[grandia01]

As part of its risk management strategy, a silver mining company sells futures contracts to hedge changes in the fair value of its inventory. On june 1, the commodity exchange spot price was $0.41 per pound, and the futures price for mid-july was $0.43 per pound. On that date, the company, which has a june 30 fiscal year-end, sold 200 futures contracts on the commodity exchange at 0.43 per pound. Each contract was for 25,000 pounds. The company designated these contracts as a fair-value hedge of 5 million pounds of current inventory for which a mid-july sale was expected. The average cost of the inventory was $0.29 per pound. The company has appropriately documented and designated the arrangement as a qualifying hedge. On june 30, the mid-july commodity exchange futures price was $0.45 per pound.

On the june 30 balance sheet, the company should record the value of the futures contracts as:

a) $100,000 asset
b) $100,000 liability
c) $2,250,000 liability
d) $2,250,000 asset

if, on june 30, the hedge has proven to be 100% effective, it should record the value of the hedged silver invtory on the balance sheet at:

a) $2,350,000
b) $2,250,000
c) $1,550,000
d) $1,450,000

the correct answers for these two questions are B & C. can someone PLEASE explain to me how and why these answers are the right ones??

thank you all for your time!

[Stilgoin]

The first question – I think- would be to record the risk of loss. Loss must be recognized when inventory price exceeds the market price for a FV Hedge.

DR: Loss (potential) on Inventory (.02*25,000*200) 100,000
CR: Inventory Liability 100,000

The 2nd question
DR: Inventory Liability 100,000
DR: Inventory Average$(5M*.29) 1,450,000
CR: Hedged Silver Inventory 1,550,000

My JEs could be wrong. I struggle with that- but I think this is close. lol

Stilgoin, CPA

There are enough critics. Be an encourager

B | 62, 78
A | 73, 67, 79
R | 82
F | 59, 59, Waiting

Ethics | 93

"Success is not final, failure is not fatal: it is the courage to continue that counts."
~Winston Churchill

“In a world full of critics, be an encourager."

[grandia01]

thank you (again) much stilgoin, you are one of the reasons why this forum is amazing.

[Author]

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