Forward Contracts – Exposed Liability/Asset

Illustration #1
hindinadeclare Company purchased chocolates from Thailand for
200,000 bahts on December 1, 20x9. Payment is due on January 30,
20y0. On December 1, 20x9, the company also entered into a 60-day
forward contract to purchase 200,000 bahts. The forward contract is
not designated as a hedge. The rates were as follows:

Requirement: Journal Entries.

Illustration #2
Batmaypasok Enterprises purchases inventory of 1,000,000 foreign
currency units (FCUs) from a foreign supplier on August 13 with
payment due on November 1. Management of Batmaypasok Enterprises
immediately enters into a forward contract to hedge this
transaction. Batmaypasok prepares quarterly financial statements
with a December 31 year-end. The relevant exchange rates and forward
contract fair values are as follows:
Nov. 1 Forward Contract
Date Spot Rate Forward Rate Fair Value

Aug. 13 P1.116 P1.10 P 0

Sept. 30 P1.129 P1.126 P 6,000
Nov. 1 P1.138 P1.138 P18,000

2. What is the balance in the accounts payable account on August 13?

3. What is the balance in the accounts payable account on September 30?

4. What is the amount of the exchange loss recognized with respect to the

accounts payable account on September 30?

5. What is the balance in the accounts payable account on November 1,

immediately before collection?

6. What is the amount of the exchange loss recognized with respect to the

accounts payable account on November 1?

7. What is the balance in the forward contract account on August 13?

8. What is the balance in the forward contract account on September 30?

9. What is the amount of the exchange loss or gain recognized with respect

to the forward contract on September 30?

10. What is the balance in the forward contract account on November 1?

11. What is the amount of the exchange loss or gain recognized with respect

to the forward contract on November 1?

12. What is the net increase or decrease in cash flow from having entered

into this forward contract hedge?

13. What is the amount of premium or discount on forward contract?

Illustration #3

Umasa, Inc. placed an order for inventory costing 500,000 foreign

currency (FC) with a foreign vendor on April 15 when the spot rate

was 1 FC = P0.683. Stark received the goods on May 1 when the spot

rate was 1 FC = P0.687.

Also on May 1, Umasa entered into a 90-day forward contract to

purchase 500,000 FC at a forward rate of 1 FC = P0.693. Payment was

made to the foreign vendor on August 1 when the spot rate was 1 FC =

P0.696.

Umasa has a June 30 year-end. On that date, the spot rate was 1 FC =

P0.691, and the forward rate on the contract was 1 FC = P0.695.

Changes in the current value of the forward contract are measured as

the present value of the changes in the forward rates over time. The

relevant discount rate is 6%.

1. The foreign exchange gain on hedging instrument (forward contract) on

June 30 amounted to:

2. The nominal value of the forward contract on June 30 amounted to:

3. The fair value of the forward contract on June 30 amounted to:

4. The net decrease on Umasa Corp.’s net income on June 30 income statement

amounted to:

5. The foreign exchange gain due to hedging instrument (forward contract)

on August 1 amounted to:

Illustration #4

Kapukpukis Corp. (a Philippine-based company) sold parts to a foreign

customer on December 1, 20x9, with payment of 10 million foreign currencies

to be received on March 31, 20y0. The following exchange rates apply:

Dates Spot Rate Forward rate

(for 3/31/20y0)

December 1, 20x9 P.0035 P.0034 (4 months)

December 31, 20x9 .0033 .0032 (3 month)

March 31, 20y0 .0038 N/A

Kapukpukis Corp. incremental borrowing rate is 12 percent. The present

value factor for three months at an annual rate of interest of 12 percent

(1 percent per month) is 0.9706.

Assuming that Kapukpukis Corp. entered into no forward contract, how much

foreign exchange gain or loss should it report on its 20x9 income statement

with regard to this transaction?

Using the same information above and assuming that Kapukpukis Corp. entered

into a forward contract to sell 10 million foreign currencies on December

1, 20x9, as a fair value hedge of a foreign currency receivable, what is

the net impact on its net income in 20x9 resulting from a fluctuation in

the value of the foreign currencies?