference between the 90-day future rate on November 1 (P.78) and the 30-
day forward rate on December 31 (P.82).

91. b - speculation (gain or loss – income statement)

Original forward rate on the date of hedging…………………………………P 0.033
Balance Sheet date: Remaining (current) forward rate – Dec. 31, 20x4… 0.036
Loss…………………………………………………………………………………….. P 0.003
Multiplied by: No. of FCs……………………………………………………………. 100,000
FC Forward Contract Loss………………………………………………………….. P 300
92. b - (220,000 FCUs)x (P0.68) = P149,600
93. B - (220,000 FCUs)x(P.68 - P.70) = P4,400 loss
(To adjust the contract to the 30 day 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, 12/12/x4 P.90

FER, 12/31/x4 P.93
AJE:
Forward Contact Receivable 3,000

Foreign Exchange Gain 3,000

 Revalue forward contract:

P3,000 = 100,000 FCU x (P.93 - P.90) change in forward rates

Foreign Exchange Loss 10,000

Account Payable 10,000

Revalue foreign currency payable:

P10,000 = 100,000 FCU x (P.98 - P.88) change in spot rates

95. b
Hedge of a Firm Commitment:
Value FEC based on changes in forward rate.
AJE:
Forward Contract Receivable 3,000

Foreign Exchange Gain 3,000

Revalue forward contract, using the forward rates.

Foreign Exchange Loss 3,000

Firm Commitment 3,000

Recognize loss on firm commitment.

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 price/Spot Price)< P16.40 (Option/Strike Price).. 2.15 in-the-money
 Intrinsic Value………………………………………………………………….. P4.05

98. d
January 1, 20x6
(the inception date of the 1-yr. put FX option period)
FX Contract Value—Option........................................................................ 8,000
Cash.................................................................................................... 8,000
To record cost of put option acquired.

Note: P1.40, OP > P1.368, Market/spot rate – In-the-money (put option)

March 31, 20x6
(an intervening financial reporting date)
FX Contract Value—Option........................................................................ 30,000
FX Gain (P30,000 × 300,000 FCUs/1,000,000 FCUs)...................... 9,000
OCI—FX Gain (P30,000 × 700,000 FCUs/1,000,000 FCUs) ...... 21,000
To adjust option’s carrying value to its fair
value of P106,000 (a given amount). P106,000 – P6,000 = P100,000)

99. a
Note: P1.40, OP > P1.368, Market/spot rate – Out-of-the-money (call option). Time value element only,
therefore any gain or loss is charged to profit and loss or current earnings, not OCI.

100. d
January 1, 20x6
(the inception date of the 1-yr. put FX option period)
FX Contract Value—Option........................................................................ 16,000
Cash.................................................................................................... 16,000
To record cost of put option acquired.

Note: P.25, OP < P.292, Market/spot rate – In-the-money (Call option)

March 31, 20x6
(an intervening financial reporting date)
FX Contract Value—Option........................................................................ 80,000
FX Gain (P80,000 × 500,000 FCUs/2,000,000 FCUs) x 50%.. ....... 10,000
OCI—FX Gain (P80,000 – P10,000)……......................................... 70,000
To adjust option’s carrying value to its fair
value of P106,000 (a given amount). P96,000 – P16,000 = P80,000)

Items 101 through 107 Solution Guide Table:

December 16 December 31 February 14
Spot rate (Market Price)........... P .16 P .15 P .147
Strike price (Option Price)....... P .16 P .16 .16
Notional amount (in Bolivar)... 1,000,000 1,000,000 1,000,000
Intrinsic value (if Market
is < Option (Strike)*........... P 0 P 10,000 P 13,000
Time value**............................ P 4,000 3,300.. 0
Fair (Total) value of Option.. .P 4,000 P 13,300 P 13,000
* (Option Price – Market Price ) x notional amount
** Fair value of option less Intrinsic Value

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, pounds or other units
specified in the financial instrument. Choices letter (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 if put option) x 1,000,000 bolivar……………………………………. 10,000
Time Value……………………………………………………………………………P 3,300

103. c (P3,300 – P4,000 = P700 loss); refer to the solution guide table for further analysis.

104. a – (P10,000 – P0 = P10,000 gain); refer to the solution guide table for further analysis.

