FINANCIAL ACCOUNTING AND REPORTING Page 1 of 11

DERIVATIVES

MULTIPLE CHOICE PROBLEMS

1. Lasalle Company is a producer of electric cables and requires 10,000 kilos

of copper per year. Lasalle acquires copper near the beginning of the year
on March 1 for its annual production. On November 30, 2021, Lasalle has
agreed to buy 10,000 kilos of copper on March 1, 2022, to be delivered on
the same date and to be used in its production process. In recent years, the
price of copper has fluctuated wildly.

To protect itself from the variability of the market price of copper, Lasalle
Company entered into a forward contract as a cash flow hedge with a
reputable bank for the purchase of 10,000 kilos of copper on March 1, 2022,
at a strike price of P800 per kilo.

If the market price on March 1, 2022, is more than P800, the difference is
paid by the bank to Lasalle. On the other hand, if the market price is less
than P800, Lasalle will pay the difference to the bank. The market prices of
the copper per pound on December 31, 2021, and March 1, 2022 are P850
and P950 respectively.

1. What is the forward contract receivable or payable to be recognized on

December 31, 2021?
a. 500,000 receivable
b. 500,000 payable
c. 1,500,000 receivable
d. 1,500,000 payable

2. What was the total amount exchange by Lasalle with the bank on March
1, 2022?
a. 500,000 receipt
b. 500,000 payment
c. 1,500,000 receipt
d. 1,500,000 payment
FINANCIAL ACCOUNTING AND REPORTING Page 2 of 11

1. Lasalle Company is a producer of electric cables and requires 10,000 kilos

of copper per year. Lasalle acquires copper near the beginning of the year
on March 1 for its annual production. On November 30, 2021, Lasalle has
agreed to buy 10,000 kilos of copper on March 1, 2022, to be delivered on
the same date and to be used in its production process. In recent years, the
price of copper has fluctuated wildly.

To protect itself from the variability of the market price of copper, Lasalle
Company entered into a forward contract as a cash flow hedge with a
reputable bank for the purchase of 10,000 kilos of copper on March 1, 2022,
at a strike price of P800 per kilo.

If the market price on March 1, 2022, is more than P800, the difference is
paid by the bank to Lasalle. On the other hand, if the market price is less
than P800, Lasalle will pay the difference to the bank. The market prices of
the copper per kilo on December 31, 2021, and March 1, 2022 are P850 and
P950 respectively.

1. What is the forward contract receivable or payable to be recognized on

December 31, 2021?
a. 500,000 receivable
b. 500,000 payable
c. 1,500,000 receivable
d. 1,500,000 payable

2. What was the total amount exchange by Lasalle with the bank on March
1, 2022?
a. 500,000 receipt
b. 500,000 payment
c. 1,500,000 receipt
d. 1,500,000 payment
FINANCIAL ACCOUNTING AND REPORTING Page 3 of 11

2. Jansen Company requires 50,000 kilos of aluminum each month in its

operations. To eliminate the price risk associated with aluminum purchases,
on December 1, 2021. Jansen entered into a futures contract as a cash
flow hedge to buy 50,000 kilos of aluminum on August 1, 2022. The futures
strike price is P150 per pound.

The futures contract is managed through an exchange, so Jansen does not

know the other party on the other side of the contract. As with most
derivative contracts, this futures contract is settled by an exchange of cash
on August 1, 2022, based on the price of aluminum on that date.

The price of aluminum on December 31, 2021, is P140 per pound, while the
price of aluminum on the date of delivery is P135 on August 1, 2022.

1. What amount should Jansen recognize as futures contract payable on

December 31, 2021?
a. 100,000
b. 500,000
c. 750,000
d. 0

2. What was the total amount exchange by Jansen in settlement of the

futures contract on August 1, 2022?
a. 500,000 receipt
b. 500,000 payment
c. 750,000 receipt
d. 750,000 payment
FINANCIAL ACCOUNTING AND REPORTING Page 4 of 11

2. Jansen Company requires 50,000 kilos of aluminum each month in its

operations. To eliminate the price risk associated with aluminum purchases,
on December 1, 2021. Jansen entered into a futures contract as a cash
flow hedge to buy 50,000 kilos of aluminum on August 1, 2022. The futures
strike price is P150 per pound.

