COLLEGE OF SCIENCE AND TECHNOLOGY

Cagamutan Norte, Leganes, Iloilo - 5003

Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

COO – FORM 12

SUBJECT TITLE: Foreign Exchange Transactions, Translations & Derivatives and Accounting
for Government and Non-Profit Organizations
INSTRUCTOR: John Rey S. Anas, CPA
SUBJECT CODE : ADV2

TOPIC 1: ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Understand how to make calculations using foreign currency exchange rates.

2. Understand the implications of accounting and be able to make calculations related to
foreign currency transactions.
3. Understand how to translate financial statements.

Introduction

Accounting for Foreign Currency Transactions are needed since many companies in our country
engage in international transactions such as:

• Importation and Exportation of goods

• Establishment of branches in another country; and
• Holding of investments in foreign countries.

Accounting issues are encountered when transactions are measured in a currency other than our
local currency. Accounting Standard to be used is PAS 21: The Effects of Changes in Foreign
Exchange Rates.

A. Foreign Currency Transactions

Foreign Currency Transactions – transactions to be settled in a foreign currency, financial

statements of an affiliate maintained in a foreign currency are translated into pesos by multiplying
the number of units of the foreign currency by a direct exchange rate.

Transactions include:

1. Buys or sell goods and services, whose price is denominated in a foreign currency
2. Borrows or lends funds when the amount payable or receivable are denominated in a
foreign currency
3. Acquires or disposes assets, or incurs or settle liabilities, denominated in a foreign
currency

The foreign currency transaction should be recorded initially at the rate of exchange at date of
transaction. At each subsequent balance sheet date:

• Foreign currency monetary amounts should be reported using the closing rate.
• Non-monetary items at historical cost should be reported using the exchange rate at date
of transaction
• Non-monetary item carried at fair value should be reported at the rate that existed when
fair values were determined

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

Any gain or loss arising from **exchange differences are reported and recognized as:

• Profit or loss

• Other comprehensive income

**Exchange Difference is the difference resulting from translating a given number of units of one
currency into another currency at different exchange rates.

THREE DATES TO CONSIDER:

1. Date of Transaction
2. Balance Sheet Date
3. Date of Settlement

Foreign Currency – an exchange rate other than functional currency.

Functional Currency- is the currency of the primary economic environment in which the entity
operates and the primary economic environment is normally the one which is primary generates
and expends cash. Also known as the “measurement currency”.

Presentation Currency- currency of which the entity prepares its financial statement.

Local Currency Unit - the currency of the country in which the subsidiary operates.

FOREIGN FUNCTIONAL PRESENTATION

CURRENCY CURRENCY CURRENCY

Remeasurement (Temporal Method) Translation(Current/Closing Rate Method)

**Resulting difference (remeasurement gain or loss) should be reported as profit or loss for the
period; remeasurement gain or loss arising from the revaluation of non-monetary item is taken to
other comprehensive income if the revaluation gains or losses are taken to other comprehensive
income.
**All resulting difference (translation gain or loss) shall be recognized in other comprehensive
income until the disposal of the foreign operation when they are included in profit or loss.

A.1.Exchange Rates

• Price of one currency items in terms of another currency.

A.1.1. Presentation of Exchange Rates

• Direct exchange rate- the number of local currency units needed to acquire one
foreign currency unit. (From the point of view of Philippine pesos as the LCU).

- Answers the question “how much is 1 foreign currency unit (FCU) in terms of local
currency unit (LCU)”?

For example, USD 1 = P50.00. This is the commonly observed presentation in our
country.

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

____ LCU = 1 FCU

____ Pesos = 1 US dollar

• Indirect quotation/ exchange rate - the number of foreign currency units needed to
acquire one local currency unit. (From the point of view of Philippine pesos as the
LCU).

- Answers the question “how much is 1 LCU in terms of FCU?”

For example, P1 = USD 0.02.

1 LCU = ____ FCU

1 Pesos = ____US dollar

A.1.2. Types of Exchange Rates

a. SPOT RATE – the exchange rate for immediate delivery (in other words, the exchange
rate today.)

b. CURRENT RATE – is defined as the spot rate on the entity’s balance sheet date.

c. FORWARD (or FUTURE) RATE – the exchange rate at which the currency can be
exchanged at a future date.

