Dayag Solution To Chapter 20

Chapter 20
Problem I
In relation to the above data, the following relevant exchange rates are needed for
further analysis in relation to hedged item and hedging instrument:
Forward Rate for

3/1/20x5 Settlement (or Expiration)
Spot Rate P40.15 (*90 days) P40.40 (**60 days)
December 1, 20x4…………………………. P40.00 P40.30
December 31, 20x4…………………………. P40.20***
March 1, 20x5…………………………………..
*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 $12000 using forward
*XD – exchange dealer rate.
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 T ransaction L oss 360 FC Receivable f rom X D…………… 300

Account payable……………. 360 FC Transaction Gain 300
[P40.30 – P48.00) x $1,200 [(P40.40 – P40.15) x $1,200]
To record a loss on the To record a gain on foreign
exposed liability denominated in currency to be received from
foreign currency. FC dealer.
*FC – foreign currency

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)………P300
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 p ayable 120 FC Tr ansaction L oss 240

FC Transaction gain……. [(P40.20 – P40.30) x $1,200}…….. FC Receivable
120 from XD [(P40.40 – P40.20) x $1,200] 240
To record a gain from 12/31/x4 to 3/1/x5 on liability denominated in FC.
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.
Accounts payable…………………… 48,240 Cash……………………………………. 48,240

Cash (refer to note below)……… Investment
48,240 in FC…………………. 48,240
To record payment of accounts payable at spot rate. To record conversion of US dollars into cash for paymentacou osnft 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 ac
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 3 60) 12/31/20x4 48,480 P 300
3/1/20x5 48,240 120 3/1/20x5 48,240 (240)
Total ga in (lo ss) (P 240 ) P 6 0
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 TransactionHedging Instrument – Forward Contracts (Exposed Liability)( Net Position Accounting)
December 1, 20x4
Transaction DateDate of Inception/Hedging of 90 days Forwards
Inventory ($1,200 x P40)…………...48,000 Memorandum entry only,

Accounts payable……………….48,000No formal journal entry as the fair value of forward
To record purchase of goods on contract is 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 Tr ansaction Lo ss 360 Forward C ontract 300

Accounts payable 360 FC Transaction Gain 300
[P40.30 – P40.00) x [(P40.40 – P40.15) x $1,200]
$1,200 To record a gain on foreign
To record a loss on the currency to be received from
exposed liability denominated in FC dealer.
foreign currency.
Forward contract (debit balance – asset)………………………. P 300
The income statement would report an exchange loss of P360 and an exchange gain of
P250.
March 1, 20x5

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

48,240 60
Cash (P40.20 x $1,200) or * Forward Contract
48,240 60
To record payment to exchange dealer (XD) Net settlement received from the dealer 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 R eceivable f rom X D……………………… P48,180
Less: P esos p ayable t o X D…………………… 48,180
Forward C ontract ( fair value)………………. P 0
Net Method: Zero. No entry required.
e.2. P300 asset

Gross method
FC R eceivable
P40.40 x f rom
$ 1,200)…
X D( P48,480
Less: P esos p ayable to X D (fixed a t P 40.15) Forward Contract (fair v alue – asset)……… 48,180
P 300
Net Method: P300.

Forward c ontract (debit b alance – asset)… P 300
e.3. P60 debit balance – asset

Gross method
FC R eceivable
P40.20 x from
$ 1,200)…
X D( P48,240
Less: P esos p ayable to X D (fixed a t P 40.15) Forward C ontract ( fair v alue – asset)……… 48,180
P 60
Net Position
12/31/x4 Gain… 300 2403/1/x5 Loss
3/1/x5Net…… 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)
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 o f I nception/Hedging o f 9 0 d
No journal entry is required to record the firm FC Receivable from XD……………

commitment. The forward contract is designated as a hedge of the firm commitment to purchase inventory on March 1, 20x5.
Pesos Theto
Payable hedge is accounted
XD (P40.15 for as a fair value
x $1,200)
To record forward contract to buy $1,200 using forwar
December 31, 20x4


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 To record a gain on foreign
commitment using the change in currency to be received from
the forward rate. FC dealer.

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
March 1, 20x5
Date of Transaction and SettlementSettlement Date/Date of Expirati on of Contract
Firm C ommitment………… 240 FC T ransaction L oss … ………… 240

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

Cash………………………………. 48,180

To record receipt of foreign currency.
Inventory (P40.20 x $1,200)…………. 48,240 Cash……………………………………. 48,240

Cash ………………………………… Investment i n FC……………..…...
48,240 48,240
To record the purchase of inventory for $1,200 at spot rate. To record conversion of US dollars into cash for purchase nivoe fno
tyr.
……………………. 60
……………. 60
ng amount oth
f efirm 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 30012/31/x4 Loss
60 60 3/1/x5 N et
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
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……. 24030012/31/x4 Loss
603/1/x5 N et
e. Same with Exposed Liability

e.1. Net Method: Zero. No entry required.
Gross Method
FC R eceivable f rom XD……………………… P48,180
Forward C ontract ( fair v alue)………………. P 0
e.2. P300 asset

