Forward Contracts

Problem I Hedging an Exposed Liability – No Premium or Discount (“Undesignated Hedges” or Hedge

does not require Hedge Accounting”)

On October 17, 2017, Shirley Ireneo Co. purchased from a Thailand firm an inventory costing 10,000
baht. Payment is due on January 15, 2018. Also on October 17, Shirley Ireneo Co. entered into a foreign
exchange forward to buy 10,000 baht on January 15, 2018.

10/17/2017 12/31/2017 1/15/2018

Spot rate (baht) P1.30 P1.42 P1.40
Forward rate (baht) 1.30 1.42 1.40

1. The December 31, 2017 profit and loss statement, foreign exchange gain or loss due to hedged item
amounted to __________.

2. The December 31, 2017 profit and loss statement, foreign exchange gain or loss due to hedging
instrument-forward contract amounted to __________.

Problem II Hedging an Exposed Liability – With Premium Added (“Undesignated Hedges” or Hedge
does not require Hedge Accounting”)

On October 17, 2017, Aljon Lee, Inc. purchased from a Thailand firm an inventory costing 10,000 baht.
Payment is due on January 15, 2018. Also on October 17, Aljon Lee, Inc. entered into a foreign exchange
forward to buy 10,000 baht on January 15, 2018.

10/17/2017 12/31/2017 1/15/2018

Spot rate (baht) P1.30 P1.42 P1.40
Forward rate (baht) 1.36 1.43 1.40

3. What amount will Aljon Lee disclose as the fair value of the forward contract on December 31, 2017?
__________

4. What amount will Aljon Lee’s fair value of the forward contract on January 15, 2018? __________

5. What was the net impact on Aljon Lee, Inc.’s income in 2018 as a result of this hedge? __________
Problem III With Present Value: Hedging an Exposed Liability

Stark, 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, Stark 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. Stark has a June 30 year-end. In 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%. Use 360 days.

6. The foreign exchange gain or loss on hedging instrument (forward contract) on June 30 amounted to
__________.

7. The nominal value of the forward contract on June 30 amounted to __________.

8. The fair value of the forward contract on June 30 amounted to __________.

9. The net income effect on June 30 amounted to __________.

10. The foreign exchange gain due to hedging instrument (forward contract) on August 1 amounted to
__________.

Problem IV Hedging an Exposed Asset – “Undesignated Hedges” or Hedge does not require Hedge
Accounting

On April 4, 2017, Conrado Uberita Beauty Products delivered to a Pakistan firm inventory it sold for
100,000 rupees. Payment is due to be received on August 2, 2017. The company’s fiscal year ends June
30. Also on April 4, Conrado Uberita Beauty Products entered into a foreign exchange forward to sell
100,000 rupees on August 2, 2017.

4/4/2017 6/30/2017 8/2/2017

Spot rate (rupee) P.80 P.84 P.82
Forward rate (rupee) .77 .83 .82

11. What was the net impact on Conrado Uberita’s income in 2017 as a result of this hedge?
__________

12. The fair value of the forward contract on June 30, 2017? __________

13. The fair value of the forward contract on August 2, 2017? __________
Problem V Hedge an Unrecognized Foreign Currency Firm Purchase Commitment – Hedge Accounting
Applies

On October 2, 2017, Asser Tamayo, Inc. ordered a custom-built passenger van from a Japanese firm. The
purchase order is noncancelable. The purchase price is 1,000,000 yen with delivery and payment to be
on March 31, 2018. On October 2, 2018, Asser Tamayo, Inc. entered into a forward contract to buy
1,000,000 yens on March 31, 2018 for P.57. On March 31, 2018, the custom-built passenger van was
delivered.

10/2/2017 12/31/2017 3/31/2018

Spot rate (yen) P.50 P.56 P.57
Forward rate (yen) .53 .58 .57

Accounted as Fair Value Hedge

14. The December 31, 2017 profit and loss statement, net foreign exchange gain or loss (forward
contract and commitment) is __________.

15. The Firm commitment account balance as shown in December 31, 2017 balance sheet amounted to
__________.

16. What is the fair value of the forward contract on December 31, 2017? __________

17. What is the fair value of the forward contract on March 31, 2018? __________

18. The Firm Commitment account balance on March 31, 2018 amounted to __________.

19. The value of the equipment on March 31, 2018 amounted to __________.

Accounted for as Cash Flow Hedge

20. The December 31, 2017 profit and loss statement, foreign exchange gain or loss on hedged
item/commitment amounted to __________.

21. The December 31, 2017 foreign exchange gain or loss on the hedging instrument (forward contract)
amounted to __________.

22. The Firm commitment account balance amounted on March 31, 2018 amounted to __________.

23. The value of the equipment on March 31, 2018 assuming that Asser Tamayo, Inc. has elected to
apply PAS 39 par. 98(b), and adjust the cost of non-financial its acquired is __________.