A.2.1. Other Considerations

- SHIPPING TERMS are also considered:

o FOB Shipping Point (FOB Seller) – transaction date is the date of

shipment.
o FOB Destination (or FOB Buyer) – transaction date is the date of receiving
the goods.

Selling and Buying Spot Rate – refer to the rate a currency broker (e.g., a bank) is willing to
pay or sell a currency.

Selling Spot Rate- This exchange rate will be used if an entity expects to settle a foreign
currency payable by purchasing a foreign currency from a currency broker.

Buying Spot Rate – Exchange rate will be used when the entity expects to realize a foreign
currency receivable by exchanging the foreign currency with currency broker.

B. Foreign Currency Translation

An entity is required to present its financial statements using its functional currency
(Philippine Peso). However, whenever needed, the entity may translate its financial
statements into any presentation currency. (e.g., Japanese yen, US Dollar, etc.).

The method used to translate a foreign entity’s financial statements and the disposition
of the resulting translation adjustment depends on the determination of the functional
currency.

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

B.1. TRANSLATION PROCEDURE (CURRENT RATE METHOD/CLOSING RATE

METHOD/NET INVESTMENT METHOD/ TRANSLATED METHOD)

• Assets and liabilities for each statement of financial position presented shall be
translated at the closing rate at the date of that statement.
• Income and expense for each statement presenting profit or loss and other
comprehensive income shall be translated at exchange rate at date of
transactions (historical rate) or using average rate for the period when it is
reasonable approximation BUT average rate will not be used when exchange rate
fluctuate significantly.
• Equity transactions such us ordinary shares and share premium shall be translated
using historical rate

All exchange differences (translation gain or loss) resulting from translating income and
expenses at the exchange rates at the date of the transactions and assets and liabilities
at the closing rate and translating the opening net assets at a closing rate that differs from
the previous closing rates shall be recognized in other comprehensive income.

Exercises

1. IAS 21, The effects of changes in foreign exchange rates, requires that the initial recognition of a
foreign currency transaction should be?

a. in the amount of the foreign currency c. the rate the currency is expected to be exchange
at settlement date
b. the closing rate at the balance sheet d. the spot rate at the date of transaction
date

2. IAS 21 defines it as the currency in which the financial statements are presented

a. functional currency c. foreign currency

b. presentation currency d. none of these

3. If one Philippine peso can be exchanged to 0.971 Taiwanese dollars. Then 20,000 Taiwanese
dollars is equals to

a. 19,420 pesos b. 20,597 pesos c. 20,000 pesos d. 19,425 pesos

4. In item number 3, what amount of Philippine peso is needed to acquire one Taiwanese dollar?
a. 1.0298 b. 1.0297 c. 0.97012 d. 0. 9821

5. On September 1, 2021 , Cano sold merchandise to a foreign firm for 200,000 francs. Terms of sale
require payment in francs on February 2022. On September 1, 2021, the spot rate was 1.20 per
franc. At December 31, 2021, Cano’s year end, the spot rate was 1.22 but the rate decreased to
1.18 in February 2022, when the payment was received. How much should Cano report as sales
in 2021?

a. 300,000 b. 240,000 c. 244,000 d. 236,000

6. In previous item 5, what would be the gain or loss in foreign transaction to be reported in 2022?

a. 7500 gain b. 4000 gain c. 4,000 loss d. 8000 loss

7. L Corp. bought inventory from a supplier in Japan on November 15, 2022 for 100,000 yen, when
the spot rate was 0.429. At L’s December 31, 2022 , the year end spot rate was 0.4248. On January

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 COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

15, 2023, L bought 100,000 yen at the spot rate of 0.4345 and paid the invoice. What would be
recorded as forex gain or loss in 2022?

a. 420 gain b. 420 loss c. 970 loss d. 970 gain

8. In previous item# 7, in L’s December 2022 balance sheet accounts receivable will have a balance
of?

a. 420 b. 42,900 c. 42,480 d. 43,450

9. Hunt company purchased merchandise for 300,000 francs from a vendor in Belgium on November
31, 2023. Payment was due in January 30, 2024. The exchange rates were as follows:

Buying rate Selling rate

November 31, 2023 1.60 1.59
December 31, 2023 1.62 1.60
January 31, 2024 1.63 1.55

