Firms Must Designate Each Derivative as a Hedging Instrument, or Else

question 224

Multiple Choice

Firms must designate each derivative as a hedging instrument, or else accounting views the derivative as a nonhedging instrument.Furthermore, firms must designate each hedging instrument as either a fair value hedge or a cash flow hedge.The accounting for nonhedging derivatives

• A)remeasures both the hedged item and the derivative to fair value each period and recognize any unrealized gains and losses in net income.
• B)remeasures the derivative to fair value each period and include the unrealized gain or loss in other comprehensive income to the extent that the derivative instrument is effective in neutralizing risk.When the firm settles the hedged item, transfer the previously unrealized gain or loss from other comprehensive income to net income.
• C)remeasures the derivative to fair value each period and include the unrealized gain or loss in net income.
• D)all of the above
• E)none of the above

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Definitions:

Fiduciary Duties

Obligations of trust and confidence requiring a party to act in the best interests of another party.

Limited Liability Company

A business entity model combining the benefit of limited liability from a corporation with the direct tax advantages of a partnership or sole proprietorship.

Breaching

The act of violating a law, duty, other form of agreement, or trust.

Taxed As A Corporation

Refers to a taxation status where a business entity is treated as a corporation for tax purposes, subjecting it to corporate income tax rates and regulations.