APR4 Unit -V (Finals) PDF

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UNIT V – ACCOUNTING FOR DERIVATIVES ANDHEDGING TRANSACTIONSSPECULATION – to buy currencyProblem 1: (adapted)On November 1, 2020, Belly Corporation entered into forward exchange contracts to purchase a US$ 20,000 in 90 days for delivery on February 1, 2021. The fiscal year end for Belly Corporation i...

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UNIT V – ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS SPECULATION – to buy currency Problem 1: (adapted) On November 1, 2020, Belly Corporation entered into forward exchange contracts to purchase a US$ 20,000 in 90 days for delivery on February 1, 2021. The fiscal year end for Belly Corporation is December 31. The exchange rates available on various dates are as follows:

Spot rate 30 day forward rate 60 day forward rate 90 days forward rate

Nov. 1, 2020 P 40.00 40.10 40.15 40.20

Dec. 31, 2020 P 40.25 40.35 40.40 40.45

REQUIRED: Prepare journal entries 2020 Nov. 1 FC Receivable ( 20,000 x 40.20) Peso Payable To record contract to buy US$ 20,000 at 40.20 forward exchange rate for 90 days Dec. 31

2021 Feb. 1

Feb. 1, 2021 P 40.40 40.50 40.70 40.65

804,000 804,000

FC receivable Forex gain To recognized forex gain for the increase in forward rate ( 40.35 – 40.20= 0.15 x 20,000)

3,000 3,000

Cash ( FC) ( $20,000 x 40.40) Forex Gain ( 40.40 – 40.35 = .05 x 20,0000) FC Receivable To record receipt of foreign currency and recognize forex gain on increase in exchange rate ( 4.40 – 4.35 = .05 x 20,000)

808,000

Peso Payable Cash To record payment to exchange dealer.

804,000

1,000 807,000

804,000

OR 2020 Dec. 31

2021 Feb. 1

•

Forward contract Gain on forward contract Increase in forward rate ( 4.35 – 4.20 = 0.15 x 20,000) Cash – foreign currency Cash – local currency Forward contract Gain on forward contract To record receipt of foreign currency in exchange for cash payment to exchange dealer.

Statement of Financial Position Presentation on December 31, 2020: FC Receivable 807,000 Less: Peso Payable 804,000 Forward contract ( fair value – asset ) 3,000

3.,000 3,000

808,000 804,000 3,000 1,000

Problem 2: On December 1, 2020, PBC Corporation entered into forward exchange contracts for speculative purposes in anticipation for a gain to sell US$ 10,000 in 90 days for delivery on March 1, 2021. The fiscal year end for PBC Corporation is December 31. The exchange rates available on various dates are as follows:

Spot rate 30 day forward rate 60 day forward rate 90 days forward rate 120 days forward rate

Nov. 1, 2020 P 40.00 40.10 40.15 40.25 40.30

Dec. 31, 2020 P 40.25 40.35 40.40 40.45 40.50

Feb. 1, 2021 P 40.35 40.50 40.70 40.65 40.70

Q1: How much is the forex gain or (loss) on December 31, 2020? ______________ Q2: How much is forex gain or (loss) on March 1, 2021? ________________ Q3: How much is the peso receivable balance as of March 1, 2021? _____________ Q4: How much is the foreign currency payable as of March 1, 2021? ____ _____ Q5: How much is the net forex gain or loss? _________________ Q6: prepare journal entries for 2020 and 2021: 2020 Dec. 31 Peso Receivable ( 10,000 x 40.25) FC Payable to sell US$ 10,000 on March 1, 2021 Dec. 31

2021 March. 1

402,500 402,500

Forex loss FC Payable Increase in forex ( 4.40 – 4.25 = 0.15 x 10,000)

1,500

FC Payable Forex Gain decrease in forex ( 4.40 – 4.35 = .05 x 10,000)

500

1,500

500

Cash Peso receivable Settlement

402,500

FC payable Cash (FC) Delivery of foreign currency

403,500

402,500

403,500

Problem 3: On December 1, 2020, MM Corporation entered into a 120-day forward contract to purchase 250,000 US dollars for speculative purposes. MM Corporation fiscal year ends on December 31. The exchange rates as follows: Spot rate Forward rate ( 3/31/2021) December 1, 2020 P 45.00 P 45.50 December 31, 2020 46.00 46.50 January 30, 2021 45.60 45.30 March 31, 2021 45.10 Q1. How much is the forex gain or loss to be reported from this forward contract in 2020? a) P 225,000 b) P 250,000 c) P 300,000 d) P 350,000 Q2.

