UM Tagum College

Arellano Street, Tagum City, 8100 Philippines

ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS

OTHER DERIVATIVES AND HEDGING ACTIVITIES

PRE-REV LECTURE JON D. INOCENTES,CPA

FOREIGN CURRENCY TRANSACTIONS

(IMPORT AND EXPORT (UNHEDGED)TRANSACTIONS)

JOURNALIZING FOREIGN CURRENCY TRANSACTIONS

Gaw Produce Co. purchased inventory from a Japanese company on December 18, 2015. Payment of ¥400,000
was due on January 18, 2016. Exchange rates between the dollar and the yen were as follows:
Exchange
Date Rate
December 18, 2015 P1 = ¥125
December 31, 2015 P1 =¥122
January 18, 2016 P1 = ¥120

Required: Prepare all journal entries for Gaw Produce Co. in connection with the purchase and payment.

PROBLEM 2
Old Colonial Corp. made a sale to a foreign customer on September 15, 2009, for 100,000 FC . Payment was
received on October 15, 2009. The following exchange rates applied:
Date Exchange Rate
September 15, 2009 FC1 = P.48
September 30,2009 FC1 = P.50
October 15, 2009 FC1 = P.44
Required:
Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that the company closes
its books on September 30 to prepare interim financial statements.

PROBLEM 3
On May 1, 2015 Jolibee, Inc. purchased from a Japanesse company for a Philippine peso equivalent of P
800,000 to be paid June 30,2016. The exchange rates were:
May 1,2016 1 yen= P .40
December 1,2016 1 yen= P.45
June 30,2016 1 yen = P .42

Required: Assume the transaction is denominated in the local currency of units of the foreign entities. Prepare
the necessary journal entries to record the above transaction.

PROBLEM SOLVING (MCQ)

1. On December 4, 2015, Aliza Corporation, ordered equipment FOB shipping point from a Switzerland
Company for 75,000 Swiss Francs. The equipment was shipped and invoiced to Aliza Company on
December 12, 2015. Aliza paid the invoice on January 21, 2016. Relevant spot rates for Swiss Francs on
the respective dates
Buying spot rate Selling spot rate
December 4, 2015 P32.45 P32.60
December 12, 2015 P32.58 P32.84
December 31, 2015 P32.72 P32.96
On December 31, 2015 Balance Sheet of Aliza Corp what will be the balance of the equipment?
a. P 2,463,000 c. P 2,433,750
b. P 2,443,500 d. P 2,445,000

2. On the December 31, 2016, income statement of Aliza Corporation, how much is the forex gain (loss) on
this transaction?
a. 3,000 gain b. 10,500 loss c. 9,000 loss d. 5,250 gain
3. On April 1, 2015 BIGAY TODO COMPANY, a Philippine corporation, sells merchandise to a foreign buyer on
account for FC100,000. Payment is due in 60 days. The account was paid in full at due date. Selected currency
exchange rates in 2015 follow:
Buying Selling
January 1, 2015 P24.12 P24.25
April 1, 2015 24.03 24.15
April 30, 2015 24.02 24.14
May 1, 2015 24.18 24.30
May 31, 2015 24.15 24.22
December 31, 2015 (BIGAY TODO's year-end)24.12 24.25
How much gain or (loss) upon receipt of the payment did BIGAY TODO recognize?
A. P(12,060) C. P 7,035
B. P 7,000 D. P12,000

The accounts of Palawan International, a Philippine Company, show P813,000 accounts receivable and
P389,000accounts payable at December 31, 2005 before adjusting entries are made. An analysis of the balances
reveals the following:
Accounts receivable
Receivable denominated in Philippine peso P285,000
Receivable denominated in 200,000 Japanese yen 118,000
Receivable denominated in 250,000 Thailand baht 410,000
Total P813,000
=======
Accounts payable
Payable denominated in Philippines peso P 68,500
Payable denominated in 10,000 Hongkong dollar 76,000
Payable denominated in 150,000 Thailand baht 244,500
Total P389,000
========
Current exchange rates on December 31, 2005 are:
Japanese yen P .66
Thailand baht P1.65
Hongkong dollars P7.00
4. What is the net exchange gain or loss that should be reflected in Palawan’s income statement for 2005 after
the year end adjustments?
a. P19,000 gain b. P19,500 loss c. P16,500 loss d. P19,500 gain

