FOREIGN CURRENCY TRANSACTIONS:

FOREX TRANSACTIONS IN GENERAL

In a strict sense, foreign exchange transactions are those that are to be settled in foreign
currency, regardless of the location of either party. These are accounted for by the domestic
company by translating the amounts in foreign currency with BSP-set exchange rates

For translation purposes, the exchange rates must be quoted directly, where the Peso is
expressed as the equivalent of one foreign currency. Rates displayed on news are usually on
indirect quotation. To convert, 1 ÷ (FC equivalent of Php 1). Converting from direct
quotation to indirect quotation also follows the same format

If the given exchange rates in a particular problem are not in Peso, conversion is necessary

How to determine a Foreign Currency Transaction?

TRANSACTION SETTLED IN Is it a foreign Is it a foreign

BETWEEN currency transaction currency transaction
to Domestic to Foreign
Corporation? Corporation?
1. DC & DC DO-Curr NO NO
2. DC & FC DO-Curr NO YES
3. DC & FC Fo-Curr YES NO
4. FC & FC Fo-Curr NO NO
*DC – Domestic Corporation
**FC – Foreign Corporation
***DO-Curr – Domestic Currency (Ex. PESO – for Philippines; US Dollar for USA)
****Fo-Curr – Foreign Currency (Ex. US Dollar for Philippines; PESO for USA)

Important Dates to Consider in Foreign Exchange (Forex) transactions

DATES IMPORTANCE RATE USED

Transaction Date (TD)
Balance Sheet Date (BD)
Settlement Date (SD)
The date when the purchase or SPOT/HISTORICAL
sale of goods or services or
currency takes place
The date when closing rates SPOT/CLOSING
will be applied in computing
for the FOREX gain or loss
The date when payment or SPOT/ACTUAL
receipt shall be made and the
FOREX gain or loss computed
Different rates in FOREX
EXCHANGE RATES SYMBOL SIGNIFICANCE
SPOT RATE SR Rate TODAY and applicable TODAY
FUTURE RATE FR Rate TODAY applicable in the
FUTURE; also known as FORWARD
RATE
HISTORICAL RATE HR Spot rate in the Transaction date
CLOSING RATE CR Spot rate in the Balance Sheet date
ACTUAL RATE AR Spot rate in the Settlement date

Items to consider and their treatment of FOREX gain or (loss):

ITEMS FOREX gain/(loss) EXAMPLE OF MONETARY &
reported in NON-MONETARY ACCOUNTS
1. MONETARY P/L Cash, Accounts Receivable, Accounts
Payable
2. NON-
MONETARY
@ Historical Cost P/L Equipment, Inventory, Building
@ Fair Value OCI Investment in Equity Securities

SPOT TRANSACTIONS:
DATE MONETARY NON-MONETARY ITEMS
ITEMS At Fair Value At Historical Cost
TD @ SR (HR) @ SR (HR) @ SR (HR)
BD @ SR (CR) @ SR (CR) @ SR (HR)
SD @ SR (AR) @ SR (AR) @ SR (AR)

IMPORT AND EXPORT (UNHEDGED)

TRANSACTIONS

In an unhedged import and export transaction, the only relevant exchange rate would
be the spot rate as of the date of the transaction, balance sheet date, and the date of
settlement

Spot rates are classified as either buying or selling (also called bid and offer rates,
respectively). If the domestic entity exports, the buying rate is used since this would be the
price that the foreign buyer would pay for the goods. If the domestic entity imports, the selling
rate is used

Suppose the domestic company exports goods on F.O.B. destination freight terms. On the date
of transaction, the spot rate to be used will be as of the date when the goods reached the buyer
– the point when legal title is passed under the freight term. Of course, if on F.O.B. shipping
point, it will be when shipped
 The domestic entity recognizes forex gains or losses as the spot rate changes during the
aforementioned dates only. For instance, if the domestic entity is an exporter (thus it has
outstanding accounts receivable) and the buying spot rate increases, the entity recognizes
forex gains to be recorded in profit/loss (together with an increase in accounts receivable)

The foreign entity does not record any forex gains or losses since the transaction is
denominated in their currency

The final cash payment during the date of settlement shall of course still be at the spot
rate, so is the cost at which the asset purchased is recorded

FOREIGN DEBT TRANSACTIONS

 Just like purchase of commodities, forex gains/losses are also recognized in foreign debt
borrowings/grants. Also, the purchase of the goods might have been made through issuance
of promissory notes and other debt instrument

 If the domestic entity is a borrower, it must use the selling spot rate, and the buying spot
rate if it lends

ILLUSTRATION Pa Rong Co. signed a two-year promissory note bearing 12% on December
1, 2016 for $10,000. Interest is to be paid monthly. Assume the selling spot rates are the
following: Php 2 (December 1), Php 3 (December 31), and Php 1.5 (December 31, 2017)
 On December 31, 2016, any forex gains/losses on the loan is based on the principal alone.
Thus, there is a forex loss of Php 10,000 with a credit to Notes Payable for 2016 ($10,000
× [Php 3 – Php 2])
 The actual interest expense is based on the current spot rate of the principal amount
 On December 31, 2017, forex gains/losses are now based on both the principal and the
interest. The forex gains/losses from the interest is based on the forex gains/losses
computed on the principal. There is a forex gain on the principal amounting to Php 15,000
($10,000 × [Php 3 – Php 1.5]). Thus, there is also a forex gain on the interest, amounting to
Php 1,800 (Php 15,000 × .12)

FIRM (PURCHASE/SALE) COMMITMENTS

There is no actual transaction taking place in a firm commitment, which can be to sell or
purchase something at a future date. This means that the purchase/the asset is not recorded
until the date of settlement, unlike the previous transaction in which the asset is already
recognized at the date of transaction. Only a memo entry is made for the asset during the
transaction date
 Only forward rates are relevant in this case. At the date of settlement, the purchase is
recorded using the forward rate at the date of settlement. In a firm commitment, the buyer (or
seller) contracts that he will pay (receive) an amount at the agreed rate no matter if it changes

