FOREIGN CURRENCY TRANSACTIONS/TRANSLATION/HEDGING AND

DERIVATIVES
Problem 24. The A Company has the pesos at its functional currency. On October 16, 2016 A
ordered some inventory from a foreign supplier and agreed a purchase price of $160,000. The
inventory was received on November 15, 2016. At December 31,2016 the inventory remained on
hand and the trade payable balance for the inventory purchase remained outstanding. The supplier
was paid on January 27,2017 and the inventory was sold on January 31, 2017. The following
information about exchange rates is available:

October 16,2016 P1: $2.60

November 15,2016 P1: $2.50
December 31,2016 P1: $2.40
January 27, 2017 P1: $2.25

At what amount should the trade payable balance due to the supplier be presented in the statement
of financial position of A at December 31,2016?

A. P61,538 C. P64,000
B. P66,667 D P71,111

Problem 25. Virgo Company acquired 65% of the share capital of a foreign entity on August
31,2016. The fair value of the net assets of the foreign entity at that date was 8.24 million yen.
This value was 2.64 million higher than the carrying value of the net assets of the foreign entity.
The excess was due to the increase in value of non-depreciable land. The functional currency of
the entity is Philippine Peso. The financial year-end of the company is December 31,2016. The
exchange rates at August 31,2016 were Yen 2= Php 1 and Yen 1.25=Php 1 respectively. What
figure for the fair value adjustment should be included in the group financial statements for the
year ended December 31,2016?

A. P4,284,800 C. P2,678,000
B. P2,112,000 D. P1,320,000

Problem 26. On November 1, 2016, Galaxy Philippines took delivery from a Thailand firm of
inventory costing 225,000 baht. Payment is due on January 30,2017. Concurrently, Galaxy
Philippines paid P2,025 cash to acquire 90-day call option for 225,000 Thailand baht.

11/1/2016 12/31/2016 1/30/2017

Spot rate (market price) P1.20 P1.22 P1.23
Strike price (exercise price) 1.20 1.20 1.20
Fair value of call option P2,025 P4,950 P6,750

The gain or loss on option contract (hedging instrument due to change in time value on December
31,2016 if changes in the value will be excluded from the assessment of hedge effectiveness should
be: The gain or loss on option contract (hedging instrument) due to change in intrinsic value on
December 31,2016. If changes in the time value will be excluded from the assessment of hedge
effectiveness should be:
 A. P1,575 loss ; P4,500 gain C. P4,500 loss ; P2,925 gain
B. P2,925 gain ; p1,575 loss D P4,500 gain ;P1,575 gain

Problem 27. On November 1, 2016 SG Company entered into a firm commitment to acquire a
equipment. The equipment is customized for the operations of SG Company. The said commitment
is binding to both SG Company and the manufacturer. Delivery and passage of title would be on
February 28, 2016 at the price of $7,000 Singapore dollars. On the same date, to hedge against
unfavorable changes in the exchange rate, SG entered into a 120-day forward contract with China
Bank for $7,000 Singapore dollars. Exchange rate were as follows:

Rate for immediate delivery Rate for future delivery

Nov. 01, 2016 P36.25 P34.30
Dec. 31, 2016 37.40 36.70
Feb. 28, 2017 39.50 39.50

How much is the fair value of the derivative instrument on December 31, 2016?

A. P4,900 positive
B. P16,800 negative
C. No fair value
D. P16,800 positive
Problem 28. On December 31, 2016 a foreign subsidiary in Hongkong submitted the following
accounts stated in foreign Currency:

Total Assets HK$ 245,000

Total Liabilities 49,000
Common Stock 122,500
Retained Earnings 73,500

The exchange rate are: Current rate, P8.75 ; Historical rate, P8.10 ; Weighted average rate, P8.50.
Assuming that the retained earnings of the subsidiary in December 31, 2016 translated to peso is
P472,500. How much is the cumulative translation adjustment (dr)/(cr) on December 31, 2016?

A. P(250,250)
B. P127,400
C. P(127,400)
D. P250,250

Problem 29. On December 12, 2015, Winning Co. entered into a forward exchange contract to
purchase 100,000 euros in 90 days. The relevant exchange rates are as follows:

Spot rate Forward rate (for March 12,2016)

November 30,2015 P0.87 P0.89
December 12,2015 0.88 0.90
December 31,2015 0.92 0.93
The purpose of this forward contract is to hedge a purchase of inventory on account in November
30, 2015, payable in March 2016. How much is the fair value of the derivative instrument on its
inception date?