How much is the forex gain or loss to be reported from this forward contract in 2021? a) P 225,000 b) P 250,000 c) P 300,000 d) P 350,000

Hedging Instruments = Forward Contract Problem 4: The following data applies to VES Company’s purchase of 45,500 Belguim francs under a forward contract dated November 1, 2020, for delivery on January 31, 2021: Nov. 1, 2020 P 55.75 P 51.30 P 57.65 P 54.25

Spot rates 30-day forward rate 60-day forward rate 90-day forward rate

Dec. 31, 2020 P 53.90 P 56.15 P 52.30 P 55.45

Jan. 31, 2021 P 54.50 P 53.20 P 55.75 P 52.10

VES entered into the forward contract to speculate in the foreign currency. REQUIRED: 1. Journal entries 2. The amount of gain or loss that should be reported in the income statement for the year ended December 31, 2020 from this forward contract Solution: 2020 Nov. 1

Dec. 31

2021 Jan. 31

FC Receivable Peso payable (45,500 x 54.25)

2,468,375 2,468,375

FC Receivable Forex gain #

86,450 86,450

Cash Loss on FC FC Receivable #

2,479,750 75,075

FC payable Cash

2,468,375

2,554,825

2,468,375

Problem 5; WIND Corp. entered into a forward contract to hedge a sale of inventory in October 26, 2020 to be collected on January 24, 2021, 72,000 FC in 90 days. The relevant exchange rates are as follows: Spot rate P 52.73 52.82 52.94

October 26, 2020 December 31, 2020 January 24, 2021

Forward rate ( Jan. 1, 2021) P 52.77 52.89

What is the net forex gain (loss) from this transaction and hedge that will be reported on Wind Corp.’s 2020 statement of Income? a) (P 2,160)

b) P 6,480

c) (P 8,640)

d) P 15,120

Problem 6: On August 3, 2020 DTD Company entered into a noncancellable purchase agreement with a RRR Company , foreign company, involving a custom-made machine. DTD took delivery of the machine on December 1, 2020 ( 120 days later). The purchase price was 100,000 foreign currency units (FCUs), which DTD remitted to the RRR Company on January 30, 2021. Direct exchange rates on the respective dates are as follows: Aug. 3, 2020 P 1.60 P 1.60

Spot rate Forward rate

Dec. 1, 2020 P 1.64 P 1.64

Dec. 31, 2020 P 1.67 P 1.67

Jan. 30, 2021 P 1.70 P 1.70

Also on August 3, 2020, DTD entered into a 180-day forward contract to buy 100,000 FCUs. Q1. What should be the capitalized cost of machinery? a) P 160,000 b) P 164,000 c) P 167,000

d) P 170,000

Q2. What is the foreign exchange gain or loss recognized in earnings for 2016 on the foreign currency commitment. a) P 0 b) P 4,000 gain c) P 4,000 loss d) P 7,000 gain Problem 7 :

CS Company sold for 111,200 euros to a customer in France on November 2, 2020. Collection in euros was due on January 31, 2021. On the same date, to hedge this foreign currency exposure, CS company enters into a forward contract to sell 111,200 euros to Metro Bank for delivery on January 31, 2021. Exchange rates for euros on different dates are as follows: Nov. 2, 2020 Dec. 31, 2020 Spot rates 81.9 80.7 30-day forward rate 82.3 80.4 60-day forward rate 81.8 80.3 90-day forward rate 80.6 81.6 120-day forward rate 80.1 81.4 REQUIRED: 1. Journal entries Solution: 2020 Nov. 1 Account Receivable Sales ( 81.9 x 111,2000) To record sale. 1

Dec.

