acyava3 q2

Companies invest in financial derivatives:

A. To reduce exposure to currency–related risks.

B. In order to realize capital gains as their value increases.

C. As means in which to enter desirable markets.

D. None of the above.

A

Which of the following statements is not correct with regard to foreign currency hedges?

A. They are executory contracts.

B. They can only be used by large companies.

C. They manage foreign exchange fluctuation risk.

D. They established a fixed exchange rate between currencies

B

Which of the following statements is not correct with regard to foreign currency forward

contracts?

A. The contract is between an individual buyer and seller.

B. The parties do not have to exchange the currency if the exchange rate is not favorable.

C. The forward contract can be for any number of currency units.

D. All of these statements are correct.

B

Which of the following does not represent an exchange risk on an exposed position to a company transacting business with foreign vendor?

A. Transaction is denominated with foreign currency, settled at a future date.

B. Firm commitment to purchase inventory to be paid for in foreign currency.

C. Forecasted foreign currency transaction with a high probability of occurrence.

D. Firm commitment to purchase inventory denominated in pesos.

D

Which of the following items is not a required condition for applying hedge accounting?

A. The hedge is expected to be highly effective.

B. The forecast transaction does not affect profit or loss.

C. The effectiveness of the hedge can be reliably measured.

D. The hedge is assessed on an ongoing basis.

B

The forward rate may be defined as:

A. The price a foreign currency can be purchased or sold today.

B. The price today at which a foreign currency can be purchased or sold in the future.

C. The forecasted future value of a foreign currency.

D. The Peso value of a foreign currency.

B

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.

C

In case of hedging transaction designated as fair value hedge, which of the following statements is correct?

I. The gain or loss from remeasuring the hedging instrument designated as fair value hedge shall be recognized in profit or loss.

II. The gain or loss from remeasuring the hedging instrument designated as fair value hedge shall be recognized in other comprehensive income.

III. The gain or loss on the changes in fair value of hedged item attributable to the hedge risk shall adjust the carrying amount of the hedged item and be recognized in profit or loss.

IV. The gain or loss on the changes in fair value of hedged item attributable to the hedge risk shall adjust the carrying amount of the hedged item and be recognized in other comprehensive income.

A. I and III

B. I and IV.

C. II and III.

D. II and IV.

A

Which of the following statements is correct with regard to accounting for a foreign currency sale on credit and an accompanying foreign currency forward contract?

A. Accounting for the change in the value of the accounts receivable at the balance sheet date is based on the change in forward exchange rate.

B. It is not necessary to account for the accounts receivable because the company has a forward contract.

C. The accounting for accounts receivable is the same regardless of whether the company hedges the receivable with a forward contract or not.

D. Changes in the fair value of the forward contract are only recognized on the date the account receivable are collected.

C

Foreign currency gains and losses on fair value hedges are:

A. Always reported currently in earnings.

B. Initially reported in earnings and later reclassified to other comprehensive income.

C. Initially reported in other comprehensive income and later reclassified to earnings.

D. Initially deferred as assets and liabilities.

A

Which of the following statements is correct with regard to foreign currency commitment hedged with a forward contract?

A. The foreign commitment hedge period ends on the date the underlying transaction is settled.

B. The gain or loss in foreign currency commitment forward contract is offset by the losses and gains pertaining to sales amount of the recognized asset value at the transaction date.

C. The forward contract is valued at difference between the forward exchange rate and spot rate.

D. The gain or loss on the forward contract is recognized only at the date of the underlying transaction.

A

Which of the following does not represent an exchange risk on an exposed position to a company transacting business with foreign vendor?

A. Transaction is denominated with foreign currency, settled at future date.

B. Firm commitment to purchase inventory to be paid for in foreign currency.

C. Forecasted foreign currency transaction with a high probability of occurrence.

D. Firm commitment to purchase inventory denominated in pesos.

D

For a cash flow hedge relating to the purchase of a particular asset, foreign exchange gains and losses made on the hedging instrument:

A. Are all passed to profit or loss.

B. Are passed to equity accounts up to the time of the underlying transaction, at which time they are then included as part of the cost of the asset. After this date, they are passed directly to profit or loss.