There is zero net forex gain/loss in a firm commitment. Suppose the domestic entity
enters in a purchase commitment, and that the forward rate increases. They would record a
forex gain on the commitment (debit Accounts Payable, credit Forex Gain) and a forex loss on
the item (debit Firm Commitment, credit Forex Loss) at the same amount. ‘Firm Commitment’
in this case is an asset account

At the date of settlement, the domestic entity pays/receives an amount equal to the
forward rate at the date of settlement. The cost of the asset, as mentioned, is at the forward rate
at the date of transaction. Any difference is debited/credited to Firm Commitment account

HEDGED FOREX TRANSACTIONS:

GENERAL CONCEPTS

Entities engage in hedging transactions to mitigate potential losses arising from volatile
exchange rates. To hedge is to take the position opposite that of the transaction. This means
that if the hedged item (the asset) records a forex gain, the hedge records a forex loss to even
out things

Hedging instruments are usually in the form of derivatives, financial instruments that
derive their value from another instrument. They are classified as either option-based (offers
one-sided protection against exchange rate risks, such as options and swaps) and forward-
based (offers two-sided protection, such as forward and futures contracts)

Just like in a firm commitment, there are two sets of entries to be made in a hedged
transaction – one for the hedged item (the asset) and one for the hedging instrument. Suppose
that the domestic entity sells, and the exchange rate increases. The hedged item would record a
forex gain (debit Accounts Receivable, credit Forex Gain), and the hedging instrument would
record a forex loss (debit Forex Loss, credit Forward Contract Payable)

The net forex gain/loss from the hedged item and hedging instrument is referred to as the
forex gain/loss from hedging activity

Of course, on the hedging instrument’s side, the Forward Contract Receivable account
absorbs any change in exchange rate if the domestic entity purchases, and Forward Contract
Payable if it sells. On the other side, Accounts Payable and Accounts Receivable absorbs the
changes, respectively
 Note that the liability/receivable to third person is based on the entries on the hedged item,
not the hedging instrument

Forward rates are used for the hedging instrument until the date of settlement, when the
spot rate is used. Of course, if the selling spot rate is used on the hedged item, the selling
forward rate is used for the hedging instrument

Problems usually present forward rates classified as per a particular number of days. The
rate to be used is the number of days remaining until the date of settlement

On settlement date, the domestic entity either receives (debits) or pays (credits) cash
equal to the difference of the spot rate at settlement and the forward rate at the date of
transaction. This is because the agreed upon rate (the forward rate at the date of transaction) is
the amount that the parties agreed to be paid regardless of the change in the rates. A bank or
other speculators usually handle the difference

HEDGED FOREX TRANSACTIONS:

ACCOUNTING FOR HEDGING INSTRUMENTS

Hedging instruments are also classified as either fair value hedges (used in transactions
with recognized assets and liabilities, such as in actual purchases/sales), cash flow hedges
(used in forecasted and anticipated transactions), and net investment hedges (similar in
treatment as to cash flow hedges, used between a domestic and a foreign entity)

If silent, the hedge is assumed to be one of fair value hedge

Recording exchange rate changes as they affect the hedging instrument can be made in
two ways – split and non-split accounting. Under split accounting, gains/losses of the
instrument is divided into the effective portion (or the intrinsic value), and the ineffective
portion (or the time value gains and losses)

In fair value hedges, both the effective and ineffective portion of the gains/losses go to
profit/loss. In cash flow/net investment

Hedges, the effective portion is a component of other comprehensive income, while the
ineffective portion goes to profit/loss

Split and non-split accounting is best illustrated with options

HEDGED FOREX TRANSACTIONS
OPTION CONTRACTS

Options are contracts that grant holders the right to either buy (call) or sell (put) goods
at the future date at a predetermined price, called the strike/exercise price. This is recorded as
an investment in the balance sheet. The amount paid for an option is referred to as the option
premium

They may be classified as to the likeability of their exercise. If the option is at the money
(strike price equals current market prices), the option is likely to be exercised, bearing no loss
on the holder. If the option is in the money, it is also likely to be exercised, bearing gains on
the holder. In a put option, this is when the strike price is greater than market prices; in a call
option, this is when the strike price is less than market prices. If out of the money, the option is
likely not to be exercised, since it would bring losses to the holder

The option contact is the hedging instrument. However, it is not a derivative like
forward contracts, since it has its own cost (the option premium). Also, it is not affected by
changes in the forward rate, since its value depends on its current fair value

The change in the fair value is the fair value is total gains/losses on the hedging instrument, to
be recorded on profit/loss (if fair value hedge) or other comprehensive income (if cash flow
hedge) if the company uses non-split accounting

If problems mention that “the effect of time value gains/losses are excluded in the assessment
of hedge effectiveness”, the company

uses split accounting, wherein the fair value change is divided into the effective and
ineffective portions. Option contracts are usually classified as cash flow hedges

Date #1 (difference) Date #2

Fair value of option xx Total gains/losses xx xx
LESS: Intrinsic value xx LESS: Intrinsic value g/l xx xx
Time value xx Time value g/l xx xx

The intrinsic value is computed by multiplying the notional amount (the amount of the
foreign currency) by the difference of the strike price and the market price per item. The
change in the intrinsic value is the effective portion of the total gains/losses. Note that the
intrinsic value itself is not the effective portion to be sent to OCI. The same goes for the time
value gains/losses
 There is only intrinsic value if the option is in the money, otherwise it shall be zero. At the
settlement date, the intrinsic value should always match the fair value of the option, resulting
to a zero time value gains/losses

The effective portion is among the components of OCI that gets transferred to profit/loss.
The amount is transferred if the asset purchased is sold or depreciated, whichever is
applicable

