Appendix A Solutions Manual

Topics: Futures contract, Bond, Income statement Pages: 44 (5117 words) Published: February 1, 2015
Appendix A

Derivatives

AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments, and faculty may approach assessment and its documentation differently, one approach is to provide specific questions on exams that become the basis for assessment. To aid faculty in this endeavor, we have labeled each question, exercise, and problem in Intermediate Accounting, 7e, with the following AACSB learning skills:

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AACSB Tags

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Reflective thinking
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Appendix A: Derivatives

© The McGraw-Hill Companies, Inc., 2013
A-1

QUESTIONS FOR REVIEW OF KEY TOPICS
Question A–1
These instruments “derive” their values or contractually required cash flows from some other security or index.

Question A–2
The FASB has taken the position that the income effects of the hedge instrument and the income effects of the item being hedged should be recognized at the same time.

Question A–3
If interest rates change, the change in the debt’s fair value will be less than the change in the swap’s fair value. The gain or loss on the $500,000 notional difference will not be offset by a corresponding loss or gain on debt. Any increase or decrease in income resulting from a hedging arrangement would be a result of hedge ineffectiveness such as this.

Question A–4
A futures contract is an agreement between a seller and a buyer that calls for the seller to deliver a certain commodity (such as wheat, silver, or Treasury bond) at a specific future date, at a predetermined price. Such contracts are actively traded on regulated futures exchanges. If the “commodity” is a financial instrument, such as a Treasury bill, commercial paper, or a CD, the contract is called a financial futures agreement.

Question A–5
An interest rate swap exchanges fixed interest payments for floating rate payments, or vice versa, without exchanging the underlying notional amount.

Question A–6
All derivatives, without exception, are reported on the balance sheet as either assets or liabilities at fair (or market) value. The rationale is that (a) derivatives create either rights or obligations that meet the FASB’s definition of assets or liabilities and (b) fair value is the most meaningful measurement.

Question A–7
A gain or loss from a cash flow hedge is deferred as other comprehensive income until it can be recognized in earnings along with the earnings effect of the item being hedged.

© The McGraw-Hill Companies, Inc., 2013
A-2

Intermediate Accounting, 7e

EXERCISES
Exercise A–1
Indicate (by abbreviation) the type of hedge each activity described below would represent.
Hedge Type
FV Fair value hedge
CF Cash flow hedge
FC Foreign currency hedge
N Would not qualify as a hedge
Activity
FV 1. An options contract to hedge possible future price changes of inventory. CF 2. A futures contract to hedge exposure to interest rate changes prior to replacing bank notes when they mature.
CF 3. An interest rate swap to synthetically convert floating rate debt into fixed rate debt.
FV 4. An interest rate swap to synthetically convert fixed rate debt into floating rate debt.
FV 5. A futures contract to hedge possible future price changes of timber covered by a firm commitment to sell.
CF 6. A futures contract to hedge possible future price changes of a forecasted sale of tin.
FC 7. ExxonMobil’s net investment in a Kuwait oil field.
CF 8. An interest rate swap to synthetically convert floating rate interest on a stock investment into fixed rate interest.
N 9. An...
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