Posted: August 31st, 2016
On November 1, Year One, the Abernethy Company signs a forward exchange contract to receive one million Japanese yen on February 1, Year Two, for $10,000 based on the three-month forward exchange rate at that time of $1 for 100 Japanese yen (1,000,000 x 1/100 or $10,000). On that same day, Abernethy agrees to acquire inventory for one million yen when it is delivered on February 1, Year Two. The forward exchange receivable is designated as a hedge for this commitment. On November 1, the spot (current) exchange rate is $1 for 94 Japanese yen but that rate change, by December 31, to $1 for 96 Japanese yen. As of December 31, Year One, the forward exchange rate to be paid one month in the future is $1 for 103 Japanese yen. What is the overall impact to be recognized on net income at the end of Year One?
b. $71 loss
c. $221 gain
d. $292 loss
7. Near the end of the Year One, a company buys two derivatives that will come due in the next year. One of these derivatives was properly designed as a cash flow hedge. The other derivative was properly designed as a fair value hedge. By the end of the year, the fair value of both of these derivatives had increased. Where will these gains be reported?
a. In net income for both hedges
b. In accumulated other comprehensive income for both hedges
c. In net income for the fair value hedge and in accumulated other comprehensive income for the cash flow hedge.
d. In net income for the cash flow hedge and in accumulated other comprehensive income for the fair
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