C. Are all passed to the cost of the asset.

D. Are passed directly to profit or loss up to the time of the expiration of the hedging instrument, at which time they are then included as part of the cost of the asset.

B

The ineffective portion of a foreign currency gain or loss on a cash flow hedge must always be reported currently in:

Earnings, Other comprehensive income

A. Yes Yes

B. Yes No

C. No Yes

D. No No

B

In case of a hedging transaction designated as a cash flow hedge, which of the following statements is correct?

A. The portion of the gain or loss on the hedging instrument designated as a cash flow hedge that is determined to be an effective hedge, or the change in intrinsic value of the derivative designated as a cash flow hedge, shall be recognized in Other Comprehensive Income (OCI).

B. The ineffective portion of the gain or loss on the hedging instrument designated as a cash flow hedge, or the change in time value of the derivative designated as a cash flow hedge, shall be recognized in profit or loss.

C. The cumulative OCI recognized in equity, arising from cumulative changes in intrinsic value of derivatives designated as a cash flow hedge, shall be reclassified from equity to profit or loss as a reclassification adjustment in the same period during which the hedged forecast cash flows affect profit or loss.

D. All of the above.

D

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? (debatable)*

A. The gain on the receivables and the loss on the forward contract are reported on the income statement.

B. The loss on the receivables and the gain on the forward contract are reported on the income statement.

C. The gain on the receivables and the loss on the forward are reported in other comprehensive income.

D. The loss on the receivables and the gain on the forward are reported in other comprehensive income.

B

IAS 21, The Effects of Changes in Foreign Exchange Rates, requires that the initial recognition of a foreign currency transaction be:

A. In the amount of the foreign currency.

B. The closing rate at balance sheet date.

C. The rate the currency is expected to be exchanged at on the settlement date for the monetary assets or liability based on the current market price of future contracts for the relevant foreign currency.

D. The spot rate at the date of the transaction.

D

An entity is engaged in exporting activities. When the buying spot rate increases, the entity should recognize

A. Exchange gain that should be reported in profit or loss.

B. Exchange loss that should be reported in profit or loss.

C. Exchange gain that should be reported in other comprehensive income.

D. Exchange loss that should be reported in other comprehensive income.

A

When translating the financial statements of an entity from its functional currency to its selected presentation currency, which of the following translation measurement is incorrect?

A. Assets and liabilities are translated at the closing rate at the date of statement of financial position.

B. Income and expenses are translated at (1) exchange rates at the date of transaction or (2) average rate for the period for practicality.

C. Equity accounts other than retained earnings are translated at the date of the transaction resulting to that equity items.

D. Retained earnings are translated using the average rate during the period.

D

When an entity’s functional currency is the currency of a hyperinflationary economy, how shall the elements of the financial statements be translated to presentation currency?

A. All amounts shall be translated at the closing rate at the date of most recent statement of financial position.

B. Assets and liabilities shall be translated at closing rate while income and expenses at average rate while equity at transaction rate.

C. All amounts are translated at average rate.

D. All amounts are translated at historical rate.

A

Foreign currency gains and losses on cash flow hedges are

A. Always reported currently in earnings.

B. Initially reported in other comprehensive income and later reclassified to earnings.

C. Initially deferred as assets and liabilities.

D. Initially reported in earnings and later reclassified to other comprehensive income.

B

Hedging a forecasted transaction is a

A. Fair value hedge

B. Net investment hedges

C. Cash flow hedge

D. Undesignated hedges

C

Foreign currency gains and losses on fair value hedges are

A. Initially reported in other comprehensive income and later reclassified to earnings.

B. Initially reported in earnings and later reclassified to other comprehensive income

C. Initially deferred as assets and liabilities.

D. Always reported currently in earnings

D

Foreign exchange gains and losses on accounts receivable and payable are denominated in a foreign currency are:

A. Accumulated and reported upon settlement

B. Deferred and treated as transaction price adjustment

C. Reported as equity adjustments from translation

D. Recognized in the period in which the exchange rates change

D

Davao Company sold merchandise denominated in Dirhams. Davao Company decided to hedge the sale of merchandise probably because

A. Since the Dirham is predicted to strengthen against the peso on the settlement date, the foreign currency gain on a purchase forward contract will hedge the loss on the hedged item.