The forex gain/loss from the hedging activity in this case is equal only to the time value
gains/losses, since the effective portion goes to other comprehensive income

FOREIGN CURRENCY TRANSLATION

The presentation currency to be used in the financial statements is the functional

currency, which is the one used in the economic environment in which the entity operates.
Sales dictate the entity’s functional currency
Translation of financial statements also give rise to gains/losses to be recorded in other
comprehensive income. This is to be transferred to profit/loss when the foreign branch is sold

Translation gain/loss to be entered in statement of comprehensive income can be

computed as follows:

Net assets @ current/year-end rate xx

ESS: Net assets @ roll-forward
Beg net assets @ rate of prev. year-end xx
ADD: Net income @ average rate xx
ADD: Dividends @ rate at declaration xx xx
Translation gain/loss, balance in OCI in equity current year xx
LESS: Translation gain/loss, beginning xx
Translation gain/loss, current year (to SCI) xx

For instance, the domestic entity owns not a business but just a single asset overseas
that’s measured at fair value, such as investment property. That item’s value shall be its fair
value overseas at foreign currency, to be translated with the exchange rate as of when the fair
value was determined. No forex gains/losses are recorded, but only unrealized gains/losses.
This is because forex gains/losses only emerge from monetary assets, such as accounts
receivable/payable

If the item is measured at cost, it remains to be measured at its historical cost, using the
exchange rate when purchased
PROBLEMS & EXERCISES

PROBLEM 1

X Tradi g pur hases goods fro Y, a o pa ased o Fra e for , , Euros € . The e ha ge
rate at this ti e is P = € . . X pa s da s later he the pre aili g e ha ge rate is P = € .
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

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

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 Co pa ought er ha dise for € , fro a Fre h o pa o De e er , . Pa e t

in Euros was due on February 28, 2014. On the same date, SBC entered into a 90-day futures contract to
u € , fro Metro a k. E ha ge rates for Euros o 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

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
 Joint Arrangements
(IFRS 11)

A joint arrangement is an agreement of which two or more parties

have joint control.

A joint arrangement has the following characteristics:

(a) The parties are bound by a contractual arrangement. An

enforceable contractual arrangement is often, but not
always in writing, usually in the form of a contract
between the parties. Joint arrangements may be structured
through a separate vehicle. When joint arrangements are
structured through a separate vehicle, the contractual
arrangements will in some cases be incorporated in the
articles, or by-laws of the separate vehicle.
(b) The contractual arrangement gives two or more of those
parties joint control of the arrangement.

Separate vehicle is a separately identifiable financial

structure, including separate legal entities or entities
recognized by statute, regardless of whether those entities have
a legal personality. This maybe in the form of a partnership or
corporation.

Joint control is the contractually agreed sharing of control of

an arrangement, which exists only when decisions about the
relevant activities require the unanimous consent of the parties
sharing control.

TYPES OF JOINT ARRANGEMENT

Joint arrangements are established for a variety of purposes (eg

as a way for parties to share costs and risks, or as a way to
provide the parties with access to a new technology or new
markets), and can be established using different structures and
legal forms. Examples of joint arrangements are construction
services, shopping center operated jointly, joint manufacturing
and distribution of a product, bank operated jointly, and oil
and gas exploration, development and production activities.

A joint arrangement is either a joint operation or a joint

venture.

Joint Operation
A joint operation is a joint arrangement whereby the parties
that have joint control of the arrangement have rights to the
assets, and obligations for the liabilities, relating to the
arrangement. Those parties are called joint operators. To manage
the activities of the joint arrangement, joint operators may
appoint an operator or manager, who will be an employee of the
joint operators.

Joint Venture

A joint venture is a joint arrangement whereby the parties that

have joint control of the arrangement have right to the net
assets of the arrangement. Those parties are called joint
ventures. This type is usually structured through a separate
vehicle (a partnership or corporation).

A joint arrangement in which the assets and liabilities relating

to the arrangement are held in a separate vehicle can be either
a joint venture or a joint operation. A joint arrangement that
is not structured through a separate vehicle is a joint
operation.

ACCOUNTING PROCEDURES

Joint operations

A joint operator shall recognize in relation to its interest in

a joint operation:

(a) Its assets, including its share of any assets held

jointly;
(b) Its liabilities, including its share of any
liabilities incurred jointly;
(c) Its revenue from the sale of its share of the output
arising from the joint operation;
(d) Its share of the revenue from the sale of the output
by the joint operation; and
(e) Its expenses, including its share of any expenses
incurred jointly.

When a joint operator sold or contributed assets to the joint

operation, the joint operator shall recognize gains and losses
resulting from such transaction only to the extent of the other
parties’ interest in the joint operation. If such transaction
provides evidence of a reduction in the net realizable value of
the assets to be sold or contributed to the joint operation or
of an impairment loss of those assets, those losses shall be
recognized full by the joint operator.

When a joint operator purchases assets from the joint operation,

it shall not recognize its share of the gains and losses until
it resells those assets to outsiders. When such transactions
provide evidence of a reduction in the net realizable value of
the assets to be purchased or of an impairment loss of those
assets, a joint operator shall recognize its share of those
losses.

Joint Ventures

A joint venture shall recognize its interest in a joint venture

as an investment and shall account for that investment using the
equity method.

Under the equity method, on initial recognition the investment

in joint venture is recognized at cost, and the carrying amount
is increased or decreased to recognize the venturer’s share of
the profit or loss of the joint arrangement after the date of
acquisition. Distributions received from the joint arrangement
reduce the carrying amount of the investment. The venturer’s
share of the profit or loss is recognized in the venture’s
profit or loss.

APPENDIX

Investment in Joint Ventures for Small and Medium-sized Entities

(SMEs)

This appendix is an integral part (Section 15) of the

International Financial Reporting Standards (IFRS) for Small and
Medium-sized Entities (SMEs).

