CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

ADVANCED FINANCIAL ACCOUNTING GERMAN/LIM/VALIX/K. DELA CRUZ/MARASIGAN

FOREIGN CURRENCY TRANSACTIONS AND DERIVATIVES

Part I – Theories

1. In case of hedging transaction designated as fair value hedge, which of the following statements is
correct?
A. The gain or loss from remeasuring the hedging instrument/derivative designated as fair value
hedge shall be recognized in profit or loss.
B. The gain or loss on the changes in fair value of hedged item attributable to the hedged risk shall
adjust the carrying amount of the hedged item and be recognized in profit or loss.
C. Both A and B.
D. Neither A nor B.

2. In case of hedging transaction designated as cash flow hedge, which of the following statements is
correct?
A. The portion of the gain or loss on the hedging instrument/derivative designated as cash flow
hedge that is determined to be an effective hedge or the change in intrinsic value of the
derivative designated as cash flow hedge shall be recognized in other comprehensive income.
B. The ineffective portion of the gain or loss on the hedging instrument/derivative designated as
cash flow hedge or the change in time value of the derivative designated as cash flow hedge
shall be recognized in profit or loss.
C. The cumulative other comprehensive income recognized in equity arising from cumulative
changes in intrinsic value of derivatives designated as cash flow hedge shall be reclassified
from equity/cumulative OCI to profit or loss as a reclassification adjustment in the same period
during which the hedged forecast cash flows affects profit or loss.
D. All of the above.

3. In case of hedging transaction considered as “undesignated hedge” such as hedge of foreign

currency denominated accounts payable or foreign currency denominated accounts receivable,
which of the following statements is correct?
A. The exchange differences arising from the changes in measurement of hedged item or foreign
currency denominated accounts payable/receivable shall be recognized in profit or loss.
B. The exchange differences arising from the changes in measurement of hedging
instruments/derivatives shall be recognized in profit or loss.
C. Both A and B.
D. Neither A nor B.

4. How shall an entity account for hedging transaction classified as hedge of firm commitment?
A. Cash flow hedge only
B. Fair value hedge only
C. Undesignated hedge only
D. IAS 39 gives the entity the option to elect either cash flow hedge or fair value hedge for hedge
of firm commitment.

5. Under PAS 21, what is the initial measurement of foreign currency denominated transaction?
A. Both monetary and nonmonetary items are measurement initially at transaction or historical
rate.
B. Monetary items are measured at closing rate while nonmonetary items are measured at
transaction rate.
C. Monetary items are measured at transaction rate while nonmonetary items are measured at
closing rate.
D. Both monetary and nonmonetary items are measurement initially at closing rate.

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6. Under PAS 21, what is the subsequent measurement of nonmonetary items?

A. Closing rate
B. Transaction rate
C. Average rate
D. Monthly rate

7. Under PAS 21, what is the subsequent measurement of monetary items?

A. Closing rate
B. Transaction rate
C. Average rate
D. Monthly rate

8. PAS 21 provides that exchange differences/(gain/loss) arising on the settlement or translating

foreign currency transaction shall be recognized in
A. Profit or loss
B. Other comprehensive income
C. Share premium
D. Retained earnings

Part II – Problem Solving

Problem 1
On December 1, 2021, Keating-5 Corporation, a Philippine Company based in Makati, ordered 1,000
units of merchandise from a US Firm, FOB Shipping Point, for $10,000, payable on January 15, 2022.
The merchandise was shipped on December 10, 2021, and was received by Keating-5 on December 17,
2021. Keating-5 paid the invoice on due date. The corporation did not enter into any form of hedging
activity.
On March 15, 2022, 300 units of the merchandise purchased were sold in cash to Bonnie Company, a
Taguig-based firm, at a total price of P250,000.
The spot rates for US Dollars on different dates are:

Buying Rate Selling Rate

December 1, 2021 39.00 40.00
December 10, 2021 38.90 40.10
December 17, 2021 40.00 40.30
December 31, 2021 40.60 40.85
January 15, 2022 40.40 40.60

Keating-5 Corporation uses the perpetual inventory system to account for its inventories.

Compute for the following:

1. Foreign Exchange gain/loss in 2021

A. 5,500 loss
B. 8,500 loss
C. 17,000 gain
D. 7,500 loss

2. Accounts payable as of December 31, 2021

A. 403,000
B. 408,500
C. 400,000
D. 391,500

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3. Foreign Exchange gain/loss in 2022
A. 2,000 loss
B. 2,000 gain
C. 2,500 gain
D. 2,500 loss

4. Net income of Keating-5, assuming no other transactions occurred in 2022

A. 132,200
B. 129,700
C. 132,500
D. 131,600

Problem 2

On November 1, 2021, Harvey Company, a Philippine-based firm, received an order for 1,500 units of
its products for $50,000. The inventory was shipped by Harvey and the customer was billed on
December 1, 2021, for which the customer issued a 3-month, 12% promissory note. Customer made
full payment on March 2, 2022. Harvey’s fiscal year end is December 31. Assuming that Harvey did
not engage in any form of hedging activity.
The following are the spot rates for US Dollars:

Buying Spot Rates Selling Spot Rates

November 1, 2021 P1: $ 0.0251 P1: $ 0.0249

December 1, 2021 P1: $ 0.0250 P1: $ 0.0249
December 31, 2021 P1: $ 0.0246 P1: $ 0.0245
March 2, 2022 P1: $ 0.0248 P1: $ 0.0246

