Question

On 1/1/20, XYZ signed a $ 5,000,000 loan with Bank M with fixed interest payments of 10%. The loan pays interest annually. On the same date, XYZ purchased an interest swap with a notional amount of $ 5,000,000 from Bank W to change the fixed-rate to floating-rate debt based on the LIBOR. From the FASB's point of view, what type of coverage is this?

Select one:
to. Non-effective (ineffective) coverage.
b. Cash flow hedge.
c. Fair value hedge.
d. No coverage.

Unrealized gains or losses associated with cash flow hedge derivatives are reported in the

Select one:

a. Statement of cash flows.

b. Statement of Income and Expenses.

c. Statement of Changes in Equity (Stockholders' Statement) as part of Capital Paid in Excess.

d. Statement of Financial Position, as other accumulated other comprehensive income.

As of December 31, 2020, Lessor, Inc. has not prepared an adjustment entry related to the lease account known as “Unguaranteed Residual Asset” (the company accounts for the account separately). What is the effect on the financial statements if the adjustment entry for the above account is not prepared?

Select one:

a. The total assets will be overestimated.

b. Net income will be overestimated.

c. The “Lease Receivable” account will be overestimated.

d. Earning per share will be underestimated.

Answer 1

On 1/1/20, XYZ signed a $ 5,000,000 .............on the LIBOR.
From the FASB's point of view, what type of coverage is this..?
Ans = (B) Cash flow hedge.
(Reason : When an entity is looking to eliminate/reduce the exposure that arises from changes in the cash flows of a financial asset or liability (or other eligible exposure) due to changes in a particular risk, such as interest rate risk on a floating rate debt instrument is popularly known as Cash Flow Hedge.)

Unrealized gains or losses associated with cash flow hedge derivatives are reported in the
Ans = (D) Statement of Financial Position, as other accumulated other comprehensive income.
(Reason : Gains and losses on cash flow hedge derivatives are “parked” in accumulated other comprehensive income "until the transactions occur or realize" and then transferred to the income statement to offset the losses and gains on these transactions.)

As of December 31, 2020, Lessor, Inc. ............. entry for the above account is not prepared?
Ans = (D) Earning per share will be underestimated.
(Reason: For the lessor, with the assumption that the residual value/assets will be realized whether it is guaranteed or unguaranteed. so that value of assets under estimated, meanwhile earning per share is also under-estimated.)