31

31

2021 Jan. 31

Jan. 31, 2021 80.1 83.9 82.6 83.4 82.8

9,107,280 9,107,280

Forward Contract Receivable (80.60 x 111,200) Forward Contract payable (fc) Forward contract to sell euros to Metro Bank.

8,962,720

Forex loss ( 80.7 - 81.9 = 1.2 x 111,200) Accounts Receivable To adjust accounts receivable to year-end spot rate

133,440

Forward Contract payable (fc) Forex gain (80.6 – 80.4 = 0.2 x 111,200) To record the decrease in forward rate. Foreign Currency (80.1 x 111,200) Forex loss Accounts Receivable (9,107,280-133,440) Receipt of foreign currency from customer

8,962,720

133,440

22,240 22,240

8,907,120 66,720 8,973,840

31

31

Forward Contract payable (8,962,720 – 22,24) Forex gain Foreign currency (80.1 x 111,200) To record delivery of foreign currency to Metro Bank

8,940,480

Cash Forward Contract Receivable (FC) To record settlement with Metro Bank

8,962,720

33,360 8,907,120

8,962,720

2. What amount will affect profit or loss regarding the hedge item on the financial statement date in 2020? 3. What amount will affect profit or loss regarding the hedging instrument the financial statement date in 2021? 4. As a result of all foregoing transactions, what amount will affect current earnings on the settlement date in 2021?

Note: if memo entry may be made to record the forward contract, the journal entries relating to Forward Contract would be: 2020 Nov. 1 Memo Entry The company entered into a forward contract with Metro Bank to sell euros on January 31, 2021 Dec. 31

2021 Jan. 31

Forward Contract Forex gain (80.6 – 80.4 = 0.2 x 111,200) To record the decrease in forward rate. Cash Forward contract Forex gain (80.4 – 80.1 = 0.3 x 111,200) Foreign currency (80.1 x 111,200) To record settlement with Metro Bank

22,240 22,240

8,962,720 22,240 33,360 8,907,120

Problem 8: On December 1, 2020, Strike Company entered into a firm commitment to acquire a machinery from Brazil Company. Delivery and passage of title would be on March 31, 2021 at the price of 37,800 euros. On the same date, to hedge against unfavorable changes in the exchange rate, Strike entered into a 120-day forward contract with BDO to buy 37,800 euros. Exchange rates were as follows: December 1, 2020 December 31, 2020 March 31, 2021 REQUIRED: 1. Journal Entries if accounted for as: a) fair value hedge b) cash flow hedge

Spot rate P 96.50 P 97.25 P 99.70

Forward rate P 94.30 P 96.50 P 99.70

Solution: 2020 Dec. 1 31

2021 Mar 31

. 31

FAIR VALUE

HEDGE Hedge item

Hedge Instru4,54ment 202 Dec. 1

No entry Loss firm Commitment 83,160 Firm commitment To recognize the change in fair value of firm commitment (96.50-94.30)

Loss on firm commit. 120,960 Firm commitment To recognize the change in fair value of firm commitment (99.70 - 96.50)

Machinery Firm Commitment Cash (FC) To record receipt of Machinery

31 83,160

Mar 31 120,960

Memo Entry Forward contract 83,160 Gain on FC To recognize the change in fair value of firm commitment

Cash (FC) Forward contract Gain on FC Cash (local currency) To record settlement With BDO.

