c
 

m ? On November 3, 20mm, Simmer Company invests P2,000,000 in a convertible debt instrument issued by Princess
Company that pays fixed interest of 7% and that can be converted into m0,000 shares in Princess Company in
five years at Simmer͛s option Otherwise the debt will pay P2,000,000 at maturity At the time of acquisition the
conversion option has a fair value of P260,000 On December 3m, 20mm the debt instrument has a fair value of
Pm,750,000 and the conversion option has a determinable fair value of P300,000

^
 What amount of derivative asset to be reported separately in the December 3m, 20mm statement of
financial position assuming the host contract (debt instrument) was classified as trading securities r initial
recognition?
a )? None c )P260,000
b )? P250,000 d ) P300,000

^

?What amount of derivative asset to be reported separately in the December 3m, 20mm statement of
financial position assuming the host contract (debt instrument) was classified as available for sale at initial
recognition?
c )? None c )P260,000
d )? P250,000 d ) P300,000

2 ? On October m, 20mm, Madison Company invests P3,000,000 in a bond whose interest payments are linked to the
price of gold On October m, 20mm, the derivative contract has a fair value of Pm50,000 Madison Company
classified the bond as available for sale
What is the carrying value of the available for sale investment on October m, 20mm?
a )? P m50,000 c ) P3,000,000
b )? P2,850,000 d ) P3,m50,000

3 ?
Company purchased a one-year debt instrument issued by B Finance Company for its principal amount of
P2,000,000 on January 2, 20m0 B Finance Company will make no interest payments during the life of the
instrument At maturity
Company will receive the principal amount plus any increase in •
? •? 
P500,000 since the issue date At the time of initial recognition,
Company classifies the debt instrument as
held-to-maturity The fair value of an at-the-money option maturing in two years is P95,238 on January 2, 20m0
while the fair value on December 3m, 20m0 is Pm20,000
What amount of derivative asset should
Company recognize separately on January 2, 20m0?
a )? None c ) Pm20,000
b )? P95,238 d ) Pm,904,762

4 ? On January 2, 20m0, S Company issues its P5,000,000 face value at par with a term of 5 years The debt is also
redeemable at par However, the loan agreement provides that during the term of the loan S Company will
either receive or pay an amount based on the changes in the share price of B Company, an unrelated listed
entity The reference point being the market price of B Company at the date of issue of the date instrument At
the time of issue the fair value of the payment linked variable is P70,000, its fair value on December 3m, 20m0, is
P95,000 and Pm20,000 on December 20mm
What amount of derivative asset/liability should be accounted for separately on January 2, 20m0?
a )? None c ) P95,000
b )? P70,000 d ) Pm20,000
5 ? P Mining Company issues a debt instrument with a face value of P4,000,000 and contingent interest payments in
addition to a guaranteed minimum interest payment of 4% per year The contingent payments are linked to the
price of gold such that additional interest payments of 5% would be paid for every Pm,250 increase in gold price
above Pm3,000 The price of gold at issue (January 2, 20m0) was Pm5,500 The marked rate of fixed interest loan
is 5% The fair value of the embedded swap are the following: Pm00,000 on January 2, 20m0; P85,000 on
December 3m, 20mm; P75,000 and P95,000 on December 3m, 20m2
What amount embedded derivative should be separately accounted on January 2, 20m0?
a )? None c ) P85,000
b )? P75,000 d ) Pm00,000

6 ? On March 3m, 20m0, Square Company entered into a lease contract that has a rent adjustment clause based on
inflation The contract requires Square Company to pay a monthly rent of Pm00,000 for a period of five years On
March 3m, 20m0, the fair value of the derivative contract is P20,000 and on December 3m, 20m0, its fair value of
P40,000
What amount of derivative Square Company should recognize separately in its December 3m, 20m0 balance
sheet?
a )? None c ) P40,000
b )? P20,000 d ) P60,000

7 ? On January 2, 2008, Cinderella Company enters into a forward contract to purchase on January 2, 20m0, a
specified number of barrels of oil at a fixed price Cinderella Company is speculating that the price of oil will
increase and plans to net settle the contract if the price increases Cinderella Company does not pay anything to
enter into a forward contract on January 2, 2008 Cinderella Company does not designate the forward contract
as a hedging instrument At the end of 2008, the fair value of the forward contract has increased to P400,000
and at the end of 2009 its fair value has declined to P350,000
What amount of forward loss should Cinderella Company recognize at the end of year 2009?
a )? None c ) P350,000
b )? P50,000 d ) P400,000