Problem VI With Present Value: Hedging a Firm Purchase Commitment

On January 1, 2017, San Jose, Inc. enters into an agreement to purchase 1,000 watches for 5,000 foreign
currencies (FC) per watch, to be delivered on March 31, 2017. The contract meets the requirement of a
firm commitment. The resulting payable is expected to be settled on April 30, 2018. On February 11,
2017 (fiscal year ends February 28), San Jose, Inc. decides to hedge the foreign currency exposure enters
into a forward contract to exchange peso for FC 5,000,000 on April 30, 2017 (at a forward rate of FC
1.429:P1). The forward contract is designated as a hedge of the firm commitment to purchase the
watches on March 31, 2017 and to settle the balance owing on April 30, 2017. Effectiveness will be
assessed based on the forward rate. The relevant discount rate is 6%. Use 360 days.

The following table summarizes the key data:

Date Spot rate Forward rate of contract expiring 4/30/2017

FC per Peso FC per Peso
1/1/2017 1.450
2/1/2017 1.400 1.429
2/28/2017 1.400 1.415
3/31/2017 1.410 1.400
4/30/2017 1.360 1.360

24. What was the net impact on San Jose Inc.’s February 28, 2017 income statement as a result of this
fair value hedge? __________

25. What is the fair value of the firm commitment account on February 28, 2017? __________

26. What was the net impact on San Jose Inc.’s March 31, 2017 income statement as a result of this fair
value hedge? __________

27. What is the fair value of the forward contract on March 31, 2017? __________

28. What is the value of the inventory on March 31, 2017? __________

29. What is the carrying amount of accounts payable on April 30, 2017? __________

30. What is the fair value of the forward contract on March 31, 2017? __________

Problem VII Hedging an Unrecognized Foreign Currency Firm Sales Commitment – Hedge Accounting
Applies (Fair Value Hedge)

On October 12, 2017, George James, Inc. obtained a noncancelable sales order from a Thailand firm for
a custom-made statue of her beloved Fatima. The contract price was 100,000 baht. On October 12, 2017
George James entered into a foreign exchange forward to sell 100,000 baht in 100 days at the forward
rate of P3.15. The statue was delivered on December 31, 2017 and collection on January 20, 2018.

10/12/2017 12/11/2017 12/31/2017 1/20/2018

Spot rate (baht) P3.20 P3.00 P3.09 P2.97
Forward rate (baht) 3.15 2.98 3.08 2.97
31. What was the net impact on George James, Inc.’s December 11, 2017 income as a result of this fair
value hedge? __________

32. What are the reportable sales in the income statement in 2017 assuming that the firm commitment
account be closed to sales account? __________

33. On December 31, 2017, the foreign exchange gain or loss on the accounts receivable (AR) and firm
commitment (FC) amounted to __________.

34. On December 31, 2017, the foreign exchange gain or loss on the hedging instrument (forward
contract) amounted to __________.

35. What was the net impact on January 31, 2018 income as a result of this fair value hedge?
__________

Problem VIII Hedging a Forecasted Transaction – Hedge Accounting Applies

On December 1, 2017, a Philippine firm, Cris Espenilla, Inc. estimates that at least 5,000 units of
inventory will be purchased from a company in Taiwan during January of 2012 for 500,000 Nt dollars.
The transaction is probable, and it is to be denominated in Nt dollar. Sales of the inventory are expected
to occur in the six months following the purchase.

The company enters into a forward contract to purchase 500,000 Nt dollars on January 31, 2018 for
P1.01.

Spot rates and forward rates at the January 31, 2018, settlement were as follows (pesos per Nt dollar):

Spot rate Forward rate for 1/31/18

December 1, 2017 P1.03 P1.01
December 31, 2017 1.00 .99
January 31, 2018 .98

36. The December 31, 2017 foreign exchange loss on hedging instrument (forward contract) amounted
to __________.

37. On January 31, 2018, foreign exchange gain or loss on hedging instrument (forward contract)
amounted to __________.

38. Suppose that in February, the inventory sold for P600,000, what would be the gross profit assuming
any adjustments (if any) regarding exchange differential will be thru Cost of Goods Sold account?
__________

Problem IX With Present Value: Hedging a Forecasted/Anticipated Sales

San Antonio, Inc. and its subsidiary DJ Company both use the peso as their functional currency. SAN
Antonio wants to limit the effect of currency fluctuations in its group accounts in the next quarter, by
hedging forecasted foreign currency (FC) denominated sales by DJ Company. SAN Antonio expects DJ
Company to sell FC 13,500,000 of goods on June 30, 2017 (fiscal year ends March 31) Therefore, on
January 1, 2017, it enters into a six-month forward contract to sell FC 13,500,000 and receive P96,429
on June 30, 2017 (at a forward rate of 1 FC: P140). Since San Antonio and DJ Company both have the
same functional currency, San Antonio is permitted to hedge the subsidiary’s exposure. The relevant
discount rate is 6%.

