Reading 29: The Lessons We Learn LOS c-Q 1～4

答案和详解如下:

1.MSH Corporation uses gold to manufacture jewelry. MSH anticipates the need for gold on June 30^th for goods that will be sold on September 30^th. Concerned that the price of gold will increase, MSH purchases a futures contract and designates the contract as a cash flow hedge. As it turns out, the spot price of gold was lower at the end of June when the contract was settled. When should MSH recognize the loss on the futures contract in the income statement and should the loss be included in income from continuing operations (IFCO)?

A)                                        September 30^th    No

B)                                        September 30^th    Yes

C)                                        June 30^th      Yes

D)                                        June 30^th      No

The correct answer was B)

On June 30^th, the loss on the futures contract should be reported in other comprehensive income. When the goods are sold on September 30^th, the loss should be recognized in the income statement along with the cost of goods sold which is lower since the price of gold declined. The loss is neither extraordinary nor related to a discontinued operation. Thus, the loss is reported “above the line” as a part of income from continued operations.

2.If the effectiveness criterion of a cash flow hedge and a net investment hedge of a foreign subsidiary are not met, where are the gains and losses from the ineffective portions recognized?

A)                                        Net income Other comprehensive income

B)                                        Other comprehensive income     Net income

C)                                        Net income Net income

D)                                        Other comprehensive income     Other comprehensive income

The correct answer was C)

In both hedge types, any portion of the hedge that is not effective is recognized in the net income.

3.Recently, Firebird Corporation purchased 1,000 shares of GTO Corporation for $50 per share. GTO is a non-dividend paying stock and Firebird expects to sell the investment in the near term. To hedge the investment, Firebird purchases a put option and designates the option as a fair value hedge. Ignoring the premium paid for the option, what is the net effect on Firebird’s total assets and net income if GTO declines $5 per share at year-end?

A)                                        No net effect       Decrease

B)                                        Decrease     No net effect

C)                                        No net effect       No net effect

D)                                        Decrease     Decrease

The correct answer was C)

Total assets do not change. The decrease in the value of the investment is exactly offset by the increase in value of the option. Net income is also unaffected. The unrealized loss on the investment is offset by the unrealized gain on the option.

4.What value is used in the balance sheet when reporting a derivative instrument used in a cash flow hedge and where are the unrealized gains and losses on the derivative instrument reported?

A)                                        Fair value     Other comprehensive income

B)                                        Fair value     Income statement

C)                                        Cost     Other comprehensive income

D)                                        Cost     Income statement

The correct answer was A)

A derivative instrument used in a cash flow hedge is reported on the balance sheet at fair value and the unrealized gains and losses are recognized in the other comprehensive income.