8 ? On January 3m, 20mm, May Company enters into a contract with April Company to receive the fair value of 2,000
of May Company͛s own outstanding ordinary shares as of February m, 20m2 in exchange for a payment of
P2m2,000 in cash or an equivalent of Pm06 per share on February m, 20m2 The contract will be settled net in
cash At the time of the contract, shares of May Company are selling at Pm00 per share; the present value of the
forward contract is zero On December 3m, 20mm, shares of May Company are selling at Pmm5 and the forward
contract has a fair value of Pm3,800 On February m, 20m2, shares of May Company are selling at Pm08 and the
fair value of the forward contract is P4,000

^
 What amount should May Company recognize as forward asset on January 3m 20mm?
a )? None c ) Pm3,800
b )? P 4,000 d ) m7,800

^

What amount of gain on forward contract should May Company recognize on December 3m, 20mm?
c )? None c ) P9,800
d )? P 4,000 d ) Pm3,800
9 ? On March m, 20mm Cold Company enters into a contract with Hot Company to pay the fair value of 4,000 of Cold
Company͛s outstanding shares as of February 28, 20m2 in exchange for P440,000 of Pmm0 per share on February
28, 20m2 The contract will be settled net in cash
On March m, 20mm, Cold Company shares are selling at Pm00 per share, the fair value of the forward contract is
nil On December 3m, 20mm Cold Company shares are selling at Pmm5 and the forward contract has a fair value of
P50,000 On February 28, 20m2 Cold Company shares are selling at Pmm2 50 and the forward contract has a fair
value of Pm0,000

^
 What amount should Cold Company recognize as forward liability on March m, 20mm?
a )? None c ) P40,000
b )? Pm0,000 d ) P50,000

^

 What amount gain or loss on forward contract should Cold Company recognize on December 3m,
20mm?
a )? None c ) P40,000
b )? Pm0,000 d ) P50,000

m0 ?On December m5, 20mm Loving Company entered into a call option contract that gives the right but not an
obligation to purchase 3,000 shares issued by Caring Company on April m5, 20m2 at an exercise price (strike
price) of Pm00 per share Loving Company paid P3 for each option shares
On December 3m, 20mm, market data suggests that Loving Company could sell each option for P4 and Caring
Company͛s share are selling at Pm00 per share On April m5, 20m2, the fair value of each option is Pm0 and Caring
Company͛s share are selling at Pmm0 per share

^
 What amount of derivative asset should Loving Company recognize on December m5, 20mm?
a )? None c ) Pm2,000
b )? P9,000 d ) P30,000

^

If Loving Company exercised its right on April m5, 20m2, what should be the initial cost of its new
investment assuming the new investment is classified as available-for-sale?
a )? P300,000 c ) P3m2,000
b )? P309,000 d ) P330,000

mm ?On September m, 20mm, Jaguar Company enters into a contract with Lynx Company that gives Lynx Company the
right to receive and Jaguar Company the obligation to pay the fair value of 5,000 of Jaguar͛s own ordinary shares
as of January 3m, 20m2, if Lynx Company exercises the right The contract will be settled net in cash If Lynx
Company does not exercise its right, no payment will be made

Below is the pertinent relevant information:

Sept m, 20mm Dec 3m, 20mm Jan 3m, 20m2
Market value of shares Pm02/share Pm06/share Pm06/share
Fair value of options P25,000 Pm5,000 Pm0,000

^
 What amount of call option obligation should the company recognize on September m, 20mm?
a )? None c ) Pm5,000
b )? P m0,000 d ) P25,000
 ^

 What amount of gain on call option obligation should the company recognize on December 3m,
20mm?
a )? None c ) Pm0,000
b )? P5,000 d ) Pm5,000

^
 What amount of cash should the company pay upon the exercise of the option?
a )? None c ) Pm0,000
b )? P5,000 d ) Pm5,000

m2 ?On August m, 20mm, Polar Company enters into a contract with Solar Company that gives Polar Company the right
to sell, and Solar Company the obligation to buy the fair value of 4,000 shares of Polar Company͛s own ordinary
share outstanding as of January 3m, 20m2 at a strike price of P329,000 (P98 per share) on January 3m, 20m2, if
Polar Company exercises the right The contract will be settled net in shares; however, if Polar Company does
exercise the right, no payment will be made

Below is pertinent relevant information:

Aug m, 20mm Dec 3m, 20mm Jan 3m, 20m2
Market Value per share Pm00/share P95/share P95/share
Fair Value of options P20,000 Pm6,000 Pm2,000

If the option is exercised, shareholder͛s equity of Polar Company is being reduced by?
a )? None c ) Pm2,000
b )? P4,000 d ) Pm6,000

m3 ?On February m, 20mm, Parish Company enters into a contract with Flourish Company that gives Flourish Company
the right receive and Parish Company to pay the fair value of 3,000 of parish Company͛s ordinary outstanding
shares as of January 3m, 20m2 in exchange for P294,000 in cash (P98 per share) on January 3m, 20m2, if Flourish
Company exercises the right The contract will be settled net in shares, however, if Flourish Company does
exercise the right, no payment will be made