Net Method: P300.
Gross method
FC R eceivable from X D (P40.40 x $ 1,200)… Less: P esos p ayable to X D (fixed a t P 40.15) Forward C ontract (fair v alue – asset)………
P48,480
48,180
P 300
e.3. P60 debit balance – asset

Gross method
FC R eceivable
P40.20 x from
$ 1,200)…
X D( P48,240
P 60
Net Method
12/31/x4 Gain…3002403/1/x5 Loss
3/1/x5Net60
f. P48,240, spot rate on the date of transaction.
Inventory at spot rate on the date of transaction (P40.20 x $1,200).................P48,240
g. P48,180, original (90-day) forward rate on the date of hedging

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

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 against the exposure to
Pesos
increases
Payable
in the
to XD
dollar
(P40.15 x $1,200) 48,180
rate on March 1, 20x5. To record forward contract to buy $1,200 using forward rate.
December 31, 20x4

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

transaction not guaranteed such as firm OCI – Exchange Gain (B/S) 300
commitment.
[(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

FC Receivable from XD (P40.40 x $1,200)… P48,480
Less: Pesos payable to XD (fixed at P40.15) Forward Contract (fair value - asset)…..…..
48,180
P 300
On March 1, 2011 (the transaction date and the settlement date), the journal entries are:
March 1, 20x5
Date of Transaction and SettlementSettlement Date/Date of Expiration of Contract
OCI – Exchange Loss (B/S)……… 240

FC Receivable from XD……… [(P40.40 – P40.20) x $1,200] 240

Cash………………………………. 48,180

To record receipt of foreign
currency.
Machinery (P40.20 x $1,200)48,240 Cash……………………………………. 48,240

Cash … ……………………………… Investment i n FC………………….
48,240 48,240
To record the purchase ofe qup
i mentfor $1,200 at the spot To record conversion of US dollars into cash for purchase m
o facn
heiyr.
rate of P40.20
60 Other C omprehensive I ncome

60 3/1/x5 Loss 240 300… … .12/31/x4 Gain
machine that results from the hedged transaction by this amount. Also, to record the basis adjustment of the carrying value of the equipment.
60 This entry
60 is recorded
3/1/x5if PAS 39 par. 98b i s adopted.
b.
b.1. Gain or loss on hedged item, 3/1/20x4: None, no entry required
b.2. P300 gain, other comprehensive income - [(P40.40 – P40.15) x $1,200]
b.3. None.
b.4. Gain or loss on hedged item, 3/1/20x4: None, no entry required for gain or loss. the
only entry is to record the purchase of machinery.
b.5. P240 loss, other comprehensive income - [(P40.40 – P40.20) x $1,200] to be recorded
on March 1, 20x5. The balance of the OCI – gain amounted to P60 computed as
follows:
Other Comprehensive Income
3/1/x5Loss 240 30012/31/x4 Gain
603/1/x5
c. Same with Exposed Liability

c.1. Net Method: Zero. No entry required.
Gross Method
c.2. P300 asset

Net Method: P300.
Gross method
FC Receivable from X D (P40.40 x $ 1,200)… Less: P esos p ayable to X D (fixed a t P 40.15) Forward C ontract (fair v alue – asset)………
P48,480
48,180
P 300
c.3. P60 debit balance – asset

Gross method
FC R eceivable
P40.20 x from
$1,200)…
X D( P48,240
P 60
Net Method
12/31/x4 Gain…3002403/1/x5 Loss
3/1/x5Net……60
4. Not a Hedge Accounting – Speculation.

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 (P40.15 x $1,200) 48,180
To record forward contract to buy $1,000 using forward rate.
December 31, 20x4

FC Receivable f rom X D 300

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

Less: Pesos payable to XD (fixed at P40.15) Forward Contract (fair value – 48,180
asset)………
P 300
March 1, 20x5
Settlement Date/Date of Expiration of Contract
FC Transacti on Loss………………… 240

FC Receivable from XD…………. 240
[(P40.40 – P40.20) x $1,200]

Cash………………………………. 48,180

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.3. Same amount with c.1
d.
d.1.
Gross Method
d.2. P300 asset

Net Method: P300.
Gross method
FC R eceivable from X D (P40.40 x $ 1,200)… Less: P esos p ayable to X D (fixed a t P 40.15) Forward Contract (fair v alue – asset)………
P48,480
48,180
P 300
d.3. P60 debit balance – asset

Gross method
FC R eceivable
P40.20 x from
$ 1,200)…
X D( P48,240
P 60
Net Method
12/31/x4 Gain…
300 2403/1/x5 Loss
3/1/x5Net…… 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
*XD – exchange dealer rate.

