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BASIC DERIVATIVESPROBLEM 1On January 1, 2020, Jackie Company borrowed P5,000,000 from a bank at a variable rate of interest for four years. Interest will be paid annually to the bank on December 31 and the principal is due on December 31, 2023.Under the agreement, the market rate of interest on each...

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BASIC DERIVATIVES PROBLEM 1 On January 1, 2020, Jackie Company borrowed P5,000,000 from a bank at a variable rate of interest for four years. Interest will be paid annually to the bank on December 31 and the principal is due on December 31, 2023. Under the agreement, the market rate of interest on each January 1 resets the variable rate for that period and the amount of interest to be paid on December 31. To protect itself from fluctuation in interest rate, the entity hedged the variable interest by entering a four-year “receive variable, pay fixed” interest rate swap with a speculator. The interest rate swap is based on the notional amount of P5,000,000 and an 8% fixed interest rate, and has designated this as a cash flow hedge. The market interest rates are 8% on January 1, 2020, 10% on January 1, 2021, 11% on January 1, 2022, and 12% on January 1, 2023.

Required: Compute for the value of the derivative for every yearend and the effects on the other comprehensive income.

PROBLEM 2 On January 1, 2020, Rhea Company received a four-year P2,000,000 loan with interest payment occurring at the end of each year and the principal to be paid on December 31, 2023. The interest for 2020is the prevailing market rate of interest of 10% on January 1, 2020, and the market rate of interest every January 1 resets the variable rate of interest for that year. The ‘underlying’ fixed interest rate is 10%. In conjunction with the loan, the entity entered a “receive variable pay fixed” interest rate swap agreement as cash flow hedge. The interest rate swap payment will be made on December 31 of each year. The market rate of interest is 6% on January 1, 2021, 7% on January 1, 2022 and 7.5% on January 1, 2023.

Required: Compute for the value of the derivative for every yearend and the effects on the other comprehensive income.

PROBLEM 3 On January 1, 2020, Stamp Company borrowed P1,000,000 from a bank at a variable rate of interest for five years. Variable interest (which is the January 1 market rate of interest) will be paid annually to the bank on December 31 and the principal is due on December 31, 2024. In conjunction with the loan, the entity entered a “receive variable pay fixed” interest rate swap agreement as cash flow hedge. The market rates on interest are 12% on January 1, 2020, 14% on January 1, 2021 and 9% on January 1, 2022.

Required: Compute for the value of the derivative for every yearend and the effects on the other comprehensive income.

PROBLEM 4 Sundown Company is a golf course developer that constructs approximately five courses each year. On July 1, 2020, the entity has agreed to buy 5,000 trees on March 1, 2021 to be planted in the courses it intends to build. To protect itself from the variability off the market price of trees, the entity entered in a forward contract with a reputable bank. The price is set at P1,500 per tree. The forward contract is designated as a cash flow hedge. The market prices are P1,800 and P1,700 on December 31, 2020 and March 1, 2021, respectively.

Required: Journalize the transactions on the forward contract....