Below is pertinent relevant information:

Feb m, 20mm Dec 3m, 20mm Jan 3m, 20m2
Market price per shares Pmm/share P95/share P95/share
Fair value of options Pm5,000 Pm2,000 P9,000

 ^
 What amount of put option liability should parish Company recognize on February m, 20mm?
a )? None c ) Pm2,000
b )? P 9,000 d ) Pm5,000

^

What is the carrying value of the option liability in the December 3m, 20mm statement of financial
position?
a )? None c ) Pm2,000
b )? P 9,000 d ) Pm5,000
m4 ?On January 2, 20m0, Garamond Company received a 2-year Pm,200,000 loan, with interest payments occurring at
the end of each year and the principal to be repaid on December 3m, 20mm The interest rate for the first year is
the prevailing market rate of 8% and the rate in 20mm will be equal to the market interest rate on January 2,
20mm In conjunction with the loan, Garamond Company enters into an interest rate swap agreement to receive
a swap payment based on the amount of the loan if the interest rate is greater than 8% and make a swap
payment if the rate is less than 8% The interest swap payment will be made in December 3m, 20mm
If the interest rate on January 2, 20mm is 7%, what amount of equity reserve should Garamond Company
recognize in its December 3m, 20m0 shareholders͛ equity?
a )? None c ) Pm20,000
b )? Pmm,2m4 d ) Pm3m,2m4

m5 ?Strenuous Company has an investment in equity instrument classified as an available for sale investment with a
historical cost of P500,000 On November m, 20mm, Strenuous Company entered into a derivative futures
contract to hedge the fair value of the investment All the conditions for hedge accounting are met, and the
hedge qualifies as a fair value hedge because it is a hedge of an exposure to changes in the fair value of
recognized asset On December 3m, 20mm the fair value of the hedge item was P460,000, based on quoted
market bid prices and the fair value of the derivative (hedging instrument) was P36,000

^
 What amount should be charged against income Strenuous Company recognized in 20mm related to
the hedged item (investment in available for sale)?
a )? None c ) P36,000
b )? P4,000 d ) P40,000

^

What amount should be credited to income Strenuous Company recognized in 20mm related to the
hedging instrument?
a )? None c ) P36,000
b )? P4,000 d ) P40,000

m6 ?xodus Company and its subsidiary, Genesis Company, both use the Philippine Peso as their functional currency
xodus Company wants to limit the effect of currency fluctuations in its group accounts in the next quarter, by
hedging forecasted Yen denominated sales by Genesis xodus Company expects Genesis Company to sell
¥m2,000,000 of goods on June 30, 20mm Therefore, on January m, 20mm, it enters into six-month forward contract
to sell ¥m2,000,000 and receive P450,000 on June 30, 20mm (at a forward rate of 357 for a ¥m)

The following table summarizes the following information:

Date Spot Rate Forward Rate
January m, 20mm Pm = ¥ 370 Pm = ¥ 375
March 3m, 20mm Pm = ¥ 375 Pm = ¥ 380
June 30, 20mm Pm = ¥ 385 Pm = ¥ 385

Market rate of interest for similar transaction is 6% per annum

What amount related to the forward contract should be reported in the shareholder͛s equity for the quarter
ended March 3m, 20mm interim financial statement?
a )? None c ) P 6,089
b )? P5,9mm d ) Pm2,000
 
 c
 

    
 

m  ^m ʹ A --------------------------------------------- Prob 34-m

 ^2 ʹ D --------------------------------------------- 34-m
  B --------------------------------------------- 34-2
  B --------------------------------------------- 34-3
  B --------------------------------------------- 34-4
  D --------------------------------------------- 34-5
  A --------------------------------------------- 34-7
  B --------------------------------------------- 34-8
  ^m ʹ A --------------------------------------------- 34-9
 ^2 ʹ D --------------------------------------------- 34-9
  ^m ʹ A --------------------------------------------- 34-mm
 ^2 ʹ D --------------------------------------------- 34-mm
m
 ^m ʹ B --------------------------------------------- 34-m3
 ^2 ʹ C --------------------------------------------- 34-m3
mm  ^m ʹ D --------------------------------------------- 34-m6
 ^2 ʹ B --------------------------------------------- 34-m6
 ^3 ʹ C --------------------------------------------- 34-m6
m  C --------------------------------------------- 34-m9
m  ^m ʹ D --------------------------------------------- 34-2m
 ^2 ʹ C --------------------------------------------- 34-2m
m  B --------------------------------------------- 34-22
m  ^m ʹ D --------------------------------------------- 34-23
 ^2 ʹ C --------------------------------------------- 34-23
m  B --------------------------------------------- 34-24



a
 •
 
!a