CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

ADVANCE FINANCIAL ACCOUNTING AND REPORTING GERMAN AND VALIX

FOREIGN CURRENCY TRANSACTIONS, HEDGING AND DERIVATIVES

Part I: Theory of Accounts

1. PAS 39 enumerated the following three types of hedging relationships, except

A. Fair value hedge: a hedge of the exposure to changes in fair value of a recognized asset (AFS
Securities) or liability or an unrecognized firm commitment, or an identified portion of such an
asset, liability or firm commitment, that is attributable to a particular risk and could affect profit
or loss.
B. Cash flow hedge: a hedge of the exposure to variability in cash flows that (1) is attributable to a
particular risk associated with a recognized asset or liability (such as all or some future interest
payments on variable rate debt) or (2) a highly probable forecast transaction and (2) could
affect profit or loss.
C. Hedge of a net investment in foreign operation which is the hedge of the amount of the
reporting entity’s interest in the net assets of the operation.
D. Undesignated hedge such as hedge of foreign currency denominated payable or receivable.

2. In case of hedging transaction designated as fair value hedge, which of the following statements is
correct?
A. The gain or loss from remeasuring the hedging instrument/derivative designated as fair value
hedge shall be recognized in profit or loss.
B. The gain or loss on the changes in fair value of hedged item/(AFS Securities) attributable to the
hedged risk shall adjust the carrying amount of the hedged item and be recognized in profit or
loss.
C. Both A and B.
D. Neither A nor B.

3. In case of hedging transaction designated as cash flow hedge, which of the following statements is
correct?
A. The portion of the gain or loss on the hedging instrument/derivative designated as cash flow
hedge that is determined to be an effective hedge or the change in intrinsic value of the
derivative designated as cash flow hedge shall be recognized in other comprehensive income.
B. The ineffective portion of the gain or loss on the hedging instrument/derivative designated as
cash flow hedge or the change in time value of the derivative designated as cash flow hedge
shall be recognized in profit or loss.
C. The cumulative other comprehensive income recognized in equity arising from cumulative
changes in intrinsic value of derivatives designated as cash flow hedge shall be reclassified
from equity/cumulative OCI to profit or loss as a reclassification adjustment in the same period
during which the hedged forecast cash flows affects profit or loss.
D. All of the above.

4. In case of hedging transaction designated as hedge of net investment in a foreign operation, which
of the following statements is correct?
A. The portion of the gain or loss on the hedging instrument/derivative designated as hedge of net
investment in foreign operation that is determined to be an effective hedge shall be recognized
in other comprehensive income.
B. The ineffective portion of the gain or loss on the hedging instrument/derivative designated as
hedge of net investment in foreign shall be recognized in profit or loss.
C. Both A and B.
D. Neither A nor B

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5. In case of hedging transaction considered as “undesignated hedge” such as hedge of foreign

currency denominated accounts payable or foreign currency denominated accounts receivable,
which of the following statements is correct?
A. The exchange differences arising from the changes in measurement of hedged item or foreign
currency denominated accounts payable/receivable shall be recognized in profit or loss.
B. The exchange differences arising from the changes in measurement of hedging
instruments/derivatives shall be recognized in profit or loss.
C. Both A and B.
D. Neither A nor B.

6. How shall an entity account for hedging transaction classified as hedge of firm commitment?
A. Cash flow hedge only
B. Fair value hedge only
C. Undesignated hedge only
D. IAS 39 gives the entity the option to elect either cash flow hedge or fair value hedge for hedge
of firm commitment.

