Fair Value Hedge: Long in Commodity Futures Daley, Inc., engages in futures trading on a regular basis. Its books are closed on June 30 of each year. On June l, 2014, Daley enters a futures contract and makes an initial margin deposit of $10,000. The contract requires Daley to purchase 10,000 units of commodity futures at $10 per unit for delivery in 90 days. Daley has a liability, recorded as Deferred Revenue, to supply the commodity (which it plans to purchase on the spot market) in 90 days to a customer. The futures are hedging the fair value of the liability even though the customer has already paid the full $150,000 selling price.
Required
a. Prepare the journal entries made on June 1, on June 30 when the futures are selling at $ 11 per unit, and on August 29 when the long position is closed out at $11.50 per unit.
b. Explain why Daley purchased commodity futures when it intends to purchase the commodity on the spot market. How much did Daley save by hedging as opposed to not hedging?