83,160

3,768,660 83,160 120,960 3,564,540

3,564,540 204,120 3,768,660

OR FAIR VALUE

HEDGE Hedge item

2020 Dec. 1

31

2021 Mar 31

Hedge Instrument 2020 Dec. 1

No entry

Loss firm Commitment Firm commitment #

83,160

Loss on firm commit. Firm commitment # Merchandise Inventory Firm Commitment Cash (C) #

120,960

31 83,160

2021 Mar 31 120,960

3,564,540 204,120

. 31 3,768,660

FC Receivable FC payable FC Receivable Gain on FC #

FC payable (/fc) Cash(local currency) # Cash (Foreign currency) FC Receivable Gain on FC #

3,564,540 3,564,540 83,160 83,160

3,563,540 3,564,540 3,768,660 3,647,700 120,960

b) cash flow hedge Hedge item 2020 Dec. 1 31

2021 Mar 31

. 31

Hedge Instru4,54ment 202 Dec. 1

No entry Loss firm Commitment 83,160 Firm commitment To recognize the change in fair value of firm commitment (96.50-94.30)

Loss on firm commit. 120,960 Firm commitment To recognize the change in fair value of firm commitment (99.70 - 96.50) Machinery 3,564,540 Firm Commitment 204,120 Cash (FC) To record receipt of Machinery

31 83,160

Mar 31 120,960

3,768,660

Memo Entry Forward contract 83,160 Gain on FC To recognize the change in fair value of firm commitment

Cash (FC) Forward contract Gain on FC Cash (local currency) To record settlement With BDO.

83,160

3,768,660 83,160 120,960 3,564,540

OR Hedge item 2020 Dec. 1

31

2021 Mar 31

Hedge Instrument 2020 Dec. 1

No entry

No entry

31

Merchandise Inventory Cash (FC) To record purchases

2021 Mar 31

3,768,660 3,768,660

. 31

FC Receivable FC payable

3,564,540

FC Receivable OCI -FC #

83,160

3,564,540

83,160

FC payable (/fc) Cash(local currency) # Cash (Foreign currency) FC Receivable OCI -FC #

3,563,540 3,564,540 3,768,660 3,647,700 120,960

OPTION CONTRACTS Call option – Hedge an exposed liability Problem 9: (adapted) On December 1, 2020, Hope Company paid P 3,000 to purchase a 90-day call option for 500,000 Thailand baht. The option purpose is to protect an exposed liability off 500,000 baht relating to a purchase of merchandise received on December 17, 2020 and to be paid on March 1, 2021. Relevant rates and market values at different dates are as follows: Dec.1, 2020 P 1.20 1.20 P 3,000

Spot rate (Market price ) Strike price (exercise price) Fair value of call option

Dec. 31, 2020 P 1.28 1.20 P 42,000

March 1, 2021 P 1.27 1.20 P 35,000

Q1: What is the Forex contract value – option as of December 31, 2020? _________________ Q2: What is the time value of option on December 11, 2020?

_________________

Q3: What is the intrinsic value of option on December 31, 2020? __________________ Q4: What is the time value of option on December 31, 2020?

____________________

Q5: What is the time value of option on March 1, 2021? ________________________ Q6. What is the intrinsic value of option on March 1, 2021? ______________________ Journal entries: FAIR VALUE 2020 Dec 1

1

Dec 31

Inventory Accounts Payable # Inv. In call option Cash # Forex Loss Accounts Payable

HEDGE

CASH FLOW HEDGE 2015 Oct. 1

600,000 600,000 3,000

1 3,000

40,000

Dec. 31 40,000

Inventory Accounts Payable # Inv. In call option Cash # Forex Loss Accounts Payable

600,000 600,000 3,000 3,000 40,000 40,000

# 31 31

2021 Mar. 1

1

1

Inv. In call option Gain on call option #

39,000

Accounts Payable Forex gain Cash (FC) # Loss on call option Inv. In call option # Cash (FC) Cash (LC) Inv. In call option #

640,000

39,000 2021 Mar. 1 5,000 635,000 7,000

31 7,000

635,000

31 600,000 35,000

# Inv. In call option Loss on call option OCI #

39,000 1,000 40,000

Accounts Payable Forex gain Cash # OCI Inv. In call option # FC Cash Inv. In call option

640,000 5,000 635,000 7,000 7,000 636,000 600,000 35,000

Problem 10. On January 1, 2021, GF, Inc. paid P 16,000 cash to acquire a put foreign exchange option for 1,000,000 Thailand baht, with an expiration date of December 31, 2021. The option hedges 2021’s forecasted exporting sales of 1,000,000 baht. GF’s fiscal year ends June 30.