7. It refers to the degree to which changes in the fair value or cash flows of the hedged item that are
attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging
instrument.
A. Hedge effectiveness
B. Hedge ineffectiveness
C. Hedge imperfectness
D. Hedge inappropriateness

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Part II: Problem Solving

Problem 1

The Philippine corporation purchased merchandise from a US firm for USD$15,000 on November 1,
2025. Also on the same date the Philippine corporation sold merchandise to a US firm for
USD$30,000.
The following rates were available:
Buying Rate Selling Rate
November 1, 2025 US$1 = P46.00 P1 = $.021505
December 31, 2025 US$1 = P45.80 P1 = $.021277
January 31, 2026 (settlement date) US$1 = P46.20 P1 = $.022222

1. What is the amount of sales revenue recognized for the year 2025?
A. 1,380,000
B. 1,395,000
C. 1,374,000
D. 1,410,000

2. What is the carrying amount of the accounts receivable on December 31, 2025?
A. 1,410,000
B. 1,374,000
C. 1,386,000
D. 1,350,000

3. What is the carrying amount of the accounts payable on December 31, 2025?
A. 687,000
B. 705,000
C. 693,000
D. 675,000
4. What is the net foreign currency gain/(loss) for the year 2025?
A. 12,000 gain
B. 12,000 loss
C. 13,500 gain
D. 13,500 loss

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Problem 2

AAA Corp. is engaged in a retail business. The company buys its merchandise from foreign suppliers
and ships its goods overseas to target customers outside their country.
On September 1, 2025 an overseas customer called up and placed an order for certain merchandise
worth $95,000 and on the same date, the company also ordered additional merchandise from its foreign
supplier worth $55,000.
On September 30, 2025, the invoice is billed to the customer and due on December 31, 2025. The
merchandise from foreign supplier was shipped on October 31, 2025 and was due on November 30,
2025.
To hedge in the possible fluctuations in the exchange rate, the entity entered into a forward contract to
sell $95,000 on September 30, 2025 for delivery on December 31, 2025 and also entered into a forward
contract to buy $55,000 on October 31, 2025 for delivery on November 30, 2025. The relevant
exchange rates were as follows:

Date 09/01/25 09/30/25 10/31/25 11/30/25 12/31/25

Selling spot rate 34.55 34.40 36.34 36.50 32.88
Buying spot rate 35.33 35.67 35.45 35.23 34.50
90-day forward rate 36.23 35.12 35.22 36.43 35.90
60-day forward rate 34.78 34.89 36.76 35.68 35.97
30-day forward rate 36.78 38.55 35.43 36.53 37.77

1. What is the carrying amount of the accounts receivable on November 30, 2025?
A. 3,467,500
B. 3,346,850
C. 3,460,850
D. 3,389,600

2. What is the carrying amount of the accounts payable on November 30, 2025 before
settlement?
A. 2,007,500
B. 1,937,650
C. 2,003,650
D. 1,962,400

3. What is the amount of sales revenue recognized for the year 2025?
A. 3,356,350
B. 3,268,000
C. 3,388,650
D. 3,282,250

4. What is the forex gain or loss due to hedging instrument pertaining to the import transaction
on the settlement date?
A. 58,850 loss
B. 58,850 gain
C. 60,500 loss
D. 60,500 gain

5. What is the net forex gain or loss for the year 2025 due to the hedging activity?
A. 2,200 net loss
B. 2,200 net gain
C. 37,150 net loss
D. 37,150 net gain

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Problem 3

On Mar 1, 2025, a Philippine company purchased merchandise from a foreign supplier in Singapore
dollar in the amount of SG$5,000. On the same date, the Philippine company issued a 60-day 15% note
payable to the foreign supplier. On April 30, 2025, the Philippine company paid the total amount due
to the foreign supplier.

Buying Rate Selling Rate

March 1, 2025 P1 = SG$.029411 SG$1 = P35.47
March 31, 2025 P1 = SG$.028901 SG$1 = P36.10
April 30, 2025 P1 = SG$.028571 SG$1 = P36.07

1. What is the forex gain or loss on March 31, 2025?

A. 3.150 gain
B. 3,150 loss
C. 3,386 gain
D. 3,386 loss

2. What is the forex gain or loss on the settlement date?

A. 150 gain
B. 150 loss
C. 151.875 gain
D. 152.875 loss

Problem 4

On September 30, 2025, Philippine Co. entered into a firm commitment with a Japanese firm to
purchase a Machinery in the amount of 5,000,000 yen, delivery and payment to be made on March 31,
2026. On September 30, 2025, Philippine Co. entered into forward contract to buy 5,000,000 yen. On
March 31, 2026, the Machinery was delivered.

