On September 1, 20X1, Bauer Inc. has 10,000 ounces of silver, with an average cost of $12 per ounce, in inventory. The spot price for silver is $16 per ounce. Bauer decides to retain the inventory until the beginning of January 20X2, hoping that the price increases to $17 per ounce. To hedge its position, Bauer sells future contracts to sell 100,000 ounces of silver at $17 per ounce on January 2, 20X2. The market spot rates and future prices for silver are as follows:

Spot PriceJanuary 20X2 Future PriceSeptember 1, 20X1$16 $17 December 31, 20X1$14.50 $15.50 January 2, 20X2$16.80 $16.80

On January 2, 20X2, Bauer sells the silver at the spot rate of $16.80 and cancels the futures contract. Prepare the journal entry Bauer makes on 1/2/X2 to cancel the futures contract.

Multiple Choice

Cash15,000 Gain on Hedge Activity 15,000 Cash2,000 Gain (Loss) on hedge activity13,000 Derivative Future Contract 15,000 Derivative Future Contract10,000 Gain on Hedge Activity 10,000 Loss on Hedge Activity15,000 Derivative Future Contract 15,000