Deck 9: Futures, Options and Interest Rate Swaps

Question 1

Which situation below accurately describes an instance of "hedge accounting"?

A) A company hedges its investment in a debt security classified as trading. Because of the hedge, changes in the value of the security are reported in other comprehensive income.
B) A company hedges its inventory, normally carried at cost. Because of the hedge, changes in the value of the inventory are reported in income.
C) A company hedging a forecasted purchase of inventory recognizes changes in the value of the inventory in other comprehensive income.
D) A company hedges its inventory, normally carried at cost. Because of the hedge, changes in the value of the inventory are reported in other comprehensive income and the inventory is carried at market value.

Answer 1

A company hedges its inventory, normally carried at cost. Because of the hedge, changes in the value of the inventory are reported in income.

Question 2

Which statement below accurately describes reporting for a cash flow hedge of an inventory purchase?

A) Changes in the value of the hedge are reported in other comprehensive income until the inventory is sold.
B) Changes in the value of the hedge are reported in other comprehensive income until the inventory is purchased.
C) Changes in the value of the hedge are reported in income, along with changes in the forecasted purchase obligation.
D) Changes in the value of the hedge are reported in other comprehensive income, along with changes in the forecasted purchase obligation.

Answer 2

Changes in the value of the hedge are reported in other comprehensive income until the inventory is sold.

Question 3

A derivative designated as a hedge of a firm commitment (a documented forthcoming sale or purchase):

A) Is marked to market each period along with the hedged purchase or sale commitment, even though the sale or purchase has not occurred.
B) Remains off-balance-sheet until the sale or purchase takes place.
C) Offsets the hedged item that is marked to market each period, with the resulting gain or loss deferred in OCI until the derivative is closed out.
D) Is marked to market each period, with the resulting gain or loss deferred in OCI until the sale or purchase takes place.

Answer 3

Is marked to market each period along with the hedged purchase or sale commitment, even though the sale or purchase has not occurred.

Question 4

If a derivative does not qualify for hedge accounting:

A) Changes in its fair value are reported in other comprehensive income.
B) Changes in its fair value are reported in income.
C) Gains and losses are reported only when realized.
D) It is not reported on the balance sheet.

Question 5

A company uses futures to hedge its inventory. Which statement is true concerning the hedge?

A) The company takes a short position in futures and records changes in their value in OCI.
B) The company takes a long position in futures and records changes in their value in income.
C) The company takes a short position in futures and records changes in their value in income.
D) The company takes a long position in futures and records changes in their value in OCI.

Question 6

A company uses futures to hedge a firm commitment to buy inventory. Which statement is true concerning the hedge?

A) The company takes a short position in futures and records changes in their value in OCI.
B) The company takes a long position in futures and records changes in their value in income.
C) The company takes a short position in futures and records changes in their value in income.
D) The company takes a long position in futures and records changes in their value in OCI.

Question 7

A company uses futures to hedge a forecasted purchase of inventory. Which statement is true concerning the hedge?

A) The company takes a short position in futures and records changes in their value in OCI.
B) The company takes a long position in futures and records changes in their value in income.
C) The company takes a short position in futures and records changes in their value in income.
D) The company takes a long position in futures and records changes in their value in OCI.

Question 8

A company has a short term note payable outstanding at an interest rate of 3%, and must refinance this liability in 90 days. The company wants to hedge against the possibility that interest rates will be higher at that time. If the interest rate on U.S. Treasury bills is highly correlated with the rate on the notes, which investment is an effective hedge?

A) Purchase call options on U.S. Treasury bills
B) Take a long position in U.S. Treasury bill futures
C) Swap the fixed interest on the note for a floating interest rate obligation tied to the U.S. Treasury bill rate
D) Take a short position in U.S. Treasury bill futures

Question 9

A company has a firm commitment to roll over a variable rate loan every 90 days. It hedges its interest rate risk by selling 90-day Treasury bills at a fixed price, for delivery in 90 days. The hedge is determined to be effective. Which statement is true?

A) If the Treasury bill rate increases, the company gains on the hedge.
B) If the variable rate on the loan increases, the company gains on its firm commitment to roll over the term loan.
C) Changes in the value of the short position in Treasury bills accumulate in other comprehensive income until interest expense is recognized on the loan.
D) If the Treasury bill rate declines, interest expense on the term loan after it is rolled over will be lower than if no hedging had occurred.

Question 10

A company holds significant inventories of soybeans. It uses soybean futures to hedge fluctuations in inventory value. If the company uses hedge accounting, the gain or loss on the futures investment is:

A) Shown on the income statement as incurred
B) Shown as a component of other comprehensive income until the inventory is sold
C) Used to adjust the carrying value of the inventory
D) Not reported

Question 11

A company hedges its purchases of oats, expected to occur in 3 months, using oat futures expiring in 3 months. Which statement is true concerning value changes in the oat futures?

A) If the futures qualify as a fair value hedge of a firm commitment to buy oats, all gains and losses on the futures are reported in income with no offset from the hedged item.
B) If the futures are effective hedges of forecasted purchases, losses on the futures are reported in income, but gains adjust the value of the oat inventory.
C) If the futures are effective hedges of a firm commitment to buy oats, gains and losses on the futures adjust cost of goods sold as they occur.
D) If the futures are effective hedges of forecasted purchases, gains and losses on the futures adjust cost of goods sold as they occur.

Question 12

A company with an investment in equity securities hedges this position by investing in short futures on the stock. This hedging relationship will generally have some effect on income, even though the terms match exactly, because:

A) Hedge accounting is not allowed for hedges of equity investments.
B) Gains and losses on stock futures are valued at changes in futures rates while losses and gains on the stock are valued at changes in current market rates.
C) The value of the stock futures is not related to the market value of the stock.
D) Gains and losses on the stock are valued at changes in futures rates while losses and gains on stock futures are valued at changes in current market rates.

