FOREIGN EXCHANGE AND DERIVATIVES

Theoretical
1. Which of the following statements is incorrect?
A. If A Philippine company sells merchandise to a foreign company denominated in Philippine peso, No
foreign exchange gain or loss will be reported
B. Non-monetary asset carried at historical cost would not result in an exchange gain/loss after conversion.
C. A U.S. parent company has a subsidiary in Germany whose functional currency is the German mark.
The U.S. dollar from the subsidiary’s viewpoint is foreign currency.
D. If ₱1.5625 can be exchanged for 1 British pound, the direct and indirect exchange rate quotations are
₱1.00 and 1.5625 British pounds, respectively.

2. Consider the following statements:

Statement 1: A Philippine importer that purchases merchandises from a foreign firm’s foreign current unit
(FCU) would be exposed to a net exchange gain on the unpaid balance if the peso weakened relative to the
FCU and the FCU was the denominated currency
Statement 2: Sophia Inc., a Philippine company, had a euro receivable from exports to Spain and a British
pound payable resulting from imports from England. Sophia recorded foreign exchange gain related to both
its euro receivable and pound payable. Euro increases and pound decrease in peso value from the date of
transaction to the settlement date
Statement 3: A foreign currency purchase transaction requires the recognition of gains and losses at the
balance sheet date because one or more of the accounts on the financial records is a monetary account.
A. False, True, True
B. True, False, False
C. True, True, True
D. False, False, False

3. Statement 1: For an account to qualify as a monetary account, it must be determinable in units of a foreign
currency.
Statement 2: When payment for a foreign currency purchase occurs at a date subsequent to the purchase, the
currency in which the transaction is denominated makes a different in the values recorded to recognize the
payment.
Statement 4: One criterion indicating the that the foreign entity’s local currency is the functional currency is
when the foreign entity generally purchases goods and services in the local market and pays for these
purchases with the local currency.
A. At least one of the statements is true.
B. At least two of the statements are true.
C. At least three of the statements are true.
D. None of the statements is true.

4. Which of the following gain or loss on changes in the value of derivatives shall be presented in other
comprehensive income with reclassification adjustment to profit or loss if already realized?
A. Gain or loss on changes of intrinsic value of derivatives classified as undesignated hedge
B. Gain or loss on changes of value of derivatives designated as cash flow hedge arising from its
ineffective portion
C. Gain or loss on changes of value of derivatives designated as hedge of net investment in foreign
operation arising from its effective portion
D. Gain or loss on changes of time value of derivatives designated as fair value hedge

5. In which type of hedging transactions or relationships will there be no gain or loss on a hedged item?
A. Fair value hedge of firm commitment importation using forward contract receivable.
B. Cash flow hedge of forecasted exportation using put option.
C. Undesignated hedge of foreign currency denominated accounts receivable using forward contract
payable.
D. Hedge of net investment in foreign operation using foreign currency denominated note payable.

6. Which statement is incorrect regarding forward and future contracts?

A. In a forward contract, the party that sells the underlying asset in the contracts is said to have a long
position and the party that buys the underlying asset in the contract pays the seller a fee to compensate
the seller for the risk of payments.
B. Delivery or final cash settlement usually takes place with forward contracts; the same is not true of
 futures contracts. Forward contracts usually have one specified delivery date; futures contract often have
a range of delivery dates.
C. Futures contracts are traded on exchanges, but forward contracts are not.
D. Futures contracts are standardized; forward contracts are not.

7. Statement 1: Hedge of a firm commitment may be designated as a fair value hedge or cash flow hedge.
Statement 2: For a firm commitment to purchase an inventory, the same amount of inventory will be
recorded if the company hedge the firm commitment and designates the hedge as fair value hedge or cash
flow hedge.
Statement 3: A Philippine company hedges an anticipated purchase of merchandise from a UK supplier,
payment to be made in pounds. The hedge qualifies as cash flow hedge of a forecasted transaction. Gains
and losses on the hedge investment are never reported on the income statement.
A. True, True, False
B. True, False, True
C. False, True, False
D. False, False, True

8. Statement 1: At an intervening balance sheet date of a foreign currency commitment created with a forward
contract, the gain or loss on the hedge is determined by comparing the forward rate at the balance sheet date
with the spot rate at the balance sheet date.
Statement 2: A speculative foreign currency contact exists when an entity enters into an agreement to buy or
sell foreign currency in the future at a known price when there is no underlying transaction or commitment
to a future transaction or forecasted future transaction.
Statement 3: There is no journal entry required for the initiation of a foreign currency forward contract
created as a hedge of a forecasted transaction.
Statement 4: Gains and losses on a foreign currency commitment are recognized as gains or losses on
the income statement in the period when the underlying transaction occurs.
Statement 5: The gain or loss or a foreign currency commitment is offset by a loss or gain on a purchase or
sales commitment.

