Problem 1

Spot Rate
(IDR/USD)

Forward
Rate
(IDR/USD)

1 Dec
2013

10.850

10.860

31 Dec
2013

10.800

10.820

31 Jan
2014

10.740

10.745

28 Feb
2014

10.780

10.780

PT BBM designates the forward contract as cash flow hedge of foreign

exchange
risk to the transaction.
1. Can PT BBM designate the forward contract above as fair value hedge of foreign
exchange risk?
Answer :
Yes it can. Because the designation of a derivative as a fair value hedge or a cash flow
hedge is determined by the hedged risk, that is, whether the entity has a fair value
exposure or a cash flow exposure. However, there is an exception where a derivative can
be designated as either a fair value hedge or a cash flow hedge is where the hedged risk is
the foreign exchange risk of a firm commitment.
2. Prepare journal entries for the period 1 December 2013 to 28 February 2014
Answer :
Date

Journal

31-Dec-13 Forward Contract

Debet
400,000

Gain on Forward Contract

(10,820-10.860) x 10,000
31-Jan-14 Account Receivable (FC)
Sales
(10,870 x 10,000)
Loss on Account Receivable

Credit

400,000
107,400,000
107,400,000

60,000
Account Receivable (FC)
[10,740-10,800] x 10,000
Forward Contract

60,000
750,000

Gain on Forward Contract

(10,745-10,820) x 10,000
28-Feb-14 Account Receivable (FC)

750,000
400,000

Gain on Forward Contract

(10,780-10,740) x 10,000
Forward Contract

400,000
350,000

Gain on Forward Contract

(10,780-10,745) x 10,000
Cash

350,000
108,600,000

Forward Contract

800,000

Account Receivable (FC)

*cash : 10,860 x 10,000
*AR : 10,780 x 10,000

107,800,000

Problem 2
Cusso Corporation had a bank loan of $50,000,000, which was to be repaid at the end of
20x5. The loan carried an interest rate based on the three-month London Interbank Offer Rate
(LIBOR) PLUS 150 basis points. Interest on the loan was payable half-yearly on 30 June and 31
December. Cusso, concerned that interest rates might increase during the next three years,
decided to enter swap with a financial intermediary on 1 January 20x3, which involved Cusso
paying a fixed rate of 5.5% per annum and receiving LIBOR plus 150 basis points. The notional
amount of the swap was $50,000,000.
LIBOR was reset semi-annually beginning with 1 January 20x3 in order to determine the
next interest payment. Differences between the fixed rate and the variable rate would be settled
on asemi-annual basis. The following interest rates occurred over the term of the swap.

Date
1 January 20x3
30 June 20x3
31 December 20x3
30 June 20x4
31 December 20x4
30 June 20x5

LIBOR
4.0%
4.5%
5.0%
4.7%
4.5%
4.3%

LIBOR + 150 basis points

5.5%
6.0%
6.5%
6.2%
6.0%
5.8%

The following assumptions are made:

a) The yield curve is flat.
b) No hedge ineffectiveness (the conditions for the FASBs short-cut method are assume to be
met).
c) Other risks remain constant.
Cusso designated the swap as a cash flow hedge.
Required:
Prepare the journal entries required to account for the loan and the swap over the period of the
swap.
Date

Curren
t
LIBO
R+
150 bp

1 Jan 20x3
30 Jun 20x3

5.5%
6.0%

31 Dec
20x3

6.5%

30 Jun 20x4

6.2%

31 Dec

6.0%

Receive of
Previous
LIBOR +
150 bp
(a)

Payment
of 5.5%
[(5.5% x
50,000,00
0)/2]
(b)

Current
Net
Receipt
(Paid)
(c)

FV of Swap Change in
Asset
FV
(Liability)
(f)
(d)

1,375,000
(5.5% x
50,000,000)
/2
1,500,000
(6.0% x
50,000,000)
/2
1,625,000
(6.5% x
50,000,000)
/2
1,550,000

1,375,000

(572,463.40
)

(572,463.40)

1,375,000

125,000

(923,745.77
)

(351,282.37)

1,375,000

250,000

(494,056.81
)

429,688.96

1,375,000

175,000

(239,183.71

254,873.10

20x4

30 June
20x5

31
December
20x5

5.8%

(6.2% x
50,000,000)
/2
1,500,000
(6.0% x
50,000,000)
/2
1,450,000
(5.8% x
50,000,000)
/2

1,375,000

125,000

(72,886.30)

166,297.41

1,375,000

75,000

72,886.30

Calculations:
(c)
: [(5.5% x 50,000,000)/2]
(d)
: (b) (c)
(e)
: Using Ms. Excel, Formula: (=PV(a/2, number of next payment, next d,0,0)
(f)
: Current FV of Swap Previous FV of Swap
Journal :
Date
30 Jun 20x3

31 Dec 20x3

30 Jun 20x4

31 Dec 20x4

Journals
Interest Expense
Cash
FV Adjustment (Equity)
Interest Rate Swap Liability
Interest Expense
Cash
Cash
Interest Expense
FV Adjustment (Equity)
Interest Rate Swap Liability
Interest Expense
Cash
Cash
Interest Expense
Interest Rate Swap Liability
FV Adjustment (Equity)
Interest Expense
Cash
Cash
Interest Expense
Interest Rate Swap Liability

Debit
1,375,000

Credit
1,375,000

572,463.4
572,463.4
1,500,000
1,500,000
125,000
125,000
351,282.3
351,282.3
1,625,000
1,625,000
250,000
250,000
429,688.9
429,688.9
1,550,000
1,550,000
175,000
175,000
254,873.10

30 Jun 20x5

31 Dec 20x5

Problem 3

FV Adjustment (Equity)
Interest Expense
Cash
Cash
Interest Expense
Interest Rate Swap Liability
FV Adjustment (Equity)
Interest Expense
Cash
Cash
Interest Expense
Interest Rate Swap Liability
FV Adjustment (Equity)

254,873.10
1,500,000
1,500,000
125,000
125,000
166,297.4
166,297.4
1,450,000
1,450,000
75,000
75,000
72,886.3
72,886.3

a. What happens to the ineffective portion of changes in fair value of cash

flow hedges?
Answer :

The ineffective portion of changes in fair value of cash flow hedge (if any) is
recognized as an expense
in the income statement.
b. Total other comprehensive income for 2015 for the three items related
to hedge accounting is (50). By how much does total equity change
because of these items and the effects they may have elsewhere in the
financial statements?
c. Suppose that for tax purposes the effective portion of changes in fair
value of cash flow hedges is taxable/deductible when the hedging
instrument is derecognized. Does the (44) then give the rise to a
deferred tax debit in the balance sheet or to a deferred tax credit?