To Account for a Forward Contract Cash Flow Hedge of a Foreign

question 22

Multiple Choice

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at the balance sheet date

• A) 1. Adjust hedged asset or liability to fair value, with counterpart (change in fair value) reported as foreign exchange gain or loss in net income,2. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value) reported in AOCI,3. Transfer an amount from AOCI to net income to offset the foreign exchange gain or loss on the hedged asset or liability recognized in 1, and4. Transfer from AOCI to net income (as discount expense or premium revenue) the current period's amortization of discount or premium.
• B) 1. Adjust hedged asset or liability to fair value, with counterpart (change in fair value) reported as foreign exchange gain or loss in net income and2. Adjust option to fair value (either an asset or zero value), with counterpart (change in fair value) reported as gain or loss in net income.
• C) 1. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value) reported as gain or loss in net income and2. Adjust firm commitment to fair value (based on change in forward rate), with counterpart (change in fair value) reported as gain or loss in net income.
• D) 1. Adjust hedged asset, with counterpart (change in fair value) reported as a foreign exchange gain in net income and2. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value) reported as a gain or loss in net income.
• E) 1. None. No journal entry is required.

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Definitions:

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent, salaries, and loan payments.

Total Cost

The sum of all expenses incurred by a firm in producing goods or services, including both fixed and variable costs.

Maximizing Profits

The process of adjusting production and sales strategies to achieve the highest possible return from operations.

Economic Profit

The difference between total revenue and total costs, including both explicit and implicit costs.