Problem 14-4 (IAA)
On January 1, 2008, Manila Company entered into a two-year P4,000,000 variable
interest rate loan at the prevailing interest rate of P12%. In 2009, the interest rate is
equal to the prevailing interest rate at the beginning of the year.
The principal loan is payable on December 31, 2009 and the interest rate is payable
on December 31 of each year.
On January 1, 2008, Manila Company entered into a “receive variable, pay fixed”
interest swap agreement with a speculator bank. The interest swap agreement is
designated as a cash flow hedge.
Required:
Prepare all indicated entries in connection with the loan and the resulting derivative
contract under the following assumptions:
1. The prevailing interest rate on January 1, 2009 is 14%. The present value of 1 at
14% for one period is .877.
2. The prevailing interest rate on January 1, 2009 is 11%. The present value of 1 at
11% for one period is .901.
Problem 14-5 (IAA)
Cavite Company received a two-year variable interest rate loan of P6,000,000 on
January 1, 2008. The interest on the loan is payable on December 31 of each year
and the principal is to be repaid on December 31, 2009.
The interest rate of 2008 is the prevailing interest rate of 10% and the rate in 2009
is equal to the prevailing rate on January 1, 2009.
In conjunction with this loan, Cavite Company entered into a “receive variable, pay
fixed” interest rate swap agreement with a speculator bank on January 1, 2008
which was designated as a cash flow hedge
The market interest rate on January 1, 2009 is 13%. The present value of 1 at 13%
for one period is .885.
Required:
Prepare all indicated entries for the years 2008 and 2009 in connection with the loan
and the derivative financial instrument.
Problem 14-6 (IAA)
On January 1, 2008, Batangas Company received a 5-year variable interest rate loan
of P3,000,000 with interest payment at the end of each year and the principal to be
repaid on December 31, 2012. The interest rate of 2008 is 8% and the rate in each
succeeding year is equal to market interest rate on January 1 of each year
In connection with the loan, Batangas Company entered into an interest rate swap
agreement with another financial institution to be effect that Batangas will receive a
swap payment if the interest on January 1 is more than 8% and will make a swap
payment if the interest is less than 8%. The swap payments are made at the end of
the tear. This interest rate swap agreement was designated as a cash flow hedge.
On January 1, 2009, the market rate of interest is 9% and on January 1, 2010, the
market rate of interest is 6%
The present value of an ordinary annuity of 1 at 9% for four periods is 3.24 and the
present value of an ordinary annuity of 1 at 6% for three periods is 2.67.
Required:
Prepare all indicated entries for 2008 and 2009 in connection with the loan and the
interest rate swap agreement.
Problem 14-7 (IAA)
On January 1, 2008, Trece Martires Company borrowed P5,000,000 from a bank at a
variable rate of interest for 4 years. Interest will be paid annually to the bank on
December 31 and the principal is due on December 31, 2011. Under the agreement,
the market rate of interest every January 1 resets the variable rate for that and the
amount of interest to be paid on December 31. In conjunction with the loan, Trece
Martires entered into a “receive variable, pay fixed” interest rate swap agreement
with another bank speculator.
The interest rate swap agreement was designated as a cash flow hedge. The market
rates of interest are:
January 1, 2008 10%
January 1, 2009 14%
January 1, 2010 12%
January 1, 2011 11%
The present value of an ordinary annuity of 1 is as follows:
At 14% for three periods 2.32
At 12% for two periods` 1.69
At 11% for one period 0.90
Required:
Prepare all entries from 2008 to 2011 to recognize all transactions relating to the
contract of loan and the derivative contract.
Problem 14-8 (IAA)
On January 1, 2008, Naic Company borrowed P5,000,000 from a bank at a variable
rate of interest for 4 years. Interest will be paid annually to the bank on December
31 and the principal is due on December 31, 2011. Under the agreement, the market
rate of interest on each January 1 resets the variable rate for that period and the
amount of interest to be paid on December 31.
To protect itself fro fluctuation in interest rate, the entity hedges the variable interest
by entering into four –year ““receive variable, pay fixed” interest rate swap with a
speculator.
The interest rate swap is based on the notional amount of P5,000,000 and an 8%
fixed interest rate. This agreement means that the entity will receive a swap
payment from the speculator if the market rate on January 1 is more than 8%and
will make a swap payment to the speculator if the market rate on January 1 is lower
than 8%. The swap payments are made at the end of the year. The entity has
designated this interest rate swap as a cash flow hedge of the variability of interest
payments on the variable rate loan.
Assume that market interest rates are 8% on January 1, 2008, 10% on January 1,
2009, 11% on January 1, 2010 and 12% on January 1, 2011.
The present value of ordinary annuity of 1 is as follows:
At 10% for three periods 2.49
At 11% for two periods 1.71
At 12% for one period 0.89
Required:
Prepare all indicated entries from 2008 to 20011 to recognize all transactions relating
to the contract of loan and the derivative contract.