A. P89,000
B. P90,000 positive
C. –nil-
D. P90,000 negative

Problem 30. On December 1, 2016, M company made a credit sale to N Company. The amount of
sale was 200,000 Korean Won. M will collect the account on January 01, 2017. On December 1,
the spot rate was 25 Korean won for one Philippine peso. Also on December 1, M entered into a
futures contract to sell 200,000 Korean won on January 01, 2017 at a forward rate of 50 Korean
Won for one Philippine peso. If the spot rate for one Philippine peso on December 31, 2016 is 40
Korean won, how much is the foreign exchange gain or loss on hedging instrument- forward
contract?

A. P3,000 gain C. P1,000 gain

B. P3,000 loss D. P1,000 loss

31. Which of the following statements is FALSE?

A. On the balance sheet date, the account Forward Contract Receivable which is the receivable
from the bank is credited to recognize foreign exchange loss for the decrease in the forward
rate under a derivative instrument which is forward contract to purchase foreign currency.
B. Assuming CG Company a Philippine Company acquired an “at the money” foreign currency
call option contract, under a fair value hedge, if the spot rate decreases from transaction date
to year-end then the intrinsic value at year-end is also equal to the gain on derivatives as to
the effective portion which affects current earnings or profit and loss.
C. A Philippine Company sold and delivered merchandise on account to a customer in another
country in 2016, the transaction is denominated in that country’s local currency to be settled
in 2017, the said transaction is not automatically a hedged item even if the bid spot rate is
decreasing.
D. On the settlement date, in the books of XYZ Company a Philippine Company with
importing transaction which is also a hedged item and a forward contract to buy foreign
currency which is also a hedging instrument, the amount of cash debited is measured in
pesos but denominated in a foreign currency.

32. Which of the following statements is FALSE?

A. On the transaction date of a forward contract to sell foreign currency, both the receivable
from the bank and the payable to the bank are measured in pesos, but only the liability to
the bank is denominated in a foreign currency.
B. If at given date whether transaction date, balance sheet date or settlement date, the spot
price is higher than the strike price then an option contract “to buy” is said to be “in the
 money”, a situation whereby the holder may exercise his right to buy since it is favorable
to him.
C. The premium paid in acquiring an option contract to buy or sell a foreign currency within
specified days at a specified price is always equal to the fair value of the derivative asset
on the first day, it may also be equal to the time value or ineffective portion on the first day
of the contract.
D. A transaction involving a 120-day forward contract derivative instrument on October 1,
2016 used in a speculation to sell foreign currency for a price set today, delivery of which
is on a specified future date, results to a gain at year-end if the forward rate increases from
the 120-day futures on the transaction date to the 30-day futures on the balance sheet date.

SPECIAL TOPICS

Problem 68. Banks J and K (the parties) agreed to combine their corporate, investment banking,
asset management and service activities by establishing a separate vehicle (Bank Q). Both parties
expect the arrangement to benefit them in different ways. (IFRS 11)

Transactions for year 2015:

Investments: Bank J P6,250,000

Bank K P6,250,000

Revenues P1,250,000
Cost and Expenses P 750,000
Dividends Paid- Bank Q P -

What is the interest of Bank J in the joint arrangement at December 31, 2015?

A. P6,250,000
B. P6,450,000
C. P6,050,000
D. P5,000,000

Problem 69. An insurance contract can contain both deposit and insurance elements. An example
might be a reinsurance contract where the cedent receives a repayment of the premiums at a future
time if there are no claims under the contract. Effectively this constitute a loan by the cedent that
will be repaid in the future. IFRS 4 requires that

A. Each payment by the cedent is accounted for as a loan advance and as a payment for
insurance cover.
B. The insurance premium is accounted for as a revenue item in the statement of income.
C. The premium is accounted for under PAS 18
D. The premium paid is treated purely as a loan, and it is accounted for under PAS 39

Problem 70. An operator builds a road at a cost of P100 M, the fair value of construction services
is P110 M, the total operating costs of the road are P70 M and total cash inflows over the life of
the concession are P200 M. Applying IFRIC 12, Service Concession Arrangement, by how much
is total revenue under the intangible asset model higher or lower than the total revenue under the
financial asset model over the life of the concession?

A. No difference
B. P10M
C. P110M
D. (P110M)