The gain or loas necogniced n eamings is included withih iereat epeneo and Enancing costs Describe the difference in the impact on Tiffany's financial statements of the "Pre-Tax Gain oss) Recognized in OCI (Effective Portion)" and "Pre-Tax Gain (Loss) Reclassified from Accumulaled OCI into Earnings (Effective Portion). BLEMS Loa 36. 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 proect 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 Decernber 1,2014 December 31, 2014 June 1, 2016. 740 Prepare the journal entries to record the following: a. b. c. Purchase of cotton Sale of cotton futures contract Adjusting entry at December 31 d. Sale of cotton on June 1 Use of futures contracts to hedge a forecasted transaction-cash flow hedge As of January, our company plans to purchase 200,000 lbs. of copper on May 31 at the prevailing spot rate. To hedge this forecasted transaction, we purchase May futures contracts in January for 200,000 bs. of copper at the futures price of $1.58Ab. On May 31, we close out our futures contracts by enter- ing into an offsetting contract in which we agree to buy 200,000 lbs. of May copper futures contracts at 1.84lb., the spot rate on that date. We also purchase 200,000 lbs. of copper at $1.84/lb. on that date inally, we sell the inventory in June for $2.06/lb. Our company operates on a calendar year and issues nancial statements quarterly L02 Following are futures and spot prices for the relevant dates: Date Spot Futures The gain or loas necogniced n eamings is included withih iereat epeneo and Enancing costs Describe the difference in the impact on Tiffany's financial statements of the "Pre-Tax Gain oss) Recognized in OCI (Effective Portion)" and "Pre-Tax Gain (Loss) Reclassified from Accumulaled OCI into Earnings (Effective Portion). BLEMS Loa 36. 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 proect 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 Decernber 1,2014 December 31, 2014 June 1, 2016. 740 Prepare the journal entries to record the following: a. b. c. Purchase of cotton Sale of cotton futures contract Adjusting entry at December 31 d. Sale of cotton on June 1 Use of futures contracts to hedge a forecasted transaction-cash flow hedge As of January, our company plans to purchase 200,000 lbs. of copper on May 31 at the prevailing spot rate. To hedge this forecasted transaction, we purchase May futures contracts in January for 200,000 bs. of copper at the futures price of $1.58Ab. On May 31, we close out our futures contracts by enter- ing into an offsetting contract in which we agree to buy 200,000 lbs. of May copper futures contracts at 1.84lb., the spot rate on that date. We also purchase 200,000 lbs. of copper at $1.84/lb. on that date inally, we sell the inventory in June for $2.06/lb. Our company operates on a calendar year and issues nancial statements quarterly L02 Following are futures and spot prices for the relevant dates: Date Spot Futures