09/30/2025 12/31/2025 03/31/2026

Spot rate 0.38 0.42 0.30
Forward rate 0.39 0.44 ?

1. What is the foreign currency gain/(loss) due to the change in the fair value of the underlying
purchase commitment on December 31, 2025?
A. 250,000 loss
B. 250,000 gain
C. 200,000 loss
D. 200,000 gain

2. How much is the firm commitment balance in 2026 before closing?

A. 100,000 asset
B. 100,000 liability
C. 450,000 asset
D. 450,000 liability

3. How much is the cost of the inventory acquired on March 31, 2026?
A. 2,300,000
B. 1,950,000
C. 1,900,000
D. 2,200,000

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Problem 5

On March 1, 2025, Philippine Entity purchased of 4,000 units of inventory from a foreign vendor due
on June1 in the amount of 200,000 foreign currencies (FC).

On March 1 also, Philippine Entity purchased a call option to buy 200,000 FC at a strike price of 1
FC = 0.55 with an option premium of P1,800 was also paid.

March 1 March 31 April 30 June 1

Spot rate 0.53 0.552 0.57 0.575
Fair value of option ? 2,700 4,800 ?

1. What is the forex gain or loss in the hedging instrument due to change in the effective portion
on April 30, 2025, if changes in the time value will be excluded from the assessment of hedge
effectiveness?
A. 4,000 gain
B. 1,000 gain
C. 3,600 gain
D. 400 gain

2. What is the forex gain or loss in the hedging instrument due to change in the ineffective
portion for the year 2025, if changes in the time value will be excluded from the assessment of
hedge effectiveness?
A. 1,800 loss
B. 500 gain
C. 1,500 loss
D. 800 loss

3. If changes in the time value will be included in the assessment of hedge effectiveness, what is
the forex gain (loss) in the hedging instrument on May 30, 2025?
A. 900 gain
B. 2,100 gain
C. 200 gain
D. 3,200 gain

4. Assume that it was a forecasted purchase on March 1 and it will probably occur on June 1.
For the year ended December 31, 2025 only 1,500 units were left unsold to third persons.
What is the balance of the cumulative Other Comprehensive Income on December 31, 2025?
A. 5,000 credit
B. 3,125 debit
C. 3,125 credit
D. 1,875 credit

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Problem 6

On January 1, 2025, Sharon, Inc. paid P32,000 cash to acquire an at-the-money put foreign exchange
option for 2,000,000 baht due on December 31, 2025. The option hedges a sales in the amount of
2,000,000 baht made on January 1, 2025

January 1 June 30 December 31

Spot Rate P1.20 P1.12 P1.15
Fair value of Put Option ? 162,000 ?

1. What is the forex gain or loss in the hedging instrument due to change in the ineffective
portion on June 30, 2025?, if changes in the time value will be excluded from the assessment
of hedge effectiveness?
A. 30,000 loss
B. 2,000 loss
C. 32,000 loss
D. 0

2. If changes in the time value will be included in the assessment of hedge effectiveness, what is
the forex gain (loss) in the hedging instrument on for the six months ended December 31,
2025?
A. 130,000 gain
B. 68,000 gain
C. 62,000 loss
D. 100,000 gain

3. What is the forex gain or loss in the hedging instrument due to change in the effective
portion for the year ended 2025, if changes in the time value will be excluded from the
assessment of hedge effectiveness?
A. 160,000 gain
B. 60,000 loss
C. 100,000 gain
D. 0

4. Assume that it was a forecasted sale on January 1 and it will probably occur on December
31. For the year ended December 31, 2025 the forecasted sale occurred, but only 75% of the
receivables were collected. What is the balance of the cumulative Other Comprehensive
Income on December 31, 2025?
A. 100,000 credit
B. 60,000 debit
C. 25,000 credit
D. 0

END

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