Question 13

A company sells $1,000,000 face value interest rate futures (120-day Treasury bills) at 91, as an effective hedge of its firm commitment to roll over its variable rate debt in 120 days. The interest rate futures increase in value to 92.5. How is this reported by the company?

A) Gain on the interest rate futures, reported in income
B) Loss on the interest rate futures, reported in other comprehensive income
C) Loss on firm commitment to roll over debt, reported in other comprehensive income
D) Gain on firm commitment to roll over debt, reported in income

Question 14

Use the following information to answer bellow questions
A firm carries a commodity inventory at a cost of $750,000 and plans to sell it in 60 days. Its market value is currently $800,000. To hedge against a decline in value of the commodity, the company sells commodity futures for delivery in 60 days at a price of $800,000. There is no margin deposit. At the company's 2020 year-end, 30 days later, the 30-day futures price is $780,000 and the inventory value declined to $779,000. Income effects of the inventory and the futures are reported in cost of goods sold.

-At what amount is the inventory valued on the company's year-end balance sheet?

A) $750,000
B) $779,000
C) $729,000
D) $780,000

Question 15

Use the following information to answer bellow questions
A firm carries a commodity inventory at a cost of $750,000 and plans to sell it in 60 days. Its market value is currently $800,000. To hedge against a decline in value of the commodity, the company sells commodity futures for delivery in 60 days at a price of $800,000. There is no margin deposit. At the company's 2020 year-end, 30 days later, the 30-day futures price is $780,000 and the inventory value declined to $779,000. Income effects of the inventory and the futures are reported in cost of goods sold.

-What is the net effect of value changes in the futures and the inventory on cost of goods sold?

A) Increase $1,000
B) Increase $21,000
C) Decrease $1,000
D) No effect

Question 16

Use the following information to answer bellow questions
A firm carries a commodity inventory at a cost of $750,000 and plans to sell it in 60 days. Its market value is currently $800,000. To hedge against a decline in value of the commodity, the company sells commodity futures for delivery in 60 days at a price of $800,000. There is no margin deposit. At the company's 2020 year-end, 30 days later, the 30-day futures price is $780,000 and the inventory value declined to $779,000. Income effects of the inventory and the futures are reported in cost of goods sold.

-How are the futures reported on the company's year-end balance sheet?

A) $20,000 liability
B) $20,000 asset
C) $21,000 asset
D) $21,000 liability

Question 17

Use the following information to answer bellow questions
Continue with the information used for questions . Thirty days after year-end, it is now 2021 and the market value of the inventory is $785,000. The company closes the futures contract and sells the inventory on the spot market for $785,000.

-How much cash does the company receive from or pay to the broker when it closes the futures contract in 2021?

A) Pays $15,000
B) Pays $5,000
C) Receives $15,000
D) Receives $5,000

Question 18

Use the following information to answer bellow questions
Continue with the information used for questions . Thirty days after year-end, it is now 2021 and the market value of the inventory is $785,000. The company closes the futures contract and sells the inventory on the spot market for $785,000.

-What amount is reported for cost of goods sold in 2021?

A) $750,000
B) $784,000
C) $779,000
D) $734,000

Question 19

Use the following information to answer bellow questions
Continue with the information used for questions . Thirty days after year-end, it is now 2021 and the market value of the inventory is $785,000. The company closes the futures contract and sells the inventory on the spot market for $785,000.

-What is the net cash inflow from the inventory and the hedge over the two years, assuming the inventory was purchased during this period?

A) $50,000
B) $15,000
C) $35,000
D) $20,000

Question 20

Use the following information to answer bellow questions
Continue with the information used for questions . Thirty days after year-end, it is now 2021 and the market value of the inventory is $785,000. The company closes the futures contract and sells the inventory on the spot market for $785,000.

-What is the net income effect from the inventory and the hedge over the two years?

A) $50,000
B) $15,000
C) $35,000
D) $20,000

Question 21

A company carries inventory at a cost of $400,000. When the inventory has a market value of $405,000, the company takes a short position in futures, at a price of $405,500. The futures position is a fair value hedge of the inventory. By the end of the year, the market price of the inventory is $404,000 and the futures price is $404,900. The company still holds the short position. The inventory is reported on the balance sheet at what amount?

A) $404,000
B) $399,000
C) $399,400
D) $404,900

Question 22

Use the following information to answer bellow Questions
A company carries an inventory of corn at cost, $500,000. The inventory has a fair value of $525,000. The company hedges the inventory's value by selling commodity futures for delivery in 60 days for $525,000. There is no margin deposit. In 30 days, at the firm's year end, the futures price for delivery in 30 days is $530,000 and the inventory's fair value increased to $532,000.

-Assuming the futures are qualified hedges of the inventory, at what value does the firm report its corn inventory at year-end?

A) $530,000
B) $525,000
C) $532,000
D) $507,000

Question 23

Use the following information to answer bellow Questions
A company carries an inventory of corn at cost, $500,000. The inventory has a fair value of $525,000. The company hedges the inventory's value by selling commodity futures for delivery in 60 days for $525,000. There is no margin deposit. In 30 days, at the firm's year end, the futures price for delivery in 30 days is $530,000 and the inventory's fair value increased to $532,000.

-If the firm closes its futures position at year-end, how much does it receive from/pay to the broker?

A) $7,000 received
B) $5,000 paid
C) $5,000 received
D) $7,000 paid

Question 24

Use the following information to answer bellow Questions
A jewelry manufacturer anticipates purchasing 1,000 ounces of gold in 90 days. To hedge against increases in the price of gold, it purchases 1,000 ounces of gold futures for delivery in 90 days at $1,350 per ounce, also the current market price. The futures investment qualifies as a cash flow hedge of the forecasted purchase. The company makes a $20,000 margin deposit. In 90 days, the market price of gold is $1,400; the company closes out its futures position and purchases the gold several days later for $1,395 per ounce. A few months later, the company sells jewelry products containing the gold.

