Question

Accounting for cash flow hedge of the forecasted sale of a commodity inventory
Assume that our company decides to hedge the risk of changes in its cash flows relating to a forecasted sale of 100,000 bushels of wheat by entering into a derivative instrument. We expect to sell the 100,000 bushels of wheat on the last day of the period. On the first day of the period, we enter into derivative contract and designate it as a cash flow hedge of the forecasted sale (assume that we neither pay nor receive a premium on the derivative security and its fair value is zero at inception). Assume that the hedging relationship qualifies for cash flow hedge accounting and that we expect that there will be no ineffectiveness from the hedge.

At inception of the hedge, the expected sales price of 100,000 bushels of wheat is $1,100,000. On the last day of the period, the fair value of the derivative has increased by $25,000, and the expected sales price of 100,000 bushels of wheat has decreased by $25,000. Both the sale of 100,000 bushels of wheat and the settlement of the derivative contract occur on the last day of the period. Complete the following table of the required journal entries during the period:

Use a negative sign with your answers to indicate a credit entry.

Use a negative sign with your answers to indicate a credit entry.

	Debit (Credit)
	Cash	Derivative	OCI	Earnings
Recognize the change in the fair value of the derivative	$Answer	$Answer	$Answer	$Answer
Recognize revenue from the sale	Answer	Answer	Answer	Answer
Recognize settlement of the derivative	Answer	Answer	Answer	Answer
Reclassify the change in the fair value of the derivative instrument to earnings.	Answer	Answer	Answer	Answer
Total	$Answer	$Answer	$Answer	$Answer

Answer 1

	Debit(Credit)
	Cash	Derivative	OCI	Earnings	Explaination
Recognize the change in the fair value of the derivative		25000	-250000		1
Recognize revenue from the sale	1075000			-1075000	4
Recognize settlement of the derivative	25000	-25000			2
Reclasiffy the change in fair value of derivative instrument to earning			25000	-25000	3
Total	1100000	-	-	-1100000
Explaination :
1) As this is a cash flow hedge , any derivative movements will be held in OCI as a hedging reserve
As value increase, a derivative asset is.
2)it is for realization of derivative in cash
3) The derivative movments in OCI has subesequently reclasiffied into profit and loss a/c
4) It is a perfectly effecitve hedge, we consider that value of derivative has gone up and bulshels has gone down , therefore sales value comes down by $25000