ExpertMedium1 markMultiple Choice
CPA · Question 26 · Area II: Technical Accounting
A company has a variable-rate loan and wishes to fix its interest payments. It enters into an interest rate swap (pay fixed, receive variable) that qualifies as a Cash Flow Hedge. At the end of the reporting period, the swap has a fair value gain of $50,000. The hedge is fully effective. Which of the following is the correct journal entry to record the change in fair value?
A company has a variable-rate loan and wishes to fix its interest payments. It enters into an interest rate swap (pay fixed, receive variable) that qualifies as a Cash Flow Hedge. At the end of the reporting period, the swap has a fair value gain of $50,000. The hedge is fully effective. Which of the following is the correct journal entry to record the change in fair value?
Answer options:
A.
Debit Swap Asset $50,000; Credit Gain on Swap (Income) $50,000
B.
Debit OCI $50,000; Credit Swap Asset $50,000
C.
Debit Swap Asset $50,000; Credit Other Comprehensive Income (OCI) $50,000
D.
Debit Swap Asset $50,000; Credit Interest Expense $50,000
How to approach this question
Identify Hedge Type. Cash Flow Hedge -> Effective portion to OCI. Fair Value Hedge -> Income. Since it's a gain, Debit Asset, Credit OCI.
Full Answer
C.Debit Swap Asset $50,000; Credit Other Comprehensive Income (OCI) $50,000✓ Correct
C
For a Cash Flow Hedge, the effective portion of the change in fair value is recorded in Other Comprehensive Income (OCI). Since it is a gain, we Debit the Swap Asset and Credit OCI.
Common mistakes
Recording in Net Income (FV Hedge rules); reversing debit/credit.
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