Problem 14-9 (IFRS)
On January 1, 2008, Laguna borrowed P1,000,000 from a bank at an 8% fixed
interest rate with interest to paid annually on December 31 and the principal to be
repaid on December 31, 2010.
On January 1, 2008, the entity entered into a “receive variable, pay fixed” interest
rate swap with a speculator and ha designated the swap as a fair value hedge of
the fixed interest rate loan. The market rate of interest on January 1 of each year
determines the interest swap settlement to be made every December 31.
This means that the entity will make a swap payment if the market rate of interest
on January 1 is higher than the 8% fixed rate and will receive a swap payment if the
market rate of interest on January 1 is lower that the 8% fixed rate.
The market rates of interest are:
January 1, 2008 8%
January 1, 2009 10%
January 1, 2010 11%
The relevant present value factors are:
PV of 1 at 10% for two periods 0.8264
PV of an ordinary annuity of 1 at 10% for two periods 1.7355
PV of 1 at 11% for one period 0.9009
Required:
Prepare all indicated entries from 2008 to 2010 to recognize all transactions relating
to the contract of loan and the interest rate swap agreement.
Problem 14-10 (IAA)
Tagaytay Company is a gold course developer that constructs approximately 5
courses each year. On January 1, 2008, Tagaytay has agreed to buy 5,000 trees on
January 1, 2009 to be planted in the courses it intends to build. In recent years, the
price of trees has fluctuated wildly. The company uses the perpetual system.
To protect itself from the variability of the market price of trees, Tagaytay Company
entered into a forward contract with a reputable bank. The price is set at P1,500 per
tree. The forward contract is designated as a cash flow hedge.
If the market price on January 1, 2009 is more than P1,500, the difference is paid by
the bank to Tagaytay. On the other hand, if the market price is less than P1,500,
Tagaytay will pay the difference to the bank.
Required:
Prepare all indicated entries for 2008 and 2009 in connection with the purchase of
trees and the related forward contract under the following assumptions:
1. The market price on December 31, 2008 and January 1, 2009 is P1,800
2. The market price on December 31, 2008 and January 1, 2009 is P1,400
Problem 14-11 (IAA)
Laguna Grill operates a chain of seafood restaurants. On September 1, 2008, Laguna
Grill determined that it will need to purchase 100,000 kilos of tuna fish on January
1, 2010. Because of the volatile fluctuation in the price of tuna fish, on September
1, 2008, Laguna negotiated a forward contract with a reputable financial institution
for Laguna Grill to purchase 100,000 kilos of tuna fish on January 1, 2010 at a price
of P8,000,000 or P80 per kilo. The perpetual system is used.
On December 31, 2008, the market price of tuna fish per kilo is P90 and on
December 31, 2009 and January 1, 2010, the market price of tuna fish per kilo is
P75. The appropriate discount rate is 12% and the present value of 1 at 12% for one
period is .893.
Required:
Prepare all indicated entries for 2008, 2009 and 2010 to record the forward contract
and the purchase of fish. The forward contract is designated as a cash flow hedge.
Problem 14-12 (IAA)
Chavacano Company operates a chain of seafood restaurants. On October 1, 2008,
Chavacano determined that it will need to purchase 50,000 kilos of deluxe fish on
March 1, 2009. Because of the volatile fluctuation in the price of deluxe fish, on
October 1, 2008, Chavacano negotiated a forward contract with a reputable bank for
Chavacano to purchase 50,000 kilos of deluxe fish on March 1, 2009 at a price of
P50 per kilo or P2,500,000. The periodic system is used.
This derivative forward contract provides that if the market price of deluxe fish on
March 1, 2009 is more than P50, the difference is paid by the bank to Chavacano. On
the other hand, if the market price on March 1, 2009 is less than P50, Chavacano will
pay the difference to the bank.
On December 31, 2008, the market price per kilo is P60 and on March 1, 2009, the
market price is P58.
Required:
Prepare all indicated entries for 2008 and 2009 to record the forward contract and
the purchase of the fish. The forward contract is designated as a cash flow hedge.
Problem 14-13 (IAA)
Quezon Company required 50,000 kilos of soya beans each month in its operations.
To eliminate the price risk associated with the purchase of soya beans, on December
1, 2008, Quezon entered into a futures contract as a cash flow hedge to buy 50,000
kilos of soya beans at P150 per kilo on January 1, 2009.
Required:
Prepare all indicated entries 2008 and 2009 to record the futures contract and the
purchase of the soya beans under the following assumptions:
1. The market price per kilo of soya beans on December 31, 2008 and January 1,
2009 is P160
2. The market price per kilo of soya beans on December 31, 2008 and January 1,
2009 is P145
Problem 14-14 (IAA)
Bicolandia Company produces bottled grape juice. Grape juice concentrate is
typically bought and sold by the pound. Bicolandia uses 100,000 pounds of grape
juice concentrate each month.
