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Wil has 100,000 units of widgets in its inventory on October 1, 2011. Wil purchased them for \$1 per unit one month ago. It hedges the value of the widgets by entering into a forward contract to sell...

Wil has 100,000 units of widgets in its inventory on October 1, 2011. Wil purchased them for \$1 per unit one month ago. It hedges the value of the widgets by entering into a forward contract to sell 100,000 widgets on January 31, 2012, for \$2 each. The contract is to be settled net. Assume that a discount rate of 6 percent is reasonable.
Prepare the journal entries to properly account for this hedge of an existing asset on the following dates:
1. October 1, 2011, when the widget price is \$1.50
2. December 31, 2011, when the widget price is \$2.50
3. January 31, 2012, when the widget price is \$2.30

Solution

David answered on Dec 31 2021
a October 1, 2008, when the widget price is \$1.50

a October 1, 2008, when the widget price is \$1.50

Earnings
\$49,012.38

Forward Contract

\$49,012.38
(100,000 x (\$2.00 - \$1.50))/(1.005)^4

(To record the change in fair value of the forward contract attributable to the discounted change in the forward price)

Inventory (100,000 x (\$2.00 -...
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