ExpertMedium1 markMultiple Choice
CPA · Question 37 · Area II: Technical Accounting
A company has a large inventory of copper. To protect against a decline in copper prices, the company sells copper futures. This is designated as a Fair Value Hedge. At year-end, the copper inventory value decreased by $50,000, and the futures contract gained $48,000 in value. <br/><br/>What is the net impact on Net Income?
A company has a large inventory of copper. To protect against a decline in copper prices, the company sells copper futures. This is designated as a Fair Value Hedge. At year-end, the copper inventory value decreased by $50,000, and the futures contract gained $48,000 in value. <br/><br/>What is the net impact on Net Income?
Answer options:
A.
$48,000 Gain
B.
$50,000 Loss
C.
$2,000 Loss
D.
$0
How to approach this question
Fair Value Hedge: Recognize gain/loss on BOTH the derivative and the hedged asset in Income. Net them out.
Full Answer
C.$2,000 Loss✓ Correct
In a Fair Value Hedge, gains and losses on the derivative and the hedged item (attributable to the hedged risk) are recognized in current earnings. <br/>Loss on Inventory: ($50,000)<br/>Gain on Derivative: $48,000<br/>Net Impact: ($2,000).
Common mistakes
Putting one side in OCI.
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