On November 1, 2008, Bicolandia entered into a grape juice concentrate is typically
bought and sold by the pound. Bicolandia uses 100,000 pounds of grape juice
concentrate each month.
On November 1, 2008, Bicolandia entered into a grape juice concentrate futures
contract as a cash flow hedge to buy 100,000 of concentrate on January 1, 2009 at a
price of P50 per pound. The market price on December 31, 2008 and January 1,
2009 of the grape juice concentrate is P65 per pound. The periodic system is used.
Required:
Prepare all indicated entries 2008 and 2009 to record the futures contract and the
purchase of the grape juice concentrate.
Problem 14-15 (IAA)
Taal Company requires 25,000 pounds of copper each month in its operations. To
eliminate the price risk associated with copper purchases, on December 1, 2008,
Taal entered into a future contract as a cash flow hedge to buy 25,000 pounds of
copper on June 1, 2009. The futures price is P50 per pound.
The future contract is managed through an exchange, so Taal does not know the
other party on the other side of the contract. As with most derivative contracts, this
futures contract is settled by an exchange of cash on June 1, 2009 based on the
price of copper on that date.
The market price per pound is P45 on December 31, 2008 and P42 on June 1, 2009.
Required:
Prepare all indicated entries 2008 and 2009 to record the futures contract and the
copper purchases.
Problem 14-16 (IAA)
Legaspi Company produces colorful 100% cotton T-shirts that are very popular
among the youth. The company uses 150,000 kilos of cotton each month in its
production process. In accordance with the company’s long-term planning, the
company normally procures one month supply of cotton to be used in its production
process.
On December 31, 2008, Legaspi Company purchased a call option to buy 150,000
kilos of cotton on July 1, 2009. The call option price is P30 per kilo. The company
paid P50,000 for the call option which was designated as a cash flow hedge.
Required:
Prepare all indicated entries 2008 and 2009 to record the call option and the
purchase of cotton under the following assumptions:
1. The market price of cotton on July 1, 2009 is P35 per kilo.
2. The market price of cotton on July 1, 2009 is P28 per kilo.
Problem 14-17 (IAA)
Naga Company uses approximately 500,000 units of raw material in its
manufacturing operations. On December 1, 2008, Naga Company purchased a call
option to buy 200,000 units of the raw material on June 1, 2009 at a price of P25 per
unit. Naga paid P20,000 for the call option and designated the call option as a cash
floe hedge against price fluctuation for its June purchase.
On December 31, 2008, the market price of the raw material is P27 per unit and on
June 1, 2009, the market price is P28.
Required:
Prepare all indicated entries 2008 and 2009 to record the option and the purchase of
the raw material.
Problem 14-18 (IAA)
Sorsogon Company sells approximately 50,000 units of finished product each month.
On December 1, 2008, Sorsogon purchased a put option to sell 50,000 units of the
finished product at a price of P175 per unit on February 1, 2009. The market price on
December 1, 2008 is P175 and Sorsogon had to pay P100,000 to purchase this put
option which is designated as a cash floe hedge against price decrease for its
February 1, 2009 sale of the 50,000 units.
On February 1, 2009, the market price of the finished product is P180 per unit.
Required:
Prepare all indicated entries 2008 and 2009 to record the put option (on the part of
the seller) and the sale of the finished product.
Product 14-19 (IAA)
On September 1, 2008, Dumaguete Company purchased equipment from USA for
$50,000 to be paid on March 1, 2009. The exchange rate on September 1, 2008 is
P40 to $1. On the same date, Dumaguete entered into a foreign currency forward
contract and agreed to pay P2,000,000 at the rate of P40 to $1. This forward
contract is designated as a fair value hedge of the payable that is denominated in
foreign currency.
The peso exchange rate to the dollar is P41 on December 31, 2008 and P43 on
March 1, 2009
Required:
Prepare all indicated entries 2008 and 2009 to record the forward contract and the
purchase of the equipment.
Problem 14-20 (IFRS)
Negros Oriental Company has the Philippine peso as its functional currency. The
company expects to purchase goods from USA for $50,000 on March 31, 2009.
Accordingly, the company is exposed to a foreign currency risk. If the dollar
increases before the purchase takes place, the company will have to pay more pesos
to obtain the $50,000 that it will have to pay for the goods
On October 1, 2008, Negros Oriental entered into a forward currency contract with a
bank speculator to purchase $50,000 in six months for a fixed amount of P2,000,000
or P40 to $1. This forward currency contract is designated as cash flow hedge of the
company’s exposure to increase in dollar exchange rate. On December 31, 2008, the
exchange rate is P41 to $1 and on March 31, 2009, the exchange rate is P43 to $1
Required:
Prepare all indicated entries 2008 and 2009 to recognize all transactions relating to
the foreign currency forward contract and the purchase of goods.