B. The Philippine peso might probably strengthen against the Dirham by the time the payment is received.

C. It is always a win-win situation, a minimal cost is incurred if predicted changes in spot rates materialize, as chances of foreign currency gains remain unaffected should rate changes went the opposite way.

D. There is no cost involved, the forward contract is executory in nature, hence no cash will be paid upon inception.

B

Which of the following statements is correct

A. In Philippines, the cost of a unit of foreign currency in Philippine pesos is a direct quotation, and the cost in that foreign currency of purchasing one in Philippine pesos is also referred to as a direct quotation.

B. In Philippines, the cost of a unit of foreign currency in Philippine pesos is an indirect quotation, while the cost in that foreign currency of purchasing one in Philippine pesos is also referred to as an indirect quotation.

C. In Philippines, the cost of a unit of foreign currency in Philippine pesos is an indirect quotation, while the cost in that foreign currency of purchasing one in Philippine pesos is referred to as a direct quotation.

D. In Philippines, the cost of a unit of foreign currency in Philippine pesos is a direct quotation, while the cost in that foreign currency of purchasing one in Philippine pesos is referred to as an indirect quotation.

D

The rate charged by commercial banks for the purchase of any foreign currency (In Canadian dollars) on any given day would be based on which of the following

A. The forward exchange contract.

B. The Foreign currency hedge.

C. The forward contract.

D. The spot rate

D

Which of the following would NOT be considered a foreign exchange hedge?

A. A foreign currency option contract

B. A forward exchange contract

C. The placement of large amounts of Canadian funds with a bank in Zunich, Switzerland

D. A foreign currency futures contract

C

A Philippine company hedges an anticipated sale of merchandise to a UK customer, payment to be received in pounds. The hedge qualifies as a cash flow hedge of a forecasted transaction. When are gains and losses on the hedge investment reported on the Income statement?

A. When the anticipated sale becomes a firm commitment.

B. When the customer pays for the merchandise.

C. As the market value of the hedge Investment changes.

D. When the company reports sales revenue on the sale.

D

On July 10, 20x4, a Philippine company with a December 31 year-end enters a forward contract that locks in the selling price of won, for delivery on August 15. The forward contract hedges a firm commitment to sell merchandise to a customer in Korea, with payment denominated in won. The sale is made on August 1, 20x4 and payment is received from the customer on August 15. Where is the value of the firm commitment to sell reported in the year-end financial statements for 20x4?

A. adjustment to cost of goods sold

B. asset or liability on the balance sheet

C. adjustment to sales revenue

D. increase or decrease in other comprehensive income

C

A Philippine company has payables to suppliers denominated in euros, and hedges these payables with foreign currency forward purchase contracts. The euro strengthens against the Philippine peso. Which statement is true?

A. The gain on the payables and the loss on the forward are reported in other Comprehensive income.

B. The loss on the payables and the gain on the forward are reported in other comprehensive income.

C. The gain on the payables and the loss on the forward are reported on the income statement.

D. The loss on the payables and the gain on the forward are reported on the income statement.

D

A Philippine company has entered into a forward purchase contract to hedge a reported foreign currency obligation. If the peso weakens against the foreign currency,

A. the gain on the foreign currency obligation adds to other comprehensive income.

B. the gain on the forward contract adds to other comprehensive income.

C. the forward contract appears as a current asset on the company's balance sheet.

D. the forward contract's reported value exactly offsets the reported foreign currency obligation, with no net balance sheet disclosure.