-How much cash will the company receive upon closing the futures contract?

A) $1,350,000
B) $ 50,000
C) $ 70,000
D) $1,370,000

Question 25

Use the following information to answer bellow Questions
A jewelry manufacturer anticipates purchasing 1,000 ounces of gold in 90 days. To hedge against increases in the price of gold, it purchases 1,000 ounces of gold futures for delivery in 90 days at $1,350 per ounce, also the current market price. The futures investment qualifies as a cash flow hedge of the forecasted purchase. The company makes a $20,000 margin deposit. In 90 days, the market price of gold is $1,400; the company closes out its futures position and purchases the gold several days later for $1,395 per ounce. A few months later, the company sells jewelry products containing the gold.

-Prior to its sale, at what amount will the purchased gold inventory be carried on the company's books?

A) $1,395,000
B) $1,345,000
C) $1,350,000
D) $1,400,000

Question 26

Use the following information to answer bellow Questions
A jewelry manufacturer anticipates purchasing 1,000 ounces of gold in 90 days. To hedge against increases in the price of gold, it purchases 1,000 ounces of gold futures for delivery in 90 days at $1,350 per ounce, also the current market price. The futures investment qualifies as a cash flow hedge of the forecasted purchase. The company makes a $20,000 margin deposit. In 90 days, the market price of gold is $1,400; the company closes out its futures position and purchases the gold several days later for $1,395 per ounce. A few months later, the company sells jewelry products containing the gold.

-The company will report cost of goods sold on the sale at:

A) $1,350,000
B) $1,400,000
C) $1,395,000
D) $1,345,000

Question 27

Use the following information to answer questions bellow.
A company obtains a $1,000,000 variable rate loan on January 1, 2021, at a 2.1% interest rate. The loan is renewable every 3 months, and the interest rate is reset at each renewal. The company hedges against rising interest rates by taking a short futures position in $1,000,000 of 3-month Treasury bills at 99. There is no margin deposit, and the hedge qualifies as a fair value hedge of a firm liability commitment. At the end of 3 months, the Treasury bills sell for 98.2 and the loan renews at 2.9%. The company closes the futures contract and renews the loan. All income effects of the loan and the futures are reported in interest expense.

-How much cash does the company receive from or pay to the broker when it closes the futures contract?

A) Receives $2,000
B) Pays $2,000
C) Receives $8,000
D) Pays $8,000

Question 28

Use the following information to answer questions bellow.
A company obtains a $1,000,000 variable rate loan on January 1, 2021, at a 2.1% interest rate. The loan is renewable every 3 months, and the interest rate is reset at each renewal. The company hedges against rising interest rates by taking a short futures position in $1,000,000 of 3-month Treasury bills at 99. There is no margin deposit, and the hedge qualifies as a fair value hedge of a firm liability commitment. At the end of 3 months, the Treasury bills sell for 98.2 and the loan renews at 2.9%. The company closes the futures contract and renews the loan. All income effects of the loan and the futures are reported in interest expense.

-At what net amount is the new loan initially reported on the company's balance sheet?

A) $1,000,000
B) $1,002,000
C) $ 998,000
D) $1,008,000

Question 29

Use the following information to answer questions bellow.
A company obtains a $1,000,000 variable rate loan on January 1, 2021, at a 2.1% interest rate. The loan is renewable every 3 months, and the interest rate is reset at each renewal. The company hedges against rising interest rates by taking a short futures position in $1,000,000 of 3-month Treasury bills at 99. There is no margin deposit, and the hedge qualifies as a fair value hedge of a firm liability commitment. At the end of 3 months, the Treasury bills sell for 98.2 and the loan renews at 2.9%. The company closes the futures contract and renews the loan. All income effects of the loan and the futures are reported in interest expense.

-At what amount will interest expense be reported for the new loan?

A) $ 7,250
B) $ 9,250
C) $29,000
D) $ 5,250

Question 30

Use the following information to answer bellow Questions.
A company bought debt securities, classified as available-for-sale, on August 1, 2020 for $105,000. On November 15, 2020, the market value of the securities is $100,000, and the company buys put options for $500, locking in the selling price of the securities at $100,000. The options qualify as a fair value hedge of the securities. All income effects of the securities and the hedge are reported in financial gains (losses). At December 31, 2020, the reporting year-end, the market value of the securities is $98,000, and the options have a fair value of $2,600. On March 1, 2021, when the market value of the securities is $95,000, the company sells the options for $5,400, and also sells the securities.

-What is the time value of the options on December 31, 2020?

A) $ 600
B) $2,000
C) $2,600
D) $ 0

Question 31

Use the following information to answer bellow Questions.
A company bought debt securities, classified as available-for-sale, on August 1, 2020 for $105,000. On November 15, 2020, the market value of the securities is $100,000, and the company buys put options for $500, locking in the selling price of the securities at $100,000. The options qualify as a fair value hedge of the securities. All income effects of the securities and the hedge are reported in financial gains (losses). At December 31, 2020, the reporting year-end, the market value of the securities is $98,000, and the options have a fair value of $2,600. On March 1, 2021, when the market value of the securities is $95,000, the company sells the options for $5,400, and also sells the securities.

-The options increased in value by $2,100 in 2020. Where is this gain reported?

A) In other comprehensive income
B) On the balance sheet as an increase in the securities investment
C) In income
D) Not reported

Question 32

Use the following information to answer bellow Questions.
A company bought debt securities, classified as available-for-sale, on August 1, 2020 for $105,000. On November 15, 2020, the market value of the securities is $100,000, and the company buys put options for $500, locking in the selling price of the securities at $100,000. The options qualify as a fair value hedge of the securities. All income effects of the securities and the hedge are reported in financial gains (losses). At December 31, 2020, the reporting year-end, the market value of the securities is $98,000, and the options have a fair value of $2,600. On March 1, 2021, when the market value of the securities is $95,000, the company sells the options for $5,400, and also sells the securities.

