FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006

PROBLEM 1

X Trading purchases goods from Y, a company based on France for 1,200,000 Euros (€). The exchange
rate at this time is P1 = €12.5. X pays 22 days later when the prevailing exchange rate is P1 = €16.
How much is the foreign currency gain/loss on the books of X and Y respectively?
A. P21,000 gain; P21,000 loss
B. P21,000 gain; 0
C. P4,200,000 loss; 0
D. P4,200,000 loss; P4,200,000 gain

PROBLEM 2

Celica Motors sold a car for P180,000 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

PROBLEM 3

Levin intends to sell ¥400,400 under a forward contract dated December 1. At what amount must
Forward Contract Receivable and Forward Contract Payable be presented on December 31?

Dates Forward Rates Spot Rates

December 1 P 0.55 P 0.53
December 31 P 0.50 P 0.49
March 22 P 0.48 P 0.46

FC Receivable FC Payable
A. P220,220 P200,200
B. P200,200 P220,220
C. P212,212 P196,196
D. P200,200 P200,200

PROBLEM 4

On January 1, 2013 Lucky Inc. paid P9,800 to acquire a put option. This is in relation to the sale of
merchandise worth $65,000. (Strike price = P4.965)
1/1/2013 3/31/2013 6/20/2013
Spot rate P4.934 P4.908 P4.75
Fair value of option P9,800 P11,400 P13,935
How much is the foreign currency gain/loss on the intrinsic portion on March 31, 2013?

A. P1,690 B. (P1,690) C. P1,600 D. (P90)

PROBLEM 5

On November 1, 2013, Word Inc. paid P45,000 to acquire call foreign exchange option for Hk$90,000.
The option is acquired to hedge the 2013 anticipated purchase of merchandise for Hk$90,000. The
option expires on March 30, 2014.

11/1/2013 12/31/2013 3/31/2014

Spot rate P3.46 P3.40 P3.39
Fair value of option P45,000 P50,500 P72,000
Strike price P3.47 P3.47 P3.47

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FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006

At what amount must the merchandise be presented as of December 31, 2013?

A. P3,114,000 B. P3,123,000 C. P3,060,000 D. P0

PROBLEM 6

On December 12, 2013, Winning Co. entered into a forward exchange contract to purchase 225,000
euros in 90 days. The relevant exchange rates are as follows:

Spot rate Forward rate (for March 12, 2014

November 30, 2013 P0.57 P0.59
December 12, 2013 P0.58 P0.60
December 31, 2013 P0.62 P0.63

The purpose of this forward contract is to hedge a purchase of inventory in November 2013, payable in
March 2014.
At December 31, 2013, what amount of foreign currency transaction from this forward contract should
Winning include in profit or loss?
A. P9,000 loss B. P6,750 gain C. 6,750 loss D. P9,000 gain

PROBLEM 7

On October 1, 2013, R Corporation purchased goods from a U.S. based corporation worth $93,750.
Payment is due in 120 days on January 30, 2014. In view of the transaction, R Corporation enters into a
forward contract to buy $93,750 from Philippine National Bank (PNB) in 120 days. The relevant
exchange rates are as follows:

10/01/2013 12/31/2013 1/30/2014

Spot rate P43 P47 P50
Forward rate P44 P46 P50

Which of the following is correct?

A. Forward Contract Receivable on Dec. 31, 2013 is P4,125,000
B. Net foreign exchange loss on settlement date is P93,750
C. Foreign exchange gain on the derivative instrument on the transaction date is P187,500
D. Foreign exchange loss on the importing transaction on year-end is P375,000

PROBLEM 8

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

FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006

FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006

PROBLEM 9

Manila Company sold merchandise for 315,000 pounds to a customer in London on November 01, 2013.
Collection in British pounds was due on January 30, 2014. On the same date, Manila entered into a 90-
day futures contract to sell 315,000 pounds to a bank. Exchange rate for pound on different dates are as
follows:
Nov. 1 Dec. 31 Jan. 31
Spot rate P51.3 P52.6 P51.8
30-day futures P52.2 P52.4 P53.1
60-day futures P51.7 P52.1 P52.5
90-day futures P50.5 P52.5 P53.3

