ExpertHard1 markMultiple Choice
CPA · Question 36 · Area II: Technical Accounting
A company enters into a Fair Value Hedge to protect the value of its fixed-rate debt against interest rate changes. At year-end: <br/>- The fair value of the swap increased by $10,000 (Gain).<br/>- The fair value of the debt decreased by $9,500 (Gain) due to rate changes.<br/><br/>What is the net impact on Net Income?
A company enters into a Fair Value Hedge to protect the value of its fixed-rate debt against interest rate changes. At year-end: <br/>- The fair value of the swap increased by $10,000 (Gain).<br/>- The fair value of the debt decreased by $9,500 (Gain) due to rate changes.<br/><br/>What is the net impact on Net Income?
Answer options:
A.
$10,000 Gain
B.
$500 Gain
C.
$500 Net Gain
D.
$0
How to approach this question
FV Hedge: Recognize Swap G/L in Income. Recognize Change in Debt FV in Income. Net them.
Full Answer
C.$500 Net Gain✓ Correct
C
The gain on the swap ($10,000) is recognized in earnings. The loss on the hedged item ($9,500) is also recognized in earnings. The net impact is a $500 gain.
Common mistakes
Thinking the debt change goes to OCI; ignoring the debt change entirely.
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