5. What is the balance of accounts receivable and payable that should be reported in Palawan’s December 31,
2005 balance sheet?
Accounts Receivable Accounts Payable
a. P829,500 P386,000
b. P386,000 P829,500
c. P813,000 P389,000
d. P389,000 P813,000

6. Melrose issued a promissory note denominated in foreign currency for the purchase made from an Italian
supplier. The following were related transactions; ( in Italy Lire). On December 1, Melrose Corporation
purchased merchandise from an Italian supplier for 60- day 18% promissory note for P 108,000 Italy lire, at
a selling rate 1 FC to 74.20 . On December 31, the selling spot rate is 1FC to 74.85. On January 30, the
selling spot rate is 1 FC to P 75.75. On the settlement date, how much is the foreign exchange gain or loss?
a. 98,658 loss c. 100,116 loss
b. 172,422 gain d. 172,422 loss

7. Makati Company buys goods from Tokyo Company of Japan, worth 2.5 million yen. The prevailing exchange rate
is P0.1302136/Yen. Makati Company settles the account 60 days later when the exchange rate is going at
P0.118376/Yen. What is the forex gain or loss of Tokyo?
a. P 29,594 gain b. P 29,594 loss c. 2.5 million Yen d. P -0-
8. Celica Motors sold a car for 180,000 pounds (£) to a customer in London on March 16, 2013 when the spot rate
was P68.45 = £1. On April 20, 2013, Celica received thirty percent of the selling price as partial payment. The
spot rate at that time was P67.48 = £1. The balance was paid on May 5 when the spot rate was P68.63 = £1.
How much was the foreign currency gain/loss on this transaction?
A. P29,700 loss B. P29,700 gain C. P142,200 loss D. P142,200 gain

Makati Corp. imports merchandise from Abu Dhabi and exports its own products to other countries. The unadjusted
accounts denominated in Dirham at Dec. 31, 2009 are as follows:
 Accounts receivable from the sale of merchandise on Dec. 16 to
Vieta Co. Billing is for 150,000 Dirham and due Jan. 15, 2010 P 103,500
 Accounts payable to Abuds Co. for merchandise received on Dec. 2 and
Payable on Jan. 30, 2010, billing is for 275,000 dirham P 195,250
Exchange rates on selected dates are as follows:
Dec. 31, 2009 - P0.68 Jan. 15, 2010 - P0.675 Jan. 30, 2010 - P0.685
9. What is the net forex gain or loss from the two transactions to reported in Makati’s income statement for 2009?
a. 1,500 loss b. 8,250 gain c. 6,750 gain d. 6,750 loss
10. Same problem above. What is the net forex gain or loss from the settlement of the two transactions to be
reported in Makati’s 2010 income statement?
a. 2,125 loss b. 2,125 gain c. 2,125 gain d. 2,075 loss

HEDGED FOREX TRANSACTIONS

PROBLEM 1
FEDEX Company purchased merchandise from a vendor for FC 100,000. The merchandise is received on
November 2,2013, FEDEX enters into a 90-day forward contract for the purchase of FC 100,000 for a delivery on
January 31, 2014, as a hedge of the foreign currency transaction.
Relevant exchange rates for the foreign currency follow:
11/02/13 12/31/13 01/31/14
Spot rate P .55 P .56 P .55
30-day forward rate .56 .58 .57
60-day forward rate .56 .59 .58
90-day forward rate .57 .58 .59
Required: Prepare all journal entries for the above information.

