On 1 November 20x5 Company X, a manufacturer of gold jewelry and ornaments, had an inventory of 10,000 ounces of gold ingots that cost $780 an ounce. The price of gold was $950 an ounce. Company X expected to use the gold to produce investment-grade gold coins that would be sold in February 20x6. Company X was concerned that the price of gold would fall, which would in turn affect the price of gold coins. Therefore, Company X decided to hedge the value of its gold inventory by selling gold futures on the commodity exchange. Gold futures were traded in 100 troy ounce contracts; Company X entered into 100 31 January 20x6 contracts at a price of $952 per ounce. The exchange required a margin deposit of $3,300 per contract. The spot price and the price of January futures contracts are as follows:

Company X designated the futures contract as a fair value hedge of the change in the value of the gold inventory due to changes in the spot price of gold. Hedge effectiveness is assessed based on the ratio of the change in the entire fair value of the futures contract to the change in the value of the inventory based on the spot gold price.

Required
1. Assess the effectiveness of the hedge at inception and during the life of the futures contract.
2. Prepare journal entries to record the hedging instrument and the hedged item.

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1 November 20x5 31 December 20x5. 31 January 20x6 Spot price of gold (per ounce) $950 940 960 January gold futures (per ounce) $952 941 960