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

question 20

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, and 4. 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 and 2. 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 and 2. 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 and 2. 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:

Potential Customer

An individual or entity that could be interested in purchasing a product or service, but has not yet decided to do so.

Reactance Response

A psychological reaction that occurs when people feel their freedom to choose or act is threatened, leading them to resist the influence or change.

Foot-in-the Door Technique

A persuasion strategy where a small request is made first in order to increase the likelihood of compliance with a larger request later.

Large Request

A significant or considerable demand or appeal made by one party to another.