105. b
Hedging Instrument/Hedging Transaction/Option Contract:
Inception date: Fair value of call option…………………….............................P 4,000
Balance sheet date: Fair value of call option……………………………......... 13,300
Foreign exchange gain…………………………………………………….............P 9,300

106. c
Foreign Currency Transaction (Hedged Item):
12/16/20x4: Spot rate…………………………………………………………………P .16
12/31/20x4: Spot rate………………………………………………………………... .15
Forex loss per unit……………………………………………………………………. P .01
Multiplied by: Number of foreign currencies…………………………………… 1,000,000
Foreign exchange loss..........…………………………………................................P 10,000
Hedging Instrument/Hedging Transaction/Option Contract:
Inception date: Fair value of call option……………………..............................P 4,000
Balance sheet date: Fair value of call option………………………………….. 13,300
Foreign exchange gain……………………………………………………………...P 9,300
Net foreign exchange loss……………………………………………………………….P 700

107. c
Foreign Currency Transaction (Hedged Item):
12/31/20x4: Spot rate…………………………………………………………………..P .150
2/14/20x5: Spot rate………………………………………………………………….. .147
Forex loss per unit………………………………………………………………………P .003
Multiplied by: Number of foreign currencies…………………………………….. 1,000,000
Foreign exchange loss..........…………………………………..................................P 3,000
Hedging Instrument/Hedging Transaction/Option Contract:
Balance sheet date (12/31/x4): Fair value of call option….…………..............P 13,300
Expiration date (2/14/x5): Fair value of call option..…………………………….. 13,000
Foreign exchange loss………………………………………………………………….P 300
Total foreign exchange loss………………………………………………………………P 3,300

108. c
12/1/20x4:Spot rate……………………………………………………………P .92
12/31/20x4:Spot rate…………………………………………………………. .93
Foreign currency gain……………………………………………. …………P .01
x: No. of foreign currencies…………………………………………………. 1,000,000
Foreign currency gain due to hedged item/commitment…………...P 10,000
Less: Discount – P10,000 x 12% x 2/12 (January and February).…........ 200
PV of foreign exchange gain due to hedged item/commitment.... P 9,800*
 Or, alternatively the computation of present value may also be presented as:
Foreign exchange gain – equity..…………………………………………P10,000
Divided by: [100% + (12%/12 x 2 months remaining)]………………….. 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 9,000
12/31/20x4: Fair value of Option (P10,000 x P.006)…………………………… 6,000
Foreign currency loss on hedging transaction (option contract)…………P 3,000

110. b– refer to No. 101 for computation. It is an asset since the 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 to No. 70)…………………………………………………………………. P 9,803
Foreign currency loss on hedging transaction (option contract)
– refer to no. 71)………………………………………………………………… ( 3,000)
Impact on net income – 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…………………………………………………..P .92
3/31/20x5 Spot rate…………………………………………………... .90
Foreign currency loss……………………………………. …………P .02
x: No. of foreign currencies………………………………………… 1,000,000
Foreign currency loss for the entire hedged
item/commitment…………………………………………… P 20,000
Add back: PV of foreign gain due to hedged
item/commitment………………………………………….… 9,803 ( 29,803)
Adjustment: Firm Commitment Account balance (credit balance) –
since the P20,000 is a foreign currency loss then the firm
commitment account is a credit balance……………………… 20,000
Foreign currency gain on hedging transaction (option contract)
12/31/20x4 (inception date): Fair value of option
(P0.006 x FC 1,000,000)………………………………………… P 6,000
3/1/20x4 (expiration date) : Fair value of option
(P0.020 x FC 1,000,000)……………………………………….… 20,000 14,000
Impact on Net Income……………………………………………………. P904,197

113. d – (150,000 FC x P.05 premium = P7,500)

114. a – (150,000 FC x P.04 premium = P6,000)

115. b – (150,000 FC x P.03 premium = P4,500)

116. c – (150,000 FC x P.97 = P145,500)
117. a
Hedged Item/Commitment:
3/01/20x3: Spot rate……………………………………………..P .095
12/31/20x3: Spot rate…………………………………………….. .094
Foreign currency loss per unit…………………………………. P .001
x: No. of foreign currencies……………………………………... 2,000,000
 Foreign currency loss due to hedged item/commitment..P 2,000
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: Fair value of Option………………………………..P 3,000
12/31/20x3: Fair value of Option6)……………………………... 3,200
Foreign currency gain on hedging transaction
(option contract)………………………………………………………… 200.00
Net impact on 20x3 income – loss (decrease)……………………..……P1,760.60