PROBLEM 2
RD Company a Filipino firm, sold hospital equipment to Salem, Ltd. Of Uk on November 12,2013 for
100,000 UK pounds, payable in 90 days, on January 30, 2014. Also, on November 2, RD entered into a 90-
day forward contract to hedge its exposed net asset position. Exchange rates for pounds are as follows:
11/02/13 12/31/13 01/30/14
Spot rate P 81.50 P 81.60 P 81.65
30-day forward rate 81.42 81.55 81.61
90-day forward rate 81.38 81.42 81.56
180-day forward rate 81.30 81.32 81.47
Required: Prepare all journal entries for the above information.

PROBLEM 3
On December 1, 2015, Jaja Company contracts to purchase special order goods from Boston Company. The
contract meets the requirement of a firm commitment-fair value hedge. Their maufacture and delivery will take
place in 90 days ( On March 1,2016). The contract price is $ 1,200 to be paid by March 1, 2016. Thus the
transaction date and delivery date are both March 1, 2016.
Also on December 1, 2015, Jaja Company entered into the second forward conrtract in hedging foreign curreny
payable commitment with a contract to receive $ 1,200 in 90 days at the forward rate of P 40.15. Relevant
exchange rates on various dates are as followa ( fiscal year end is December 31)

12/01/2015 12/31/15 03/1/16

Spot rate P40.00 P 40.30 P 40.20
30-day forward rate 40.05 40.45 40.40
60-day forward rate 40.10 40.40 40.50
90-day forward rate 40.15 P 40.45 40.60
Required: Prepare journal entries to record the above hedging item and hedging instrument.
PROBLEM 4
On December 1, 2015, Jaja Company expects to purchase a machine for $ 1,200 in United States on Marc
1, 2016. The transaction is probable but there is no binding agreement for this purchase and is to be
denominated in dollars.. The contract price is $ 1,200 to be paid by March 1, 2016. Thus the transaction date
and delivery date are both March 1, 2016.Also on December 1, 2015, Jaja Company entered into a forward
conrtract to purchase $ 1,200 at the forward rate of P 40.15. Jaja designates the forward contract as a
hedging instrument in a cash flow hedge of the exposure to increases in the dollar rate. Relevant exchange
rates on various dates are as followa ( fiscal year end is December 31)
12/01/2015 12/31/15 03/1/16
Spot rate P40.00 P 40.30 P 40.20
30-day forward rate 40.05 40.45 40.40
60-day forward rate 40.10 40.40 40.50
90-day forward rate 40.15 P 40.45 40.60

Required: Prepare journal entries to record the above hedging item and hedging instrument.

PROBLEM 5
On December 1, 2013 LG Company paid P 6,000 to purchase a 90-day put option for FC 400,000.
The options purpose is to hedge an exposed accounts receivable of P 400,000 from a sale of merchandise. The
Merchandise is to be shipped on December 1, 2013,payment for which is due on March 1, 2014.
Relevant rates and market values at diffeerent dates are as follows:
12/01/2013 12/31/2013 03/01/2014
Spot rate (market price) P 1.20 P 1.12 P 1.13
Strike price ( exercise price) 1.21 1.20 1.20
Fair value of put option P 6,000 P 36,000 P 28,000
Required: Prepare all journal entries for the above information.

PROBLEM SOLVING (MCQ)