The futures contract is managed through an exchange, so Jansen does not

know the other party on the other side of the contract. As with most
derivative contracts, this futures contract is settled by an exchange of cash
on August 1, 2022, based on the price of aluminum on that date.

The price of aluminum on December 31, 2021, is P140 per pound, while the
price of aluminum on the date of delivery is P135 on August 1, 2022.

1. What amount should Jansen recognize as futures contract payable on

December 31, 2021?
a. 100,000
b. 500,000
c. 750,000
d. 0

2. What was the total amount exchange by Jansen in settlement of the

futures contract on August 1, 2022?
a. 500,000 receipt
b. 500,000 payment
c. 750,000 receipt
d. 750,000 payment
FINANCIAL ACCOUNTING AND REPORTING Page 5 of 11

3. Charles Company makes colorful Piña Silk barong tagalogs that are very
popular among sophisticated business executives. Charles uses 20,000
kilos of Piña Silk each month in its production process.

On December 1, 2021, Charles purchased a call option as a cash flow

hedge to buy 20,000 kilos of Piña Silk on May 1, 2022. The option exercise
price is P200 per pound. Charles paid P80,000 for the call option.

This derivative option contract means that if the market price is higher than
P200, Charles can exercise the option and buy the asset at the fixed option
price of P200. If the market price is lower than P200 Charles can throw
away the option and buy the asset at the cheaper price.

As the most derivative contracts, this option contract will be settled by an

exchange of cash on May 1, 2022, based on the price of cotton on that date.
If the price of cotton on December 31, 2021, is P230 per pound and P225 on
May 1, 2022, Charles will recognize the following amounts:

1. What is the receivable on the call option on December 31, 2021?

a. 520,000
b. 600,000
c. 500,000
d. 0

2. What is the amount of the purchase that shall be recognized by Charles

in 2022?
a. 4,080,000
b. 4,500,000
c. 4,000,000
d. 4,600,000
FINANCIAL ACCOUNTING AND REPORTING Page 6 of 11

3. Charles Company makes colorful Piña Silk barong tagalogs that are very
popular among sophisticated business executives. Charles uses 20,000
kilos of Piña Silk each month in its production process.

On December 1, 2021, Charles purchased a call option as a cash flow

hedge to buy 20,000 kilos of Piña Silk on May 1, 2022. The option exercise
price is P200 per pound. Charles paid P80,000 for the call option.

This derivative option contract means that if the market price is higher than
P200, Charles can exercise the option and buy the asset at the fixed option
price of P200. If the market price is lower than P200 Charles can throw
away the option and buy the asset at the cheaper price.

As the most derivative contracts, this option contract will be settled by an

exchange of cash on May 1, 2022, based on the price of cotton on that date.
If the price of cotton on December 31, 2021, is P230 per pound and P225 on
May 1, 2022, Charles will recognize the following amounts:

1. What is the receivable on the call option on December 31, 2021?

a. 520,000
b. 600,000
c. 500,000
d. 0

2. What is the amount of the purchase that shall be recognized by Charles

in 2022?
a. 4,080,000
b. 4,500,000
c. 4,000,000
d. 4,600,000
FINANCIAL ACCOUNTING AND REPORTING Page 7 of 11

4. On January 1, 2021, Moderna Company entered a two-year P6,000,000

“Variable Interest Rate Loan” at the prevailing interest rate of 12%. The
December 31, 2021, interest payment is based on the January 1, 2021,
which is 12%. However, the 2022 interest payment will be equal to the
prevailing interest rate on January 1, 2022.

The principal loan is payable on December 31, 2022, and the interest is
payable on December 31 of each year.

During 2021, Moderna Company entered a “receive variable, pay fixed”

interest swap agreement as a cash flow hedge with a speculator bank at the
prevailing rate of interest of 12%.

This derivative contract means, that if the rate is higher than 12%, Moderna
will receive an interest rate swap payment equal to the difference in the
rate times the principal of the loan. However, Moderna will pay the bank an
equivalent amount if the rate is lower than 12% o January 1, 2022.

The prevailing interest rate on January 1, 2022, is 15% and the present
value of 1 at 15% for 1 period is .8696. Moderna accordingly paid the lender
bank on December 31, 2022.