-The securities declined in value by $7,000 in 2020. Where is this loss reported?

A) $7,000 loss in other comprehensive income
B) $5,000 loss in other comprehensive income and $2,000 loss in income
C) $5,000 loss in income and $2,000 loss in other comprehensive income
D) $7,000 loss in income

Question 33

Use the following information to answer bellow Questions.
A company bought debt securities, classified as available-for-sale, on August 1, 2020 for $105,000. On November 15, 2020, the market value of the securities is $100,000, and the company buys put options for $500, locking in the selling price of the securities at $100,000. The options qualify as a fair value hedge of the securities. All income effects of the securities and the hedge are reported in financial gains (losses). At December 31, 2020, the reporting year-end, the market value of the securities is $98,000, and the options have a fair value of $2,600. On March 1, 2021, when the market value of the securities is $95,000, the company sells the options for $5,400, and also sells the securities.

-What amount is reported for the investment in securities at December 31, 2020?

A) $ 98,000
B) $100,000
C) $103,000
D) $105,000

Question 34

Use the following information to answer bellow Questions.
A company bought debt securities, classified as available-for-sale, on August 1, 2020 for $105,000. On November 15, 2020, the market value of the securities is $100,000, and the company buys put options for $500, locking in the selling price of the securities at $100,000. The options qualify as a fair value hedge of the securities. All income effects of the securities and the hedge are reported in financial gains (losses). At December 31, 2020, the reporting year-end, the market value of the securities is $98,000, and the options have a fair value of $2,600. On March 1, 2021, when the market value of the securities is $95,000, the company sells the options for $5,400, and also sells the securities.

-What is the net effect on the company's 2020 financial gain (loss) of the securities and the hedge?

A) $4,900 loss
B) $2,100 gain
C) $ 100 gain
D) no net effect

Question 35

Use the following information to answer bellow Questions.
A company bought debt securities, classified as available-for-sale, on August 1, 2020 for $105,000. On November 15, 2020, the market value of the securities is $100,000, and the company buys put options for $500, locking in the selling price of the securities at $100,000. The options qualify as a fair value hedge of the securities. All income effects of the securities and the hedge are reported in financial gains (losses). At December 31, 2020, the reporting year-end, the market value of the securities is $98,000, and the options have a fair value of $2,600. On March 1, 2021, when the market value of the securities is $95,000, the company sells the options for $5,400, and also sells the securities.

-What is the net effect on the company's 2021 financial gain (loss) of the securities and the hedge?

A) no net effect
B) $5,100 loss
C) $ 200 loss
D) $5,200 loss

Question 36

Use the following information to answer bellow Questions
In 2020, a U.S. company issued a purchase order to a Singapore supplier for merchandise priced at S$1,000,000. At the time of the purchase order, the spot and relevant forward rate for Singapore dollars was $0.76. The company paid $3,000 for call options locking in the cost of S$1,000,000 at $760,000. The investment is a fair value hedge of the firm commitment to purchase the currency. All income effects of the purchase and the hedge are reported in cost of goods sold. At the end of the year, the spot rate was $0.80/S$, the relevant forward rate was $0.81/S$, and the call options had a market value of $41,000. In 2021, the options came due. The spot rate was $0.83/S$, and the company sold the options at their intrinsic value of $70,000. The company then took delivery of the merchandise and paid the supplier with Singapore dollars purchased on the spot market.

-At what value is the investment in options reported on the company's 2020 balance sheet?

A) $40,000
B) $38,000
C) $ 3,000
D) $41,000

Question 37

Use the following information to answer bellow Questions
In 2020, a U.S. company issued a purchase order to a Singapore supplier for merchandise priced at S$1,000,000. At the time of the purchase order, the spot and relevant forward rate for Singapore dollars was $0.76. The company paid $3,000 for call options locking in the cost of S$1,000,000 at $760,000. The investment is a fair value hedge of the firm commitment to purchase the currency. All income effects of the purchase and the hedge are reported in cost of goods sold. At the end of the year, the spot rate was $0.80/S$, the relevant forward rate was $0.81/S$, and the call options had a market value of $41,000. In 2021, the options came due. The spot rate was $0.83/S$, and the company sold the options at their intrinsic value of $70,000. The company then took delivery of the merchandise and paid the supplier with Singapore dollars purchased on the spot market.

-What is the net impact on the company's 2020 income?

A) $ 2,000 loss
B) $12,000 loss
C) $38,000 gain
D) no effect

Question 38

Use the following information to answer bellow Questions
In 2020, a U.S. company issued a purchase order to a Singapore supplier for merchandise priced at S$1,000,000. At the time of the purchase order, the spot and relevant forward rate for Singapore dollars was $0.76. The company paid $3,000 for call options locking in the cost of S$1,000,000 at $760,000. The investment is a fair value hedge of the firm commitment to purchase the currency. All income effects of the purchase and the hedge are reported in cost of goods sold. At the end of the year, the spot rate was $0.80/S$, the relevant forward rate was $0.81/S$, and the call options had a market value of $41,000. In 2021, the options came due. The spot rate was $0.83/S$, and the company sold the options at their intrinsic value of $70,000. The company then took delivery of the merchandise and paid the supplier with Singapore dollars purchased on the spot market.

-At what value does the company report the inventory acquired in 2021?