1. How much is the FX gain/loss in 2021?

A. 32,520.33 gain
B. 32,520.33 loss
C. 52,845.53 gain
D. 52,845.53 loss

2. How much is the interest income in 2021?

A. 20,408.16
B. 32,520.33
C. 20,325.20
D. 52,845.53

3. How much is the FX gain/loss in 2022?

A. 16,391.29 loss
B. 163.91 loss
C. 40,322.58 gain
D. 16,555.21 loss

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Problem 3
On November 1, 2021, Blackpink Corporation sold merchandise to BTS Corporation for $50,000.
Payment will be received on January 31, 2022. On the same date, Blackpink Corporation immediately
entered into a forward exchange contract to sell $50,000. The fiscal year-end for Blackpink
Corporation is December 31. The Peso-Dollar exchange rates available on various dates are as follows:

November 1, 2021 December 31, 2021 January 31, 2022

Spot rate 40.00 40.25 40.50
30-day forward rate 40.10 40.35 40.55
60-day forward rate 40.20 40.40 40.65
90 day forward rate 40.30 40.45 40.60

1. How much is the FX gain or loss from the Hedge Instrument in 2021?
A. 12,500 gain
B. 12,500 loss
C. 2,500 loss
D. 2,500 gain

2. How much is the fair value of the forward contract asset/liability in the December 31, 2021
statement of financial position?
A. 2,500 liability
B. 2,500 asset
C. 12,500 liability
D. 0

3. How much is the gain or loss from the hedging activity in 2022?
A. 5,000 gain
B. 5,000 loss
C. 12,500 gain
D. 7,500 loss

Problem 4
On December 15, 2021, ABC Co. purchased goods from a Korean firm for 40,000 won, to be settled on
January 15, 2022 ABC Co. was concerned about the fluctuation in the Korean won, so on this date,
ABC Co. entered into a 30-day forward contract to buy 40,000 won for ₱49,600 from a bank at the
forward rate of ₱1.24.
Relevant rates are shown below:
Dec. 15, 2021 Dec. 31, 2021 Jan. 15, 2022
Spot rate 1.20 1.26 1.30
Forward rate 1.24 1.27 1.30

1. How much is the gain/loss from the hedge item in 2021?

A. 1,200 gain
B. 1,200 loss
C. 2,400 gain
D. 2,400 loss

2. How much is the net cash paid/received at the time of the settlement of the hedge item and
hedge instrument in 2022?
A. 52,000 paid
B. 49,600 received
C. 49,600 paid
D. 52,000 received

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Problem 5
On September 30, 2021, Army ordered goods from a Japanese firm. The purchase order is non-
cancelable. The purchase price is 5,000,000 yen with delivery and payment to be made on March 31,
2022. On September 30, 2021, Army entered into forward contract to buy 5,000,000 yen. On March 31,
2022, the Machinery was delivered.

September 30, 2021 December 31, 2021 March 31, 2022

Spot rate 0.38 0.42 0.46
Forward rate 0.39 0.44 ?

1. How much is the firm commitment balance in 2021?

A. 100,000 asset
B. 100,000 liability
C. 250,000 asset
D. 250,000 liability

2. How much is the initial cost of the inventory acquired on March 31, 2022?
A. 2,300,000
B. 1,950,000
C. 1,900,000
D. 2,200,000

Problem 6

On June 1, 2021, the company forecasted the purchase of 5,000 units of inventory from a foreign
vendor. The purchase would probably occur on September 1 and required the payment of 100,000
foreign currencies (FC).

On June 1, the company purchased a call option to buy 100,000 FC at a strike price of 1 FC = 0.55
during September. An option premium of P900 was paid. Assume the use of split accounting meaning
the changes in the value of the option will excluded from the assessment of hedge effectiveness.
Spot rates, strike price and option values are as follows:

June 1 June 30 July 31 September 1

Spot rate 0.53 0.552 0.57 0.575
Strike price 0.55
Fair value of option 900 1,350 2,400 2,500

On September 1, the company purchased 5,000 units of inventory at a cost of 100,000 FC. The option
was exercised on September 1.

1. How much is the FX gain or loss to be recognized in Profit and Loss on June 30?
A. 450
B. 250
C. 200
D. 0

2. How much is the cumulative FX gain/loss in equity as of July 31?

A. 2,000 gain
B. 2,000 loss
C. 1,800 gain
D. 750 loss

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3. Assuming that the policy of the company for a forecast transaction that results to the
recognition of a non-financial asset is to remove the accumulated OCI and include it in the
initial cost of the non-financial asset, how much is the cost of inventory on September 1?
A. 57,000
B. 60,000
C. 55,000
D. 57,500

Problem 7

On January 1, 2021, Sharon, Inc. paid P16,000 cash to acquire a put foreign exchange option for
1,000,000 baht, with an expiration date of December 31, 2021. The option hedges 2021’s forecasted
exporting sales of 1,000,000 baht. Sharon’s fiscal year ends June 30. Assume the use of split
accounting.

The relevant rates are as follows:

January 1, 2021 June 30, 2021 December 31, 2021

Spot Rate P1.20 P1.12 P1.15
Strike Price 1.19
Fair value of Put Option ? 81,000 ?

1. The foreign exchange gain or loss on option contract to be recognized in Profit/Loss on June
30, 2021 is:
A. 65,000 gain
B. 5,000 loss
C. 5,000 gain
D. 0

2. How much is the FX Gain/Loss to be recognized in OCI on December 31, 2021?

A. 41,000 gain
B. 30,000 gain
C. 30,000 loss
D. 41,000 loss

3. Assuming that the forecasted transaction was consummated on December 31, 2021, and the
put option was exercised, how much is the sales revenue to be recognized on December 31,
2021?
A. 1,150,000
B. 1,190,000
C. 1,120,000
D. 1,200,000

END

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