This case illustrates the accounting for a cash flow hedge.


Question Description:

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This case illustrates the accounting for a cash flow hedge. Facts Entity A is a producer of widgets. To hedge the risk of declines in the price of 100 widgets that it expects to sell on December 31, 20X8, Entity A on January 1, 20X7, enters into a net-settled forward contract on 100 widgets for delivery on December 31, 20X8. During 20X7, the change in the fair value of the forward contract is a decrease of $8,000. During 20X8, the change in the fair value of the forward contract is an increase of $2,000. On December 31, 20X8, Entity A settles the forward contract by paying $6,000.At the same time, it sells 100 widgets to customers for $93,000. Required Prepare the appropriate journal entries on January 1, 20X7, December 31, 20X7, and December 31, 20X8. Assume that all conditions for hedge accounting are met and that the hedging relationship is fully effective (100%).

Answer

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