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Chapter 12: Q30. (page 610)

What is the purpose of a fair value hedge?

Short Answer

Expert verified

The purpose of the fair value hedge is that offset the hedged exposure with a change in the fair value of the asset.

Step by step solution

01

Definition of fair value hedge

A fair hedge is a hedge that finds the effect of the change in the fair value of the profit and loss.

02

Purpose of fair value hedge

The fair value hedge is a very important part of hedge accounting. As an important part of hedge accounting, the main purpose of the fair value hedge is that it helps in setting the profit and losses and changes in the fair value.

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Most popular questions from this chapter

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(Copyright Impairment) Presented below is information related to copyrights owned by Mare Company at December 31, 2017.

Cost

\(8,600,000

Carrying amount

4,300,000

Expected future net cash flows

4,000,000

Fair value

3,200,000

Assume that Mare Company will continue to use this copyright in the future. As of December 31, 2017, the copyright is estimated to have a remaining useful life of 10 years.

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017. The company does not use accumulated amortization accounts.
  2. Prepare the journal entry to record amortization expense for 2018 related to the copyrights.
  3. The fair value of the copyright at December 31, 2018, is \)3,400,000. Prepare the journal entry (if any) necessary to record the increase in fair value.

Briefly discuss how a transfer of securities from the available-for-sale category to the trading category affects stockholders’ equity and income.
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