The TAGALOG CORPORATION purchases merchandise from a foreign exporter on November 15, 2014 for FC
100,000, payable in that currency on January 15, 2015. TAGALOG predicts the Philippine peso might probably weaken
against the foreign currency over the 60-day period and entered into a hedge of the exposed foreign currency amount
against the risk of exchange losses. The hedging relationship was designed in a way that it would be fully effective thru
the entire hedge period, and selected a forward contract for that purpose.
The following are relevant spot and forward rates at selected dates.
11/15/14 12/31/14 01/15/15
Spot rates P0.4295 P0.4245 P0.4345
Forward rates P0.4325 P0.4300 P0.4345
1. How much should TAGALOG CORPORATION report as transaction gain or (loss) on its Accounts payable (in FC) at
December 31, 2014 (its current year-end)?
A. P(300) C. P250
B. P(250) D. P500
2. How much amount was Due from the Broker as at December 31, 2014?
A. P42,450C. P43,250
B. P43,000D. P43,450
3. How much transaction gain or (loss) should TAGALOG CORPORATION report when the Accounts payable (in FC)
was settled in 2015?
A. P(1,000) C. P500
B. P (500) D. P1,000
4. How much was the transaction gain or (loss) recognized on the forward contract at December 31, 2014?
A. P(300) C. P250
B. P(250) D. P500

5. Given the following information (For ¥1):

SPOT RATES
Bid Rate Offer Rate
Transaction Date P 43 P 45
Balance Sheet Date 48 49
 Settlement Date 49 55
FORWARD RATES
120-day futures 90-day futures 60-day futures 30-day futures
Transaction Date P 43 P 45 P 44 P 46
Balance Sheet Date 42 46 47 49
Settlement Date 45 48 49 52
On October 1, 2013, KEL Co. sold merchandise worth ¥2,750 to a Japanese company, payable on January 31, 2014.
To hedge this foreign currency exposure, KEL contracted to sell ¥2,750 on October 1, 2013 to be delivered on January
31, 2014. On balance sheet date, how much is the net forex gain/loss from this hedging activity?
A. P2,750 loss B. P2,750 gain C. P30,250 loss D. P30,250 gain

On December 1, 2001, Noypi Inc. which is operaring in the Philippines, sold goods on account to USA
Company at a price of $1000 collectible on March 2, 2002. In order to hedge this foreign currency
denominated accounts receivable. Noypi entered into a forward contract with BPI for the sale of $1000 to be
delivered on March 2, 2002. The following direct exchange rates are provided by the bank:
12/01/2001 12/31/2001 3/2/2002
Buying spot P 40 P 37 P 38
Selling spot 41 43 45
Buying forward rate-30 days 38 32 35
Selling forward rate-30 days 34 31 36
Buying forward rate-60 days 43 35 46
Selling forward rate-60days 40 41 43
Buying forward rate-90 days 42 40 38
Selling forward rate-90 days 34 40 36
6. What amount of sales to be recognized by Noypi Inc. for the year ended December 31, 2001?

a. P 40,000 c. P 34,000
b. P 41,000 d. P 42,000

7. What is the book of Noypi’s Accounts Receivable for the year ended December 31, 2001?

a. P 37,000 c. P 40,000
b. P 43,000 d. P 35,000

8. What is the foreign currency gain or (loss) to be recognized by Noypi on hedge item for the year ended December
31, 2001?

a. 2,000 gain c. 1,000 gain

b. 3,000 loss d. 4,000 loss

9. What is the foreign currency gain or (loss) to be recognized by Noypi on the hedge instrument for the year
ended December 31, 2002?

a. 11,000 loss c. 3,000 loss

b. 10,000 loss d. 2,000 gain

On November 1, 2016, 7D Co. entered into a firm commitment for the export of dried mangoes with a contract price
of 10,000 Yen. The goods will be delivered by 7D Co. on January 30, 2017. On the same day, in order to protect itself
from the risk of changes in fair value of the firm commitment due to changes in the underlying foreign currency, 7D
entered into a forward contract with BDO for the sale of 10,000 Yen at the forward rate on November 1, 2016. IAS 39
provides that hedge of foreign currency of a firm commitment maybe accounted for as either a fair value hedge or
cash flow hedge. 7D Co. elected to account for the hedge of the firm commitment using fair value hedge.The
following direct exchange rates are provided:
November 1,2016 December 31, 2016 January 30,2017
Buying spot P 10 P 13 P 12
Selling spot 13 15 16
Buying forward rate-90 days 11 14 15
Selling forward rate-90 days 13 16 17
Buying forward rate-60 days 14 17 16
Selling forward rate-60days 15 18 14
Buying forward rate-30 days 11 15 12
Selling forward rate-30 days 13 11 14
10. What is the book value of the firm commitment
 a. P 40,000 asset c. P 20,000 liability
b. P 30,000 asset d. P 10,000 liability

