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Problem 5: On Nov 2,2020, P Corp entered into a firm commitment...

Problem 5: On Nov 2,2020, P Corp entered into a firm commitment with Japanese firm to acquire equipment, delivery and passage title on March 31,2021, at a price of 4,375 yen. On the same date, to hedge against unfavorable changes in the exchange rate of the yen, P Corp entered into a 150 day forward contract with BPI for 4,375 yen. The relevant exchange rates were as follows:

Nov 2, 2020 Dec 31, 2020 Mar 31, 2021

Spot rate P37 P38 P35

Forward rate P40 P33 P35

  1. What is the foreign currency gain/(loss) due to the change in the fair value of the underlying purchase commitment on Dec 31, 2020?

a. 30,625 gain

b. 30,625 loss

c. 4.375 gain

d. 4,375 loss

  1. What is the amount debited to the equipment account?

a. 161,875 on Nov 2, 2020

b. 175,000 on Nov 2, 2020

c. 153,125 on Mar 31, 2021

d. 175,000 on Mar 31, 2021

Problem 6: On Nov 1, 2020, 7D Co. entered into a firm commitment with Toki-Toki Japanese Company for the export of dried mangoes with a contract price of 10,000 Yen. The goods will be delivered by 7D Co. on Jan 30, 2021. 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 underlying foreign currency, 7D Co. entered into a forward contract with BDO for the sale of 10,000 Yen at the forward rate on Nov 1, 2020. IAS 39 provides the hedge of the foreign currency risk of a firm commitment may be accounted for as either 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:

Nov 1, 2020 Dec 31, 2020 Jan 30, 2021

Buying spot rate P10 P13 P12

Selling spot rate P13 P15 P16

Forward buying 90-days P11 P14 P15

Forward selling 90-days P13 P16 P17

Forward buying 60-days P14 P17 P16

Forward selling 60-days P15 P18 P14

Forward buying 30-days P11 P15 P12

Forward selling 30-days P13 P11 P14

  1. What is the foreign currency gain/(loss) due to hedged item for the year ended Dec 31, 2020?

a. 40,000 gain

b. 20,000 loss

c. 30,000 gain

d. 10,000 loss

  1. What is the foreign currency gain/(loss) due to hedging instrument for the year ended Dec 31, 2021?

a. 50,000 loss

b. 30,000 gain

c. 20,000 gain

d. 20,000 loss

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