FC Receivable from XDP48,180
Less: Pesos payable to XD……………………48,180
Forward Contract (fair value)……………….P0
December 31, 20x4


Account payable……………. FC Transaction
360 Gain 294
[P40.30 – P40.00) x $1,200 To record a gain on foreign currency to be received from FC dealer.
To record a loss on the exposed liability denominated in foreign currency.
Note: Discounted or present value for hedged item isGain [(P40.40 – P40.15) x $1,200]............ P 300
not necessary for exposed asset or liability since spotLess: Discount (P300 x 12% x 2/12)…………… 6
Rate i s i n e ffect.Present v alue o f g ain*…………………………. P294
* or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x 2
months = 2%

FC Receivable from XD (P40.40 x $1,200)- P6. P48,474
Less: Pesos payable to XD (fixed at P40.15)… Forward Contract (fair value – asset)………
48,180
P 294
March 1, 20x5

FC Transaction gain……. [(P40.20 – P40.30) x $1,200}…….. FC Receivable
120 from XD 234
To record a gain from 12/31/x4 to 3/1/x5 on liability denominated in FC.To record a loss on foreign currency to be received from FC dealer.
Note: Discounted or present value for hedged item isOverall gain (P40.20 – P40.15) x $1,200 ……..P 60
not necessary for exposed asset or liability since spotLess: 12/31/20x4 Gain at present value 294
rate i s i n e ffect.FC Transaction l oss………………………………P234

Cash………………………………. 48,180

To record receipt of foreign Currency.
Accounts payable48,240 Cash……………………………………. 48,240

Cash (refer to note below)……… Investment
48,240 in FC…………………. 48,240
To record payment of accounts payable at spot rate. To record conversion of US dollars into cash for paymentao
cu o
n
sft 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 ac
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.
Gross Method
P48,180
48,180
P 0
b.2. P294 asset

Gross method
FC R eceivable from X D ( P40.40 x $ 1,200)- P6. P48,474
Less: P esos p ayable to X D ( fixed a t P 40.15)… Forward C ontract (fair v alue – asset)……… 48,180
P 294
Net Method: P294.

b.3. P60 debit balance – asset

Gross method
FC R eceivable
P40.20 x from
$ 1,200)…
X D( P48,240
P 60
Net Method
12/31/x4 Gain… 300 2403/1/x5 Loss
3/1/x5Net…… 60
2. Fair Value Hedge – Hedging an Unrecognized Foreign Currency Firm Commitment.


December 1, 20x4
Order) Date o f I nception/Hedging o f 9 0 d ays F orwards
equired to record the firm FC Receivable from XD…………… 48,180

orward contract is designated as a hedge of the firm commitment to purchase inventory on March 1, 20x5.
Pesos Thetohedge
Payable is accounted
XD (P40.15 for as a fair value hedge.
x $1,200) 48,180
This is computed using the change in the forward rate. These entries are as follows:
December 31, 20x4

Firm Commitment FC Transaction
294 Gain [(P40.40 – P40.15) x $1,200] 294
[P40.40 – P40.15) x $1,200 To record a gain on foreign currency to be received from FC dealer.
To record a loss on firm commitment using the change in the forward rate.
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 gai n*…………………………… P294
* or P300 x 1 / (1.02); 2% represents 12%/12 = 1%
x 2 months = 2%

Assets Liability
FC Receivable from XD (P40.40 x $1,200) - P6… Firm Commitment..................................................P 294
P48,474 Less: Pesos Payable to XD(fixed at P40.15)
….… 48,180
Forward Contract (fair value)……………………P 294
March 1, 20x5
Firm C ommitment………… 234

FC T ransaction L oss … ………… 234
FC Transaction gain……. FC Receivable
234 from XD……… 234
To record a gain on fair value offi
r mcommitment. To record a loss on foreign 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 Transacti on Gain…………………………….. P234 FC Transaction loss……………………………… P234

Cash………………………………. 48,180

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

Cash ………………………………… 48,240 Investment i n FC……………..…... 48,240
To record the purchase To record conversion of US
of inventory for $1,200 at spot dollars into cash for purchase
rate. of inventory.
60
60
rom 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.
Firm Commitment
3/1/x5 Gain……. 234 29412/31/x4 Loss
60 60 3/1/x5 N et
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
Present val ue 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 294
value…………………………………….
FC Transaction Gain……………………………………………………………. P234
a.5. P234 loss
Overall g ain ( P40.20 – P40.15) x $ 1,200 … ….. P 60
Less: 1 2/31/20x4 G ain a t p resent v 294
alue……..
FC T ransaction lo ss……………………………… P234
a.6. P234 gain (a.4) – P234 loss (a.5) = P0
b.
b.1. Zero, no entry required
b.2. P294 liability
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 N et
c.
c.1.
Gross Method
c.2. P294 asset

Gross method
P 294
Net Method: P294.


Gross method
FC R eceivable
P40.20 x from
$ 1,200)…
X D( P48,240
P 60
Net Method
12/31/x4 Gain… 300 2403/1/x5 Loss
3/1/x5Net…… 60
3. Cash Flow Hedge - Hedge of a Forecasted Transaction.


