Accounting for cash flow hedge of the forecasted sale of a commodity inventory

Assume that our company decides to hedge the risk of changes in its cash flows relating to a forecasted sale of 100,000 bushels of wheat by entering into a derivative instrument. We expect to sell the 100,000 bushels of wheat on the last day of the period. On the first day of the period, we enter into derivative contract and designate it as a cash flow hedge of the forecasted sale (assume that we neither pay nor receive a premium on the derivative security and its fair value is zero at inception). Assume that the hedging relationship qualifies for cash flow hedge accounting and that we expect that there will be no ineffectiveness from the hedge.

At inception of the hedge, the expected sales price of 100,000 bushels of wheat is $1,100,000. On the last day of the period, the fair value of the derivative has increased by $25,000, and the expected sales price of 100,000 bushels of wheat has decreased by $25,000. Both the sale of 100,000 bushels of wheat and the settlement of the derivative contract occur 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 ocl Earnings Recognize the change in the fair value of the derivative 0 $25,000 $(250,000$ Recognize revenue from the sale 1,075,000 0 (1,075,000 Recognize settlement of the derivative 25,000 0 (25,000) 0 Reclassify the change in the fair value of the derivative instrument to earnings. 25,000 (25,000) $1,100,000 $ 0 $(1,100,00 Total Check