11. What is the net foreign currency gain or loss for the year ended December 31, 2017?

a. P 40,000 gain c. P 20,000 gain

b. P 30,000 loss d. P 0

12. What is the amount recognized as sales on January 30,2017?

a. P 140,000 c. P 130,000
b. P 120,000 d. P 110,000

On October 12, 2013, DEF obtained a non-cancellable sales order from a Thailand firm for a custom-made machine.
The contract price was 100,000 baht. On October 12, 2013 DEF Corp. entered into a foreign exchanged forward to
sell 100,000 baht in 100 days at the forward rate of P 3.15. The machine was delivered on December 11, 2013 and
and collection on January 20,2014.

10/12/2013 12/11/2013 12/31/2013 1/20/2014

Spot rate (baht) P 3.20 P 3.00 P 3.09 P 2.97
Forward rate (baht) 3.15 2.98 3.08

13. What is the reportable sales amount in the income statement in 2013?
a. P 300,000 b. P 308,000 c. P 309,000 d. P 317,000
14. On December 31,2013 the foreign exchange gain or loss on accounts receivable amounted to
a. P 9,000 loss b. P 10,000 c. 9,000 gain d. 11,000 loss
15. On December 11, 2013 profit and loss statement, foreign exchange gain or loss on the hedging
Instrument ( forward contract )amounts to
a. P 17,000 loss b. P 20,000 loss c. P 17,000 gain d. P 20,000 gain
16. On December 11, 2013 profit and loss statement, foreign exchange gain or loss on the hedge item (firm
Commitment ) amounts to
a. P 17,000 loss b. P 20,000 loss c. P 17,000 gain d. P 20,000 gai
17. The December 31, 2013 Accounts receivable amounted to
a. P 298,000 b. P 300,000 c. P 309,000 d. P 320,000
18. On December 31, 2013 foreign exchange gains or loss on the hedging instrument bforward contract) amounted to
a. P 7,000 gain b. P 9,000 gain c. P 7,000 loss d. P 11,000 loss
19. On January 20,2014, the net foreign exchange gain or loss amounted to
a. P 0 b. P 1,000 gain c. P 2,000 gain d. P 1,000 loss

On December 1, 2011, Philip Company paid P3,000 to purchase a 90-day call option for 500,000 Thailand Baht. The
option’s purpose is to protect an exposed liability of 500,000 baht relating to a purchase of merchandise received on
December 1, 2011 and to be paid on March 1, 2012. Relevant rates and market values at different dates are as
follows:
12/01/2011 12/31/2011 03/01/2012
Spot rate P1.20 1.28 1.27
Strike Price 1.20 1.20 1.20
Fair value of call option P3,000 P42,000 P35,000

20. Calculate the option’s time value at December 1, 2011

a. P3,000 b. P35,000 c. P40,000 d. P42,000

21. The December 31, 2011 accounts payable amounted to

a. P600,000 b. P 640,000 c. P 635,000 d. P 700,000

22. The December 31, 2011 net foreign exchange gain or (loss) is
b. P0 b. P1,000 c. P(1,000) d. P40,000

23. The March 1, 2012 expiration date, the foreign currency contract value-Option is:
a. P3,000 b. P35,000 c. P39,000 d. P42,000
24. Calculate the option’s (1) time value and (2) instrinsic value at March 1, 2012
a. (1) 3,000 and (2) 35,000
b. (1) 4,000 and (2) 39,000
c. (1) P 0 and (2) 35,000
 d. (1) P 35,000 and (2) 0

