Accounting for fair value hedge of inventory (no ineffectiveness in the hedge)
Our company reports commodities inventory on our balance sheet at $1 million. The inventory has a fair value of $1.1 million and we are concerned about a forecasted decline in the commodity price. We purchase a financial derivative in order to mitigate this risk. On the last day of the period, the fair value of the inventory has declined by $25,000 and the fair value of the derivative has increased by $25,000. All of the inventory is sold at its fair value and the derivative is settled on the last day of the period. Complete the following table of the required journal entries during the period:
Use a negative sign with your answers to indicate a credit entry.
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