QUESTION 3 Not changed since last attempt Marked out of 45.00 F Flag quest Use of futures contracts to hedge cotton inventory-fair value hedge On December 1, 2014, a cotton wholesaler purchases 7 million pounds of cotton inventory at an average cost of 75 cents per pound. To protect the inventory from a possible decline in cotton prices, the company sells cotton futures contracts for 7 million pounds at 66 cents a pound for delivery on June 1, 2015, 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 74 cents per pound. On December 31, 2014, the company's fiscal year-end, the June cotton futures price has fallen to 56 cents a pound, and the spot price has fallen to 65 cents a pound, On June 1, 2015, the company closes out its futures contracts by entering into an offsetting contract in which it agrees to buy June 2015 cotton futures contracts at 47 cents a pound, the spot rate on that date. Finally, the company sells its cotton for $0.47 per pound on June 1, 2015. Following are futures and spot prices for the relevant dates: Spot Futures 660 56C Date December 1, 2014 December 31, 2014 June 1, 2015 740 650 47C Required Prepare the journal entries to record the following: (If no entry is required, select "No entry required" for both the debit and credit account titles.) a. Purchase of cotton General Journal Date Description Debit Credit 12/01/2014