Fair Value Hedge: Short in Commodity Futures American Italian Pasta Company (AIPC) manufactures several varieties of pasta. The price of pasta is very sensitive to the cost of certain commodities. On January 1, 2013, AIPC had excess commodity inventories carried at acquisition cost of $150,000. These commodities could be sold or manufactured into pasta later in the year. To hedge against possible declines in the value of its commodities inventory, on January 6 AIPC sold commodity futures, obligating the company to deliver the commodities in February for $160,000. The futures exchange requires a $10,000 margin deposit. On February 19, the futures price increased to $171,000 and the company closed out its futures contract. Spot prices continued to rise and AIPC sold its inventory for $173,500 on March 2.
Required
a. Prepare the journal entries related to AIPC's futures contract and sale of commodities inventory. Assume a perpetual inventory system and that spot and futures prices move in tandem.
b. By how much would AIPC's profit increase if the hedge was not undertaken?