A) $830,000
B) $810,000
C) $800,000
D) $760,000

Question 39

Use the following information to answer bellow Questions
In 2020, a U.S. company issued a purchase order to a Singapore supplier for merchandise priced at S$1,000,000. At the time of the purchase order, the spot and relevant forward rate for Singapore dollars was $0.76. The company paid $3,000 for call options locking in the cost of S$1,000,000 at $760,000. The investment is a fair value hedge of the firm commitment to purchase the currency. All income effects of the purchase and the hedge are reported in cost of goods sold. At the end of the year, the spot rate was $0.80/S$, the relevant forward rate was $0.81/S$, and the call options had a market value of $41,000. In 2021, the options came due. The spot rate was $0.83/S$, and the company sold the options at their intrinsic value of $70,000. The company then took delivery of the merchandise and paid the supplier with Singapore dollars purchased on the spot market.

-The company sold the inventory for $850,000 in 2021. By what amount is 2021 income increased by the inventory sale and the hedge?

A) $87,000
B) $20,000
C) $99,000
D) $90,000

Question 40

When a share of a company's stock is selling for $55.00, a call option on the stock with a strike price of $56.00 is said to be:

A) In the money
B) Out of the money
C) Carried at basis
D) An American option

Question 41

When a share of a company's stock is selling for $55.00, a put option on the stock with a strike price of $56.00 is said to be:

A) In the money
B) Out of the money
C) Carried at basis
D) An American option

Question 42

A company uses options to hedge its forecasted purchase of merchandise. If the options qualify as a cash flow hedge of the forecasted purchase, and analysis of hedge effectiveness excludes option time value, which statement is true concerning reporting for changes in the value of the options?

A) All changes in option value remain in other comprehensive income until the merchandise is purchased.
B) All changes in option value are adjustments to cost of goods sold as they occur.
C) Changes in intrinsic value adjust cost of goods sold when the merchandise is sold.
D) Changes in intrinsic value adjust the carrying value of the merchandise when it is purchased.

Question 43

A company uses options to hedge its merchandise inventory. If the options qualify as a fair value hedge of the inventory, and analysis of hedge effectiveness excludes option time value, which statement is true concerning reporting for changes in the value of the options?

A) All changes in option value remain in other comprehensive income until the merchandise is purchased.
B) All changes in option value are adjustments to cost of goods sold as they occur.
C) Changes in intrinsic value adjust cost of goods sold when the merchandise is sold.
D) Changes in intrinsic value adjust the carrying value of the merchandise when it is purchased.

Question 44

Use the following information to answer bellow Questions.
On January 1, 2020, Teller Corporation borrows $1 million for three years at the prime rate plus 1.5%, with the rate adjusted annually. The interest is due December 31 of each year. The prime rate is currently 0.5%. To hedge against rising interest rates, Teller buys a three-year, 2% interest rate cap for $5,000, paid in full immediately. Teller's loan was renewed December 31, 2020, when the prime rate was 0.7%, and the fair value of the cap declines by $800. By the end of 2021, the cap's value increases by $300. The cap qualifies as a hedge of the future variable interest payment, and all income effects of the loan and the cap are reported in interest expense.

-Total interest expense for 2020 is

A) $20,000
B) $20,800
C) $19,200
D) $25,000

Question 45

Use the following information to answer bellow Questions.
On January 1, 2020, Teller Corporation borrows $1 million for three years at the prime rate plus 1.5%, with the rate adjusted annually. The interest is due December 31 of each year. The prime rate is currently 0.5%. To hedge against rising interest rates, Teller buys a three-year, 2% interest rate cap for $5,000, paid in full immediately. Teller's loan was renewed December 31, 2020, when the prime rate was 0.7%, and the fair value of the cap declines by $800. By the end of 2021, the cap's value increases by $300. The cap qualifies as a hedge of the future variable interest payment, and all income effects of the loan and the cap are reported in interest expense.

-Total interest expense for 2021 is

A) $22,000
B) $22,300
C) $20,000
D) $21,700

Question 46

Use the following information to answer bellow Questions.
On January 1, 2020, Teller Corporation borrows $1 million for three years at the prime rate plus 1.5%, with the rate adjusted annually. The interest is due December 31 of each year. The prime rate is currently 0.5%. To hedge against rising interest rates, Teller buys a three-year, 2% interest rate cap for $5,000, paid in full immediately. Teller's loan was renewed December 31, 2020, when the prime rate was 0.7%, and the fair value of the cap declines by $800. By the end of 2021, the cap's value increases by $300. The cap qualifies as a hedge of the future variable interest payment, and all income effects of the loan and the cap are reported in interest expense.

-What is the change in the time value of the cap in 2020?

A) $ 800 decrease
B) $2,000 increase
C) $1,200 decrease
D) $1,200 increase

Question 47

Use the following information to answer bellow Questions.
On January 1, 2020, Teller Corporation borrows $1 million for three years at the prime rate plus 1.5%, with the rate adjusted annually. The interest is due December 31 of each year. The prime rate is currently 0.5%. To hedge against rising interest rates, Teller buys a three-year, 2% interest rate cap for $5,000, paid in full immediately. Teller's loan was renewed December 31, 2020, when the prime rate was 0.7%, and the fair value of the cap declines by $800. By the end of 2021, the cap's value increases by $300. The cap qualifies as a hedge of the future variable interest payment, and all income effects of the loan and the cap are reported in interest expense.

-What is the change in the intrinsic value of the cap in 2021?

A) $ 300 increase
B) $1,700 decrease
C) $2,000 increase
D) $1,700 increase

Question 48

Use the following information to answer bellow Questions.
On January 1, 2020, Teller Corporation borrows $1 million for three years at the prime rate plus 1.5%, with the rate adjusted annually. The interest is due December 31 of each year. The prime rate is currently 0.5%. To hedge against rising interest rates, Teller buys a three-year, 2% interest rate cap for $5,000, paid in full immediately. Teller's loan was renewed December 31, 2020, when the prime rate was 0.7%, and the fair value of the cap declines by $800. By the end of 2021, the cap's value increases by $300. The cap qualifies as a hedge of the future variable interest payment, and all income effects of the loan and the cap are reported in interest expense.

