University of San Jose – Recoletos

College of Commerce
Accountancy and Finance Department

Accounting 106: Valuation Concepts

Mr. Jun Brian Alenton, CPA, CMA, CAT, RCA, MICB

ACCOUNTING FOR DERIVATIVES

(PFRS 9)

1. Under PAS 39, all of the following are characteristics of a derivative except
a. Its value changes in response to the change in a specified underlying.
b. It requires no initial investment or an initial net investment that is smaller than would be required for other
types of contracts that would be expected to have a similar response to changes in market factors.
c. It is settled at a future date.
d. It is acquired or incurred by the entity for the purpose of generating a profit from short-term fluctuations in
market factors.

2. The value of a derivative changes in response to the change in a specified:

I. Interest rate
II. Financial instrument price
III. Commodity price
IV. Foreign exchange rate
V. Index of prices or rates
VI. Credit rating or index
a. I, II, III, IV, V, or VI
b. I, II, III, IV, or V only
c. I, II, III, or IV only
d. I, II, or IV only

3. Forwards are
a. Contracts that give the purchaser the right, but not the obligation, to buy or sell a specified quantity of a
particular financial instrument, commodity, or foreign currency, at a specified price (strike price), during or at
a specified period of time.
b. Contracts to exchange cash flows as of a specified date or a series of specified dates based on a notional amount
and fixed and floating rates.
c. Contracts to purchase or sell a specific quantity of a financial instrument, a commodity, or a foreign currency at
a specified price determined at the outset, with delivery or settlement at a specified future date.
d. Contracts that compensate the purchaser if interest rates rise above a predetermined rate (strike rate) or that
compensate the purchaser if rates fall below a predetermined rate.

4. Futures are contracts similar to forwards but with the following differences:
a. Futures are generic exchange-traded, whereas forwards are individually tailored.
b. Futures are generally settled through an offsetting (reversing) trade, whereas forwards are generally settled by
delivery of the underlying item or cash settlement.
c. Both a and b.
d. Neither a nor b.

5. Which statement is correct regarding forward contracts?

a. These contracts are generic exchange-traded.
b. The party that sells the underlying asset in the contract is said to have a long position.
c. The party that buys the underlying asset in the contract pays the seller a fee to compensate the seller for the
risk of payments.
d. Settlement is at maturity by actual delivery of the item specified in the contract, or by a net cash settlement.

6. Which statement is incorrect regarding derivatives?

a. An entity shall recognize derivatives on its statement of financial position when, and only when, the entity
becomes a party to the contractual provisions of the instrument.
b. Derivatives are initially recognized at its fair value plus transaction costs.
c. Derivatives are subsequently measured at fair value through profit or loss.
d. Derivatives are usually classified as current in the statement of financial position.

7. On January 1, 2019, Job Corporation enters into a forward contract to purchase on January 1, 2021, a specified
number of barrels of oil at a fixed price. Job Corporation is speculating that the price of oil will increase and plans
to net settle the contract if the price increases. Job Corporation does not pay anything to enter into the forward
contract on January 1, 2019. Job Corporation does not designate the forward contract as a hedging instrument. At
the end of 2019, the fair value of the forward contract has increased to P400,000. At the end of 2020, the fair value
of the forward contract has declined to P350,000. How much should be recognized in 2020 profit or loss related to
this forward contract?
a. P400,000 c. P50,000
b. P350,000 d. P 0

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Use the following information for the next two questions.
On July 1 of the current year, Angat Company sold goods to Moshi Sushi Company for ¥47,850,000 to be paid on
September 30. The current exchange rate on July 1 was ¥110=P1, so the total payment at the current exchange rate
would be equal to P435,000. Angat entered into a forward contract with a universal bank to guarantee the number of
pesos to be received. According to the terms of the contract, if ¥47,850,000 is worth less than P435,000, the bank will
pay Angat the difference in cash. Likewise, if ¥47,850,000 is worth more than P435,000, Angat must pay the bank the
difference in cash.
8. Assuming the exchange rate on September 30 is ¥115=P1, what amount will Angat pay to, or receive from, the
bank (rounded to the nearest peso)?
a. P18,913 payment c. P87,000 payment
b. P18,913 receipt d. P87,000 receipt

9. Assuming the exchange rate on September 30 is ¥105=P1, what amount will Angat pay to, or receive from, the
bank (rounded to the nearest peso)?
a. P87,000 payment c. P20,714 payment
b. P87,000 receipt d. P20,714 receipt

10. On January 1, 2019, Doodles Company borrowed P5,000,000 from a bank at a variable rate of interest for 4 years.
Interest will be paid annually to the bank on December 31 and the principal is due on December 31, 2022. Under
the agreement, the market rate of interest on each January 1 resets the variable rate for that period and the amount
of interest to be paid on December 31.
To protect itself from fluctuations in interest rates, the entity hedges the variable interest by entering into a four-
year "receive variable, pay fixed" interest rate swap with a speculator. The interest rate swap is based on the
notional amount of P5,000,000 and an 8% fixed interest rate. The entity has designated this interest rates swap
as a cash flow hedge of the variability of interest payments on the variable rate loan. Assume that market interest
rates are 8% on January 1, 2019, 10% on January 1, 2020, and 11% on January 1, 2021. (Round off present value
factors to four decimal places)
The amount to be recognized as derivative asset on December 31, 2020 is
a. P122,185 c. P256,875
b. P366,555 d. P 85,625

Use the following information for the next four questions.