A. All of the statements are true.

B. At least 4 statements are true.
C. At least 3 statements are true.
D. At least 1 or 2 statements are true.

Practical
1. For the year ended December 31, 20x1, Lakers Company had the following transactions with foreign
business:

Date Nature of Transaction

Purchase from Vendor Y
December 1, 20x1 Imported merchandise costing 150,000, Malaysian Ringgit from Malaysian
wholesaler
January 10, 20x2 Paid the amount owed
Sale to Customer Z
November 15, 20x1 Sale merchandise for 200,000 Japanese Yen to Japanese wholesaler
January 31, 20x2 Received the amount owed

Malaysian Ringgit Exchange Rate 12/1/20x1 12/31/20x1 01/10/20x2

Buying Rate MYR 0.082 0.079 0.085
Selling Rate MYR 0.085 0.080 0.088

Japanese Yen Exchange Rate 11/15/20x1 12/31/20x1 01/31/20x2

Buying Rate P 0.45 P 0.55 P0.60
Selling Rate P 0.48 P 0.575 P0.62

How much is the net foreign exchange gain (loss) for the year 20x1 and 20x2?
2. Jeremiah has the following assets and liabilities transacted from US.
Exchange rate at
Account Acquisition Cost
acquisition
Cash Surrender Value $ 4,500 P 1.85
Accounts Receivable 2,540 2.40
Allowance for bad debts 1,200 2.40
Prepaid rent 3,800 2.50
Prepaid Interest 1,200 2.50
Investment property at fair value 54,000 2.10
Investment in bonds measured at amortized 21,000 2.40
costs
Investment in bonds measured at FVPL 23,000 2.70
Investment in bonds measured at FVOCI 34,000 1.90
Inventories 9,600 2.00
Advances to Employees 4,000 2.20
PPE, Cost 5,000 2.25
Accounts Payable 15,000 2.00
Liability for refundable deposit 30,000 2.40
Finance Lease Liability 10,000 2.50
Deferred Income 24,000 2.40

All were transacted in the current year. The fair value of the following asset at year end is as follows:
Investment property at fair value $ 60,000
Investment in bonds measured at FVPL 22,000
Investment in bonds measured at FVOCI 25,000

The exchange rate at the end of the year is $1= PHP2.00. How much is the foreign exchange gain/loss to be
recognized in profit or loss?

3. Certain balance sheet accounts of a foreign subsidiary in a foreign country of a Philippine Corporation at
December 31, 20x1 have been converted into Philippine pesos as follows:
Current Rate Historical Rate
Cash on hand and demand deposits P37,500 P32,500
Accounts receivable 62,500 55,000
Prepaid advertising and rent 12,500 10,000
Investment at FVPL 65,000 53,000
Investment at FVOCI 24,000 30,000
Investments at Amortized Cost 23,000 40,000
Investment in Associate 50,000 50,000
Notes Receivable 80,000 100,000
Accrued Interest 8,000 10,000
Patents, carried at revalued amount 80,000 85,000
Trademarks 40,000 34,000
Deferred charges 41,000 50,000
Customer list 30,000 34,000
Goodwill from Business Combination 15,000 7,500
Noncurrent accounts receivable 10,000 8,750
Licenses and copyrights 5,000 3,750
Inventories, carried at cost 75,000 72,500
Land 125,000 120,000
Assets measured at fair value were revalued at year-end. How much is the foreign exchange gain or loss in
20x1?
4. BANE Corporation purchased goods from YELLOW Company of India for 600,000 INR. The merchandise
was received on November 1, 20x1, with payment due on January 30, 20x2. Also on November 1, 20x1,
BANE Corporation entered into a forward contract with Land Bank to purchase the necessary 600,000
Indian Rupees for delivery on January 30, 20x2 to hedge the purchase transaction. The following direct
exchange rates were provided:
11/1/20x1 12/31/20x1 1/30/20x2
Spot rate – selling 0.82 0.83 0.85
Spot rate – buying 0.80 0.81 0.81
90-day forward – buying 0.81 0.82 0.83
90-day forward – selling 0.823 0.82 0.83
60-day forward – buying 0.826 0.821 0.822
60-day forward – selling 0.84 0.845 0.843
30-day forward – buying 0.83 0.831 0.832
30-day forward – selling 0.844 0.845 0.846

What is the foreign exchange gain (loss) to be recognized with respect to the hedging instrument for the year
ended December 31, 20x1 and hedged item for the year ended 20x2, respectively?