-When Teller is reimbursed in 2021 by the cap writer, what account is credited?

A) Investment in cap
B) Cash
C) Interest expense
D) Loan payable

Question 49

Use the following information to answer bellow questions
A U.S. company expects to sell £100,000 in merchandise to a customer in the U.K. in 3 months. To protect against a strengthening U.S. dollar, on November 1 the company pays $3,000 for January put options on £100,000, with a strike price of $1.40/£. The current spot rate is $1.38/£. The intrinsic value of the options is designated as a cash flow hedge of the forecasted sale, and changes in time value are reported in income. Income effects of the sale and the options are reported in sales revenue. On December 31, the company's year-end, the spot rate is $1.375/£ and the options have a market value of $3,200. On January 31, the spot rate is $1.35/£, and the company sells the options for their intrinsic value. The company delivers the merchandise, receives payment in pounds sterling, and converts the currency to U.S. dollars at the spot rate. The company's year-end is December 31.

-When the options are adjusted to their December 31 market value, what is the effect on sales revenue?

A) $200 increase
B) $500 increase
C) $200 decrease
D) $300 decrease

Question 50

Use the following information to answer bellow questions
A U.S. company expects to sell £100,000 in merchandise to a customer in the U.K. in 3 months. To protect against a strengthening U.S. dollar, on November 1 the company pays $3,000 for January put options on £100,000, with a strike price of $1.40/£. The current spot rate is $1.38/£. The intrinsic value of the options is designated as a cash flow hedge of the forecasted sale, and changes in time value are reported in income. Income effects of the sale and the options are reported in sales revenue. On December 31, the company's year-end, the spot rate is $1.375/£ and the options have a market value of $3,200. On January 31, the spot rate is $1.35/£, and the company sells the options for their intrinsic value. The company delivers the merchandise, receives payment in pounds sterling, and converts the currency to U.S. dollars at the spot rate. The company's year-end is December 31.

-When the options are adjusted to their December 31 market value, what is the effect on other comprehensive income?

A) $200 increase
B) $500 increase
C) $200 decrease
D) $300 decrease

Question 51

Use the following information to answer bellow questions
A U.S. company expects to sell £100,000 in merchandise to a customer in the U.K. in 3 months. To protect against a strengthening U.S. dollar, on November 1 the company pays $3,000 for January put options on £100,000, with a strike price of $1.40/£. The current spot rate is $1.38/£. The intrinsic value of the options is designated as a cash flow hedge of the forecasted sale, and changes in time value are reported in income. Income effects of the sale and the options are reported in sales revenue. On December 31, the company's year-end, the spot rate is $1.375/£ and the options have a market value of $3,200. On January 31, the spot rate is $1.35/£, and the company sells the options for their intrinsic value. The company delivers the merchandise, receives payment in pounds sterling, and converts the currency to U.S. dollars at the spot rate. The company's year-end is December 31.

-What amount is reported as sales revenue on January 31?

A) $137,300
B) $138,000
C) $135,000
D) $137,500

Question 52

Use the following information to answer bellow questions
On January 1, a company holds an inventory of a commodity carried at a cost of $100,000. The commodity's current market value is $110,000. To guard against a potential decline in the value of that inventory, the company purchases put options with a total strike price of $110,000 exercisable in 3 months, paying a total of $500 for the options. The puts qualify as a fair value hedge of the inventory. All income effects of the inventory and the hedge are reported in cost of goods sold. On March 25, the commodity's market price is $108,000 and the company closes the hedge by selling the put options for $2,200. The company sells its inventory later in the year. The company has a December 31 year-end.

-How is cost of goods sold affected by the sale of the options on March 25?

A) $2,200 decrease
B) $1,700 decrease
C) $1,700 increase
D) not affected

Question 53

Use the following information to answer bellow questions
On January 1, a company holds an inventory of a commodity carried at a cost of $100,000. The commodity's current market value is $110,000. To guard against a potential decline in the value of that inventory, the company purchases put options with a total strike price of $110,000 exercisable in 3 months, paying a total of $500 for the options. The puts qualify as a fair value hedge of the inventory. All income effects of the inventory and the hedge are reported in cost of goods sold. On March 25, the commodity's market price is $108,000 and the company closes the hedge by selling the put options for $2,200. The company sells its inventory later in the year. The company has a December 31 year-end.

-What is the carrying value of the inventory as of March 25?

A) $100,000
B) $108,000
C) $110,000
D) $ 98,000

Question 54

Use the following information to answer bellow questions
On January 1, a company holds an inventory of a commodity carried at a cost of $100,000. The commodity's current market value is $110,000. To guard against a potential decline in the value of that inventory, the company purchases put options with a total strike price of $110,000 exercisable in 3 months, paying a total of $500 for the options. The puts qualify as a fair value hedge of the inventory. All income effects of the inventory and the hedge are reported in cost of goods sold. On March 25, the commodity's market price is $108,000 and the company closes the hedge by selling the put options for $2,200. The company sells its inventory later in the year. The company has a December 31 year-end.

-What is total cost of goods sold for the year?

A) $100,000
B) $ 96,300
C) $ 98,300
D) $ 98,000

Question 55

Option value changes are classified as intrinsic value changes and time value changes. Assume a company designates changes in intrinsic value as the hedge, with changes in time value reported in income. For options used to hedge a forecasted sale of merchandise, when does the change in option intrinsic value impact income?

A) When the value changes occur.
B) Never.
C) When the merchandise sale is recorded.
D) When the options are sold.

Question 56

Which of the following is a fair value hedge?