December 1, 20x4
Pesos
increases
Payable
in to
theXD
dollar
(P40.15 x $1,200) 48,180
December 31, 20x4

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

transaction not guaranteed such as firm commitment.
OCI – Exchange Gain (B/S)….... 294
Gain [(P40.40 – P40.15) x $1,200]
P 300
Less: Discount (P300 x 12% x 2/12)…………….. 6
Present value of gain*…………………………… P294
* or P300 x 1 / (1.02); 2% represents 12%/12 = 1%
x 2 months = 2%

FC Receivable from XD (P40.40 x $1,200)-P6 P48,474
Less: Pesos payable to XD (fixed at P40.15) Forward Contract (fair value - asset)…..…..
48,180
P 294
March 1, 20x5
OCI – Exchange Loss (B/S)………. 234

FC Receivable from X D……… 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

Cash………………………………. 48,180

FC Receivable from XD To record receipt of foreign currency. 48,240
Machinery (P40.20 x $1,200)………... 48,240 Cash……………………………………. 48,240

Cash … ……………………………… Investment
48,240 i n FC…………………. 48,240
To record the purchase of equipmentfor $1,000 at the spot To record conversion of US dollars into cash for purchase m
ofnach
ye.ri
rate of P40.20
60 Other C omprehensive I ncome

60 3/1/x5 Loss 234 29412/31/x4 Gain
machine that results from the hedged transaction by this amount. Also, to record the basis adjustment of the carrying value of the equipment.60This entry
60 is recorded if PAS 39 par. 98b is adopted.
3/1/x5
a.
a.1. Gain or loss on hedged item, 3/1/20x4: None, no entry required.
a.2. P294 gain, other comprehensive income
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/x5Loss 234 29412/31/x4 Gain
603/1/x5
b.
b.1.
Gross Method
b.2. P294 asset

Gross method
P 294
Net Method: P294.

b.3. P60 debit balance – asset

Gross method
FC R eceivable
P40.20 x from
$ 1,200)…
X D( P48,240
P 60
Net Method
12/31/x4 Gain… 300 2403/1/x5 Loss
3/1/x5Net…… 60
4. Not a Hedge Accounting – Speculation.

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 (P40.15 x $1,200) 48,180
December 31, 20x4

FC Receivable f rom X294

D
FC Transaction Gain 294
Gain [(P40.40 – P40.15) x $1,200]
P 300
Less: Discount (P300 x 12% x 2/12)…………….. 6
Present value of gain*…………………………… P294
* or P300 x 1 / (1.02); 2% represents 12%/12 = 1% x
2 months = 2%

FC Receivable from XD (P40.40 x $1,200)-P6 P48,474
Less: Pesos payable to XD (fixed at P40.15) Forward Contract (fair value – asset)………
48,180
P 294
March 1, 20x5
Settlement Date/Date of Expiration of Contract
FC Transacti on Loss………………… 234

FC Receivable from XD…………. 234
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

Cash………………………………. 48,180

Cash……………………………………. 48,240
Investment in FC…………………. 48,240
To record conversion of US dollars into cash.
a.
a.1. P294 gain
a.3. P294 gain.
a.5. P234 loss – other comprehensive income
Overall g ain ( P40.20 – P40.15) x $ 1,200 … ….. P 60
Less: 1 2/31/20x4 G ain a t p resent v 294
alue……..
FC T ransaction lo ss……………………………… P234
b.
b.1. Zero, no entry required
b.2. P294 liability
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 N et
c.
c.1.
Gross Method
FC R eceivable f rom XD……………………… P48,180
c.2. P294 asset
Gross method
Less: P esos p ayable t o X D ( fixed a t P40.15)… Forward C ontract ( fair v alue – asset)……… 48,180
P 294
Net Method: P294.


Gross method
FC R eceivable from X D (P40.20 x $ 1,200)… P48,240
P 60
Net Method
12/31/x4 Gain… 300 2403/1/x5 Loss
3/1/x5Net…… 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 (or Expiration) P41.25 (*270 days) P41.00 (**210 days) P40.95 (***150 days)
Spot Rate
November 1 , 2 0x4…………………. P40.60 P40.75 P40.70
December 31, 20x4…………………. P41.55****
March 1, 20x5……………………………………
August 1, 20x5………………………………..
***remaining or current forward rate on 3/1/20x5
zero.

November 1, 20x4
Order) Date o f I nception/Hedging o f 270 d ays F orwards
ed to record the firm FC Receivable from XD…………… 49,500

d contract is designated as a hedge of the firm commitment to purchase inventory on March 1, 20x5.
Pesos Theto
Payable hedge is accounted
XD (P41.25 for as a fair value hedge.
x $1,200) 49,500
December 31, 20x4

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 To record a loss on foreign
commitment using the change in currency to be received from
the forward rate. FC dealer.
Assets Liability
Firm CommitmentP 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)………………….P300
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.
300
300
he 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 /x5300300
August 1, 20x5
FC Transaction Loss………………… 1,020 FC Receivable from XD……………. 660

Accounts payable…. FC1,020
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 8/1/x5 on liability denominated in FC. To record a gain on foreign currency to be received from FC dealer.

Cash………………………………. 49,500


Cash…………………………………. Investment
49,860 in FC…………………. 49,860
To record payment of accounts payable at spot rate. To record conversion of US dollars into cash for paymentacou osnft 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 (or Expiration) P40.15 (*90 days) P40.40 (**60 days)
Spot Rate
December 1, 20x4…………………………. P40.00 P40.30
December 31, 20x4…………………………. P40.20***
March 1, 20x5…………………………………..
zero.

