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LOS c: Provide a simplified description of the accounting treatment for derivatives being used: to hedge exposure to changes in the value of assets and liabilities, to hedge exposure to variable cash flow, and to hedge a foreign currency exposure of an instrument in a foreign corporation. ffice ffice" />
Q1. 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?
Balance sheet Unrealized gains and losses
A) Cost Other comprehensive income
B) Fair value Income statement
C) Fair value Other comprehensive income
Correct answer is C)
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.
Q2. 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?
Total assets Net income
A) Decrease No net effect
B) No net effect Decrease
C) No net effect No net effect
Correct answer is 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.
Q3. 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?
Cash flow hedge Net investment hedge of a foreign subsidiary
A) Net income Net income
B) Other comprehensive income Other comprehensive income
C) Net income Other comprehensive income
Correct answer is A)
In both hedge types, any portion of the hedge that is not effective is recognized in the net income.
Q4. MSH Corporation uses gold to manufacture jewelry. MSH anticipates the need for gold on June 30th for goods that will be sold
on September 30th. 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)?
Date loss is recognized Loss included in IFCO
A) September 30th No
B) June 30th Yes
C) September 30th Yes
Correct answer is C)
On June 30th, the loss on the futures contract should be reported in other comprehensive income. When the goods are sold on September 30th, 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.
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发表于 2009-3-3 09:13
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