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19-1: d.
19-2: c.
19-3: d.
September 30:
Forex rate, September 1 P 5.61
Forex rate, September 30 5.59
Decrease in forex rate P 0.02
December 31:
Forex rate, October 1 P 5.59
Forex rate, December 30 5.62
Increase in forex rate P 0.03
19-4: c.
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19-5: a.
19-6: b.
19-7: a.
2012
Forex rate, 11/5/12 P 0.4295
Forex rate, 12/31/12 0.4245
Decrease in forex rate P 0.0050
Payable in foreign currency 50,000
Forex gain P 250
2013
Forex rate, 12/31/12 P 0.4245
Forex rate, 1/15/13 0.4345
Decrease in forex rate P 0.0100
Payable in foreign currency 50,000
Forex loss P (500)
19-10: b
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19-11: d. forex gain (loss) on purchase commitments is based on the changes in the forward rates.
On December 31, 2013, no changes in forward rates occurred, so no forex gains (losses) are to be
recognized on December 31, 2013 under both transactions.
19-12: b.
19-13: d.
19-14: b.
19-15: a.
19-16: a. The forex gain or loss (changes in forward rates) is offset by gain or loss in firm
commitment to purchase machinery. The hedge was perfect.
19-17: 1. a
June 30: 400,000 FC x (P1.381 P1.370) P(4,400)
July 31: 400,000 FC x (P1.385 P1.381) (1,600)
Net forex loss P (6,000)
2. c
June 30: (P2,600 P1,400) P1,200
July 31: [(P1.385 P1.375) x 400,000FC] P2,600 1,400
Net gain on option P2,600
Note that the option has expired and, therefore, there is no time value.
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3. a
Down payment (50,000 FC x P1.350) P 67,500
Balance due (400,000 FC x P1.370) 548,000
Cost of machinery P615,500
19-18: 1. a
FCA FCB
Number of FC in commitment:
P549,600/P1,200 458,000
P297,975/P0.685 435,000
Change in spot rate from commitment date to
Transaction date:
P1.200 P1.160 P 0.04
P0.685 P0.692 P 0.007
Gain (loss) on commitment:
458,000 FCA x P0.04 P(18,320)
435,000 FCB x P0.007 P 3,045
2. a
FCA FCB
Receivables at spot rate at transaction date:
458,000 FCA x P1.160 P531,280
435,000 FCB x P0.692 P301,020
Receivables at spot rate at settlement date:
458,000 FCA x P1.170 535,860
435,000 FCB x P0.720 313,200
Exchange gain (loss): 4,580 12,180
19-19: 1. a
2. d
Computations: Forward
Contract Option
Prior to transaction date:
Gain (loss) on commitment [100,000 x (P1.250 P1.320)] P (7,000) P (7,000)
Gain (loss) on hedging instrument:
Forward contract [100,000 x (P1.320 P1.250)] 7,000
Option [100,000 x (P1.320 spot 0 P1.250 strike)] 7,000
Gain (loss) excluded from hedge effectiveness:
Forward contract [100,000 x P1.270 P1.250)] (2,000)
Option (premium paid is all time value) - (1,200)
Effect on earnings prior to transaction date P (2,000) P (2,100)
19-20: a
12/01/13: A$70,000/P42,000 = 1.667 A$ to P1.00
12/31/13: A$70,000/P41,000 = 1.679 A$ to P1.00
19-22: a, The balance will not change, because it is denominated in Philippine peso.
19-23: a
P82,000/KRW 400,000 = P.205
The P82,000 is the amount of the peso payable to bank. This amount is computed using the
forward rate.
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Problems
Problem 19-1
Foreign Foreign
Currency Currency
Accounts Accounts Transactions Transactions
Receivable Payable Exchange Loss Exchange Gain
Problem 19-2
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Problem 19-2, continued:
Problem 19-3
a. No net exposure between November 1 and March 1. Michael, Inc. has hedged its foreign currency
purchase commitment with a forward contract to receive an equal number of foreign currency
units.
128
Problem 19-3, continued:
December 31: Firm commitment for merchandise 4,800
Forex gain 4,800
To record increase in fair value of the
Purchase commitment, and resultant
gain or the decrease in the forward rate.
Problem 19-4
129
Problem 19-4, continued:
August 1: Accounts payable 480,000
Forex loss ( 1,000,000 x P.03) 30,000
Cash ( 1,000,000 x P.51) 510,000
To record settlement.
Problem 19-5
Cash 1,240,000
Forward contract receivable 1,240,000
To record collection for forward contract.
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Problem 19-6
Problem 19-7
Contract 1:
131
Problem 19-7, continued:
Contract 2:
Problem 19-8
132
Problem 19-8, continued:
June 20: Inventory- Used Equipment 21,960
Cash 21,960
To record reconditioning the equipment
(30,000 FC x P0.732)
133
Problem 19-8, continued:
Schedule 1
June 15 June 30
Number of FC 400,000 400,000
Forward rate remaining time 1 FC P0.731 P0.737
Problem 19-9
Cash 164,000
Forward contract receivable 164,000
To record receipt of Phil. Pesos in settlement of the
forward contract receivable.
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Problem 19-10
Current assets:
Forward contract receivable (Siam hedge: in Phil. pesos) P 168,000
Forward contract receivable (Indon hedge: 10,000,000 x P.0077) 77,000
Forward contract receivable (Speculation in Yen: 200,000 x P.670) 134,000
Change in value of firm commitment 1,000
Current liabilities:
Accounts payable (Indon account: 10,000,000 x P.0077) P 77,000
Forward contract payable (Siam hedge: 100,000 Baht x P1.690) 169,000
Forward contract payable (Speculation in Yen: payable in Phil. pesos) 130,000
Problem 19-11
a. Entry to record the purchase of the call options on November 30, 2012:
135
Record the increase in the intrinsic value
of the options to other comprehensive income.
Problem 19-11, continued:
c. Entries to record March 1, 2013, expiration of options, the sales of option, and the purchase
of oil.
Cash 30,000
Call options 30,000
Record the sale of the call options.
d. June 1, 2013, entries to record the sale of the oil and other entries:
Cash 340,000
Sales 340,000
Record the sale of 10,000 barrels
of oil at P34 per barrel
OCI 30,000
Cost of goods sold 30,000
Reclassify into earnings the other
comprehensive income from the
cash flow hedge.
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137