December 1, 20x4
Pesos
increases
Payable
in the
to XD
dollar
(P40.15 x $1,200) 48,180
December 31, 20x4

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

transaction not guaranteed such as firm commitment. OCI – Exchange Gain (B/S) 300
[(P40.40 – P40.15) x $1,200]
To record a gain on foreign
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).

Less: Pesos payable to XD (fixed at P40.15) Fair value of Forward Contract, 48,180
12/1/20x4..
P 300
On March 1, 2011 (the transaction date and the settlement date), the journal entries are:
March 1, 20x5
OCI – Exchange Loss (B/S)……… 240

FC Receivable from XD……… [(P40.40 – P40.20) x $1,200] 240
FC dealer.

Cash………………………………. 48,180

FC Receivable from XD To record receipt of foreign currency. 48,240
Inventory (P40.20 x $1,200)………... 48,240 Cash.......................................................48,240

Cash ………………………………… 48,240 Investment i n FC…………………. 48,240
To record the purchase To record conversion of US
of merchandise for $1,200 at the dollars into cash for purchase
spot rate of P40.20 of machinery.
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 L oss……………….. 60 Other C omprehensive I ncome

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 B roker (F C2) 82,000
Pesos Payable t o E xchange B roker ( 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 R eceivable ( FC1) 42,000
Sales 42,000
P42,000 = FC1 70,000 x (P1/FC1 1.667)
Pesos Receivable from Exchange Broker 40,600

Foreign Currency Payable to
P40,600 = FC1 70,000 x P.58 Dec. 1 forward rate,
and also peso amount stated in problem information
(P.58 = P40,600 / FC1 70,000)
December 31, 20x4

Foreign C urrency T ransaction L oss 300
Accounts R eceivable (F C1) 300
P300 = change in accounts receivable (FC1) as noted
in problem information.
Foreign Currency Payable to

Exchange Bro ker 700
Foreign C urrency T ransaction G ain 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
P700 = FC1 70,000 x (P.57 - P.58)
2. Transactions with Foreign Company 2 (FC2)
October 2, 20x4
Equipment 80,000
Accounts P ayable (F C2) 80,000
P80,000 = FC2 400,000 x
P.20
Pesos P ayable t o E xchange B 82,000
roker
P82,000 = FC2 400,000 x P.2050, and
the P82,000 is presented in the problem
for the foreign currency receivable.
December 31, 20x4

Accounts Pa yable (F C2) 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
P800 = FC2 400,000 x (P.202 - P.200)
Foreign C urrency T ransaction L oss 1,000

Exchange Bro ker 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
Market or or OptionElement
option Time Intrinsic
SituationExisting Value** At-the-moneyTVP360 In-the-money TV & I VValue*
Spot Rateprice) P240 In-the-moneyIV***
P0 P4,800 P4,200 P 0
12/ 1 /20x4P1.20P1.20
12/31/20x4P1.28P1.20
3/ 1/20x5P1.27P1.20
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.
Hedged Item – Importing Transaction

(Exposed Liability)Hedging Instrument – Option Contracts December 1, 20x4
Inventory (60,000 FC x P1.2)……….. 72,000 Investment in FC Call Option…….. 360

Accounts p ayable………………. 72,000 Cash……………………………….. 360
To record purchase of goods
To record purchase of call
on account using the spot rate
option.
on 12/1/1/x4.
December 31, 20x4

FC Transaction Loss………………….. 4,800 Investment in FC Call Option…… 4,680
Account payable………………… 4,800 FC Transaction Gain…. (P5,040 – P360 = P4,680) 4,680
[P1.28 – P1.20) x 60,000 FC To record a gain on call option.
To record a loss on the exposed liability denominated in foreign currency.
March 1, 20x5
Accounts payable……………. 600 FC T ransaction 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.

Cash [(P1.20 x 60,000 FC) + Investment in FC Call Option… 4,200
P4,200, proceeds from call To record the derecognition of
option]………………………….. 76,200 call 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 C ommitment Call O ption Contract

Total Call Option (CO Premium x FCs) Fair Value of Call Option
Spot Fair Change in(CO)Premium per FC P.002 P120 P600 Change in
Date Rate P0.20 P0.21 value Fair ValueP.010*** Fair Value
11/20/x4
12/20/x4 (P 600)* (P 600)** 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 intrins ic 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:

(exercise price Currency
Market or or option OptionElementTime Intrinsic
Spot Rateprice) SituationExistingValue** At-the-moneyTVP120 Value* P 0
11/20/20x4P0.20P0.20 In-the-moneyIVP 0 P 6 00
12/20/20x4P0.21P0.20

(Firm Commitment) Hedging Instrument – Option Contracts
November 20, 20x4
Date of CommitmentDate of Inception/Hedging of 90 days Forwards
There is no entry to record the sales agreement Investment in FC Call Option…… 120
because it is an executory contract. Cash………………………………. 120
To record purchase of call option.
December 20, 20x4