On January 2, 2020, Jones Company purchased a call option for P30,000 on Merchant ordinary shares. The call option
gives Jones the option to buy 100,000 shares of Merchant at a strike price of P50 per share. The market price of a
Merchant share is P50 on January 2, 2020. On March 31, 2020, the market price for Merchant share is P53 per share,
and the time value of the option is P20,000.

11. In exchange for the rights inherent in an option contract, the owner of the option will typically pay a price
a. Only when a call option is exercised.
b. Only when a put option is exercised.
c. When either a call option or a put option is exercised.
d. At the time the option is received regardless of whether the option is exercised or not.

12. Intrinsic value of an option is

a. The component of an option’s market value that can be realized by exercising the option immediately.
b. The portion of the option premium that can be attributed to the time remaining until the expiration of the option
contract.
c. Current price of any specific option contract that has yet to expire.
d. The price that would be received to sell an option in an orderly transaction between market participants at the
measurement date.

13. If the price of the underlying is greater than the strike or exercise price of the underlying, the call option is
a. In the money. c. Out of the money.
b. At the money. d. On the money.

14. What was the effect on profit of entering into the derivative transaction for the period January 2 to March 31, 2020?
a. P300,000 c. P270,000
b. P290,000 d. (P10,000)

Use the following information for the next two questions.

On January 2, 2020, Jones Company purchased a put option for P30,000 on Merchant ordinary shares. The contract is
for 100,000 shares of Merchant at a strike price of P50 per share. The market price of a Merchant share is P50 on
January 2, 2020. The option expires on June 30, 2020.

15. Assume that the market price for Merchant share is P53 per share, and the time value of the option is P20,000 on
March 31, 2020. What was the effect on profit of entering into the derivative transaction for the period January 2
to March 31, 2020?
a. P290,000 c. (P30,000)
b. P 20,000 d. (P10,000)

ACCTG 106 PFRS 9: DERIVATIVES AND HEDGING Page 2 of 3

16. Assume that the market price for Merchant share is P52 per share on June 30, 2020. The gain or loss on settlement
of put option is
a. P200,000 gain c. P230,000 loss
b. P170,000 gain d. P 30,000 loss

17. On June 18, Bocaue Corporation entered into a firm commitment to purchase specialized equipment from the Ushi
Trading Company for ¥80,000,000 on August 20. The exchange rate on June 18 is ¥100 = P1. To reduce the
exchange rate risk that could increase the cost of the equipment in pesos, Bocaue pays P12,000 for a call option
contract. This contract gives Bocaue the option to purchase ¥80,000,000 at an exchange rate of ¥100 = P1 on
August 20. On August 20, the exchange rate is ¥93 = P1.
How much did Bocaue save by purchasing the call option?
a. P12,000
b. P48,215
c. P60,215
d. Bocaue would have been better off not to have purchased the call option.

18. In accordance with PAS 39, an embedded derivative shall be separated from the host contract and accounted for as
a derivative if, and only if:
a. The economic characteristics and risks of the embedded derivative are not closely related to the economic
characteristics and risks of the host contract.
b. A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative.
c. The hybrid (combined) instrument is not measured at fair value with changes in fair value recognized in profit
or loss.
d. All of these.

19. If Entity O is required by PAS 39 to separate the embedded derivative from its host contract, but is unable to
measure the embedded derivative separately either at acquisition or at the end of a subsequent financial reporting
period, it shall
a. Designate the entire hybrid contract as at fair value through profit or loss.
b. Designate the entire hybrid contract as available for sale.
c. Designate the entire hybrid contract as held to maturity.
d. Any of these.

20. In what way does PFRS 9 require embedded derivatives to be accounted for?
a. Embedded derivatives that would have been separately accounted for at FVTPL under PAS 39 because they were
not closely related to the financial asset host will have to be separated.
b. Embedded derivatives that would have been separately accounted for at FVTPL under PAS 39 because they were
not closely related to the financial asset host will no longer be separated.
c. Embedded derivatives are accounted for at amortized cost.
d. Embedded derivatives are accounted for at fair value with gains and losses going to OCI.

21. Change in fair value of a derivative is recognized in other comprehensive income when the derivative is
a. For speculation.
b. A hedging instrument in a fair value hedge.
c. A hedging instrument in an ineffective cash flow hedge.
d. A hedging instrument in an effective cash flow hedge.

Use the following information for the next three questions.

On December 12, 2020, Slow Corp. entered into three forward exchange contracts, each to purchase 100,000 euros in
ninety days. The relevant exchange rates are as follows:
Forward Rates for
Date Spot Rates March 12, 2021
11/30/20 P87 P89
12/12/20 88 90
12/31/20 92 93

22. Slow entered into the first forward contract to hedge a purchase of inventory in November 2020, payable in March
2021. At December 31, 2020, what amount of foreign currency transaction gain from this forward contract should
Slow include in net income?
a. P1,000,000 c. P300,000
b. P 500,000 d. P 0

23. Slow entered into a second forward contract to hedge a commitment to purchase equipment being manufactured
to Slow’s specifications. The expected delivery date is March 2021 at which time settlement is due to the
manufacturer. The hedge qualifies as a fair value hedge. At December 31, 2020, what amount of foreign currency
transaction gain from this forward contract should Slow include in net income?
a. P1,000,000 c. P300,000
b. P 500,000 d. P 0

24. Slow entered into a third forward contract for speculation. At December 31, 2020, what amount of foreign currency
transaction gain from this forward contract should Slow include in net income?
a. P1,000,000 c. P300,000
b. P 500,000 d. P 0

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