The following table summarizes the key data:

Date Spot rate at Forward Rate

indicated date for 6/30/2017
1/1/2017 P1 : FC135 P1: FC140
3/31/2017 P1 : FC140 P1: FC142
6/30/2017 P1 : FC144 P1: FC144

39. What was the net impact on San Antonio, Inc.’s March 31, 2017 income as a result of this cash flow
hedge? __________

40. What is the fair value of the forward contract on March 31, 2017? __________

41. What is the foreign exchange gain or loss due to hedging instrument on June 30, 2017? __________

42. What is the reportable sales amount on June 30, 2017 assuming that any exchange differential will
be thru the Sales account? __________

Option Contracts

Problem X Hedging an Exposed Liability – “Undesignated Hedges” or Hedge does not require Hedge
Accounting

On November 1, 2017, Caltex Philippines took delivery from a Thailand firm of inventory costing 100,000
baht. Payment is due on January 30, 2018. Concurrently, Caltex Philippines paid P900 cash to acquire a
90-day call option for 100,000 Thailand baht.

11/1/2017 12/31/2017 1/30/2018

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 P900 P2,200 P3,000

43. What is the notional amount? _________

44. What is the intrinsic value and time value of option on December 31, 2017? __________
45. The foreign exchange gain or loss on option contract (hedging instrument) due to change in time
value on December 31, 2017 if changes in the time value will be excluded from the assessment of hedge
effectiveness should be __________

46. The foreign exchange gain or loss on option contract (hedging instrument) due to change in intrinsic
value on December 31, 2017 if changes in the time value will be excluded from the assessment of hedge
effectiveness should be __________

47. The foreign exchange gain or loss on option contract (hedging instrument) on December 31, 2017 if
changes in the time value will be included from the assessment of hedge effectiveness should be
__________

48. The December 31, 2017 net foreign exchange gain or loss amounted to __________

49. The January 31, 2018 net foreign exchange gain or loss amounted to ___________

Problem XI Hedging an Exposed Asset – “Undesignated Hedges” or Hedge does not require Hedge
Accounting

On December 16, 2017, Gumamela Conrading sold flowers to a Venezuelan firm. Payment of 1,000,000
Venezuelan Bolivar is due on February 14, 2018. Concurrently, Gumamela Conrading paid P4,000 cash to
acquire a 60-day put option for 1,000,000 Venezuelan Bolivar. Conrading follows calendar basis to
reporting.

12/16/2017 12/31/2017 2/14/2018

Spot rate (market price) P.16 P.15 P.147
Strike price (Exercise price) .16 .16 .16
Fair value of call option P4,000 P13,300 P13,000

50. What is the notional amount? __________

51. What is the intrinsic value (IV) and time value (TV) of option on December 31, 2017? __________

52. The foreign exchange gain or loss on option contract (hedging instrument) due to change in time
value on December 31, 2017 if changes in the time value will be excluded from the assessment of hedge
effectiveness should be __________

53. The foreign exchange gain or loss on option contract (hedging instrument) due to change in intrinsic
value on December 31, 2017 if changes in the time value will be excluded from the assessment of hedge
effectiveness should be __________

54. The foreign exchange gain or loss on option contract (hedging instrument) on December 31, 2017 if
the time value will be included from the assessment of hedge effectiveness should be __________

55. The December 31, 2017 net foreign exchange gain or loss amounted to __________
56. The February 14, 2018 net foreign exchange gain or loss amounted to __________

Problem XII Hedging a Foreign Currency Firm Sales Commitment

On December 31, 2017, Pedrito Corporation entered into a firm commitment to sell specialized
equipment to Nwoke Trading Company for 1 million foreign currencies (FC) to be delivered and settled
on March 1, 2018 at a strike price of P0.92. The premium for such an option on December 1, 2017, is
P0.009 per FC. Include the time value element in assessing hedge effectiveness or nonsplit accounting is
used. Following is the summary of the relevant data; (assume a 12% relevant discount rate)

12/1/2017 12/31/2017 3/1/2018

Spot rate (market price) P.92 P.93 P.90
Strike price (exercise price) .92 .92 .92
Option premium for 3/1/2018 P0.009 P0.006 P0.020

57. The December 31, 2017 foreign currency gain or loss due to hedged item/commitment should be
__________.

58. The December 31, 2017 foreign currency gain or loss due to hedging transaction (option contract)
should be __________.

