On Jan 1, a company enters into an interest rate swap to hedge the variability of cash flows on its variable-rate debt. The swap is designated as a Cash Flow Hedge. At year-end, the fair value of the swap has increased by $10,000 (Asset). The hedge is fully effective. <br/><br/>What is the journal entry to record the change in fair value?

Answer options:

Debit Swap Asset $10,000; Credit Gain on Swap (Income) $10,000.

Debit Swap Asset $10,000; Credit Other Comprehensive Income (OCI) $10,000.

Debit OCI $10,000; Credit Swap Asset $10,000.

Debit Swap Asset $10,000; Credit Interest Expense $10,000.

How to approach this question

Cash Flow Hedge = OCI. Fair Value Hedge = Income.

Full Answer

B.Debit Swap Asset $10,000; Credit Other Comprehensive Income (OCI) $10,000.✓ Correct

For a qualifying Cash Flow Hedge, the effective portion of the gain or loss on the hedging instrument is reported in Other Comprehensive Income (OCI). It is reclassified to earnings in the same period the hedged forecasted transaction affects earnings.

Common mistakes

Recording gain in Income.

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