Use of futures contracts to hedge cotton inventoryfair 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 for7 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:

DateSpotFuturesDecember 1, 20147466December 31, 20146556June 1, 201547n/a

QU F5I10N 3 N at changed since last amen-up: Marl-wed out 45.00 I? Flag quesh Use of futures contracts to hedge cotton inventoryfair 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 onJune 1, 201 5, 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 ows from anticipated sales]. The cotton spot price on December 1 is 7'4 cents per pound. june 1, 2015, the company closes out its futures contracts by entering into an offsetting contract in which it agrees to buyjune 2015 cotton futures contracts atzlffcents a pound. the spot rate on that date. Finally, the company sells its cotton for $0.47 per pound onJune 1. 2015. On December 31. 20141. the compa I'IYS scal yea r-encl. the June cotton futures price has fallen to 56 cents a poundr and the spot price has fallen to 65 cents a pound. On Following are futures and spot prices for the relevant dates: Date 5pm: Fun-es December 'I, 2014 7'46 66': December 31, 2014 65': 56': june 'I, 20-15 47': na'a 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 Gena- juurnl Dltl.' Deln'lorl Dell": Credlt 12.010014 0 0