1. What is the derivative asset or liability to be recognized by Moderna on

December 31, 2021?
a. 156,528 receivable
b. 156,528 payable
c. 180,000 receivable
d. 180,000 payable

2. What is the interest expense to be recognized for the year ended

December 31, 2022?
a. 720,000
b. 900,000
c. 800,000
d. 750,000
FINANCIAL ACCOUNTING AND REPORTING Page 8 of 11

4. On January 1, 2021, Moderna Company entered a two-year P6,000,000

“Variable Interest Rate Loan” at the prevailing interest rate of 12%. The
December 31, 2021, interest payment is based on the January 1, 2021,
which is 12%. However, the 2022 interest payment will be equal to the
prevailing interest rate on January 1, 2022.

The principal loan is payable on December 31, 2022, and the interest is
payable on December 31 of each year.

During 2021, Moderna Company entered a “receive variable, pay fixed”

interest swap agreement as a cash flow hedge with a speculator bank at the
prevailing rate of interest of 12%.

This derivative contract means, that if the rate is higher than 12%, Moderna
will receive an interest rate swap payment equal to the difference in the
rate times the principal of the loan. However, Moderna will pay the bank an
equivalent amount if the rate is lower than 12% o January 1, 2022.

The prevailing interest rate on January 1, 2022, is 15% and the present
value of 1 at 15% for 1 period is .8696. Moderna accordingly paid the lender
bank on December 31, 2022.

1. What is the derivative asset or liability to be recognized by Moderna on

December 31, 2021?
a. 156,528 receivable
b. 156,528 payable
c. 180,000 receivable
d. 180,000 payable

2. What is the interest expense to be recognized for the year ended

December 31, 2022?
a. 720,000
b. 900,000
c. 800,000
d. 750,000
FINANCIAL ACCOUNTING AND REPORTING Page 9 of 11

5. On January 1, 2021, Burberry Company received a 4-year variable interest

rate loan of P2,000,000 with interest payment at the end of each year on
December 31 and the principal to be repaid on December 31, 2024.

The interest rate for 2021 is 10% and the interest payment in each
succeeding year is equal to market interest rate on January 1 of that
particular year and therefor is subject to change from a year-to-year basis
starting calendar year 2022.

In connection with the loan, Burberry Company entered into an interest rate
swap agreement as a cash flow hedge with another financial institution to the
effect that Burberry will receive a swap payment if the interest rate on
January 1, 2022, 2023 and 2024 is more than 10% and will make a swap
payment if the interest is less than 10% in the same aforementioned years.

The swap payments are made at the end of the year.

On January 1, 2022, the market rate of interest is 13% and on January 1,

2023, the market rate of interest is 15%.

The present value of an ordinary annuity of 1 at 13% for three periods is

2.36 and the present value of an ordinary annuity of 1 at 15% for two periods
is 1.63.

1. What is the interest rate swap receivable December 31, 2021?

a. 60,000
b. 97,800
c. 180,000
d. 141,600

2. What is the interest rate swap receivable December 31, 2022?

a. 100,000
b. 200,000
c. 163,000
d. 86,900
FINANCIAL ACCOUNTING AND REPORTING Page 10 of 11

5. On January 1, 2021, Burberry Company received a 4-year variable interest

rate loan of P2,000,000 with interest payment at the end of each year on
December 31 and the principal to be repaid on December 31, 2024.

The interest rate for 2021 is 10% and the interest payment in each
succeeding year is equal to market interest rate on January 1 of that
particular year and therefor is subject to change from a year-to-year basis
starting calendar year 2022.

In connection with the loan, Burberry Company entered into an interest rate
swap agreement as a cash flow hedge with another financial institution to the
effect that Burberry will receive a swap payment if the interest rate on
January 1, 2022, 2023 and 2024 is more than 10% and will make a swap
payment if the interest is less than 10% in the same aforementioned years.

The swap payments are made at the end of the year.

On January 1, 2022, the market rate of interest is 13% and on January 1,

2023, the market rate of interest is 15%.

The present value of an ordinary annuity of 1 at 13% for three periods is

2.36 and the present value of an ordinary annuity of 1 at 15% for two periods
is 1.63.

1. What is the interest rate swap receivable December 31, 2021?

a. 60,000
b. 97,800
c. 180,000
d. 141,600

2. What is the interest rate swap receivable December 31, 2022?

a. 100,000
b. 200,000
c. 163,000
d. 86,900
FINANCIAL ACCOUNTING AND REPORTING Page 11 of 11

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