9 eBook Print Question 1 Answer saved Marked out of 33.33 P Flag question Use of futures contracts to hedge cotton inventory-fair value hedge On December 1, 2018, a cotton wholesaler purchases 10 million pounds of cotton inventory at an average cost of 95 cents per pound. To protect the inventory from a possible decline in cotton prices, the company sells cotton futures contracts for 10 million pounds at 86 cents a pound for delivery on June 1, 2019, to coincide with its expected physical sale of its cotton inventory. The company designates the hedge as a fair value hedge (i.e., the company is hedging changes in the inventory's fair value, not changes in cash flows from anticipated sales). The cotton spot price on December 1 is 94 cents per pound. On December 31, 2018, the company's fiscal year-end, the June 1 cotton futures price has fallen to 76 cents a pound, and the spot price has fallen to 85 cents a pound. On June 1, 2019, the company closes out its futures contracts. Following are futures and spot prices for the relevant dates: On December 31, 2018, the company's fiscal year-end, the June 1 cotton futures price has fallen to 76 cents a pound, and the spot price has fallen to 85 cents a pound. On June 1, 2019, the company closes out its futures contracts. Following are futures and spot prices for the relevant dates: Date Spot Futures December 1, 2018 $0.94 $0.86 December 31, 2018 $0.85 $0.76 June 1, 2019 $0.67 n/a Required Prepare the journal entries to record the following: a. Purchase of cotton b. Sale of cotton futures contract C. Adjusting entry at December 31 d. Sale of cotton on June Note: If no entry is required, select "No entry required" for both the debit and credit account titles. General Journal Date Description Debit Credit 12/1/18 Cotton inventory 9500000 0 Cash 0 9500000 To record purchase of cotton. 12/1/18 No entry required 0 0 No entry required 0 To record sale of futures contract. 12/31/18 . 0 0 0 0 To adjust carrying amount of inventory. 12/31/18 0 a 0 To adjust the futures contract. 6/1/19 0 0 o od 0 0 Futures contract To close out futures contract. 0 0 0 0 To adjust carrying amount of inventory. Accounts receivable 0 0 0 0 Cotton Sales 0 0 0 0 To record sale of cotton inventory