5. On November 1, 20x1, EVA Corporation entered into a forward contract, for speculative purposes, with
Banco de Toro to purchase 300,000 Indian Rupees for delivery on January 30, 20x2. The following direct
exchange rates were provided:
11/1/20x1 12/31/20x1 01/30/20x2
Spot rate – selling 0.82 0.83 0.85
Spot rate – buying 0.80 0.81 0.81
90-day forward – buying 0.81 0.82 0.83
90-day forward – selling 0.823 0.82 0.83
60-day forward – buying 0.826 0.821 0.822
60-day forward – selling 0.84 0.845 0.843
30-day forward – buying 0.83 0.831 0.832
30-day forward – selling 0.844 0.829 0.846
How much is the net benefit or cost of entering into a forward contract?

6. On November 1, Mary Jane Company entered into a firm commitment to acquire a machine from a UAE
Company. Delivery and passage of title would be on February 28, 20x2 at the price of 37,800 dirhams. On
the same date, to hedge against unfavorable changes in the exchange rate, Mary Jane entered into a 120-day
forward contract with a bank for 37,800 dirhams. Exchange rates were as follows:
Spot Rate Forward Rate
Nov. 01, 20x1 96.50 94.30
Dec. 31, 20x1 97.25 96.50
Feb. 28, 20x2 99.70 99.70
The machinery’s useful life is 10 years.

Determine the effects of the above transactions in profit or loss for the year 20x1 and 20x2.
7. On October 31, 20x1, Pyramid Philippines took delivery from a British firm of inventory costing £725,000.
Payment is due on January 31, 20x2. At the same time, Pyramid paid P8,250 cash to acquire a 90-day call
option for £725,000 which is formally designated as the hedging instrument.

Oct. 31, 20x1 Dec. 31, 20x1 Jan. 31, 20x2

Strike price P 3.60 ? ?
Spot rate 3.61 3.62 3.64
Forward rate 3.72 3.77 3.78
Fair value of call option ? P 17,000 P 29,000

Option was exercised on January 31, 20x2.

A. Compute the effects of the above transactions to profit or loss in 20x1 and 20x2.
B. Assume instead that on October 31, 20x1, the company merely anticipated the transaction and the
actual delivery transpired on January 31, 20x2. Compute the effects to profit of loss in 20x1 and 20x2.

8. On December 1, 20x1, Alexa anticipated the purchase of inventory on February 28, 20x2 at a price of
$15,000. In order to hedge this highly probable forecasted importation, Alexa entered into a forward
contract with a bank to purchase $15,000 on December 1, 20x1. Alexa is operating in the Philippine
economy where the functional currency is Philippine peso.
December 1, 20x1 December 31, 20x1 February 28, 20x2
Buying spot P 42 P40 P41
Selling spot P 46 P44 P43
90-day forward buying P 41 P43 P44
90-day forward selling P 45 P41 P43
60-day forward buying P 48 P42 P41
60-day forward selling P 49 P41 P40
30-day forward buying P 46 P43 P42
30-day forward selling P 45 P44 P40
The related accounts payable was paid on March 31, 20x2 when the buying spot rate was P44, and the
selling spot rate was P46. Subsequently Alexa sold the inventory to Washed Qualifiers Company for
1,200,000. What is the foreign exchange gain/(loss) to be recognized in other comprehensive income for
20x1 and the related net income to be reported in profit or loss from all the above transactions for 20x2?

9. Kenji Corporation has a 40% equity investment in a Company in Singapore, NS Company. On December
31, 20x1, the balance in KENJI’s Investment in NS account was P1,065,600, equal to 40% of NS’s net
assets of 55,500 Singapore Dollars times a P48 year-end exchange rate. On this date, KENJI has no
adjustment balance relative to its investment in NS. To hedge its net investment in NS, KENJI borrowed
12,000 Singapore Dollars for one year at 12% interest on January 1, 20x2 at a spot rate of P48. The loan is
denominated in Singapore Dollars, with principal and interest payable on January 1, 20x3. Assume that on
November 2, 20x2, NS declares and pays a 3,500 Singapore Dollars dividend, when the spot rate is P46. On
December 31, 20x2, NS reported net income of 12,500 Singapore dollars. The weighted average exchange
rate for the year 20x2 is P52, and the closing exchange rate on December 31, 20x2 is P50.

As a result of the hedging, how much is the translation adjustment that will appear in the stockholders’
equity section of the Statement of Financial Position of KENJI Corporation on December 31, 20x2?