What would be reported as gain or loss in December 31, 2024?

a. 3,000 b. 6,000 c. 15,000 d. 24,000

10. On September 9, 20x5, Pilshot Inc. accepted a noncancellable merchandise sales order
from a Japanese firm. The contract price was 100,000 yens. The merchandise was delivered on
December 14, 20x5. The invoice was dated December 11, 20x5, the shipping date (FOB
shipping point). Full payment was received on January 22, 20x6. The spot direct exchange rates
for the Japanese yens on the respective dates are as follows:

September 9, December 11, December 14, December 31, January 22,

20x5 20x5 20x5 20x5 20x6
P0.75 P0.78 P0.77 P0.73 P0.725

What is the reportable sales amount in the 20x5 income statement?

a. P73,000 b. P75,000 c. P77,000 d. 78,000

11. Using the information in No.10, what is the reportable foreign exchange gain or loss
amount in the 20x5 income statement?

a. P2,000 gain b. P4,000 loss c. P5,000 loss d. 5,000 gain

12. Using the same information in No. 10, what is the reported value of the receivables from
the customer at December 31, 20x5?

a. P73,000 b. P75,000 c. P77,000 d. 78,000

13. Under IAS 21, retained earnings at functional currency shall be translated into
presentation currency at

a. average rate b. historical rate c. closing rate d. none

14. Mikey Corp. , a wholly-owned subsidiary of A Inc. in USA has the following date for the year
ended December 31, 2019
US Dollars Peso equivalent
Selling expenses 350,000 December 31, 2019 40
Salaries and wages 600,000 Average rate for 2019 35
Depreciation expense 250,000 January 1, 2019 25
Freight- in 100,000 Closing average rate for 20
2019

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

What would be the total peso amount of expenses to be presented in the income statement in
2019?
a. 42,000,000 b. 45,500,000 c. 52,000,000 d. none of these

15. Using the rates in item number 16, what would be the indirect exchange rate in December 31,
2019?
a. 0.0286 b. 0.0250 c. 0.0285 d. 0.0260

ABC US Inc. is operating within US territory wherein the functional currency US $. However, the
presentation currency of the said bank Philippine Peso. The following financial position data for
the year 2022 are provided:

16. Assets, 12/31/2022 17. $1,000

18. Liabilities, 12/31/2022 19. 200

20. Ordinary shares, 12/31/2022 21. 300

22. Share premium, 12/31/2022 23. 100

24. Retained earnings, 1/1/2022 25. 200

26. 2022 net income 27. 300

28. Dividends declared, 12/1/2022 29. 100

30. 1/1/2015 31. P45

32. 12/31/2021 33. 42

34. 12/1/2022 35. 41

36. 12/31/2022 37. 43

38. Average rate for 202239. 44

The following additional data are provided:

All ordinary shares are issued on January 1, 2015.

The translated amount of retained earnings at Philippine Peso on December 31, 2021 is
P8,000.

16. What is the translation adjustment to be recognized by ABC US in its Statement of

Comprehensive Income for the year ended December 31, 2022?

a. 17,100 credit b. 3000 credit c. 3,000 debit d. 700 debit

17. How much is the translated amount of shareholders equity to be presented in 2022?

a. 17,100 b. 18,000 c. 43,000 d. 35,100

18. What will be the translated net assets in pesos in 2021?

a. 24,600 b. 25,200 c. 34,400 d. 25,800

---END OF TOPIC 1--

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 COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

Topic 2: DERIVATIVES

Learning Objectives:
i. Understand the definition of a derivative and the types of risks that derivatives can
manage.
ii. Understand the structure, benefits, and costs of options, futures, forward contracts,
and swaps.
iii. Understand the definition of a cash flow hedge and the circumstances in which a
derivative is accounted for as a cash flow hedge.
iv. Understand the definition of a fair value hedge and the circumstances in which a
derivative is accounted for as a fair value hedge.
v. Account for a cash- flow-hedge situation from inception through settlement and for a
fair- value-hedge situation from inception through settlement.

NOTES:

DERIVATIVES

A derivative is a financial instrument or other contract that drives its value from the changes in
value of some other underlying asset or other instrument.

An underlying is a specified price, rate or other variable including scheduled event that may or
may not occur. On initial date of transaction, a derivative normally entails no cost or an initial net
investment that is smaller than would be required for other types of contracts that have smaller
response to changes in market factors.

