ABC Co. goes into a futures contract for hedging purposes on Day1 of Quarter 1. The following
Question:
ABC Co. goes into a futures contract for hedging purposes on Day1 of Quarter 1. The following tabulates the cumulative fair value changes in the futures contract and the item being hedged (let’s just call it ‘widget’), and hedging effectiveness on a ‘cumulative’ basis every quarter. That is, the company calculates hedging effectiveness based on the cumulative changes in the fair value of the futures and hedged item.
Change in FV of Futures Contract | Change in FV of Hedged Item (Widget) | Ratio | Hedge Effective? | |
End of QTR1 | Cumulative loss of $80 | Cumulative gain of $100 | 80% | Yes |
End of QTR2 | Cumulative loss of $150 | Cumulative gain of $200 | 75% | No |
The beginning balance of “widget” on the company’s balance sheet on Day 1 of Quarter 1 is $100.
REQUIRED:
For each of the following two independent scenarios, identify the UHG or UHL that should be recognized into Other Comprehensive Income and Net Income, respectively. Differentiate an unrealized holding loss from an unrealized holding gain by putting the UHL number in parentheses (UHL). If the answer is zero, then write ‘0’ instead of leaving it blank. If you leave it blank, it is considered a wrong answer.
PART I
This hedge is a Fair Value Hedge (hedge FV of widget) | This hedge is a Cash Flow Hedge (hedge future sale of widget) | ||||
Net Income | OCI | Net Income | OCI | ||
QTR1 | |||||
QTR2 |
PART II: Fill in the partial balance sheets ending on the last day of the two quarters. Recall that widget has a beginning balance of 100 on Day 1 of Quarter 1. If R/E or AOCI numbers are cumulative deficits/cumulative losses, put them into parentheses. If the answer is zero, then write ‘0’ instead of leaving it blank. If you leave it blank, it is considered a wrong answer.
Balance Sheets | This Hedge is a Fair Value Hedge (Hedge Fair Value of Widget) | This Hedge is a Cash Flow Hedge (Hedge Future Sale of Widget) | ||
End of QTR1 | Asset | Liability and Shareholders' Equity | Asset | Liability and Shareholders' Equity |
Widget ? | Futures ? | Widget ? | Futures ? | |
Retained Earnings ? | Retained Earnings ? | |||
AOCI ? | ||||
End of QTR2 | Asset | Liabilities and Shareholders' Equity | Asset | Liabilities and Shareholders' Equity |
Widget ? | Futures ? | Widget ? | Futures ? | |
Retained Earnings ? | Retained Earnings ? | |||
AOCI ? |