Small and Medium-sized Entities (SMEs). These are entities:

a. With total assets of between P3 million to P350 million
and total liabilities of between 3 million to
P250million.
b. That publish general purpose financial statements for
external users.
 c. That are not in the process of filing their financial
statements for the purpose of issuing any class of
instruments in a public market; and
d. That do not have public accountability.

An entity has public accountability if:

a. Its debt or equity instruments are traded in a public
market or in the process of issuing such instruments for
trading in a public market.
b. It holds assets in a fiduciary capacity for a broad group
of outsiders as one of its primary business. This is
typically the case for financing companies, insurance
companies, brokers and dealers of securities, and
investment banks.

Joint Ventures defined

Section 15 of IFRS for SMEs defines joint venture as a

contractual arrangement whereby two or more parties undertake an
economic activity that is subject to joint control. Joint
ventures can take the form of jointly controlled operations,
jointly controlled assets, or jointly controlled entities.

The above definition is different from the definition in IFRS 11

(Joint arrangements) and IFRS 28 (Investments in associates and
joint ventures). However, they share the following
characteristics:

(a) A contractual arrangement exists between the parties

involved in the venture; and
(b) The contractual arrangement establishes joint control.

ACCOUNTING PROCEDURES

Jointly Controlled Operations

The operation of this type involves the use of the assets and
the other resources of the parties (venturer) rather than the
establishment of a corporation, partnership or other entity, or
a financial structure that is separate from the parties
themselves. Each party uses its own property, plant and
equipment and carries its own inventories. It also incurs its
own expenses and liabilities and raises its own finance, which
represent its own obligations. The activities nay be carried out
by a manager, who is an employee of the parties. The agreement
usually provides a means by which the revenue and expenses
incurred in common are shared among the parties.
Jointly Controlled Assets

This type involves the joint control, and often the joint
ownership, by the parties (venturers) of one or more assets
contributed to, or acquired for the purpose of, the joint
venture and dedicated to the purposes of the joint venture.

Jointly Controlled Entities

A jointly controlled entity is a joint venture that involves the

establishment of a corporation, partnership or other entity in
which each venture has an interest. The entity operates in the
same way as other entities, except that a contractual
arrangement between the venturers establishes joint control over
the economic activity of the entity.

This is similar to the joint venture type of joint arrangements

under IFRS 11.

Measurement

Section 15 (Investments in Joint Ventures) of the IFRS for SMEs

requires an entity to choose one of the following three models
to account for its investments in joint ventures:

(a) Cost Model. The investment in a joint venture is

measured at cost (including transaction costs) less any
accumulated impairment loss. However, an investor using the
cost model is required to use the fair value model for any
investment in a joint venture for which a published price
quotation exists. The investor shall recognize
distributions received from the investment as income
without regard to whether the distributions are from
accumulated profits of the jointly controlled entity
arising before or after the date of acquisition.
(b) Equity Method. The investments in a joint venture is
initially recognized at the transaction price (including
transaction costs) and adjusted thereafter for the post-
acquisition change in the investor’s share of profit or
loss and other comprehensive income of the joint venture.
(c) Fair Value Model. The investment in joint venture is
initially recognized at the transaction price (excluding
transaction costs). After initial recognition, at reporting
date, the investment in joint venture is measured at fair
value. Changes in fair value are recognized in profit or
 loss. However, an investor using the fair value model is
required to use the cost model for any investment in joint
venture for which it is impractical to measure fair value
reliably without undue cost or effort.

Cost of Acquisition

The cost of acquisition in exchange for the control of the

acquire includes the fair value of assets given, liabilities
incurred or assumed and equity instruments issued by the
acquirer, plus any directly attributable costs.

Transactions between a venture and a joint venture

When a venture contributes or sells assets to a joint venture,

recognition of any portion of a gain or loss from the
transaction shall reflect the substance of the transaction.
While the assets are retained by the joint venture and provided
the venture has transferred the significant risks and rewards of
ownership, the venture shall recognize only that portion of the
gain or loss is attributable to the interests of the other
venturers. The venture shall recognize the full amount of any
loss when contribution or sale provides evidence of an
impairment loss.

When a venturer purchases assets from a joint venture, the

venture shall not recognized its share of the profits of the
joint venture from the transaction until it resells the assets
to an independent party. A venture shall recognize its share of
the losses resulting from these transactions in the same way as
profits except that losses shall be recognized immediately when
they represent an impairment loss.

The above principles are similar to the principles of accounting

for Joint Operation type of Joint Arrangement (IFRS 11)
 PROBLEMS

Numbers 1 to 3 are based on the following data:

A and B (the parties) are two companies whose businesses 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 motor way between two cities for P24
million (a fixed price contract).

The contractual arrangement determines the participation shares

of A and B and establishes:
a. Joint control of the arrangement;
b. The rights to all the assets needed to undertake the
activities of the arrangement are shared by the parties
on the basis of their participation shares in the
arrangement;
c. 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
d. The profit or loss resulting from the activities of the
arrangement is shared by A and B on the basis of their
participation shares in the arrangement.

In 2013, in accordance with the agreement between A and B:

 A and B each used their own equipment and employees in the
construction activity
 A constructed three bridges needed to cross rivers on the
route at a cost of P8 million
 B constructed all of the other elements of the motorway at
a cost of P10 million.
 A and B shares equally in the P24 million jointly invoiced
(and received from) the government.