After initial date of transaction, the value of a derivative is determined by multiplying (or other
arithmetical interaction) the notional amount by the underlying.

A “notional amount” is a specified unit of measure (e.g., number of currency units, number of
shares, bushels, pounds, etc.

PURPOSE OF DERIVATIVES
The purpose of obtaining derivatives is either:
a. To speculate (incur risk); or
b. To hedge (avoid or manage risk).

Risk is the possibility that an event will occur having an adverse effect on the achievement
of an entity’s objectives. It is measured in terms of impact (possible loss) and likelihood
(probability).

Financial risk - is the risk of possible future change in one or more of a specified interest rate,
financial instrument price, commodity price, foreign exchange rate, index of prices or rates,
credit rating or credit index or other variable. This type of risk includes the following:
1. Credit risk – risk that one party to a financial instrument will cause a financial loss for
the other party by failing to discharge an obligation.
2. Liquidity risk – the risk that an entity will encounter difficulty in meeting obligations
associated with the financial liabilities that are settled by delivering cash or another
financial asset.
3. Market risk – the risk that the fair value or future cash flows of a financial instrument
will fluctuate because of the changes in market prices.

3 CHARACTERISTICS OF A DERIVATIVE

1. Its value changes in response to changes in underlying

2. It requires no initial investment. Or an initial investment that is smaller than would be
required for other types of contracts.
3. It is settled at a future date.

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

Types of Derivatives

1. Forward Contract – a contract that gives the holder the obligation to buy or sell an asset
at a future date.
a. At a specified amount or quantity,
b. At a specified future date, and
c. At a price which is agreed upon right now.

2. Option Contract - a contract that gives the holder the RIGHT but not the obligation to buy
or sell an asset at a future date.

Type of Option Strike Price = Strike Price < Strike Price >
Market price Market Price Market Price

Call (BUY) At the money In the money Out of the money

Put (SELL) At the money Out of the money In the money

3. Swap Agreement – a contract between two parties to exchange payments in the future
based on the movement of some agreed-upon price or rate. (e.g., Interest rate swap and
foreign currency swap)
- One party will pay in fixed and the other party will pay in Variable .

Measurement of Derivatives
All derivatives are measured at FAIR VALUE. The accounting for fair value changes depends on
whether the derivative is:
1. Not designated as a hedging instrument;
2. Designated as fair value hedge; or
3. Designated as a cash flow hedge.

*Derivatives not designated as hedging instrument are considered as obtained for

speculation about the direction of movement of some price, rate, or any underlying. Non-
designated derivatives are accounted for as held for trading securities. Accordingly
recognized in profit or loss.

HEDGING
- Means designating one or more hedging instruments so that their change in fair values
or cash flows offset, in whole or in part, the change in the fair value or cash flows of
the hedged item.
- A risk management strategy to minimize or offset the risk of any adverse price
movements.
- Its objective is to reduce potential loss arising from transaction exposure.
Components of a Hedging Relationship
1. Hedging instrument – a designated derivative or a designated non-derivative financial
asset or financial liability whose fair value or cash flows are expected to offset changes in
the fair value or cash flows of a designated hedged item.
2. Hedged item – an asset, liability, firm commitment, highly probable forecast transaction or
net investment in a foreign operation that (a) exposes the entity to risk of changes in fair
value or future cash flows and (b) is designated as being hedged.

HEDGED ITEMS
A hedged items can be a:
a. Recognized asset or liability (e.g., recorded receivables or recorded payables)
b. Unrecognized firm commitment (e.g., receivable not yet recorded on a future sale
commitment or payable not yet recorded on a future purchase commitment)

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
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c. Highly probable forecast transaction (e.g., a planned but not committed future sale or
future purchase; the “girly stuff” you want to purchase)
d. Net investment in a foreign operation (e.g., a foreign subsidiary)

HEDGING RELATIONSHIPS
Heding relationships are of three types:
a. Fair value hedge
b. Cash flow hedge
c. Hedge of a net investment in foreign operation

FAIR VALUE HEDGES

A hedge of the exposure to changes in fair value of a recognized asset or liability or an
unrecognized firm commitment that is attributable to a particular risk and could affect profit or loss.

