Malolos Company has the Philippine peso as its functional currency. The entity expects to purchase equipment from USA for $20,000 on March 31, 2017. Accordingly, the entity is exposed to a foreign currency exchange risk. If the dollar increases before the purchase takes place, the entity will have to pay more pesos to obtain the $20,000 that it will have to pay for the equipment.

To offset the risk of any increase in the dollar rate, the entity enters into a forward currency contract on October 1, 2016 to purchase $20,000 in six months for a fixed amount of P1,000,000 or P50 to $1. The entity designates the forward currency contract as the hedging instrument in a cash flow hedge of its exposure to increases in the dollar exchange rate.

On December 31, 2016, the exchange rate is P52 to $1 and on March 31, 2017, the exchange rate is P53 to $1. In the December 31, 2016 statement of financial position, the company should record the value of the forward contract as a(n)?

a. P40,000 asset c. P1,040,000 asset

b. P40,000 liability d. P1,040,000 liability