C

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? (debatable)*

A. The gain on the receivables and the loss on the forward are reported in other Comprehensive income.

B. The gain on the receivables and the loss on the forward are reported on the income statement.

C. The loss on the receivables and the gain on the forward are reported in other Comprehensive income.

D. The loss on the receivables and the gain on the forward are reported on the income statement.

D

On December 1, a Philippine company agrees to buy euros on February 1 at a contract price of P64.00. The exchange rate for euros declines to P63.50 (Philippine strengthens) between December 1 and December 31, when the company's reporting year ends. How is this contract reported on the company's year-end balance sheet?

A. The contract is not reported on the balance sheet.

B. In the liability section.

C. In the asset section.

D. As a contra asset.

B

Exchange gains and losses on a forward exchange contract that covers the same time period as the transaction which it provides a hedge for should be recognized as

A. Income from continuing operations, but only if material.

B. an extraordinary item.

C. Income from continuing operations.

D. part of the original sales transaction.

C

Which of the following statements is not correct with regards to a forecasted foreign currency transaction hedged with a forward contract?

A. A journal entry is not required at the time the hedge is established

B. The forward contract must be revalued at the balance sheet date

C. A purchase or sales Commitment is revalued at the date the forward contract is revalued

D. The gain or loss due to fluctuating exchange rates is initially recognized in other comprehensive income

C

Statement I: The functional currency of an entity can be changed at any time based on the decision of the entity’s leadership.

Statement II: The essential feature of a monetary item is a right to receive or an obligation to deliver a fixed or determinable number of units or currency.

a. Both statements are true.

b. Both statements are false.

c. Only the first statement is true.

d. Only the second statement is true.

D

Statement I: When there is a change in an entity’s functional currency, the entity shall apply the translation procedures applicable to the new functional currency retroactively from the date of change.

Statement II: A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange at the date of the transaction.

a. Both statements are true.

b. Both statements are false.

c. Only the first statement is true.

d. Only the second statement is true

D

A company involved in a foreign currency transaction should record it initially at

a. Spot rate at the date of the transaction.

b. Spot rate at the date of offer.

c. Closing spot rate at the financial statement reporting date.

d. Average exchange rate at the date of the transaction.

A

ACYAVA3 Inc., a Philippine company, had a Euro receivable from exports to Spain and a British Pound payable on imports from England. ACYAVA3 recorded foreign exchange gain on both the Euro receivable and British Pound payable. Which of the following statements is correct in this situation?

a. The Euro receivable was reduced due to the foreign exchange difference, whereas the British Pound payable was increased for the same reason.

b. Less Philippine peso was obtained for every Euro received from the exports, while More Philippine peso was spent for every British Pound acquired to pay for the imports.

c. The Euro received from the exports was used to hedge the British Pound payable on the imports.

d. The spot rate used for the Euro receivable increased, while the spot rate used for the British pound payable decreased.

D

When translating the financial statements of a foreign operation, which of the following transaction procedures is incorrect?

a. Assets and liabilities are translated at the closing rate on the reporting date.

b. Income and expenses may be translated, for practical reasons, at the average exchange rate.

c. All resulting exchange differences shall be recognized in other comprehensive income.

d. All resulting exchange differences shall be closed to retained earnings account.

D

Which of the following factors influence the spread between the forward and spot rates?

a. The length of the forward exchange contract.

b. The current cross rate between the two currencies.

c. Which between the two currencies involved is the domestic currency.

d. All of the choices given in the choices here may influence the spread.

B

What is the purpose of using a hedge?

a. To eliminate any foreign exchange losses.

b. To maximize any foreign exchange gains.

c. To limit exposure to foreign exchange rates.

d. To facilitate trading in international markets.

C

A hedge of the exposure changes in the fair value of a recognized asset or liability, or an unrecognized firm commitment is classified as a

a. Cash flow hedge.

b. Foreign currency hedge.

c. Underlying.

d. Fair value hedge.

D

The forward rate may be defined as

a. The price a foreign currency can be purchased or sold today.

b. The price determined today at which a foreign currency can be purchased or sold at a future date.

c. The forecasted future value of a foreign currency.

d. The translated value of a foreign currency

B

Gains and losses on the hedge asset/liability and the hedge instrument for a fair value hedge will be recognized

a. In current earnings.

b. In other comprehensive income.

c. On a cumulative basis from the change in expected cash flows from the hedged instrument.

d. On the balance sheet either as an asset or a liability.