A fair value hedge is accounted for as follows:

a. The gain or loss from measuring the hedging instrument at fair value shall be recognized
in profit or loss; and
b. The gain or loss on the hedged item shall adjust the carrying amount of the hedged item
and recognized in profit or loss. This applies even if the hedged item is measured at cost.

CASH FLOW HEDGES

A hedge of the exposure to variability in cash flows that is attributable to a particular risk
associated with a recognized asset or liability or a highly probable forecast transaction and could
affect profit or loss.

A cash flow hedge is accounted for as follows :

a. The portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge shall be recognized in other comprehensive income.
b. The ineffective portion of the gain or loss on the hedging instrument shall be recognized
in profit or loss.

HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATION

Hedges of a net investment in a foreign operation are accounted for similarly to cash flow
hedges, accordingly:
a. The portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge shall be recognized in other comprehensive income; and
b. The ineffective portion on the hedging shall be recognized in profit or loss.

The gain or loss on the hedging instrument relating to the effective portion of the hedge that
has been recognized in other comprehensive income shall be reclassified from the equity to
profit or loss as a reclassification adjustment on the disposal or partial disposal of the foreign
operation.

Type of hedge Accounting for changes in fair value of

hedging instrument (derivative)
1. No hedging designation Profit or loss
(speculation)
2. Fair value hedge Profit or loss
3. Cash flow hedge:
a. Effective portion a. Other comprehensive income
b. Ineffective portion b. Profit or loss
4. Hedge of net investment in a
foreign operation:
a. Effective portion a. Other comprehensive income
b. Ineffective portion b. Profit or loss

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

Type of hedge item Type of hedge

1. Recognized asset or liability Fair value hedge or Cash flow hedge
2. Unrecognized firm commitment Fair value hedge (except for a hedge
of the foreign currency risk of a firm
commitment which may be
accounted for as a fair value hedge
or a cash flow hedge)
3. Highly probable forecast Cash flow hedge
transaction
4. Net investment in foreign operation Cash flow hedge

ILLUSTRATIONS:

FORWARD CONTRACTS: Fair value hedge of a recognized asset

On December 15, 20x1, ABC Co. sold goods to Japanese firm for 1,000,000 yes. BC Co. was
concerned about the fluctuation in the Japanese yen, so o this date, ABC Co. entered into a 30-
day forward to sell 1,000,000 yens for P470,000 to a bank at a forward rate of P0.47.

Relevant rates are shown below:

Dec. 15, 20x1 Dec. 31, 20x1 Jan. 15, 20x2
Spot rate P0.48 P0.49 P0.46
Forward rate P0.47 P0.485 P0.46

FORWARD CONTRACTS: Fair value hedge of a recognized liability

On December 15, 20x1, ABC Co. purchased goods from a Korean firm for 10,000 wons. ABC
Co. was concerned about the fluctuation in the Korean won, so on this date, ABC Co. entered
into a 30-day forward contract to buy 10,000 wons for P12,400 from a bank at the forward rate
of P1.24.

Relevant rates are shown below:

Dec. 15, 20x1 Dec. 31, 20x1 Jan. 15, 20x2
Spot rate P1.20 P1.26 P1.30
Forward rate P1.24 P1.27 P1.30

UNRECOGNIZED FIRM COMMITMENT: Fair value hedge of a firm sale commitment

On December 15, 20x1, ABC Co. received a sale order from a Japanese firm in the amount of
1,000,000 yens. The goods are to be delivered on January 15,20x2. ABC Co. was concerned
about the fluctuation in the Japanese yen, so on this date, ABC Co. entered into a 30-day
forward contract to sell 1,000,000 yens for P470,000 to a bank at the forward rate of P0.47

Relevant rates are shown below:

Dec. 15, 20x1 Dec. 31, 20x1 Jan. 15, 20x2
Spot rate P0.48 P0.49 P0.46
Forward rate P0.47 P0.485 P0.46

OPTIONS: Fair value hedge of a recognized asset

On December 15, 20x1, ABC Co. sold goods to a Japanese firm for 1,000,000 yens. ABC Co.
was concerned about the fluctuation in the Japanese yen, so on this date, ABC Co. purchased a
foreign currency put option for P7,500 to sell 1,000,000 yens at P0.47 on January 15, 20x2.

