Derivatives and Hedge Accounting by Robert Carl Arrojo, CPA

Theories
1. Which of the following gain or loss on changes in the value of derivates shall be presented in other
comprehensive income with reclassification adjustment to profit or loss if already realized?
A. Gain or loss on changes of intrinsic value of derivates classified as undesignated hedge
B. Gain or loss on changes of value of derivates designated as cash flow hedge arising from its
ineffective portion
C. Gain or loss on changes of value of derivatives designated as hedge of net investment in
foreign operation arising from its effective portion
D. Gain or loss on changes of time value of derivatives designated as fair value hedge

2. In which type of hedging transactions or relationships will there be no gain or loss on hedged item?
A. Fair value hedge of firm commitment importation using forward contract receivable.
B. Cash flow hedge of forecasted exportation using put option.
C. Undesignated hedge of foreign currency denominated accounts receivable using forward

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contract payable.
D. Hedge of net investment in foreign operation using foreign currency denominated note payable.

3. Gains and losses of the effective portion of hedging instrument will be recognized in current

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earnings in each reporting period for which of the following?
Fair value hedge Cash flow hedge
A. Yes No
B. Yes Yes
C. No No
D. No EV Yes

4. Hedge accounting permitted for all of the following types of hedges except:
A. Unrecognized firm commitment C. Available for sale securities
B. Trading securities D. Net investment in foreign operations
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5. Which of the following hedges record gains/losses related to the hedge instrument in net income?
Forward contract Option used as hedge Foreign currency
of a foreign currency option used as a
firm commitment cash flow hedge
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A. Yes Yes Yes

B. Yes No Yes
C. Yes Yes No
D. No Yes Yes

6. Which of the following gains or losses on derivatives shall be presented in Other Comprehensive
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Income with Reclassification Adjustment Section of Statement of Comprehensive Income?

I. Gain or loss on intrinsic value of call option used to hedge foreign currency denominated
monetary liability
II. Gain or loss on ineffective portion of monetary liability used to hedge the net investment of
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foreign operation
III. Gain or loss on forward contract receivable used to hedge forecasted purchase of equipment
IV. Gain or loss on forward contract payable used to hedge firm commitment sale of inventories
A. III only
B. I and II only
C. I and III only
D. I, II and III only
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7. Statement 1: Hedge of a firm commitment may be designated as a fair value hedge or cash flow
hedge
Statement 2: For a firm commitment to purchase an inventory, the same amount of inventory will
be recorded if the company hedge the firm commitment and designates the hedge as fair value
hedge or cash flow hedge
A. True, True
B. True, False
C. False, True
D. False, False

8. A Philippine company has euro-denominated receivables that it hedges with a forward sale of
euros. The euro weakens against the Philippine peso. Which statement is true?
A. The gain on the receivables and the loss on the forward are reported on the income statement

@reocpareview.ph MAY 2021 CPA REVIEW SEASON

 B. The gain on the receivables and the lossm on the forward are reported in other
comprehensive income
C. The loss on the eceivables and the gain on the forward are reported on the income statement
D. The loss on the receivables and the gain on the forward are reported in other comprehensive
income.

9. Gain and losses recognized from differences in forward exchange rates from speculations are
presented on:
A. Other comprehensive income
B. Balance sheet
C. Profit or loss
D. Cash flows

10. A Philippine company hedges an anticipated purchase of merchandise from a UK supplier,

payment to be made in pounds. The hedge qualifies as cash flow hedge of a forecasted transaction.
What are gains and losses on the hedge investment reported on the income statement?
A. When the company takes delivery of the merchandise

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B. When the company pays for the merchandise
C. As the market value of the hedge investment changes
D. When the company sells the merchandise.