How much is the net foreign exchange gain or loss on January 30, 2014?
A. P63,000 loss B. P31,500 loss C. P63,000 gain D. P31,500 gain

PROBLEM 10
On November 1, S Company entered into a firm commitment to sell a machinery. Delivery and passage
of title would be on February 28, 2014 at the price of $15,750 Singapore dollars. On the same date, S
Company entered into a 120-day forward contract with China Bank to sell the $15,750 Singapore dollars.
Exchange rate were as follows:

Spot rate Forward rate

November 01, 2013 P46.25 P44.30
December 31, 2013 P47.40 P46.70
February 28, 2014 P49.50 P49.50

How much is the foreign exchange gain or loss recognized by S Company on the firm commitment on
December 31, 2013?

A. P18,112.50 gain B. P18,112.50 loss C. P37,800 loss D. P37,800 gain

PROBLEM 11

SBC Company bought merchandise for €625,000 from a French company on December 1, 2013. Payment
in Euros was due on February 28, 2014. On the same date, SBC entered into a 90-day futures contract to
buy €625,000 from Metro bank. Exchange rates for Euros on different dates are as follows:

Dec. 1 Dec. 31 Feb. 28

Spot rate P61.55 P62.85 P62.05
30-day futures P62.45 P62.65 P63.35
60-day futures P61.95 P62.35 P62.75
90-day futures P60.75 P62.75 P63.55

How much is the foreign exchange gain/loss on the forward contract on February 28, 2014?
A. P500,000 loss B. P187,500 loss C. P187,500 gain D. P500,000 gain

PROBLEM 12

GV Company anticipates the price of cement will increase the coming months. Therefore, it decides to
purchase call options on cement as a price-risk hedging device to hedge the expected increase in prices
on a forecasted purchase of cement. On December 1, 2013, GV purchased call options for 1,200 sacks of
cement at P165 per sack at a premium of P5 per sack, with a March 31, 2014 call date. The following is
the pricing information for the term of the call:

Date Market Price Fair Value of Option Contract

December 1, 2013 P165
December 31, 2013 P168 P7,500
March 31, 2014 P172

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FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006

On March 31, 2014, GV exercised the option and acquired 1,300 sacks of cement. On May 15, 2014, GV
sold all the sacks of cement for P176 per sack.
How much is the net income in 2014?
A. P13,600 B. P9,700 C. P7,600 D. P1,400

PROBLEM 13

On July 1, 2013, Peru Company purchased 1,750 shares of Lima Corp. common stock at a cost of P75 per
share and classified it as an available for sale security. On October 1, Peru Company purchased an at-the
–money put option on Lima Corp. at a premium of P24,500 with a strike price P115 per share and an
expiration date of April 2014. Peru Company specifies that only the intrinsic value of the option is to be
used to measure effectiveness. The following shows the fair value of the hedged item and the hedging
instrument.

10/1/13 12/31/13 3/3/14 4/17/14

Lima’s share price P115 P103 P95 P95
Intrinsic value 0 P21,000 P35,000 P35,000
Time value P24,500 P15,050 P3,710 0
Fair value P24,500 P36,050 P38,710 P35,000

What is the cumulative effect on retained earnings of the hedge and sale?
A. P10,500 B. P70,000 C. P45,500 D. P80,500

PROBLEM 14

TRANS Corp. owns a subsidiary in Singapore whose statement of financial position in Singapore Dollars
for the last two years follow:

December 31, 2012 December 31, 2013

Assets
Cash and cash equivalents S$ 450,000 S$ 375,000
Receivables 1,837,000 2,212,500
Inventory 2,400,000 2,550,000
PPE, net 3,825,000 3,450,000
Total Assets S$ 8,512,500 S$ 8,587,500
Liabilities and Equity
Accounts Payable S$ 825,000 S$ 1,125,000
Long-term debt 4,837,500 4,275,000
Common stock 1,725,000 1,725,000
Retained earnings 1,125,000 1,462,500
Total Liabilities and Equity S$ 8,512,500 S$ 8,587,500

Relevant exchange rates are:

January 1, 2012 S$ 1 = P 45
December 31, 2012 S$ 1 = P 42.50
December 31, 2013 S$ 1 = P 47.50
Average 2012 S$ 1 = P 43.75
September 12, 2012 S$ 1 = P40

TRANS Corp. formed the subsidiary on January 1, 2012. Income of the subsidiary was earned evenly
throughout the years and the subsidiary declared dividends worth S$75,000 on September 12, 2012 and
none were declared during 2013.
How much is the cumulative translation adjustment for 2013?
A. P9,093,750 B. P8,531,250 C. P15,093,750 D. P13,125,000

FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006

FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006

JOINT ARRANGEMENTS (IFRS 11)

PROBLEM 1

GX Builders Corp. and JQ Progress Co. are two companies whose business are the construction of many
types of public and private construction services. They set up a contractual arrangement to work
together for the purpose of fulfilling a contract with the government for the construction of a motorway
between two cities for P144 million fixed price contract.

The contractual arrangement determines the participation shares of GX and JQ and establishes:

 Joint control of the arrangement

 The rights to all assets needed to undertake the activities of the arrangement are shared by the
parties on the basis of their participation shares in the arrangement.
 The parties have joint responsibility for all operating and financial obligations relating to the
activities of the arrangement on the basis of their participation shares in the arrangement; and
 The profit and loss resulting from the activities of the arrangement is shared by GX and JQ on the
basis of their participation shares in the arrangement.

In 2013, in accordance with the agreement between GX and JQ:

 GX and JQ each used their own equipment and employees in the construction activity
 GX constructed three bridges needed to cross rivers on the route at a cost of P48 million
 JQ constructed all of the other elements of the motorway at a cost of P60 million.
 GX and JQ shares equally in the P144 million jointly invoiced to and received from the government.

1. What is the gross profit of the joint arrangement?

A. P48 million
B. P84 million
C. P36 million
D. P24 million

2. What is the gross profit earned by GX in 2013?

A. P36 million
B. P84 million
C. P24 million
D. P12 million

PROBLEM 2

Two real estate companies, RK Developers and SV Holdings set up a separate vehicle (entity DP) for the
purpose of acquiring and operating a shopping centre. The contractual arrangement between the
parties establishes joint control of the activities that are conducted by entity DP. The main feature of
entity DP’s legal form is that the entity, not the parties, has rights to the assets and obligations for the
liabilities relating to the arrangement. These activities include the rental of the retail units, managing the
car park, maintaining the centre and its equipment, such as lifts, and building the reputation and
customer base for the centre as a whole.

The terms of the contractual arrangement are such that:

 Entity DP owns the shopping centre. The contractual arrangement does not specify that the parties
have rights to the shopping centre.
 The parties are not liable in respect of the liabilities of entity DP. If entity DP is unable to pay any of
its liabilities, the liability of each to any third party will be limited to the parties unpaid contribution.
 The parties have the right to sell or pledge their interests in entity DP
 Each party receives a share of the income from the shopping centre (rental income net of operating
costs) in accordance with its interests in entity DP.

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Transactions of the contractual arrangement for 2012 and 2013 follow:

2012

 RK and SV contributed P60 million each for a ½ interest in the net assets of Entity DP.
 Organization expenses incurred amounts to P600,000.
 Entity DP acquired land at a cost of P12 million.
 Constructed a building (shopping centre) at a cost of P90 million.
 Operating expenses for the year amounts to P6 million.
 Rental income collected from the tenants, P60 million
 Net income or loss is distributed to the venturers in accordance with their interest.

2013

 Operating expenses (including depreciation) incurred for the year, P21 million
 Rental income collected for the year, P72 million
 Each venture receives a share of the income or loss from rental income net of the operating
expenses.

1. What is the interest of RK Developers in the joint venture as of December 31, 2012?
A. P84 million
B. P86.7 million
C. P90 million
D. P120 million
2. What is the net income (loss) of entity DP on December 31, 2013?
A. P51 million
B. P72 million
C. P93 million
D. P63 million
3. What is the interest of SV Holdings in the joint arrangement as of December 31, 2013?
A. P112.2 million
B. P87 million
C. P60 million
D. P84 million

*** END ***

FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006