A firm carries a commodity inventory at a cost of $760,000 and plans to sell it in 60 days. Its market value is currently $800,000. To hedge against a decline in value of the commodity, the company sells commodity futures for delivery in 60 days at a price of $800,000. There is no margin deposit. At the company’s year-end, 30 days later, the 30-day futures price is $790,000 and the inventory market value declined to $791,000. Income effects of the inventory and the futures are reported in cost of goods sold. Thirty days after the end of the year, the market value of the inventory is $786,000. The company closes the futures contract and sells the inventory on the spot market for $786,000. What is the net income effect from the inventory and the hedge over the two years?
A firm carries a commodity inventory at a cost of $760,000 and plans to sell it in 60 days. Its market value is currently $800,000. To hedge against a decline in value of the commodity, the company sells commodity futures for delivery in 60 days at a price of $800,000. There is no margin deposit. At the company’s year-end, 30 days later, the 30-day futures price is $790,000 and the inventory market value declined to $791,000. Income effects of the inventory and the futures are reported in cost of goods sold.
Thirty days after the end of the year, the market value of the inventory is $786,000. The company closes the futures contract and sells the inventory on the spot market for $786,000.
What is the net income effect from the inventory and the hedge over the two years?
Select one:
a. $40,000
b. $34,000
c. $54,000
d. $44,000
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