Fair Value Hedge: Short in Commodity Futures

American Italian Pasta Company (AIPC) manufactures several varieties of pasta. On January 1, 2020, AIPC had excess commodity inventories carried at acquisition cost of $1,000,000. These commodities could be sold or manufactured into pasta later in the year. To hedge against possible declines in the value of its commodities inventory, on January 6 AIPC sold commodity futures, obligating the company to deliver the commodities in February for $1,100,000. The futures exchange requires a $20,000 margin deposit. On February 19, the futures price increased to $1,150,000 and the company closed out its futures contract. Spot prices continued to rise and AIPC sold its inventory for $1,175,000 in cash on March 2.

Required

a. Prepare the journal entries related to AIPCs futures contract and sale of commodities inventory. Assume a perpetual inventory system, that spot and futures prices move in tandem, and the futures position qualifies for hedge accounting. All income effects for the inventories and related hedges are reported in cost of goods sold.

Date	Description		Debit	Credit
1/6/20	AnswerCashCost of goods soldInventoryInvestment in futuresSales revenue		Answer	Answer
	AnswerCashCost of goods soldInventoryInvestment in futuresSales revenue		Answer	Answer
	To record the initial margin deposit on the sale of commodity.
2/19/20	AnswerCashCost of goods soldInventoryInvestment in futuresSales revenue		Answer	Answer
	AnswerCashCost of goods soldInventoryInvestment in futuresSales revenue		Answer	Answer
	Cash		Answer	Answer
	To settle the contract.
	AnswerCashCost of goods soldInventoryInvestment in futuresSales revenue		Answer	Answer
	AnswerCashCost of goods soldInventoryInvestment in futuresSales revenue		Answer	Answer
	To adjust the carrying value of the hedged inventory for the change in fair value.
3/2/20	AnswerCashCost of goods soldInventoryInvestment in futuresSales revenue		Answer	Answer
	AnswerCashCost of goods soldInventoryInvestment in futuresSales revenue		Answer	Answer
	To record sale of commodities.
	AnswerCashCost of goods soldInventoryInvestment in futuresSales revenue		Answer	Answer
	AnswerCashCost of goods soldInventoryInvestment in futuresSales revenue		Answer	Answer
	To recognize the cost of sales.

b. By how much would AIPCs profit increase if the hedge was not undertaken?

$Answer