DERIVATIVES AND FOREIGN CURRENCY TRANSACTIONS 30-day forward rate 51.30 56.15 53.

20
JOINT VENTURE 60-day forward rate 57.65 52.30 55.75
90-day forward rate 54.25 55.45 52.10

PROBLEM 1 NOP entered into the forward contract to speculate in the foreign currency.
On November 19, 2011, RST Company, a Philippine company ordered merchandise from Sweden Company for In its income statement for the year ended December 31, 2011, what amount of gain/loss should NOP report from
31,800 Sweden kronor. The merchandise was delivered on December 18, 2011. The invoice was dated this forward contract? P86,260 gain
December 2, 2011, the shipping date(FOB shipping point). RST Company paid the invoice on January 28, 2012.
The spot rates for Sweden kronor on the respective dates were: PROBLEM 5
M Company sold merchandise for 111,200 rupees to a customer in India on November 02, 2011. Collection in
November 19, 2011 P76.90 India rupees was due on January 31, 2012. On the same date, to hedge this foreign currency exposure, M
December 2, 2011 76.15 Company entered into a future contract to sell 111,200 rupees to a bank for delivery on January 31, 2012.
December 18, 2011 75.75 Exchange rates for rupees on different dates are as follows:
December 31, 2011 72.35 Nov. Dec. Jan.
January 28, 2012 73.15 2 31 31
Strike Price P81.8 P81.8 P81.8
What is the reportable foreign exchange gain/loss amount in RST’s 2011 income statement? P120,840 gain Bid spot rate 81.9 80.7 80.1
Offer spot rate 81.7 80.5 80.3
PROBLEM 2 30-day futures 82.3 80.4 83.9
On October 5, 2011, DEF Company sold goods on account to Malaysia Corporation for 50,320 Ringgits. The date 60-day futures 81.8 80.3 82.6
of invoice is October 29, 2011 and payment is due on January 30, 2012. Exchange rates were as follows: 90-day futures 80.6 81.6 83.4
BID OFFER 120-day futures 80.1 81.4 82.8
Rate rate
October 05,2011 P67.50 69.20 1. What is the reportable sales amount in the December 31, 2011 income statement?P9,107,280
October 29, 2011 68.70 66.80 2. How much is the foreign exchange gain/loss due to hedged item in the December 31, 2011 profit and loss
December 31, 2011 64.10 63.40 statement?P133,440 loss
January 30, 2012 62.40 65.50 3. What is the reported value of the receivable from the customer at December 31, 2011? P8,973,840
4. How much is the foreign exchange gain/loss due to hedging instrument in the 2012 profit and loss
What is the reportable foreign exchange gain/loss amount in DEF’s 2012 income statement? P85,544 loss statement? P33,360 gain
5. What is the balance of the Forward Contract Payable account as of December 31, 2011? P8,940,480
PROBLEM 3 6. What was the net impact in M Company’s income in 2012 as a result of this hedging activity? P33,360 loss
On December 1, 2011, J Company sold goods to account to Lebanon Company. The amount of sale was 44,625
Lebanon pounds. The Lebanon Company will settle the account on January 2, 2012. On December 1, the spot PROBLEM 6
rate was 40 Lebanon pounds for one Philippine peso. Also on December 1, J Company entered into a future R Company acquired machinery for 169,200 lira from a vendor in Turkey on December 1, 2011. Payment in
contract to sell the 44,625 Lebanon pounds on January 2, 2012 at a forward rate of 25 Lebanon pounds for one Turkey lira was due on March 31, 2012. On the same date, to hedge this foreign currency exposure, R entered
Philippine peso. The spot rate and forward rate for one Philippine peso on December 31, 2011 is 30 Lebanon into a futures contract to purchase 169,200 lira from a bank for delivery on March 31, 2012. Exchange rates for
pounds and 50 Lebanon pounds, respectively. pounds on different dates are as follows:
December 1 December 31 March 31
How much is the foreign exchange gain/loss on hedging instrument? P892.50 gain Strike price P41.5 P41.5 P41.5
Buying spot rate 41.6 42.5 43.4
PROBLEM 4 Selling spot rate 41.4 42.3 43.7
The following data applies to NOP Company’s purchase of 45,400 Belgium francs under a forward contract dated 30 day futures 42.3 41.8 43.2
November 1, 2011, for delivery on January 31, 2012: 60 day futures 41.8 42.2 42.6
11/1/11 12/31/1 01/31/12 90 day futures 40.6 42.5 43.4
1 120 day futures 42.2 42.8 42.9
Spot rates P55.75 P53.90 P54.50
1. What amount is the capitalizable cost of the machinery? P7,004,880 QRS Company shares:
2. How much is the foreign gain/loss due to hedged item in the 2012 profit and loss statement? P236,880 loss Per share P28 P26.50 P23.50
3. What is the reported value of the payable to the vendor at December 31, 2011? P7,157,160 Put Option (4,600 shares)
4. How much is the foreign gain/loss due to hedging instrument in the December 31, 2011 profit and loss Market value P15,400 P20,700
statement? P50,760 gain 1. The foreign exchange gain/loss on option contract due to change in time value on December 31, 2011 if split
5. What is the balance of the Forward Contract Receivable account as of December 31, 2011? P7,191,000 accounting is used in the assessment of hedge effectiveness should be: P3,400 loss
6. What was the net impact in R Company’s income in 2011 as a result of this hedging? P101,520 loss 2. The foreign exchange gain/loss on option contract due to change in intrinsic value in 2012 if split accounting
is used in the assessment of hedge effectiveness should be: P13,800 gain
3. The 2012 net foreign exchange gain/loss in the hedging activity amounted to: P8,500 loss
PROBLEM 7 4. The foreign exchange gain/loss on option contract on December 31, 2011 if non-split accounting is used in
On November 1, S Company entered into a firm commitment to acquire machinery from United Arab Emirates the assessment of hedged effectiveness should be: P3,500 gain
Company. Delivery and passage of title would be on February 28, 2012 at the price of 37,800 dirhams, accounted
for as fair value hedge. On the same date, to hedge against unfavorable changes in the exchange rate, S entered
into a 120-day forward contract with a bank for 37,800 dirhams. Exchange rates were as follows:
Spot Rate Forward Rate
Nov. 1, 2010 P96.50 P94.30
Dec. 31, 2010 97.25 96.50
Feb. 28, 2011 99.70 99.70
1. The December 31, 2011 foreign exchange gain/loss on the hedging instrument amounted to: P83,160 gain
2. The firm commitment account balance as shown in the December 31, 2011 statement of financial position
amounted to: (Indicate whether asset of liability): P83,160 liab