A) A hedge of a forecasted purchase transaction
B) A receive fixed/pay variable interest rate swap
C) A receive variable/pay fixed interest rate swap
D) A hedge of a forecasted sale transaction

Question 57

A company has a receive fixed/pay variable interest rate swap that qualifies as an effective hedge of its fixed rate debt. If interest rates rise:

A) The gain on the debt and the loss on the swap are reported in income.
B) The change in the value of the swap is reported in other comprehensive income and adjusts future interest expense recognized on the debt.
C) The loss on the debt and the gain on the swap are reported in income.
D) The swap is written off.

Question 58

A company has a receive variable/pay fixed interest rate swap that qualifies as an effective hedge of its variable rate debt. When it enters the swap agreement, it records the swap investment at what amount?

A) The sum of expected swap receipts/payments.
B) The expected swap receipt/payment for the coming year.
C) The present value of expected swap receipts/payments.
D) No entry is recorded until swap receipts/payments are made.

Question 59

A company enters a receive variable/pay fixed interest rate swap, and the market interest rate increases. Which of the following statements is true from the company's perspective?

A) The market value of the swap increases.
B) The swap is considered a fair value hedge.
C) Changes in the value of the swap are reported in current earnings.
D) There is no change in the market value of the swap.

Question 60

A company has variable rate debt. It swaps the variable payments for fixed payments. If interest rates increase during the year:

A) The loss on the swap and the gain on the fixed rate debt are reported in income.
B) The gain on the swap and the loss on the fixed rate debt are reported in income.
C) The gain on the swap is reported in other comprehensive income.
D) The loss on the swap is reported in other comprehensive income.

Question 61

A company has $1,000,000 in variable rate debt, at a current rate of 2.5%. The rate is reset annually, and interest is due at the time the rate is reset for the following year. For the current year, the company swaps its variable payments for fixed payments of 2.3%. At the end of the current year, the company makes the variable rate payment of $25,000. For the net receipt/payment of $2,000 on the swap, the company

A) Credits cash and debits loan payable.
B) Debits cash and credits loan payable.
C) Credits cash and debits investment in swap.
D) Debits cash and credits investment in swap.

Question 62

A company has fixed rate debt. It swaps the fixed payments for variable payments. If the company uses hedge accounting for the swap, how does the accounting differ from normal accounting?

A) Changes in the market value of the swap are reported in income.
B) Changes in the market value of the debt are reported in income.
C) Changes in the market value of the swap are reported in other comprehensive income.
D) Changes in the market value of the debt are not reported.

Question 63

A company has fixed rate debt and enters a receive fixed/pay variable swap. Interest expense equals:

A) The fixed rate interest adjusted for amounts reclassified from other comprehensive income
B) The variable rate interest adjusted for amounts reclassified from other comprehensive income
C) The fixed rate interest adjusted for the net cash paid to or received from the intermediary
D) The variable rate interest adjusted for the net cash paid to or received from the intermediary

Question 64

A company with fixed rate debt swaps the fixed interest payments on the loans for variable payments. The company's adjusting entries to report the impact of an interest rate decline will include:

A) A debit to other comprehensive income
B) A credit to gain on debt
C) A debit to swap investment
D) A credit to other comprehensive income

Question 65

Use the following information to answer Questions bellow
A company has $1,000,000 in 2.8% fixed rate debt, with interest due on December 31 of each year. On January 1 it swaps its fixed interest payments for variable payments at the Treasury bill rate plus 0.7%. The current Treasury bill rate is 1.9%. The swap qualifies as a fair value hedge of the fixed payments. The company's accounting year ends December 31, and all income effects of the loan and the swap are reported in interest expense. On December 31, the Treasury bill rate has increased to 2.2%, increasing the variable payments on the swap for the following year. The swap value and the loan value each change by $80,000.

-The company's net cash flow on the swap for the current year is

A) $2,000 outflow
B) $2,000 inflow
C) $28,000 inflow
D) $26,000 outflow

Question 66

Use the following information to answer Questions bellow
A company has $1,000,000 in 2.8% fixed rate debt, with interest due on December 31 of each year. On January 1 it swaps its fixed interest payments for variable payments at the Treasury bill rate plus 0.7%. The current Treasury bill rate is 1.9%. The swap qualifies as a fair value hedge of the fixed payments. The company's accounting year ends December 31, and all income effects of the loan and the swap are reported in interest expense. On December 31, the Treasury bill rate has increased to 2.2%, increasing the variable payments on the swap for the following year. The swap value and the loan value each change by $80,000.

-The company reports interest expense for the current year in the amount of

A) $28,000
B) $26,000
C) $30,000
D) $25,000

Question 67

Use the following information to answer Questions bellow
A company has $1,000,000 in 2.8% fixed rate debt, with interest due on December 31 of each year. On January 1 it swaps its fixed interest payments for variable payments at the Treasury bill rate plus 0.7%. The current Treasury bill rate is 1.9%. The swap qualifies as a fair value hedge of the fixed payments. The company's accounting year ends December 31, and all income effects of the loan and the swap are reported in interest expense. On December 31, the Treasury bill rate has increased to 2.2%, increasing the variable payments on the swap for the following year. The swap value and the loan value each change by $80,000.

-The change in the value of the loan

A) Reduces interest expense.
B) Increases other comprehensive income.
C) Increases interest expense.
D) Is not recorded.

Question 68

Use the following information to answer bellow Questions
A company has $1,000,000 in variable rate debt, with interest due on December 31 of each year. Interest is set at the Treasury bill rate plus 1.2%. The principal of the loan is due December 31, 2021. On January 1, 2020, the company enters a two-year receive variable/pay fixed interest rate swap, at a fixed rate of 2.2%. The swap is settled at the end of each year. The Treasury bill rate for 2020 is 0.8%, and it is 0.7% in 2021. The company records the swap at the expected future receipts/payments, equal to the receipt/payment for the current year, discounted at the variable rate. The swap qualifies as a cash flow hedge of the variable interest payments, and income effects of the debt and the swap are reported in interest expense.

