tuto 3 - answer

1. TUTORIAL 3
SOLUTION
SOLUTION FOR Q1
a)
Loss $2,000
(100,000 x (1.87 – 1.85) = 2,000
b)
Asset $950
(100,000 x (1.85 – 1.84) = 1,000
1,000 x 0.95 (present value discount factor) = 950
SOLUTION FOR Q2
a. Forward Contract Cash Flow Hedge of Foreign Currency Receivable
1 December 2012
Accounts receivable (USD) [20,000 x RM3.00] 60,000
Sales 60,000
No entry for the forward contract.
31 December 2012
Accounts receivable (USD) 1,000
Foreign exchange gain 1,000
[20,000 x (RM3.05 – RM3.00)]
Loss on forward contract 1,000
Cash flow hedge reserve 1,000
Cash flow hedge reserve 1,176.36
Forward contract 1,176.36
[20,000 x (RM3.04 – RM3.10) = RM1,200 x .9803 = RM1,176.36]
Cash flow hedge reserve 266.67
Premium revenue 266.67
[20,000 x (RM3.04 – RM3.00) = RM800 x 1/3 = RM266.67]

2. 1 March 2013
Accounts receivable (USD) 1,400
Foreign exchange gain 1,400
[20,000 x (RM3.12 – RM3.05)]
Loss on forward contract 1,400
Cash flow hedge reserve 1,400
Cash flow hedge reserve 423.64
Forward contract 423.64
[20,000 x (RM3.12 - RM3.04) = RM1,600 – 1,176.36]
Cash flow hedge reserve 533.33
Premium revenue 533.33
[RM800 x 2/3 = RM533.33]
Foreign currency (USD) [20,000 x RM3.12] 62,400
Accounts receivable (USD) 62,400
Cash [20,000 x RM3.04] 60,800
Forward contract 1,600
Foreign currency (USD) 62,400
b. Forward Contract Fair Value Hedge of Foreign Currency Receivable
1 December 2012
Accounts receivable (USD) 60,000
Sales 60,000
[20,000 x RM3.00]
No entry for the forward contract.

3. 31 December 2012
Accounts receivable (USD) 1,000
Foreign exchange gain 1,000
[20,000 x (RM3.05 – RM3.00)]
Loss on forward contract 1,176.36
Forward contract 1,176.36
[20,000 x (RM3.04 – RM3.10) = RM1,200 x .9803 = RM1,176.36]
1 March 2013
Accounts receivable (USD) 1,400
Foreign exchange gain 1,400
[20,000 x (RM3.12 – RM3.05)]
Loss on forward contract 423.64
Forward contract 423.64
[20,000 x (RM3.12 – RM3.04) = RM1,600 – 1,176.36]
Foreign currency (USD) 62,400
Accounts receivable (USD) 62,400
[20,000 x RM3.12]
Cash [20,000 x RM3.04] 60,800
Forward contract 1,600
Foreign currency (USD) 62,400

4. SOLUTION FOR Q3
a)
1 November 2013:
Materials 300,000
Accounts Payable (USD) 300,000
(To record purchase: USD100,000 x RM3.00)
31 December 2013
Foreign exchange loss 900
Accounts payable (USD) 900
[To adjust the value of accounts payable to the new spot rate: 100,000 x (RM3.009 –
RM3.00)]
Forward contract 990
Cash flow hedge reserve 990
[To record the forward contract as an asset at its fair value: 100,000 x (RM2.995 – RM2.985)
= RM1,000 x .990 (PVFn=1/i=1%) = RM990]
Cash flow hedge reserve 900
Gain on forward contract 900
(To record a gain on forward contract to offset the foreign exchange loss on accounts
payable)
Cash flow hedge reserve 1,000
Discount revenue 1,000
[To allocate the forward contract discount to net income using straight-line method: 100,000
x (RM3.00 – RM2.985) = RM1,500 x 2/3 = RM1,000]
31 January 2014
Accounts payable (USD) 2,900
Foreign exchange gain 2,900
[To adjust the value of accounts payable to the new spot rate: 100,000 x (RM3.009 –
RM2.980)]
Cash flow hedge reserve 1,490
Forward contract 1,490

5. [To adjust the carrying value of the forward contract to its current fair value: 100,000 x
(RM2.985 – RM2.980) = RM500 + RM990]
Cash flow hedge reserve 500
Discount revenue 500
[To allocate the forward contract discount to net income: RM1,500 x 1/3 = RM500]
Loss on forward contract 2,900
Cash flow hedge reserve 2,900
(To record a loss on forward contract to offset the foreign exchange gain on accounts
payable)
Foreign currency (USD) [100,000 x RM2.980] 298,000
Forward contract 500
Cash [100,000 x RM2.985] 298,500
Accounts payable (USD) 298,000
Foreign currency (USD) 298,000
b)
Fair value hedge:
On reporting date, the hedge asset or liability is reported at fair value. Change in fair value is
recognized through profit or loss.
The derivative hedging instrument is adjusted to fair value (resulting in an asset or liability
reported on the balance sheet), with the counterpart recognized as a gain or loss in net
income.
The discount or premium on a forward contract is not allocated to net income.