59. The December 31, 2017 firm commitment account should be __________.

60. The 2017 impact on net income due to hedged item/commitment and hedging transaction (option
contract) should be (increase or decrease) __________.

61. The 2018 net income should be __________.

Problem XIII Hedging a Forecasted Purchases Transaction – Hedge Accounting Applies (Nonsplit
Accounting: Include the time value element in assessing hedge effectiveness)

On January 1, 2017, Buyco paid P17,000 cash to acquire a call foreign currency option for 1,000,000
Thailand baht, with an expiration date of December 31, 2017. The option hedges 2017 forecasted
importing purchases of 1,000,000 Thailand baht. At June 30, 2017, import purchases totaled 750,000
Thailand baht, of which 600,000 Thailand baht had been resold to Philippine customers. The firm’s fiscal
year ends June 30. Include the time value element in assessing hedge effectiveness or nonsplit
accounting is used.

1/1/2017 6/30/2017 12/31/2017

Spot rate (market price) P1.15 P1.18 P1.17
Strike price (exercise price) 1.14 1.14 1.14
Fair value of call option P44,000

62. What is the intrinsic value (IV) and time value (TV) of option on June 30, 2017? __________
63. What is the intrinsic value (IV) and time value (TV) of option on December 31, 2017? __________

64. The foreign exchange gain on option contract (hedging instrument) on June 30, 2017 to be
recognized in current earnings should be __________.

65. The foreign exchange gain on option contract (hedging instrument) on June 30, 2017 to be
recognized in OCI should be __________.

66. The foreign exchange gain or loss on current earnings on December 31, 2017 should be __________.

Hedging a Forecasted Purchases Transaction – Hedge Accounting Applies (Split Accounting: Exclude
the time value element is assessing hedge effectiveness)

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

It is anticipated that the inventory could be further processed and delivered to customers by early
October.

On June 1,, the company purchased a call option to buy 100,000 FC at a strike (option) price of 1FC =
P0.55 during September. An option premium of P900 was paid. Changes in the value of the option will
be 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 (market price) P0.53 P0.552 P0.57 P0.575
Strike price (exercise price) 0.55 0.55 0.55 0.55
Fair value of call option P900 P1,350 P2,400 P2,600

On September 1, the company purchased 5,000 units of inventory at a cost of 103,000 FC. The option
was settled/sold on September 1 at its fair value of P2,600.

After incurring further processing costs of P20,000, the inventory was sold for P95,000 on October 5.

67. The foreign exchange gain on option contract (hedging instrument) on June 30 is __________ OCI;
__________ Earnings.

68. The foreign exchange gain (loss) on option contract (hedging instrument) on July 31 is __________
OCI; __________ Earnings.

69. The foreign exchange gain (loss) on option contract (hedging instrument) on September 1 is
__________ OCI; __________ Earnings.

70. The cost of inventory that was sold on October 5 is __________.

71. The cost of sales assuming that OCI account be closed to cost of sales account on October 5 is
__________.

72. What is the adjusted gross profit arising from the above transactions? __________.

73. What is the net income effect of the above transactions? __________.

Problem XIV Hedging a Forecasted Sales Transaction – Hedge Accounting Applies (Split Accounting:
Exclude the time value element in assessing hedge effectiveness)

Rita Con, Inc. anticipates a sale to a foreign customer of 1,400,000 foreign currencies (FC) in six months.
On January 1, 2017, when the spot rate was P1 to FC 1.40, Rita Con purchased an option to sell FC
1,400,000 on June 30, 2017, for P979,021 (P1 : FC 1.43). The cost and the fair value of the option at
inception was P32,000.

The anticipated sale takes place on June 30, 2017, but in the amount of FC 1,300,000, FC 100,000 less
than expected. Exclude the time value element in assessing hedge effectiveness or split accounting is
used. The firm’s fiscal year ends in March 31.

The following table summarizes the key data: (note: exchange rates were expressed in an indirect
quotation)

1/1/2017 3/31/2017 6/30/2017

Spot rate (market price) FC 1.40: P1 FC 1.45: P1 FC 1.50: P1
Strike price (exercise price) FC 1.43: P1 FC 1.43: P1 FC 1.43: P1
Fair value of put option P32,000 P30,000 ?

74. The foreign exchange gain (or loss) on option contract (hedging instrument) on March 31 is
__________ OCI; __________ Earnings.

75. The foreign exchange gain (loss) on option contract (hedging instrument) on June 30 is __________
OCI; __________ Earnings.

76. The reportable sales amount once the actual transaction occurs on June 30 should be __________.

77. The deferred gain to be reclassified to earnings to reflect the ineffective portion of the intrinsic value
of the option contract due to overhedging, at the date that the occurrence of the remaining shortfall of
FC 100,000 of sales that was considered no longer probable should be __________.