25. The March 1, 2012 expiration date foreign exchange net gain or (loss) is
a. P0 b. P2,000 c. P(2000) d. P5,000

On June 18, Sony Corporation entered into a firm commitment to purchase specialized equipment from the Philip
Trading Company for ¥ 80,000,000 on August 20. The exchange rate on June 18 is ¥100= P 1. To reduce the
exchange risk that could increase the cost of the equipment in pesos, Sony pays P 12,000 for a call option contract.
This contract gives Sony the option to purchase ¥ 80,000,000 at an exchange rate of ¥100= P 1 on August 20. On
August 20, the exchange rate is ¥93= P 1.

26. How much did Sony save by purchasing call option?

a. P 12,000
b. P 48,215
c. P 60,215
d. Sony would have been better off not to have a purchase call option.
27. What is the final recorded value of the equipment?
a. P 800,000 b. P 860,215 c. P 848,215 d. P 788,000

28. On May 1, 2013, PERFECT Co. anticipated the purchase of 85,000 units of merchandise from a foreign vendor.
The purchase would probably occur on October 28, 2013 and require the payment of 1,250,000 foreign currencies
(FC). On May 1, 2013, the company purchased a call option to buy 1,250,000FC at a strike price of 1FC = P0.27.
An option premium of P14000 was paid. Changes in the value of the option will be excluded from the assessment
of hedge effectiveness. For the year 2013, the following rates are as follows:
May 1 May 31 June 30 October 28
Spot Rate P 0.25 P 0.28 P 0.30 P 0.32
Strike Price 0.27 0.27 0.27 0.27
FV of call option P14,000 P17,500 P39,000 ?
The foreign exchange gain (loss) on option contract to be recognized in (1) equity and (2) earnings on June 30:
A. P(25,000) ; P3,500
B. P(37,500) ; P21,500
C. P25,000 ; P(21,500)
D. P37,500 ; P(3,500)

29. On October 31, 2013, Pyramid Philippines took delivery from a British firm of inventory costing £725,000.
Payment is due on January 31, 2014. At the same time, Pyramid paid P8,250 cash to acquire a 90-day call option
for £725,000.
October 31, 2013 December 31, 2013 January 31, 2014
Strike Price P 3.60 P 3.60 P 3.60
Spot Rate 3.61 3.62 3.64
Forward Rate 3.72 3.77 3.78
Fair Value of Call Option P 8,250 P 17,000 ?
Given the information above, compute for the following:
Foreign exchange gain or loss on option contract due to change in time value on December 31, 2013 if changes in the
time value will be excluded from the assessment of hedge effectiveness, and foreign exchange gain or loss due to
change in intrinsic value on January 31, 2014 if changes in the time value will be excluded from the assessment of
hedge effectiveness.
A. P1,500 gain ; P7,250 gain
B. P1,500 gain ; P14,500 gain
C. P5,250 loss ; P7,250 gain
D. P5,250 loss ; P14,500 gain

30. On October 31, 2013, Pointers Philippines took delivery from a British firm of inventory costing £1,450,000.
Payment is due on January 31, 2014. At the same time, Pointers paid P16,500 cash to acquire a 90-day call
option for £1,450,000.
10/31/2013 12/31/2013 1/31/2014
Strike Price P12.60 P12.60 P12.60
Spot rate P12.61 P12.62 P12.64
Forward rate P12.72 P12.77 P12.78
Fair Value of Call Option ? P34,000 ?
Given the information above, compute for the following:
Foreign exchange gain or loss on option contract due to change in time value on December 31, 2013,
and foreign exchange gain or loss due to change in intrinsic value on January 31, 2014.
A. P3,000 gain; P29,000 gain C. P10,500 loss; P29,000 gain
B. P10,500 loss; P14,500 gain D. P3,000 gain; P14,500 gain