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

Firm Commitment………………… 600 FC Transaction Gain…. (P600 – P480 = P100) 120
[(P.21 – P0.20) x 60,000 FC] To record a gain on call option.
To record loss on firm commitment based on spot rate.
Equipment…………………………….. 12,600 Cash……………………………….. 600

Cash [(P0.20 x 60,000 FC) + P600, proceeds from call option]………………………….. Investment in FC Call Option
12,600 600
To record purchase of equipment at spot rate (P.21 x 60,000 FC) To record the derecognition ofc aloption on realization.
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 ra te (m arket p rice) P0.20 0.20 P480 P0.18 0.20
Strike p rice (e xercise p rice) Fair va lue of ca ll op tion N/A
N/A – not applicable
The following table summarizes the succeeding journal entries in relation to hedged item and
hedging instrument:
Firm C ommitment Call O ption C ontract

Total Call Option (CO Premium x FCs) Fair Value of Call Option
Spot Fair Change in(CO)Premium per FC P.002 P120 Change in
Date Rate P0.20 P0.18 value Fair ValueP.000*** P 0 Fair Value
11/20/x4
12/31/x4 P1,200* P1,200** (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 intrins ic 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:

(exercise price Currency
Market or or option OptionElement Time Intrinsic
Spot Rateprice) SituationExisting Value** In-the-money TV & I V P120 In-the-moneyIVP
Value* P 00
11/20/20x4P0.20P0.20 P 0
12/20/20x4P0.18P0.20
** None since the option price is greater than the market price.

(Firm Commitment) Hedging Instrument – Option Contracts
November 20, 20x4
Date of CommitmentDate of Inception/Hedging of 90 days Forwards
There is no entry to record the sales agreement Investment in FC Call Option…… 120
because it is an executory contract. Cash………………………………. 120
To record purchase of call option.
December 20, 20x4

Firm C ommitment……… 1,200 FC T ransaction L oss……….…… 120

FC Gain on Firm Commitment [(P0.20 – P0.18) x 60,000 FC] 1,200 Investment in FC Call Option (P120 – P0 = P120) 120
To record loss on firm commitment based on spot rate. To record a gain on call option.
Equipment…………………………….. 12,000 No entry required since the

Cash [(P0.20 x 60,000 FC) + 12,000Investment 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:

(exercise price Currency Option Situation
Market or or option In-the-money In-the-money In-the-money
Element Time Intrinsic
Spot Rateprice) Existing TV & I Value** I V Value*
V TV & P8,400 P12,000 P48,000 P36,000
P4,800
1/ 1/20x4P1.15P1.14 IV***
6/30/20x4P1.18P1.14
12/31/20x4P1.17P1.14 P 0
***time already expired, so need to determine time value unless It is a residual amount.

(Forecasted Transaction)Hedging Instrument – Option Contracts December 1, 20x4
No journal entry is required to record the forecasted Investment in FC Call Option…….. 20,400
transaction. The forward contract is designated as a Cash……………………………….. 20,400
hedge against the exposure to increases in the dollar To record purchase of call
rate on March 1, 20x5. option.
December 31, 20x4

No entry required, since it is only a forecasted

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

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 ofc aloption 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
Pound should be FCU
11/10/x6: Original forward rate on the date of hedging..……………………….P 1.64
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6......……. 1.59
Gain on forward contract per FC………...…………………………………………..P.. .05
Multiplied by: No. of FCs..........................................................................................100,000
Gain on forward contract..…………………………………………………………….P 5,000
3.a
Euro should be FCU
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6.………. 0.445
Gain on forward contract per FC.................................................................P .005
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 i n v alue o f F orward C ontract R eceivable 1,000
Value of Receivable, discounted at 8%, n 1 1,000 - (1,000 x [.08 ÷ 12]) =
993 Value o f re ceivable 74,000 + 9 93 = 7
4,993
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
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
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:
Exchange Br oker (F C) 12,600
Pesos Payable t o E xchange B roker 12,600
Signed 90-day forward exchange contract
to purchase 100,000 FC:
P12,600 = 100,000 FC x P.126 forward rate
38.c
December 31, 20x4
Exchange Br oker (F C) 300
Foreign C urrency T ransaction G ain 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 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 C urrency U nits 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:
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:
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6......……. 1.59
Gain on forward contract per FC………...…………………………………………..P. . .05
Gain on forward contract..…………………………………………………………….P 5,000
47.b
Firm Commitment:
Balance Sheet date: Remaining (current) forward rate – 12/31/20x6.………. 0.445
Gain on forward contract per FC.................................................................P .005
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 100,000 4,000
FCs……………………………………………
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
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
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
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
Gain on Firm Commitment....................................................P 0.05
Multiplied by: No. of 100,000 5,000
FCs……………………………………………
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
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 va lue 4/ 1 200,000 x 0.58 116,000
Fwd va lue 6/ 30 200,000 x 0.56 112,000
Decrease in F air V alue o f P ayable 4,000
PV of ch ange: 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 a mount 15,000 15,000 15,000
Forward r ate f or r emaining t ime 0.690 0.680 0.675
Initial fo rward ra te 0.690 0.690
Change i n o riginal f orward r ate (0.010) (0.015)
Fair value of fwd contract in future pesos:
Original fo rward v alue 10,350 10,350
Current fo rward v alue 10,200 10,125
(Gain) L oss in fo rward rate (150) (225)
Current present value
PV o f (P 150) n =1; i= 0.667% (149)
PV o f ( P225) n =0; n o d iscounting (225)
Prior pre sent va lue 0 149
Change in p resent value (149) (76)
76.d
1-Aug 30-Aug 30-Sep
Notional a mount 15,000 15,000 15,000
Forward r ate f or r emaining t ime 0.690 0.680 0.675
Initial fo rward ra te 0.690 0.690
Change in o riginal f orward r ate (0.010) (0.015)
Fair value of fwd contract in future dollars:
Original fo rward v alue 10,350 10,350
Current fo rward v alue 10,200 10,125
(Gain) L oss in fo rward ra te (150) (225)
Current present value
PV o f (P 150) n =1; i= 0.667% (149)
PV o f (P 225) n =0; n o d iscounting (225)
Prior pre sent va lue 0 149
Change in p resent va lue (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)