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

a. P8 million
b. P14 million
c. P6 million
d. P4 million

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

a. P6 million
b. P14 million
c. P4 million
d. P2 million
 3. What is the gross profit earned by B in 2013?
a. P2 million
b. P14 million
c. P7 million
d. P6 milllion

Use the following data in answering Nos. 4 to 6

Two real estate companies, R and S (the parties) set up a
separate vehicle (entity X) 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 X. The main feature of entity X’s legal form
is that 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:

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

Transactions of the contractual arrangement for 2012 and 2013

follow:

2012:
 Co. R and Co. S contributed P10 million each for one-half
interest in the net assets of Entity X.
 Organization expenses incurred amounts to P100,000.
 Entity X acquired land at a cost of P2 million.
 Constructed a building (shopping centre) at a cost of P15
million.
 Operating expenses for the year amounts to P1 million.
 Rental income collected from the tenants, P10 million.
  Net income or loss is distributed to the venturers in
accordance with their interest
2013:
 Operating expenses (including depreciation) incurred for
the year, P3.5 million
 Rental income collected for the year, P12 million
 Each venturer receives a share of the income or loss from
rental income net of the operating expenses.

4. What is the interest of Co. R in the joint venture as of

December 31, 2012?
a. P14 M
b. P14.45 M
c. P 15 M
d. P20 M

5. What is the net income (loss) of Entity X on December 31,

2013?
a. P8.5 M
b. P12 M
c. P15.5 M
d. P10.5 M

6. What is the interest of Co. S in the joint arrangement as

of December 31, 2013?
a. P18.7 M
b. P14.5 M
c. P10.0 M
d. P14.0 M

Questions 7 to 9 are based on the following data:

On January 1, 2013, Red, White and Blue (the joint operators)
jointly buy a helicopter for P30 million cash. The joint
arrangement includes the following arrangements:
a. The parties are joint owners of the helicopter.
b. The helicopter is at the disposal of each party for 70 days
each year.
c. The parties may decide to use the helicopter or lease it to
a third party.
d. The maintenance and disposal of the helicopter require the
unanimous consent of the parties.
e. The contractual arrangement is for the expected life (20
years) of the helicopter and can be change only if all the
parties agree. The residual value of the helicopter is NIL.
f. Revenues and expenses are to be shared equally among the
joint operators.
In 2013, the parties paid P300,000 to meet the costs of
maintaining the helicopter.

In 2013 each party also incurred costs of running the helicopter

when they made use of the helicopter (eg Red incurred costs of
P200,000 on pilot fees, aviation fuel and landing costs). In
2013 the parties earned rental income of P2.5 million by renting
the helicopter to others.

7. What is the net income (loss) of the joint arrangement on

December 31, 2013?
a. P5 M
b. P2 M
c. P1.5 M
d. P2.5 M

8. What is the book value of the helicopter on the books of

Red on December 31, 2013?
a. P28.5 M
b. P19 M
c. P21 M
d. 9.5 M

9. What is the share of White in the net income (loss) of the

joint arrangement on December 31, 2013?
a. P166,667
b. P150,000
c. P125,000
d. P160,000

Question 10 and 11 are based on the following data:

Banks A and B (the parties) agreed to combine their corporate,

investment banking, asset management and service activities by
establishing a separate vehicle (bank X). Both parties expect
the arrangement to benefit them in different ways.

The assets and liabilities held in Bank X are the assets and
liabilities of Bank X and not the assets and liabilities of the
parties. Banks A and B each have a 40 percent ownership interest
in Bank X, with the remaining 20 percent being listed and widely
held. The stockholders’ agreement between bank A and bank B
establishes joint control of the activities of bank X.

Transactions for the year 2013 and 2014 follow:

 2013 2014
Investments: Bank A P50M P5M
Bank B 50M 5M
Revenues 10M 12M
Cost and expenses 6M 7M
Dividends paid – Bank X - 4M

10. What is the interest of bank A in the joint

arrangement at December 31, 2013?
a. P50 M
b. P48.4 M
c. P48 M
d. P40 M

11. What is the interest of bank B in the joint

arrangement at December 31, 2014?
a. P52.5 M
b. P52.4 M
c. P54.5 M
d. P50.5 M

12. Appendix problem:

On January 1, 2013 entities A and B each acquired 30 percent of

the ordinary shares that carry voting rights at a general
meeting of shareholders of entity X for P300,000. Entities A and
B immediately agreed to share control over entity X. For the
year ended December 31, 2013 entity X recognized a profit of
P400,000.

On December 31, 2013 entity X declared and paid a dividend of

P150,000 for the year 2013. At December 31, 2013 the fair value
of each venturer’s investment in entity X is P425,000. Entities
A and B uses the cost model to account for its investment in
jointly controlled entities. However, there is no published
price quotation for entity X. investments are accounted for
using the cost model.

At December 31, 2013 the venturers must report their investment

in entity X at:
a. P300,000
b. P345,000
c. P255,000
d. P420,000
 13. Using the same facts in No. 12, assuming on January 2,
2013 entity X also declared a dividend of P100,000 for the
year 2012 and at December 31, 2013 the fair value of each
venturer’s investment in entity X is P400,000.

How much dividend income each venture should recognize on

December 31, 2013?
a. P45,000
b. P30,000
c. P75,000
d. P15,000

Numbers 14 and 15 are based on the following data (Appendix

Problem):

Using the same facts in No. 12. However, there is a published

price quotation for entity X.

14. How much income is to be recognized by each venture in

profit or loss for the year ended December 31, 2013?
a. P165,000
b. P170,000
c. P125,000
d. P200,000

15. At December 31, 2013 the venturers must each report

its investment in entity X at:
a. P425,000
b. P300,000
c. P330,000
d. P345,000

Numbers 16 and 17 are based on the following data (Appendix

Problem):
On March 1, 2013 entities A and B each acquired 30 percent of
the ordinary shares that carry voting rights at a general
meeting of shareholders of entity AB for P300,000. Entities A
and B immediately agreed to share control over entity AB.

