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#20
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During 2014, Martha Company entered into a receive variable, pay fixed interest swap agreement as a cash flow
hedge with a speculator bank at the prevailing rate of interest of 12%. This derivative contract means, that if the rate
is higher than 12%, Martha will receive an interest rate swap payment equal to the difference in rate times the
principal of the loan and will pay the bank an equivalent amount if the rate is lower than 12% on January 1, 2016. If
the prevailing interest rate on January 1, 2015 is 15% and the present value of 1 at 15% for 1 period is .870. What is
the derivative asset or liability to be recognized by Martha on December 31, 2014?
a.
b.
c.
d.
104,400 receivable
104,400 payable
120,000 receivable
120,000 payable
5. On January 1, 2013, Melissa Company received a 4-year variable interest rate loan of P5,000,000 with interest
payment at the end of each year and the principal to be repaid on December 31, 2016. The interest rate for 2013 is
10% and the rate in each succeeding year is equal to market interest rate on January 1 of each year.
In connection with the loan, Melissa Company entered into an interest rate swap agreement as a cash flow hedge
with another financial institution to the effect that Melissa will receive a swap payment if the interest on January 1 is
more than 10% and will make a swap payment if the interest is less than 10%. The swap payments are made at the
end of the year.
On January 1, 2014, the market rate of interest is 14% and on January 1, 2015, the market rate of interest is 12%.
The present value of an ordinary annuity of 1 at 14% for three periods is 2.32 and the present value of an ordinary
annuity of 1 at 12% for two periods is 1.69.
1. What is the interest rate swap receivable December 31, 2013?
a.
b.
c.
d.
169,000 receivable
464,000 receivable
264,000 receivable
338,000 receivable
169,000 receivable
464,000 receivable
264,000 receivable
338,000 receivable
6. Merylin Company has the Philippine peso as its functional currency. On October 1, 2014, the company expects to
purchase goods from the USA for $50,000 on March 31, 2015. 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, 2014, Merylin entered into a foreign currency
forward contract with a bank speculator to purchase $50,000 in six months for a fixed amount of P2,500,000 or P50 to
$1. This forward currency contract is designated as a cash flow hedge of the companys exposure to increase in
dollar exchange rate. On December 31, 2014, the exchange rate is P52 to $1 and on March 31, 2015, the exchange
rate is P53 to $1. What is the derivative asset to be reported by Merylin Company on December 31, 2014?
a.
50,000
b. 150,000
c. 100,000
d.
0
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#20