-On January 1, 2020, the company records the swap agreement as a(n)

A) asset of $3,883.
B) asset of $3,561.
C) liability of $3,561.
D) liability of $3,883.

Question 69

Use the following information to answer bellow Questions
A company has $1,000,000 in variable rate debt, with interest due on December 31 of each year. Interest is set at the Treasury bill rate plus 1.2%. The principal of the loan is due December 31, 2021. On January 1, 2020, the company enters a two-year receive variable/pay fixed interest rate swap, at a fixed rate of 2.2%. The swap is settled at the end of each year. The Treasury bill rate for 2020 is 0.8%, and it is 0.7% in 2021. The company records the swap at the expected future receipts/payments, equal to the receipt/payment for the current year, discounted at the variable rate. The swap qualifies as a cash flow hedge of the variable interest payments, and income effects of the debt and the swap are reported in interest expense.

-The company records interest expense for 2020 in the amount of

A) $2,000.
B) $20,000.
C) $22,000.
D) $18,000.

Question 70

Use the following information to answer bellow Questions
A company has $1,000,000 in variable rate debt, with interest due on December 31 of each year. Interest is set at the Treasury bill rate plus 1.2%. The principal of the loan is due December 31, 2021. On January 1, 2020, the company enters a two-year receive variable/pay fixed interest rate swap, at a fixed rate of 2.2%. The swap is settled at the end of each year. The Treasury bill rate for 2020 is 0.8%, and it is 0.7% in 2021. The company records the swap at the expected future receipts/payments, equal to the receipt/payment for the current year, discounted at the variable rate. The swap qualifies as a cash flow hedge of the variable interest payments, and income effects of the debt and the swap are reported in interest expense.

-At the end of 2020, the company adjusts the swap to its current value. The effect on other comprehensive income is a

A) debit of $1,061.
B) credit of $883.
C) debit of $3,000.
D) credit of $56.

Question 71

Use the following information to answer bellow Questions
A company has $1,000,000 in variable rate debt, with interest due on December 31 of each year. Interest is set at the Treasury bill rate plus 1.2%. The principal of the loan is due December 31, 2021. On January 1, 2020, the company enters a two-year receive variable/pay fixed interest rate swap, at a fixed rate of 2.2%. The swap is settled at the end of each year. The Treasury bill rate for 2020 is 0.8%, and it is 0.7% in 2021. The company records the swap at the expected future receipts/payments, equal to the receipt/payment for the current year, discounted at the variable rate. The swap qualifies as a cash flow hedge of the variable interest payments, and income effects of the debt and the swap are reported in interest expense.

-On December 31, 2021, the company records its variable rate cash payment to the holder of the loan at the variable rate, debiting interest expense. The entry to adjust interest expense to its correct amount involves a $3,000

A) credit to interest expense.
B) credit to other comprehensive income.
C) debit to loan payable.
D) debit to other comprehensive income.

Question 72

U.S. GAAP requires disclosure of the impact of hedges on income, classified in these categories:

A) effective hedges and noneffective hedges
B) futures, options, and swaps
C) domestic and international hedges
D) fair value hedges and cash flow hedges

Question 73

Which one of the following derivatives and hedging disclosures is required by U.S. GAAP?

A) Impact on income of unhedged financial risk
B) Amounts of hedging gains and losses permanently classified in accumulated other comprehensive income
C) Gains and losses on derivatives reported in income and other comprehensive income
D) Degree of effectiveness of hedges, classified into fair value and cash flow categories

Question 74

Which one of the following derivatives and hedging disclosures is not required by U.S. GAAP?

A) Net gain or loss recognized in earnings from fair value and cash flow hedges
B) Maximum length of time covered by cash flow hedges of forecasted transactions
C) Net gain or loss on foreign currency hedges reported in accumulated other comprehensive income
D) Total risk, and percentage of risk hedged, by hedge type

Question 75

Which item below is reported differently using U.S. GAAP versus IFRS?

A) Changes in the intrinsic value of options used as fair value hedges of inventory.
B) Designation of interest rate swaps as cash flow hedges or fair value hedges.
C) Changes in the intrinsic value of fair value interest rate swaps used to hedge fixed rate obligations.
D) Differences between spot and futures rates for fair value hedges of inventory using futures.

Question 76

IFRS 9 requires that changes in the value of hedges of equity investments reported at FV-OCI be reported:

A) In other comprehensive income until the equity investments are sold.
B) In other comprehensive income, with no reclassification to income.
C) In income as incurred.
D) As a direct adjustment to retained earnings.

Question 77

An IFRS company has 1,000 bushels of soybeans in its inventory and hedges the price risk of this inventory with a short futures contract locking in the selling price of 1,000 bushels of soybeans. As time passes, changes in the value of the inventory are not exactly offset by changes in the value of the futures contract because

A) The futures value consists of time value, which changes with time.
B) Spot rates and futures rates do not change by the same amount over time.
C) The inventory remains at cost while the futures are valued at market.
D) The inventory is revalued at the balance sheet date and the futures are revalued on a daily basis.

Question 78

The difference between futures and spot rates is called

A) Discount
B) Premium
C) Basis
D) Strike price

Question 79

IFRS 9 requires that the change in time value of options used for hedging be reported:

A) In other comprehensive income and amortized to income over time.
B) In other comprehensive income, with no reclassification to income.
C) In income as incurred.
D) As an adjustment to the carrying value of the hedged item.

Question 80

IFRS 9 requires that the difference between the spot and futures price of futures used for hedging to be reported:

A) In other comprehensive income and amortized to income over time.
B) In other comprehensive income, with no reclassification to income.
C) In income as incurred.
D) As an adjustment to the carrying value of the hedged item.