On December 31, 2013 entity AB declared a dividend of P100,000

for the year 2013. Entity AB reported a profit of P80,000 for
the year ended December 31, 2013. At December 31, 2013 the fair
value of each venturer’s investment in entity AB is P293,000 and
the cost to sell amounts to P3,000. There is no published price
quotation for entity AB. Investments are accounted for using the
equity method.
 16. At December 31, 2013 entities A and B must each report
their investment in Entity AB at:
a. P290,000
b. P293,000
c. P300,000
d. P296,000

17. How much impairment loss should be recognized by each

venture?
a. P10,000
b. P3,000
c. P13,000
d. P7,000

18. Appendix Problem:

On March 1, 2013 entities A and B each acquired 30 percent of

the ordinary shares that carry voting rights at a general
meeting of shareholders of entity Z for P300,000. Entities A and
B immediately agreed to share control over entity Z.

On December 31, 2013 entity Z declared a dividend of P100,000

for the year 2013. Entity Z reported a profit of P60,000 for the
year ended December 31, 2013. At December 31, 2013 the
recoverable amount of each venturer’s investment in entity Z is
P292,000 (fair value of P295,000 less costs to sell of P3,000).
Entities A and B uses the equity method to account for its
investment in entity Z. however, there is no published price
quotation for entity Z.

On December 31, 2013, entities A and B must each report its

investment in entity Z at:

a. P285,000
b. P290,000
c. P288,000
d. P260,000

Items 19 and 20 are based on the following data (Appendix

Problem):

On January 1, 2013 entities A and B each acquired 30 percent of

the ordinary shares that carry voting rights at a general
meeting of shareholders of entity M for 100,000. The purchase
price is equal to the fair value of 30 percent of entity M’s
identifiable assets less 30 percent of its identifiable
liabilities.
Entities A and B immediately agreed to share control over entity
M.

For the year ended December 31, 2013 entity M recognized a loss
for P600,000. Entities A and B have no constructive or legal
obligation with respect of their jointly controlled entity’s
loss and have made no payments on its behalf.

Entity M recognized profit for the year ened December 31, 2013
of 800,000. There is no published price quotation for entity M.
Investments are accounted for using the equity method.

19. At December 331, 2013 how much investment in entity M

should be reported by each venture.
a. P100,000
b. P-0-
c. P180,000
d. P40,000

20. At December 31, 2013 each venturer must measure their

investment in entity M at:
a. P160,000
b. P100,000
c. P180,000
d. P-0-

21. APPENDIX PROBLEM

On January 1, 2013 entities A and B (the venturers) form a joint

venture (entity X). Upon incorporation of entity X, entities A
and B each take up 50 percent of the share capital of entity X.
In return for their interests in entity X entities A and B each
contribute P100, 000 to entity X.
Entity A contributes machine with a fair value of P100,000 and a
carrying amount P80,000. Entity B’s contribution is P100,000
cash.

The machine contributed by entity A has an estimated useful life

of 10 years with no residual value.

Entity X’s profit for the year ended December 31, 2013 is P30,
000 (after deducting depreciation expense of P10,000 on the
machine contributed by entity A). Entity A accounts for his
investment using the equity method.

What is the cost of investment of entity A on December 31, 2013.

 a. P90,000
b. P121,000
c. P105,000
d. P106,000

22. Appendix Problem

On January 1, 2013 enties M and N each acquired 30 percent

of the ordinary shares that carry voting rights at general
meeting of shareholders of entity’s Z for P300, 000.
Contingent consideration probable to be paid by entity M is
measured reliably at P50,000. Entities M and N immediately
agreed to share control over entity Z.

For the year ended December 31, 2013 entity Z recognized a

profit for P400, 000. On December 30, 2013, entity Z
declared and paid a dividend of P150, 000 for the year
2013. At December 31, 2013 the fair value of each ventures’
investment in entity Z is P425,000. However, there is no
published price quotation for entity Z.
On December 31, 2013 entity M sell goods for P60,000 to
entity Z. At December 31, 2013 this goods were in the
inventories of Equity Z (ie they had not been sold by
entity Z). Entity M sells goods at a 50 percent mark-up on
cost. Entities M and N account for its investment in
entity Z using the equity method.

At December 31, 2013 entity M would report its investment

in entity Z at:
a. P439,000
b. P375,000
c. P363,000
d. P300,000

23. Appendix Problem

On January 1, 2013 entities X and Y each acquired 30
percent of the ordinary shares that carry voting rights at
a general meeting of shareholders of entity O for P300,
000. Acquisition-related costs, such as broker and legal
fees paid amounts to P50,000 by entity X. Entities X and Y
immediately agreed to share control over entity O.

For the year ended December 31, 2013 entity O recognized a

profit of P400,000. On December 30, 2013 entity O declared and
paid a dividend of P150,000 for the year 2013. At December
31, 2013 the fair value of each venturers’ investments in equity
O is P425, 000. However, there is no published price
quotation for entity O.

In 2013 entity X purchased goods for P100,000 from entity

O. At December 31, 2013 P60, 000 of the goods purchased
from entity O were in entity X’s inventories (ie they had
not been sold by entity X). Entity O sells at a 50 percent
mark-up on cost.

Entities X and Y account for its investment in entity O

using the equity method.

