Answer:
A. The Journal entry with their narrations is shown below:-
B. $50,000
Explanation:
a. The Journal entry is shown below:-
Investment in futures Dr, $20,000
To Cash $20,000
(Being the initial margin deposit on the sale of the commodity is recorded)
b. Loss on hedging $50,000
($1,150,000 - $1,100,000)
To Investment in futures $20,000
To Cash $30,000
(Being to settle the contract is recorded)
c. Inventory Dr, $50,000
To Gain on hedging $50,000
(Being To adjust the carrying value of the hedged inventory for the change in fair value is recorded)
d. Cash Dr, $1,175,000
To Sales revenue $1,175,000
(Being the sale of commodities is recorded)
e. Cost of goods sold $1,050,000
($1,000,000 + $50,000)
To Inventory $1,050,000
(Being to recognize the cost of sales is recorded)
B. The computation of AIPC’s profit is shown below:-
AIPC’s profit after hedge = Sold inventory - (Acquisition cost + (Future price - Commodities in February))
= $1,175,000 - ($1,000,000 + ($1,150,000 - $1,100,000)
)
= $1,175,000 - ($1,000,000 + $50,000)
= $1,175,000 - $1,050,000
= $125,000
So, If there is no hedge by selling futures short, it would be possible to avoid the loss of $50,000
.
Therefore the AIPC’s profit would have increased by $50,000 to $175,000