Balance Sheet date: Remaining (current) forward rate – Dec. 31, 20x4… 0.036
Loss……………………………………………………………………………………..P 0.003
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 C ontact R eceivable 3,000
Foreign Ex change G ain 3,000
Revalue forward contract:
P3,000 = 100,000 FCU x (P.93 - P.90) change in forward rates
Foreign Ex change Lo ss 10,000

Account Pa yable 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 C ontract R eceivable 3,000
Revalue forward contract, using the forward rates.
Foreign Ex change Lo ss 3,000

Firm Co mmitment 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 C ontract R eceivable 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 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)
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 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 r ate ( Market P rice) ... P .16 P .15 P .147
Strike p rice ( Option P rice) 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 v alue** ........................ 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
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
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.......................................................P 10,000
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)……………….. P188,760.60
119. c
Net cash inflow with option (P190,000 – P3,000)…………………… P187,000
Cash inflow without option (at spot rate of P.089 x 2,000,000 FC. 178,000
Net in crease in c ash in flow 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.
Quiz - XX
1. a – the machine’s final recorded value should be the spot rate on the date of transaction
since it is hedging that involves exposed liability (P.00781 x 200,000,000 = P1 ,562,000).
2. c – (P.1865 – P.1850) gain x 100,000 FC = P150 gain
3. using spot rate

Accounts payable.........................................................................18,650
FC Units………………………………………………………………… 18,650
4. c – (P42 – P40) gain x 1,000 FC = P2,000 gain
5.
Accounts payable.........................................................................42,000
FC Units………………………………………………………………… 42,000
6.b
Hedging Instrument:
Origininal forward rate on the date of hedging……………………………….P0.90
Balance Sheet date: Remaining (current) forward rate – 12/3/1/20x4…… 0.93
Gain…………………………………………………………………………………….P .03
Multiplied by: No. of FCs.....................................................................................200,000
The entry would be as follows:

Foreign Currency Receivable from Exchange Broker...................6,000
Foreign Currency Gain……………………………………………… 6,000
7.a
The entry on the date of expiration of the contract:

Pesos Payable to Exchange Broker (P.90 x 200,000 FC)...................180,000
Cash…………………………………………………………………….. 180,000
Foreign Currency Units or Investment in Foreign Currency (P.92)…184,000

Foreign Currency Loss – forward contract...………………………….. 2,000
Foreign Currency Receivable from Exchange Broker (.P93)… 186,000
8.b – refer to No.
7 9. d – refer to
No.7
10. c
P1,000 = 50,000 FCs x (P.74 - P.72). The loss is calculated using only forward rates. On
September 30, 20x4, the loss is the difference between the 60-day forward rate of P.74 on
September 1 and the 30-day forward rate of P.72 on September 30, 20x4.
11. d
Date of transaction: 9/1/20x4: Spot rate………………………………………..P 1.46
Balance Sheet date: Sept. 30, 20x4: Spot rate………………………………… 1.50
Gain…………………………………………………………………………………….P..............04
FC Transaction Loss………..…………………………………………………………P 10,000
The question refers to foreign currency transaction loss which indicates that only the exposed
liability had a loss, while the the forward contract transaction results in a gain computed as
follows:
Original forward rate on the date of hedging…………………………………P1.47

Balance Sheet date: Remaining (current) forward rate – Sept. 30, 20x4… 1.48
Gain…………………………………………………………………………………….P .01
If the question is the net impact on the net income the loss on exposed liability and the gain
of forward contract should be offsetted, thereby resulting a net effect of P7,500 decrease in
net income.
12. b – speculation (gain or loss – income statement)

Gain…………………………………………………………………………………….P..............01
13. b
Receivable balance: P162,000 (spot rate on the balance sheet date, P.81 x 200,000 FCU)
Gain or loss: P4,000 loss [(P.83 – P.81) x 200,000 FCU]
14.
Balance Sheet date: 4/30/20x4: Spot rate……………………………………… 1.20
Gain…………………………………………………………………………………….P.............04
follows:

Gain…………………………………………………………………………………….P . . .01
net income.
15. P12,000
Balance Sheet date: 4/30/20x4: Spot rate……………………………………… 1.20
Gain…………………………………………………………………………………….P.............04
follows:
Original forward rate on the date of hedging………………………………… P 1.17

Gain…………………………………………………………………………………….P..............01
net income.
16. P3,000
Gain…………………………………………………………………………………….P..............01
17. d
PAS 32 and 39 requires the FCU payable be recorded at the forward rate on the date of
hedging.
Letter (d) is the required entry under the old practice wherein the FCU payable are recorded
using the spot rate on the date of hedging.
18. d – no adjustment required on the date of transaction.
19.(P1.47 x 600,000 FC) the original (60-day) forward rate on the date of hedging (i.e.,
November 30, 20x4)
20.since no forward contract was entered into, the only effect on income statement is only the
foreign currency exchange gain on exposed asset position.
Spot rate on the date of transaction: 12/16/20x4…………………………….P 0.00090
Balance Sheet date: Spot rate – December 31, 20x4.............................. 0.00092
Gain……………………………………………………………………………………P 0.00002
Multiplied by: No. of FCs…………………………………………………………… 10
M Foreign Currency Exchange Gain……………………………………………….P 200
21. P695.05 increase

Hedged Item: Exposed Asset:
Spot rate on the date of transaction: 12/16/20x4…………………………….P 0.00090
Balance Sheet date: Spot rate – December 31, 20x4………………………. 0.00092
Gain……………………………………………………………………………………P 0.00002
Multiplied by: No. of FCs……………………………………………………………. 10
M Foreign Currency Exchange Gain……………………………………………….P 200
Hedging Instrument:
Original forward rate on the date of hedging: 12/16/20x4…………………P 0.00098
Balance Sheet date: Remaining (current) forward rate – 12/31/20x4…… 0.00093
Gain…………………………………………………………………………………….P..........00005
Multiplied by: No. of FCs..............................................................................10,000,000
FC Forward Contract Gain…………………………………………………………P 500
Multiplied by: PV of P 1 at 12%...................................................................................9901
FC Forward Contract Gain…………………………………………………………P 495.50
Net impact on 20x4 income statement…………………………………………..P 695.05
22. P100 increase

Hedged Item: Exposed Asset:
Balance Sheet date: Spot rate – December 31, 20x4……………………….P 0.00092
Date of Settlement: Spot rate – January 15, 20x5……………………………. 0.00095
Gain……………………………………………………………………………………P 0.00003
Multiplied by: No. of FCs……………………………………………………………. 10 M
Foreign Currency Exchange Gain……………………………………………….P 300
Hedging Instrument:
Balance Sheet date: Remaining (current) forward rate – 12/31/20x4……P 0.00093
Date of expiration: Spot rate – January 15, 20x5................................................0.00095
Loss……………………………………………………………………………………..P.........00002
Multiplied by: No. of FCs............................................................................10,000,000
FC Forward Contract Loss………………………………………………………….P 200
Net impact on 20x5 income statement…………………………………………..P 100
23. 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)
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)

E C E E C b c
B B C C A c c
A B B A C d b
E B C D B d 204.b
E 165A A D B b b
D E A B B c b
B E A A d d c
D A C B c c d
A 179A A c d d
D 180.D C a b 220a
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.

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Chapter 20

Forward Rate for

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

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

Balance Sheet Presentation on 12/1/20x4

December 31, 20x4

FC T ransaction L oss 360 FC Receivable f rom X D…………… 300

Balance Sheet Presentation on 12/31/20x4

Accounts p ayable 120 FC Tr ansaction L oss 240

Pesos Payable from XD……………. 48,180

Investment in FC……………………. 48,240

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

Note: This entry may be ignored and instead the

These transactions can be summarized in the following table.

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

“Net” Position Accounting

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

December 31, 20x4

FC Tr ansaction Lo ss 360 Forward C ontract 300

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

Accounts p ayable 120 FC Tr ansaction L oss 240

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

Forward Contract (Asset/Liability)

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

Net Method: Zero. No entry required.

e.2. P300 asset

Net Method: P300.

e.3. P60 debit balance – asset

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 .

No journal entry is required to record the firm FC Receivable from XD……………

December 31, 20x4

FC T ransaction L oss 300 FC Receivable f rom X D…………… 300

Balance Sheet Presentation on 12/31/20x4

Firm C ommitment………… 240 FC T ransaction L oss … ………… 240

Pesos Payable from XD……………. 48,180

Investment in FC……………………. 48,240

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

c. – same with Exposed Liability

e. Same with Exposed Liability

e.2. P300 asset

e.3. P60 debit balance – asset

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

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

Hedged Item Hedging Instrument – Forward Contracts

December 31, 20x4

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

Balance Sheet Presentation on 12/31/20x4

OCI – Exchange Loss (B/S)……… 240

Pesos Payable from XD……………. 48,180

Investment in FC……………………. 48,240

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

60 Other C omprehensive I ncome

c. Same with Exposed Liability

c.2. P300 asset

c.3. P60 debit balance – asset

4. Not a Hedge Accounting – Speculation.