A

Which of the following statements is true concerning hedge accounting?

a. Hedges of foreign currency firm commitments are used for future sales only.

b. Hedges of foreign currency firm commitments are used for future purchases only.

c. Hedges of foreign currency firm commitments are used for current purchases or sales.

d. Hedges of foreign currency firm commitments are used for future sales or purchases.

D

What does a put option give the holder the right to do?

a. Enter into a currency swap.

b. Sell a designated foreign currency.

c. Buy a designated foreign currency.

d. Trade in the commodities market.

B

Which statement is true regarding a foreign currency option?

a. A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future.

b. A foreign currency option gives the holder the obligation to only buy foreign currency in the future.

c. A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future.

d. A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate.

C

Which of the following best describes a hedged item?

a. It is a designated derivative whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item.

b. It is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that exposes the entity to risk of changes in fair value or future cash flows.

c. It is a binding agreement for the exchange of a specified quantity of resources at a specified price on a specified future date or dates.

d. It is an agreement between two parties to exchange cash flows on a determined rate.

B

Which of the following is not a requirement for a hedging relationship to qualify for hedge accounting under PAS 39?

a. The hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk.

b. The effectiveness of the hedge can be reliably measured.

c. The hedge is assessed initially and determined to be highly effective, without need of ongoing reassessment.

d. At the inception of the hedge, there is a formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge.

C

Which of the following statements is correct regarding the difference between a forward contract and a futures contract?

a. A forward contract concerns a transaction involving goods, whereas a futures contract concerns a transaction involving services.

b. A forward contract is one that involves fair value hedge, whereas a futures contract is one that involves cash flow hedge.

c. A forward contract is a private agreement between two parties that cannot be traded on an exchange, whereas a futures contract is one that can be traded on an exchange.

d. A forward contract can be entered into only for transactions where the settlement date does not exceed one year, whereas a futures contract can be entered into for transactions

C

How is a firm commitment that is the subject of a hedging instrument recorded on the date of the inception of the hedging instrument?

a. As an asset or liability, equivalent to the fair value of the hedging instrument.

b. As gain or loss in other comprehensive income, equivalent to the fair value of the hedging instrument.

c. No entry is made for the firm commitment on that date.

d. As an item of retained earnings, equivalent to the fair value of the hedging instrument.

C

Which of the following is NOT a characteristic of a hyperinflationary economy under PAS 29?

a. The general population regards monetary amounts in terms of the local currency.

b. Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period.

c. The interest rate, wages and prices are linked to a price index.

d. The general population prefers to keep its wealth in nonmonetary assets in a relatively stable foreign currency

A

Which of the following gains or losses on derivatives shall be presented in Other Comprehensive Income?

a. Gain or loss on intrinsic value of call option used to hedge foreign currency denominated monetary liability.

b. Gain or loss on ineffective portion of monetary liability used to hedge the net investment of foreign operation.

c. Gain or loss on forward contract receivable used to hedge forecasted purchase of equipment.

d. Gain or loss on forward contract payable used to hedge firm commitment sale of inventories.

C

A Philippine exporter has a 90-day account receivable denominated in US Dollar as a result of an export sale made on May 1, 2x23 to a customer based in the USA. The exporter signed a 90-day forward contract on May 1, 2x23 to sell US Dollars. The spot rate was Php50.50 on that date and the 90-day forward rate was Php50.00.

On June 30, 2x23, which is the exporter’s fiscal year-end, the spot rate was Php50.70 and the 30-day forward rate was Php50.25. Which one of the following would the exporter have reported in its profit and loss statement for the year ended June 30, 2x23?

a. Net credit adjustment to beginning retained earnings

b. Net foreign exchange gain.

c. Net foreign exchange loss.

d. None, as any foreign exchange gain or loss is recorded as comprehensive income.

C