At December 31, 2013 entity X would report its investment

in entity O at:
a. P469,000
b. P369,000
c. P419,000
d. P375,000

ANSWERS
1. C 6. A 11. B 16. A 21. D
2. C 7. A 12. A 17. A 22. A
3. A 8. D 13. C 18. A 23. C
4. B 9. A 14. B 19. B
5. A 10. B 15. A 20. A

SOLUTIONS
1. Construction revenue P24M
Construction cost 18M
Gross profit P6M

2. Construction revenue (P24M/2) P12M

Construction cost 8M
Gross profit earned by A P4M

3. Construction revenue (P24M/2) P12M

Construction cost 10M
Gross profit earned by B P2M

4. Investment – Co. R P10M

Profit share:
Rental income 10M
Total expenses (P1M + .1M) 1.1M
Net profit 8.9M
Interest 50% 4.450
 Interest – Co. R, December 31, P14,450M
2012

5. Rental income P12M

Operating expenses 3.5M
Net income P8.5M

6. Investment – Co. S P10M

Profit share – 2012 4.450
Profit share – 2013 (P8.5M x 50%) 4.250
Interest – Co. S, December 31, 2013 P18,700M

7. Rental income P2.5M

Operating expenses (P.3M + .2M) (.5)
Depreciation expense (30M/20) (1.5)
Net income P.5M

8. Cost (P30/3) P10M

Accumulated depreciation (1.5/3) .5
Book value P9.5M

9. P500,000 x 1/3 = P166,667

10. Investment – 2013 P50M

Profit share (P10M – 6M) x 40% 1.6M
Interest – Bank A, December 31, 2013 P48.4M

11. Investment – 2013 P50M

Profit share – 2013 2
Profit share – 2014 (P12M – 7M) x 40% 2
Dividends received (P4M x 40%) (1.6)
Interest – Bank B, December 31, 2014 P52.4M

12. At December 31, 2014, the venturers must report their investment
in entity X ( a jointly controlled entity) at P300,000 (at cost).
There is no impairment loss, because the fair value (P425,000) exceeds
its carrying amount P300,000.

13. The venturers must, without regard to whether the distributions

are from entity X’s accumulated profits arising before or after
January 1, 2013, each recognize dividend income of P75,000 in profit
for the year ended December 31, 2013. The computation is:

Dividends declared on January 2, 2013 P30,000

(P100,000 x 30%)
Dividends declared on December 31, 2013 45,000
(P150,000 x 30%)
Total dividend income P75,000
14. The venturers each recognize a total income P170,000 computed as
follows:

Dividends income (P150,000 x 30%) P45,000

Increase in value of investment (P425,000 – 125,000
300,000)
Total income to profit or loss P170,000

15. At December 31,2013 the venturers must each report its investment
in entity X at P425,000 (at fair value). Even though the venturers
each used the cost model as its accounting policy for investment in
entity X they account for their investments using the fair value model
because entity Z has a published price quotation.

16. At December 31, 2013 entities A and B must each report their
investment in entity AB at P290,000 (at recoverable amount 293,000 –
3,000).

17. At December 31, 2013, the carrying amount is reduced to P290,000

(the lower of its recoverable amount and its carrying amount before
impairment (P300,000 cost). Each venture recognizes the impairment of
P10,000 in profit or loss for the year ended December 31, 2013.

18. At December 31, 2013 entities A and b must each report its
investment in entity Z at P285,000 computed as follows:

Cost of investment P300,000

Profit share (10/12 x P60,000) x 15,000
30%
Dividend income (30% x P100,000) (30,000)
Investment in entity Z, December P285,000
31,2013

19. At December 31, 2012 each venture must measure its investment in
entity M at P0 computed as follows:

Cost of investment P100,000

Loss share 100,000
Investment in entity M, December P 0
31,2012

In 2012 each venturer does not recognize (P180,000 of its share of

entity M’s losses. The loss recognized by the entity is limited to its
investment of P100,000).
20. At December 31, 2013 entities A and B must each measure their
investment in entity M at P160,000 computed as follows:

Cost of investment, 2012 P100,000

Loss share 2012 (100,000)
Profit share, 2013:
Profit share, 2013 (30% x 240,000
P800,000)
Unrecognized loss in 2012 (80,000) 160,000
Investment in entity M, P160,000
December 31, 2013

21. Investment of Machine, January 1, 2013:

Carrying amount P80,000

Realized gain (P100,000 – 10,000 90,000
80,000)50%
Profit share (50% x 30,000) 15,000
Realized gain on machine 1,000
(P10,000/10 yrs)
Investment account balance, P106,000
December 31, 2013

22. At December 31, 2013 entity M would report its investment in

entity Z at P369,000 computed as follows:

Cost of investment, January 1, 2013 P350,000

(P300,000 + 50,000)
Profit share (30% x 400,000) 120,000
Unrealized profit (50/150 x 60,000) (6,000)
Dividend income (30% x 150,000) (45,000)
Investment in entity Z, December 31, P419,000
2013

23. At December 31, 2013 entity X would report its investment in

entity O at P419,000 computed as follows:

Cost of investment, January 1, 2011 P350,000

(P300,000 + 50,000)
Profit share (30% x 400,000) – (30% x 114,000
20,000)
Dividend income (30% x 150,000) (45,000)
Investment in entity O, December 31, P419,000
2013
Unrealized profit (50/150 x 60,000) P20,000
1 (B)
For payment, the currency used is Euros. X Trading is the company that used foreign exchange.
Whereas, Y company has been using euros as its currency so no forex transaction in its case. Y Company received the payment in euros.

X Trading Y
(Peso) (Euros) Please note that the exchange rate is for problem use only.
Date of purchase (1200000/12.5) 96,000.00 1,200,000.00 Real exchange rates are not taken into consideration.
Date of payment (1200000/16) 75,000.00 1,200,000.00
Forex Gain / (Loss) 21,000.00 -

The exchange rate used herein is indirect. To get the direct exchange rate:

Date of purchase (see formula) 0.08

Date of payment 0.06
Decline in rates (Gain on the part of a buyer) 0.02
x Price of the product purchased 1,200,000.00
Gail (Loss) on forex transaction 21,000.00

2 (A)

Direct exchange rate:

Spot rate
Celica Motors (seller) 180,000.00 68.45 12,321,000.00
Down payment 54,000.00 67.48 3,643,920.00
Balance 126,000.00 68.63 8,647,380.00
Gain (Loss) on forex transaction - 29,700.00

It was a loss because at the time of purchase, the peso value was 12,321,000.
The peso value received by the seller for down payment and balance is only 12,291,300.
Thus, there is a forex loss of P29,700.

