Moon Pacific Ltd. reported the following amounts on the 31 December 20X2 SFP (in thousands):

Moon Pacific has material accounts receivable and purchase orders from customers that are denominated in euros. The company follows a policy of hedging all exchange exposure with futures contracts.

Required:
1. Explain the conditions that cause a derivative instrument to be an asset or a liability.
2. Explain the use of derivatives to hedge exchange exposure caused by U.S. dollar accounts receivable.
3. Are gains and losses from derivatives included in earnings? Explain.
4. What conditions must be met for hedge accounting to be invoked?
5. What is the most likely explanation for the presence of the $134 hedge reserve?

Transcribed Image Text:

Assets Derivative asset Liabilities $1,455 Derivative obligation Equity Reserve: hedge gain $2,101 $ 134