FAR 6_04B

  1. How are gains/losses recognized for (1) derivative as a hedge, (2) derivative not as a hedge
    • (1) IF Fair Value Hedge: change recognized in earnings
    • IF Cash Flow Hedge: The effective portion is recognized in OCI, the ineffective portion in earnings
    • (2) Changes are recognized in earnings
  2. The effective portion of a cash flow hedge has been properly accounted in OCI. When does the OCI portion migrate to earnings for the following (1) when a forecasted sale or expense is hedged, (2) when a forecasted inventory purchase is hedged.
    • (1) When the sale or expense is recognized in earnings
    • (2) When the inventory is sold to customers
  3. The effective portion of a cash flow hedge has been properly accounted in OCI. When does the OCI portion migrate to earnings for the following (1) when a forecasted fixed asset purchase is hedged, (2) if an existing asset or liability is hedged.
    • (1) As the fixed asset is depreciated
    • (2) When the asset or liability impacts earning
  4. What constitutes a Fair Value Hedge?
    When the derivative is used to offset a change in a fixed contract, a particular asset or a particular liability
  5. What constitutes a Cash Flow Hedge?
    When the derivative is used to offset changes from cash flows that will be needed in the future, but that are not established through a contract (such as purchases for inventory that may have volatile prices).
  6. Where are gains and losses from the following foreign currency hedges captured? (1) Fair Value Hedge, (2) Cash Flow Hedge, (3) Net Investment Hedge
    • (1) in earnings
    • (2) the effective portion in OCI, the ineffective portion in earnings
    • (3) the effective portion in OCI, the ineffective portion in earnings
  7. In what section of the Cash Flow Statement are the following reported (1) derivative designated as a hedge, (2) derivative not designated as a hedge
    • (1) In the same category as the hedged item
    • (2) IF it’s for trading = operating; IF it’s as an investment = Investment
    • If the risk to the entity is that the cost of, or prices of, or rates for ... to go UP in the future, the best methods to reduce risk would be to...
    • Buy a call option, or go long (buy) on a forward or future contract.
  8. If the risk to the entity is that the cost of, or prices of, or rates for ... will go DOWN in the future, the best methods to reduce risk would be to...
    Buy a put option, or go short (sell) on a forward or future contract.
  9. The entity has a purchase commitment and the market price is now lower than the contract price. Which journal entry accts are used for the fair value adjustment? Which financial statement does this impact?
    • [DR] Loss on Firm Purchase Committment
    • [CR] Purchase Commitment Liability
    • Income Statement for Loss
    • Balance Sheet for Liability
  10. The entity has taken a short position on a fair value hedge. The market price is now less than the strike price. Which journal entry accts are used for the fair value adjustment? Which financial statement does this impact?
    • [DR] Fair Value Hedge (asset)
    • [CR] Gain on Fair Value Hedge
    • Income Statement for Gain
    • Balance Sheet for Hedge
  11. The entity has taken a long position on a fair value hedge. The market price is now more than the strike price. Which journal entry accts are used for the fair value adjustment? Which financial statement does this impact?
    • [DR] Loss on Fair Value Hedge
    • [CR] Fair Value Hedge Liability
    • Income Statement for Loss
    • Balance Sheet for Liability
  12. How is the fair value of an option calculated?
    • The change of (market price vs option price) x notional amount
    • +/- The change in the time value of the option.
  13. True / False: A journal entry is required on the date an entity enters into a contract.
    False
  14. When is a cash flow hedge considered “effective” and thus goes on OCI?
    When either the gain or loss on the hedge does not exceed the opposite amount (gain vs loss) of the item it is hedging.
  15. What are the journal entries to account for an effective portion of (1) gain, vs (2) loss to OCI?
    • IF A GAIN
    • [DR] Cash Flow Hedge
    • … [CR] OCI – effective portion of cash flow hedge
    • IF A LOSS
    • [DR] OCI – effective portion of a cash flow hedge
    • … [CR] Cash Flow Hedge
  16. What amounts are included in the closing journal entries for a cash flow hedge?
    The net difference between the contract settlement amount and the market price.
  17. A gain on an effective cash flow hedge was recorded in OCI against an Inventory purchase. When does the amount in OCI migrate to the Income Statement?
    When the inventory is sold
  18. The gain/loss on a net investment hedge is captured on which financial statement?
    OCI
Author
BethM
ID
338106
Card Set
FAR 6_04B
Description
Becker Review 2018
Updated