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. What is the net impact on Net Income?

Answer options:

$48,000 Gain

$50,000 Loss

$2,000 Loss

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. Loss on Inventory: ($50,000) Gain on Derivative: $48,000 Net Impact: ($2,000).

Common mistakes

Putting one side in OCI.

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