What is the purpose of a fair value hedge?
The purpose of the fair value hedge is that offset the hedged exposure with a change in the fair value of the asset.
A fair hedge is a hedge that finds the effect of the change in the fair value of the profit and loss.
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.
Stave Company invests $10,000,000 in 5% fixed rate corporate bonds on January 1, 2017. All the bonds are classified as available-for-sale and are purchased at par. At year-end, market interest rates have declined, and the fair value of the bonds is now $10,600,000. Interest is paid on January 1. Prepare journal entries for Stave Company to (a) record the transactions related to these bonds in 2017, assuming Stave does not elect the fair option; and (b) record the transactions related to these bonds in 2017, assuming that Stave Company elects the fair value option to account for these bond.
(Copyright Impairment) Presented below is information related to copyrights owned by Mare Company at December 31, 2017.
Expected future net cash flows
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.
Taylor Swift Corporation purchases a patent from Salmon Company on January 1, 2017, for $54,000. The patent has a remaining legal life of 16 years. Taylor Swift feels the patent will be useful for 10 years. Prepare Taylor Swift’s journal entries to record the purchase of the patent and 2017 amortization.
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