To a seller, any decline in currency value of a receivable is a loss, because he would be receiving less.
To a buyer, any decline in currency value of a payable is a gain, because he would be paying less.
Vice versa for an increase in currency value.

3 (A)

Levin is a buyer of goods, and a seller of foreign currency under a forward contract. Hedging is setting aside a fund to a bank or financial institution that is willing to absorb any gain or loss resulting from a hedged transaction.
It is called a hedged transaction because, no matter what the spot rates are, the buyer (or seller) who made a hedged contract, he would be paying (or receiving) the stated amount in the hedge contract.

FC Receivable FC Payable
400400 x 0.55 220,220.00
400400 x 0.50 200,200.00

As a buyer of goods (hedged transaction), he would be recording his payable using current rates. So, on December 31, his payable is 400400 x 0.50. You use the forward rates because it was done through a forward contract.
As a seller of forex (hedging instrument), he would be recording the value of the forward contract at its value upon incepcion (December 1). So, it would be 400,400 x 0.55.
4 (A) Correction on the problem: The FV of option on 6/20/2013 is 13,975.
1/1 3/31 6/20
Fair value of put option 9,800.00 11,400.00 13,975.00
- Intrinsic value 2,015.00 3,705.00 13,975.00
Time value 7,785.00 7,695.00 -

The intrinsic value may be computed as (Strike price minus spot rate) x foreign currency.
On March 31, the gain would be 3705 minus 2015 = 1690. (The intrinsic value increased, so it's a gain.)

5 D

There's that phrase "anticipated purchase". The purchase hasn't happened yet although they already acquired a hedging instrument.
Since the purchase hasn't occurred yet, no merchandise would be recorded.

6 B

The focus was the forward contract, which was entered into on 12/12, the forward rate was 0.60.
The report period being asked was 12/31, the forward rate was 0.63.
Profit or loss is computed as (0.60 - 0.63) x 225000 = 6750.
The transaction is a purchase, so the hedging instrument was a receivable. The value increased, so it was a gain.

7 D

A - Forward contract receivable is (46 x 93750) = 4312500.

B - It was a net forex gain, not loss.
C - Zero, it was only the transaction date. No changes yet on the forex.

Payable - @ spot rate Forward Contract - Receivable

Oct. 1 43.00 44.00
Dec. 31 47.00 Loss 4 46.00 Gain 2 Net loss 2
Jan. 30 50.00 Loss 3 50.00 Gain 4 Net gain 1 (on settlement date) x 93750

The rate used in the forward contract on Jan. 30 (settlement date) is actually the spot rate. It just so happens that the spot rate and the forward rate are both 50.
Just keep in mind that it's the spot rate to be used in there.

8 A

1/3 12/31 1/31

Fair value of put option 16,500.00 34,000.00 58,000.00
- Intrinsic value 14,500.00 29,000.00 58,000.00
Time value 2,000.00 5,000.00 - 0.00

At settlement date, the FV and instrinsic value is actually equal.

Change in time value on 12/31 - from 2000 to 5000, that's a gain of 3000.
Change in intrinsic value on 1/31 - from 29000 to 58000, that's a gain of 29000.

9 A Receivable - @ spot rate Futures contract - payable

 Nov. 1 51.30 50.50
Dec. 31 52.60 Gain 1.3 52.40 Loss 1.9 Net loss 0.6
Jan. 31 51.80 Loss 0.8 51.80 Gain 0.6 Net loss 0.2 x 315000 = 63000

The rate to be used in the futures contract is 90-day futures on Nov. 1, since there are 90 days before settlement date; 30-day futures on Dec. 31,
since there are 30 days before settlement, and spot rate on settlement date.
10 D

Forex gain or loss on firm commitment on Dec. 31 (46.70 minus 44.30) x 15750 = 37800

S Company is a seller, from that transaction it will have a receivable. The value of forex using the forward rates increased, so it's a gain.

11 B

Forex gain or loss on the forward contract on Feb 28 (62.05 minus 62.35) x 625000 = 187500

SBC company is the buyer, it has a payable. The forward contract would then be a receivable. As such, the decrease in rates would mean a loss.

Payable- @ spot rate Futures contract - receivable

Dec. 1 61.55 60.75
Dec. 31 62.85 62.35
Feb. 28 62.05 62.05 Loss 0.3

12 B (Split Accounting); C (Non-split accounting)

Dec. 1 Dec. 31 Mar. 31

Fair value of put option 6,000.00 7,500.00 8,400.00
- Intrinsic value - 3,600.00 8,400.00
Time value 6,000.00 3,900.00 -

Loss on time value - from 3900 to 0. Loss 3,900.00

Sales (1300 x 176) 228,800.00

Cost (1200 x 165) 198,000.00
(100 x 172) 17,200.00
Gross Profit 13,600.00
Loss on forex 3,900.00
Net Income 9,700.00

13 C

Hedged item (Purchase at market price)

share price on 10/1 115.00
share price on 4/17 95.00
20.00
1,750.00
Gain (decrease in the amount to be paid) 35,000.00
 Hedging instrument
Oct. 1 Dec. 31 Mar. 3 Apr. 17
Fair value of put option 24,500.00 36,050.00 38,710.00 35,000.00

Forex gain of 10500 on fair value of option, increase from 24500 to 35000.

Total gain (35000 + 10500) = 45500

14 A 2012 2013
Assets 361,781,250.00 407,906,250.00
2012 - Loss 6,000,000.00
2013 - Gain 15,093,750.00 Liabilities 240,656,250.00 256,500,000.00
Cumulative adjustment 9,093,750.00 Common stock 77,625,000.00 77,625,000.00
Retained earnings 52,500,000.00 64,687,500.00
Dividends 3,000,000.00
- 6,000,000.00 9,093,750.00