1. Which of the following statements properly describes GAAP accounting for derivatives?
A. Marking-to-market of all derivatives must be done annually according to GAAP and any changes in value on a quarterly basis are only required to be disclosed in a footnote.
B. A firm, which wants to reduce earnings volatility, is better off classifying their investments in derivatives as hedging derivatives rather than as speculative.
C. Changes in the fair value of a derivative designated as a cash flow hedge are reported in as a component of income from continuing operations.
D. A derivative’s unrealized holding gain or loss for a particular year should be reported as a component of that year’s income from continuing operations but should be reported as a contingent liability.
2. Your American Uncle Guido just moved to Canada to open his dream business, Capicolas, Cannolis and Canoes, a combination Italian deli, bakery and canoe outfitter. Given the shortcomings of the American education system, he is having trouble calculating the tax shield from the depreciation on his canoes and has asked for your help. Assuming he bought 75 canoes for $1,000 each, he has a marginal tax rate of 20% and that the canoes, as class 7 assets, have a CCA rate of 15%, what is the size of his depreciation tax shield from the canoes in year 3?
a. $1056.66 b. $1149.89 c. $1625.62 d. $1769.53