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PROBLEMS
1. Kuzma Company acquired a heavy equipment for $16,500 from a supplier in Los Angeles, USA on
December 1, 2023. Payment in US dollars was due on March 31, 2024. On the same date, to hedge
this foreign currency exposure, Barako entered into a forward contract to purchase $16,500 from JP

dates were as follows:

December 1, 2023
Bid
41.6
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Morgan Chase Bank for delivery on March 31, 2024. Direct exchange rates for dollars on different

Spot Rates
Offer
41.4
December 31, 2023 42.0 42.3
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March 31, 2024 43.4 43.7

Forward Rates
Dec. 1 Dec. 31 March 31
30-day forward 42.3 41.8 43.2
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60-day forward 41.8 42.2 42.6

90-day forward 40.6 42.5 43.4
120-day forward 42.2 42.8 42.9

What is the net impact in Kuzma Company income in 2023 and 2024 due to the above foreign exchange
transactions including the hedging activity?
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A. 9,900 loss and 8,250 loss

B. 9,900 gain and 8,250 loss
C. 1,650 loss and 11,550 gain
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D. 1,650 gain and 11,550 gain

2. Z Company sold merchandise for 120,000 rupees to a customer in India on November 01, 2023.
Collection in India rupees was due on March 1, 2024. On December 1, 2023, to hedge this foreign
currency exposure, Z Company entered a forward contract to sell 120,000 rupees to a bank for delivery
on March 1, 2024. Exchange rates for rupees on different dates are as follows:
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November 1, 2023 December 1 2023 December 31, 2023 March 1, 2024

Buying Spot 40 39 38 41
Selling Spot 42 41 45 40
Forward buying- 43 43 41 46
120 days
Forward selling 41 42 40 47
120 days
Forward buying 45 44 42 48
60 days
Forward selling 43 41 43 49
60 days
 Forward buying 42 40 44 43
30 days
Forward selling 41 43 41 45
30 days

What is the (1) net foreign currency gain/(loss) for the year ended December 31, 2023 and (2) net
foreign currency gain( loss) for the year ended December 31, 2024, respectively in Profit or Loss?
A. P 120,000 gain and P 120,000 loss
B. P 120,000 loss and P 480,000 gain
C. P 240,000 loss and P 360,000 gain
D. P 240,000 gain and P 240,000 loss

3. On November 1, 2022, Dire Company entered into a firm commitment to acquire a machinery with
useful life of 10 years from Noob Company,located at Indonesia. Delivery and passage of title would
be on March 1, 2023 at the price of 5,000,000 Rupiah. On the same date, to hedge against unfavorable
changes in the exchange rate, Dire entered into a 120-day forward contract with Metro bank for

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5,000,000 Rupiah. Dire accounted for the hedge as cash flow hedge.
Nov. 1 Dec. 31 March 1
Bid spot rate Rp 81.9 Rp 80.7 Rp 80.1
Offer spot rate 81.7 80.5 80

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30-day forward 82.3 80.4 83.9
60-day forward 81.8 80.3 82.6
90-day forward 80.6 81.6 83.4
120-day forward 80.1 81.4 82.8

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Dire Company records depreciation for a full year at the year of purchase.

