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Foreign Currency Transaction, Balances, Fs & Hedges
Foreign Currency Transaction, Balances, Fs & Hedges
TRANSACTIONS, BALANCES,
FINANCIAL STATEMENTS, AND
HEDGES.
CURRENCY EXCHANGE RATES
A) Directly quoted: expressed in one unit of the foreign currency into so
many
units of the functional currency, i.e.:
$1 : P 40
FR – P0.305
AOCI 30,000
Foreign exchange gain 30,000
Discount expense 10,000
AOCI 10,000
Cash 5,000
Forward contract 5,000
Option Contracts
Cash 20,000
Foreign currency option 20,000
Hedge of a Firm Commitment for the Sale of
Merchandise by Forward Contract.
Problem 7-a. Fair value at forward rates.
Cash 5,000
Forward contract 5,000
Suggested Solution to Problem 8
Hedge of a Forecasted Cash Trans.
For the Purchase Forward Contract
12/01/16 No entry. FV of FEC is nil.
FR-P1.305
12/31/16 Forward Contract 10,783
FR-P1.316 AOCI 10,783
(P11,000 x 0.9803)
03/31/17 AOCI 15,783
SR-P1.300 Forward Contract 15,783
Forward contract 5,000
Cash 5,000
Suggested Solution to Problem 8
For the Forecasted Cash Transaction
No entries until the actual transaction occurs at delivery date.
Equipment 5,000
A0CI 5,000
TRANSLATION of FOREIGN CURRENCY
FINANCIAL STATEMENTS
This is an accounts payable in foreign currency. Please take note that the exchange
rates are indirectly-quoted.
Gain/(Loss)
Peso equivalent, 10/01/16: $10,000 divide by $0.018 P555,555
Peso equivalent, 12/31/16: $10,000 divide by $0.017 588,235 P(32,680)
Peso equivalent, 04/01/17: $10,000 divide by $0.020 500,000 P 88,235
OVERALL (P555,555 vs P500,000) P55,555
Multiple Choice
3. D
Because the local currency (HK$) is not the functional currency (PhlP) of
the Hongkong Subsidiary, a remeasurement (by the Temporal Method) must
precede the translation to the presentation currency (by the Current Rate
Method). The latter is avoided because the functional currency and the
presentation currency are both in Philippine peso.
Note: If the 2nd paragraph is omitted, the current rate method is used instead:
[(HK#120,000 + HK$80,000 + HK$200,000) x 5.44] P2,176,000
Multiple Choice
6. A
11. B
Baht 500,000 * P1.28 P640,000
12. B
Time value (P 3,000 - P1,000) P 2,000
Intrinsic value (P1.28 – P1.20) * Baht 500,000 40,000
Total fair value P 42,000
Suggested solutions to Problems 13 and 14
13. C
On A/P (P1.28 – P1.27) * Baht 500,000 P 5,000
On Call Option: Time value P(2,000)
Intrinsic value (5,000) (7,000)
14. B
Intrinsic value (P1.27 – P1.20) * Baht 500,000 P35,000
Suggested solutions to Problems 15 thru 17
15. A
The total premium paid P 3,000
16. C
Intrinsic value (P1.28 – P1.20) * Baht 500,000 P40,000
17. C
Time value (fully expired) P 0
Intrinsic value (before net cash settlement) 35,000
Total fair value settled by cash payment P 35,000