ExpertHard1 markMultiple Choice
CPA · Question 37 · Area 3: Select Transactions
A company enters into a derivative to hedge the exposure to changes in the fair value of a recognized asset (Fair Value Hedge). In Year 1, the derivative gains $10,000 in value, and the hedged asset loses $8,000 in value due to the hedged risk. How is this reported?
A company enters into a derivative to hedge the exposure to changes in the fair value of a recognized asset (Fair Value Hedge). In Year 1, the derivative gains $10,000 in value, and the hedged asset loses $8,000 in value due to the hedged risk. How is this reported?
Answer options:
A.
Derivative Gain in OCI; Asset Loss in NI.
B.
Derivative Gain in NI; Asset Loss in NI.
C.
Derivative Gain in OCI; Asset Loss in OCI.
D.
Net Gain of $2,000 in OCI.
How to approach this question
Identify Hedge Type. Fair Value Hedge -> Net Income (match gain/loss). Cash Flow Hedge -> Effective portion to OCI.
Full Answer
B.Derivative Gain in NI; Asset Loss in NI.✓ Correct
In a Fair Value Hedge, gains/losses on the derivative and the offsetting loss/gain on the hedged item are recognized in earnings (Net Income) in the same period.
Common mistakes
Confusing FV Hedge with Cash Flow Hedge (OCI).
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