Accounting for fair value hedge of inventory (ineffectiveness in the hedge) Our

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Accounting for fair value hedge of inventory (ineffectiveness in the hedge) Our company reports commodities inventory on our balance sheet at $5 million. The inventory has a fair value of $5.5 million and we are concerned about a forecasted decline in the commodity price We 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 $125,000 whereas, the fair value of the derivative has increased by $112,500. 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 Debit (Credit) Cash Derivative Inventory Earnings Recognize the change in the fair value of the derivative Recognize the change in the fair value of the inventory Recognize revenue from the sale Recognize cost of goods sold relating to the sale Recognize settlement of the derivative Total

Explanation / Answer

Debit / (Credit)

Particulars

Cash

Derivative

Inventory

Earnings

Explanations for the entries

Recognize the change in fair value of the derivative

    112,500.00

      (112,500.00)

Recognition of increase in the value of the derivative

Recognize the change in fair value of the inventory

      (125,000.00)

        125,000.00

Recognition of loss due to decline in value of inventory

Recognize revenue from sales

   5,500,000.00

(5,500,000.00)

Sale resulted in increase of earnings

Recognize cost goods sold relating to the sale

(4,875,000.00)

     4,875,000.00

Cost of inventory less already adjusted decline in the value of inventory

Recognize the settlement of the derivative

       112,500.00

(112,500.00)

Receipt of cash due to settlement on the final day.

Debit / (Credit)

Particulars

Cash

Derivative

Inventory

Earnings

Explanations for the entries

Recognize the change in fair value of the derivative

    112,500.00

      (112,500.00)

Recognition of increase in the value of the derivative

Recognize the change in fair value of the inventory

      (125,000.00)

        125,000.00

Recognition of loss due to decline in value of inventory

Recognize revenue from sales

   5,500,000.00

(5,500,000.00)

Sale resulted in increase of earnings

Recognize cost goods sold relating to the sale

(4,875,000.00)

     4,875,000.00

Cost of inventory less already adjusted decline in the value of inventory

Recognize the settlement of the derivative

       112,500.00

(112,500.00)

Receipt of cash due to settlement on the final day.

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