What is the foreign currency gain or loss on the hedged item to be recognized in profit or loss for the
year December 31, 2022 and what is the net impact in Dire Company’s profit or loss because of all the
above transactions for the year 2023?
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A. P 155 loss: P 6,250 profit
B. P 155 gain; P P 6,250 loss
C. P 0; P 5,201.83 loss
D. P 0; P 6,242.20
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4. On December 1, 2020, Spadats Company, a Philippine firm, entered into a 120-day forward contract
to buy 150,000 US dollars for speculative purposes. The exchange rates are as follows:
Offer rates Spot Forwar Bid rates Spot Forward
Rate d Rate Rate Rate
December 1, 2020 P45.2 P45.8 December 1, P46.10 P46.50
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2020
December 31, 44.8 45 December 31, 45.10 45.5
2020 2020
March 30, 2020 46 ? March 30, 2020 47 ?
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The foreign exchange gain or loss to be reported due to speculation for the year 2020 and 2021 are:
A. P 120,000 gain; P 150,000 loss
B. P 120,000 loss; P 150,000 gain
C. P 150,000 gain: 225,000 loss:
D. P150,000 loss; 225,000 gain
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5. On August 3, 2022, Gambling Addicts Company, a Philippine firm entered into 180-day forward contract
to sell € (euro) 600,000 for speculative purposes. The exchange rate are as follows:
August 3, 2022 December 31, 2022 Jan. 30, 2023
Spot €1.65 €1.62 ????
30-day 1.64 1.59 1.60
60-day 1.63 1.56 1.58
90 day 1.65 1.58 1.59
120 day 1.67 1.54 1.61
150 day 1.68 1.57 1.62
180 day 1.64 1.58 1.64
If Gambling Addicts Company recognized P13,722 gain on its income statement for the year 2023,
what is the spot rate on January 30, 2023?
A. €1.53
B. €1.65
C. €1.62
 D. €1.67

6. On November 1, 2022, Curry entered a firm commitment with Yamate Japanese Company for the
export of magazines with a contract price of 20,000 yen. The goods will be delivered by Curry on March
1, 2023. On the same day in order to protect from the risk of changes in fair value of the firm commitment
due to changes in underlying foreign currency. Marie Co. entered a forward contract with BDO for the
sale 20,000 yen at the 120 day forward rate of P 11 on November 1, 2022. The firm commitment is
accounted for as fair value hedge.

Curry reported P 40,000 firm commitment as an asset account for the year ended 2022. He also
recognized P 80,000 loss for the hedging instrument for the year ended 2023.

What was the forward rate (determine rate, how many days and if selling/ buying) used to compute
firm commitment for the year ended 2022 and the spot rate (determine rate and selling/buying) for
March 1, 2023
A. 60 day forward buying, P 15; Buying spot rate, P 11
B. 60 day forward selling, P 15; selling spot rate, P 19

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C. 60 day forward buying, P 15; Buying spot rate, P 7
D. 60 day forward buying, P 13; Buying spot rate, P 17

7. On January 1, 2023, Hoodwink Inc. entered into an agreement to purchase 1,000 bow and arrows as

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inventory for 8 foreign currencies (FC) per bow and arrows, to be delivered on April 30, 2023. The
contract meets the requirement of a firm commitment. The resulting payable is expected to be settled
on the same date. On January 1, 2023, Hoodwink Inc. decides to hedge the foreign currency exposure
and enters a forward contract to exchange peso for FC 8,000 on April 30, 2023. The forward contract

settle the balance owing on April 30,2023

The following table summarizes the key data:

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is designated as a hedge of the firm commitment to purchase the watches on March 31, 2023 and to

Date Spot rate Forward rate expiring

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Peso per FC 4/30/2023
January 1 145 147
February 1 140 143
April 30 136 136
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Subsequently, Hoodwink sold the 8,000 bow and arrows to Windranger for P 1,300,000. Hoodwink
elected to use fair value hedge for the firm commitment.

What will be the impact in net income (loss) from the above transactions for the year 2023?
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A. 188,000
B. 148,000
C. 124,000
D. 220,000
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8. On December 1, 2022, NoMail anticipated the purchase of inventory on March 1, 2023 at a price of
$15,000. In order to hedge this highly probable forecasted importation, NoMail entered into a forward
contract with a bank to purchase $15,000 on December 1, 2022. NoMail is operating in Philippine
economy where the functional currency is Philippine peso.
December 1, 2022 December 31, 2022 March 1, 2023
Buying spot P 42 P40 P41
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Selling spot P 46 P44 P43

90-day forward buying P 41 P43 P44
90-day forward selling P 45 P41 P43
60-day forward buying P 48 P42 P41
60-day forward selling P 49 P41 P40
30-day forward buying P 46 P43 P42
30-day forward selling P 45 P44 P40

The related accounts payable was paid on March 31, 2023 when the buying spot rate was P 40 and
the selling spot rate was P 42.