PROBLEM 8
On October 1, 2011, HIJ Philippines took delivery from Bahrain firm of inventory costing 1,140,000 dinar. Payment
is due on January 30, 2012. Concurrently, HIJ Philippines paid P15,700 cash to acquire an at the money call
option for 1,140,000 Bahrain Dinar. Strike price is P12.40.
10/1/2011 12/31/2011 1/30/2012
Market price 12.40 12.423 12.427
Fair value of call option P28,200 P30,780

1. The foreign exchange gain/loss on hedging instrument due to change in the ineffective portion on December
31, 2011 if changes in the time value will be excluded from the assessment of hedge effectiveness should
be: P13,720 loss
2. The foreign exchange gain/loss on hedging instrument due to change in the effective portion on December
31, 2012 if changes in the time value will be excluded from the assessment of hedge effectiveness should
be: P4,560 gain
3. The December 31, 2011 net foreign exchange gain/loss in the hedging activity amounted to: P13,720 loss
4. The foreign exchange gain/loss on hedging instrument in 2012 if changes in the time value will be included
from the assessment of hedge effectiveness should be: P2,580 gain

PROBLEM 9
On December 1, 2011, KLM Corporation acquired 4,600 shares of QRS Company at a cost of P28 per share.
KLM classifies them as available-for-sale securities. On this same date, KLM decides to hedge against a possible
decline in the value of the securities by purchasing, at a cost of P11,900, an at-the-money put option to sell the
4,600 shares. The option expires on April 1, 2012. The fair values of the investment at the options follow:
12/1/11 12/31/11 4/1/12
 Sales 105,000
PROBLEM 10 Cost of goods sold 15,000
On August 1, EFG Company forecasted the purchase of P60,000 units of inventory from Bangladesh Company. Operating expnse 45,000
The purchase would probably occur on November 2 and require the payment of 2,340,000 taka. It is anticipated Dividends paid 22,500
that the inventory could be further processed and delivered to customers by early December. On August 1, the Total HK$ 423,000 HK$ 423,000
company purchased a call option to buy 2,340,000 taka at a strike price of 1FC = P7.95. An option premium of
P8,850 was paid. Changes in the value of the option will be excluded from the assessment of hedge Additional information:
effectiveness. Purchases of inventory goods are made evenly during the year. Items in the ending inventory were purchased
November 1.
Spot rates and option values are as follows: Equipment is depreciated by the straightline method with a 10 year life and no residual value. A full year’s
Aug 1 Aug 31 Sep 30 Nov 2 depreciation is taken in the year of acquisition. The equipment was acquired on March 1.
Spot rate P7.93 P7.952 P7.963 P7.97 Dividends were declared and paid on November1
Fair value of call option P8,850 P15,690 P34,410 P46,800 Exchange rates were as follows
January 1 HK$1 = P5.30
On November 2, EFG Company purchased 60,000 units of inventory at a cost of 2,376,000 taka. The option was March 1 HK$1 = P5.40
settled/sold on November 2 at its fair vale. After incurring further processing costs of P240,000, the inventory was November 1 HK$1 = P5.70
sold for P29,400,000 on December 7. December 31 HK$1 = P5.00
2010 Average HK$1 = P5.50
1. The foreign exchange gain/loss on option contract on August 31 that would affect earnings? P2,160gain
2. The foreign exchange gain/loss on option contract on September 30 that would affect other Cumulative translation adjustment gain/loss is: P41,250 loss
comprehensive income? P30,420 gain
3. The foreign exchange gain/loss on option contract on November 2 that would affect earnings: P3,990 - End -
loss
4. The cost of sales assuming the other comprehensive income account be closed to cost of sales account
on December 7: P19,129,920
Acquisition cost (2376000*7.97)
OCI
Further processing cost

5. What is the net income effect of the above transactions? Increase of: P10,261,230
Sales 29400000
coGs 19129920
(8850)
PROBLEM 11
On January 1, 2011 XYZ Corporation organized Avenue Company as a subsidiary in Hongkong with an initial
investment cost of HK$90,000. Avenue’s December 31, 2011, trial balance in HK$ is as follows:
Debit Credit
Cash HK$ 10,500
Accounts Receivable 30,000
Receivable from XYZ 7,500
Inventory 37,500
Plant and Equipment 150,000
Accumulated depreciation HK$ 15,000
Accounts payable 18,000
Bonds payable 75,000
Common stock 90,000