118. d
Sales (3/1/20x4 spot rate: P.089 x FC 2,000,000) …………………… P 178,000.00
Adjustment: Firm Commitment Account balance
(credit balance) – since the P12,000 is a foreign currency
loss then the firm commitment account is a credit balance 12,000.00*
Adjusted Sales…………………………………………………………… P190,000.00
Foreign exchange loss on hedged item/
commitment, 3/31/2012:
5/01/20x3: Spot rate…………………………………………P .095
3/01/20x4 Spot rate…………………………………………. .089
Foreign currency loss…………………………………. ……P .006
x: No. of foreign currencies…..……………………………. 2,000,000
Foreign currency loss for the entire hedged item
/commitment…………………………………………P 12,000*
Less: PV of foreign loss due to hedged item
/commitment………………………………………… 1,960.60 (10,039.40)
Foreign currency gain on hedging instrument
(option contract):
12/31/20x3 (balance sheet date): Fair value of option.P 3,200
3/01/20x4 (expiration date) : Fair value of option
[(P0.95 – P.089) x FC 2,000,000)..……………………… 12,000 8,800.00
Net impact on 20x4 income – loss (decrease)……………….. P 188,760.60

119. c
Net cash inflow with option (P190,000 – P3,000)…………………… P 187,000
Cash inflow without option (at spot rate of P.089 x 2,000,000 FC. 178,000
Net increase in cash inflow P 9,000

120. a
Note: P1.40, OP < P1.368, Market/spot rate – Out-of-the-money (put option). Time value element only,
therefore any gain or loss is charged to profit and loss or current earnings, not OCI. Refer to No. 99.

Theories
Completion Statements
1. hedging
2. existing assets and liabilities, firm commitments, forecasted transactions
3. firm commitment
4. forecasted
5. hedged item
6. hedging instrument
7. FX forwards, FX options
8. two-sided, counterbalanced
9. one-sided, counterbalanced
10. Hedge accounting
11. exchange rate, specified period
 12. call, put
13. option holder
14. option writer
15. premium
16. “in the money”
17. time value element, intrinsic value element
18. exchange rate, future date
19. fulfill, obligation
20. take
21. executory
22. unrealized
23. the net position, setoff
24. premium, discount, time value
25. premium, decrease
26. split accounting
27. designated, effective, firm
28. speculating
29. firm commitment, forecasted transaction
30. market, credit, liquidity
31. market, credit
32. market, liquidity
33. unlimited
34. “on-balance-sheet,” “off-balance-sheet”
35. rights, obligations, assets, liabilities
36. fair values
37. assets, liabilities
38. undesignated, fair value, cash flow, net investment
39. asset, liability, firm commitment
40. forecasted transaction.
41. fair value
42. cash flow
43. net investment
44. earnings
45. other comprehensive income, earnings
46. earnings, earnings
47. forward
48. valuing, reporting
49. hedging effectiveness
50. time value
51. ineffective

True or False
52. False 68. False 84. True 100. False 116. True 132. True 148. False
53. False 69. False 85. False 101. True 117. False 133. False 149. True
54. False 70. True 86. True 102. True 118. False 134. True 150 False
55. False 71. False 87. True 103. False 119. True 135. False 151. True
56. True 72. False 88. False 104. True 120 True 136. False 152. False
57. True 73. False 89. False 105. True 121. False 137. False
58. False 74. True 90. False 106. True 122. False 138. False
59. True 75. True 91. True 107. True 123. False 139. False
60. True 76. True 92. False 108. False 124. False 140. True
61. False 77. True 93. True 109. True 125. True 141. False
62. True 78. True 94. False 110. False 126. False 142. True
63. False 79 False 95. True 111. False 127. True 143. False
64. False 80. False 96. False 112. False 128. False 144. True
 65 True 81. False 97. False 113. False 129. True 145. False
66. False 82. False 98. False 114. True 130. False 146. True
67. False 83. True 99. False 115. False 131. False 147. False

Multiple Choice Questions (theories)

153. e 161. c 171. e 181. E 191. C 201. b 211. c
154. b 162. b 172. c 182. C 192. A 202. c 212. c
155. a 163. b 173. b 183. A 193. C 203. d 213. b
156. e 164. b 174. c 184. D 194. B 204. d 204. b
157. e 165 a 175. a 185. D 195. B 205. b 215. b
158. d 166. e 176. a 186. B 196. B 206. c 216. b
159. b 167. e 177. a 187. A 197. d 207. d 217. c
160. d 168. a 178. c 188. B 198. c 208. c 218. d
169. a 179 a 189. A 199. c 209. d 219. d
170. d 180. d 190. C 200. a 210. b 220 a

Note for:
197. An underlying is a financial or physical variable.
199. The net investment must be less than that required for other types.
202. Trading securities do not qualify for hedge 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.