Subsequently NoMail sold the inventory to Washed Qualifiers Company for 1,200,000.
 What is the foreign exchange gain/(loss) to be recognized in other comprehensive income for 2022 and
the related net income to be reported in profit or loss from all the above transactions for 2023?
A. P 60,000 gain; P 570,000 net profit
B. P 60,000 loss; P 540,000 net profit
C. P 10,000 loss; P 505,000 net profit
D. P 10,000 gain; P 0

9. On December 1, 2026, Lebron anticipates that it will sell merchandise for $1,000 a on March 1, 2027.
In order to hedge this foreign commitment, Lebron entered into a forward contract with a bank to sell
$1,000. Lebron is operating in Philippine economy where the functional currency is Philippine peso.
The following direct exchange rates are given:
December 1, 2026 December 31, 2026 March 1, 2027
Buying spot P43 P40 P47
Selling spot P45 P44 P49
90-day forward buying P41 P43 P44
90-day forward selling P42 P41 P43

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60-day forward buying P45 P42 P41
60-day forward selling P46 P45 P40
30-day forward buying P47 P46 P42
30-day forward selling P48 P47 P43

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The cost of the merchandise amounted to P 25,000.
What is the foreign currency gain or (loss) to be presented in other comprehensive income for the year
ended December 31, 2026 and what will be the impact on net profit/ loss for the year 2027?
A. P 1,000 loss; P 16,000 profit
B. P 1,000 gain P 22,000 profit
C. P 3,000 loss P 22,000 profit
D. P 3,000 gain P 16,000 profit
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10. ASUS Corporation has a 30% equity investment in a Company in Singapore, NS Company. On
December 31, 2022, the balance in ASUS’s Investment in NS account is P472,500, equal to 30% of
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NS’s net assets of 37,500 Singapore Dollars times a P42 year-end exchange rate. On this date, ASUS
has no adjustment balance relative to its investment in NS. To hedge its net investment in NS, ASUS
borrows 9,375 Singapore Dollars for one year at 12% interest on January 1, 2023 at a spot rate of P42.
The loan is denominated in Singapore Dollars, with principal and interest payable on January 1, 2024.
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Assume that on November 2, 2023, NS declares and pays a 1,875 Singapore Dollars dividend, when
the spot rate is P43.50. On December 31, 2023, P reports net income of 7,500 Singapore dollars. The
weighted average exchange rate for the year 2023 is P43, and the closing exchange rate on December
31, 2023 is P44.

As a result of the hedging, how much is the translation adjustment that will appear in the stockholders’
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equity section of the Statement of Financial Position of ASUS Corporation on December 31, 2023?
A. 24,468.75
B. 4,593.75
C. 18,750
D. 5,718.75
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11. On December 31, 2023, Hidilyn Company, the parent of the 100% owned Chinese subsidiary, expected
the yen to weaken by the end of 2024. Accordingly, Hidilyn Company, the parent, contracted with a foreign
exchange trader on December 31, 2023, to sell 2,300,000 yens (the subsidiary's net asset position at that
date) in 365 days at the forward rate of P.435. The following direct exchange rates are as follows:
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12/31/2023 (Inception Date)

Spot Rate: 0.440
Forward Rate 0.435

12/31/2024 (Expiration Date and Financial Reporting Date)

Spot Rate 0.400
Forward Rate 0.400

The January 1, 2024 balance of the translation reserve (cumulative) - debit amounted to P129,000 and
translation reserve loss for 2024 of P100,000.

The December 31, 2024, translation reserve balance (cumulative translation adjustment) amounted to:
A. P148,500 debit
B. P309,500 debit
C. P229,500 debit
D. P 148,500 credit

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