medium · Financial Accounting accounting-cycle-financial-statements
A manufacturer enters into a cash flow hedge using a derivative to lock in the price of aluminum for next year's production. The derivative gains $10,000 in value by year-end, but the aluminum hasn't been purchased yet.
How is this $10,000 gain recorded?
- Recognized immediately as taxable 'Hedge Income' within the current year's Net Income.
- Recorded in Other Comprehensive Income (OCI) to be deferred until the aluminum is used.
- As a direct reduction in the current 'Inventory' balance on the balance sheet.
- As a 'Deferred Tax Asset' representing a certain future income tax benefit realized next year.
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