Spot rate (market price) Strike price (exercise price) Fair value of put option at 6/30/2015

1/1/2021 P 1.20 1.20

6/30/2021 P 1.12 1.19 P 81,000

What is the intrinsic value and time value of option on January 1, 2015? Intrinsic value Time value Intrinsic value a) P 16,000 P 0 c) P 10,000 b) 0 16,000 d) 6,000

12/31/2021 P1.15 1.19

Time value P 6,000 10,000

Problem 11: On August 1, 2020, SSR, Inc. a Philippine Company purchased a machine costing FC200,000 from foreign vendor to be paid on October 1, 2020. Also on August 1, 2020, SSR entered into a contract to purchase FC200,000 to be delivered on October 1, 2020, at a forward rate of P 0.35 The exchange rate was as follows: August 1, 2020 FC1 = P 0.34 August 31, 2020 = P 0.31 September 30, 2020 = P 0.33

October 1, 2020 FC1 = P 0. 32 November 30, 2020 0.32 December 31, 2020 0.33

Q1. Which of the following statements is incorrect concerning the accounting treatment of these transactions? a) The machine final recorded value was P 70,000. b) The beginning balance in the accounts payable was P 68,000 c) The exchange gain on the accounts payable of P 4,000 was recognized on October 1, 2020. d) The peso value of the accounts payable just before payment on October 1, 2020 was P 64,000. Q2. Which of the following statements is incorrect concerning the forward contract? a) The balance of Foreign Currency Receivable on October 1, 2020 was P 70,000. b) The peso equivalent of the foreign currency to be received on October 1, 2020 was P 64,000 c) The loss on forward contract to be recognized on October 1, 2020 amounted to P 6,000. d) The amount paid for the forward contract on October 1, 2020 was P 64,000.

Problem 12: On October 1, 2020, HR Philippines took delivery from Thailand firm of inventory costing 1,140,000 baht. Payment is due on January 31, 2021. Concurrently, HR Philippines paid P 15,700 cash to acquire an at-themoney call option for 1,140,000 baht. Strike price is P 12.40.

Market price Fair value of call option

Oct. 1, 2020 P 12.40

Dec. 31, 2020 P 12.423 P 28,200

Jan. 31, 2021 P 12.427 P 30,780

Which of the following statements is incorrect concerning the accounting treatment of these transactions? a) The gain on hedging instrument of P 4,560 due to change in change in intrinsic value on Jan. 31, 2021. b) The final value of the inventory was P 14,136,000. c) The option to buy was “out of the money” on January 31, 2021. d) The peso value of the foreign currency on January 31, 2021 was P 14,166,780

Problem 13. CS Company sold for 111,200 euros to a customer in France on November 2, 2020. Collection in euros was due on January 31, 2021. On the same date, to hedge this foreign currency exposure, CS company entered into a futures contract to sell 111,200 euros to Metro Bank for delivery on January 31, 2021. Exchange rates for euros on different dates are as follows:

Spot rates 30-day futures 60-day futures 90-day futures 120-day futures

Nov. 2, 2020 81.9 82.3 81.8 80.6 80.1

Dec. 31, 2020 80.7 80.4 80.3 81.6 81.4

Jan. 31, 2021 80.1 83.9 82.6 83.4 82.8

Which of the following statements is incorrect concerning the accounting treatment of these transactions? a) A forex loss of P 133,440 on the hedge item was recorded on the financial statement date in 2020. b) A net forex loss of P 33, 360 on the hedge item and the hedging instrument on Jan. 31, 2021. c) The peso value of the foreign currency on January 31, 2021 was P 8,907,120. d) The peso value of forward contract payable before payment on January 31, 2021 was P 8,962,720.

Problem 14. On September 1, 2020, RRD Corp. entered into a foreign exchange contract for speculative purposes by purchasing 50,000 deutsche marks for delivery in 60 days. The rates to exchange follow:

Spot rate 30-day forward r...