ILLUSTRATION 20-2: (BUYER’S POINT OF VIEW) USING FOREIGN

CURRENCY FORWARD CONTRACTS HEDGING INSTRUMENT

On December 1, 20x4, Dominador Company entered into four

forward exchange contracts to purchase US $1,000 in 90 days for
delivery on March 1, 20x5 for ₱40.15

12/1/20x4 12/31/20x4 3/1/20x5

Spot Rate ₱40.00 ₱40.30 ₱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 ₱40.45 ₱40.60
 A. NOT A HEDGE ACCOUNTING –
IMPORTING TRANSACTION (EXPOSED LIABILITY)

Also on December 1, 20x4, Dominador Company entered into the

first forward contracts to buy US $1,000 on March 1, 20x5 for ₱40.15

Hedged Item Hedging Instrument

December 1, 20x4
Inventory 40,000 FC Receivable from XD 40,000
Accounts Payable 40,000 Pesos Payable from XD 40,000

December 31, 20x4

FC Transaction Loss 300 FC Receivable from XD 250
Accounts Payable 300 FC Transaction Gain 250
(₱40.30 – ₱40.00) x $1000 (₱40.40 – ₱40.15) x $1000
 A. NOT A HEDGE ACCOUNTING –
IMPORTING TRANSACTION (EXPOSED LIABILITY)
March 1, 20x5
Accounts Payable 100 FC Transaction Loss 200
FC Transaction Gain 100 FC Receivable from XD 200
(₱40.20 – ₱40.30) x $1000 (₱40.40 – ₱40.20) x $1000

Pesos Payable from XD 40,150

Cash 40,150

Investment in FC 40,200
FC Receivable from XD 40,200

Accounts Payable 40,200 Cash 40,200

Cash 40,200 Investment in FC 40,200
 Hedged Item
A. NOT
Accounts Payable
A HEDGE ACCOUNTING
Balance
–
Transaction gain (loss)
IMPORTING TRANSACTION (EXPOSED LIABILITY)
12/1/20x4 ₱40,000
12/31/20x4 40,000 (₱300)
3/1/20x5 40,000 100
Total Gain (Loss) (₱200)

Hedging Instrument
FC Receivable Balance Transaction gain (loss)

12/1/20x4 ₱40,150
12/31/20x4 40,400 ₱250
3/1/20x5 40,200 (200)
Total Gain (Loss) ₱50
 Without Hedging With Hedging
Proceeds from sales ₱60,000 ₱60,000
A. NOT A HEDGE ACCOUNTING –
Proceeds from forward
IMPORTING TRANSACTION (EXPOSED LIABILITY)
contract . 50
Total Proceeds ₱60,000 ₱60,050

Sales ₱60,000 ₱60,000

Less: Cost of Goods Sold 40,000 40,000
Gross Profit ₱20,000 ₱20,000
Add (Deduct):
Foreign Currency (200) (200)
Transaction Gain (Loss)
Foreign Currency
Transaction Gain (Loss) . 50
Net Income ₱19,800 ₱19,850
 “NET” POSITION ACCOUNTING

Hedged Item Hedging Instrument

December 1, 20x4
Inventory 40,000
Accounts Payable 40,000

December 31, 20x4

FC Transaction Loss 300 FC Receivable from XD 250
Accounts Payable 300 FC Transaction Gain 250
(₱40.30 – ₱40.00) x $1000 (₱40.40 – ₱40.15) x $1000
 A. NOT A HEDGE ACCOUNTING –
IMPORTING TRANSACTION (EXPOSED LIABILITY)
March 1, 20x5
Accounts Payable 100 FC Transaction Loss 200
FC Transaction Gain 100 FC Receivable from XD 200
(₱40.20 – ₱40.30) x $1000 (₱40.40 – ₱40.20) x $1000
Accounts Payable 40,200 Cash 50
Cash 40,200 Forward Contract 50
 B. FAIR VALUE HEDGE- HEDGING AN UNRECOGNIZED
FOREIGN CURRENCY FIRM COMMITMENT

On December 1, 20x4, Dominador Company contracts to purchase

special order goods from New York Company. Their manufacture and
delivery will take place in 90 days (on March 1, 20x5). The contract
price is $1000 to be paid by March 1, 20x5.

Hedged Item Hedging Instrument

December 1, 20x4
No journal entry is required FC Receivable from XD 40,150
Pesos Payable from XD 40,150
 A. NOT A HEDGE ACCOUNTING
December 31, 20x4 –
IMPORTING
FC TRANSACTION
Transaction Loss 250 FC (EXPOSED
Receivable from LIABILITY)
XD 250
Firm Commitment 250 FC Transaction Gain 250
(₱40.40 – ₱40.15) x $1000 (₱40.40 – ₱40.15) x $1000

December 31, 20x4

Balance Sheet
Assets Liability
FC Receivable from XD ₱40,400 Firm Commitment ₱ 250
Less: Pesos Payable 40,150
Forward Contract ₱ 250
 March 1, 20x5
A. NOT A200
Firm Commitment HEDGE ACCOUNTING
FC Transaction Loss– 200
IMPORTING TRANSACTION
FC Transaction Gain 200 (EXPOSED
FC Receivable LIABILITY)
from XD 200
(₱40.40 – ₱40.20) x $1000

Pesos Payable from XD 40,150

Cash 40,150

Investment in FC 40,200
FC Receivable from XD 40,200

Accounts Payable 40,200 Cash 40,200

Cash 40,200 Investment in FC 40,200

Firm Commitment 50
Inventory 50