Dec. 15, 20x1 Dec. 31, 20x1 Jan. 15, 20x2

Spot rate P0.48 P0.49 P0.46

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
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Fair value of Put option P7,500 P5,000 P8,000

Write journal entries.

a. Assume that the spot rate on January 15, 20x2 is P0.48. The entries are:

OPTIONS: No hedging designation

On April, 20x1, ABC Co. enters into a call option contract with an investment banker which
gives ABC Co. the option to purchase 1,000 XYZ, Inc. shares of stocks at a strike price of P100
per share. The call option expires on July 1, 20x2. ABC Co. pays the investment banker P600
for the call option. The market price of the XYZ, Inc. shares on April 1, 20x1 is P100 per share.

Write journal entries.

SWAPS: Cash Flow Hedge – Variable-rate debt

On January 1, 20x1, ABC Co. obtained a two-year, P1,000,000 variable-rate loan with interest
payments due at each year-end and the principal due on December 31, 20x2.

As protection from possible fluctuations in market rates, ABC Co. enters into an interest rate
swap for the whole principal of the loan. Under the agreement, ABC Co. shall receive variable
interest and pay fixed interest based on a fixed rate of 8%. The interest rate swap will be settled
net on maturity date.

The following are the current market rates:

January 1, 20x1 8%
January 1, 20x2 10%

EXERCISES:

1. On December 12, 2019, Imp Co. entered into forward exchange contract to purchase
100,000 local currency units (LCU) in 90 days to hedge a purchase of inventory in
November 2019 payable in March 2020. The relevant exchange rates are as follows:

Spot rate Forward rate

(March 12, 2020)
November 30, 2019 P0.87 P0.89
December 12, 2019 0.88 0.90
December 31, 2019 0.92 0.93

At December 31, 2009, what amount of foreign currency transaction gain from his
forward contract should Imp include in net income?
a. 0 c. 5,000
b. 3,000 d. 10,000

On December 1, 2020, Entity A imported goods at a price of $1,000 payable on March 1,

2021. In order to hedge this foreign currency denominated importation, Entity A entered
into a forward contract with a bank to purchase $1,000. Entity A is operating in the
Philippine economy where the functional currency is Philippine peso.

The following direct exchange rates are given:

December December March 1,
1, 2020 31, 2020 2021
Buying spot P43 P40 P41
Selling spot P45 P44 P49
90-day forward buying P41 P43 P44

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Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com

90-day forward selling P42 P41 P43

60-day forward buying P45 P42 P41
60-day forward selling P46 P45 P40
30-day forward buying P47 P46 P42
30-day forward selling P48 P47 P43

2. What is the foreign currency gain or (loss) on the hedged item for the year ended
December 31, 2020
a. (2,000) c. 3,000
b. 1,000 d. 4,000

3. What is the foreign currency gain or (loss) on the hedging instrument for the year
ended December 31, 2021?
a. 4,000 c. (1,000)
b. (2,000) d. 3,000

On November 1, 2020, Entity A anticipated the purchase of inventory on January 31, 2021 at a
price of $1,000. In order to hedge this highly probable forecasted importation, Entity A acquired a
call option from a bank giving it the right to purchase $1,000 at an option price of P40 by paying
an option premium of P300. Entity A is operating in Philippine economy where the functional
currency is Philippine Peso.

The following data are provided:

November December January 31,

1, 2020 31, 2020 2021
Buying spot rate P38 P39 P42
Selling spot rate P40 P44 P43
Fair value of call option ? P4,500 ?

Entity A imported the goods on the date anticipated. Afterwards, Entity A was able to resell 30%
of the goods imported during 2021.

4. What is the unrealized holding gain or (loss) to be recognized in the other

comprehensive income of statement of comprehensive income for the year ended
December 31, 2020?
a. 4,000 c. 4,300
b. 4,500 d. 4,200

5. What is the unrealized holding gain or (loss) to be recognized in the profit or loss of
statement of comprehensive income for the year ended December 31, 2020?
a. 300 c. 500
b. 200 d. 100

6. What is the unrealized holding gain or (loss) to be recognized in the other

comprehensive income of statement of comprehensive income for the year ended
December 31, 2021?
a. (3,000) c. (1,000)
b. (2,000) d. (4,000)

END OF TOPIC 2

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