This case illustrates how to account for derivatives.
Facts On January 1, 20X6, Entity A enters into a forward contract to purchase on January 1, 20X8, a specified number of barrels of oil at a fixed price. Entity A is speculating that the price of oil will increase and plans to net settle the contract if the price increases. Entity A does not pay anything to enter in to the forward contract on January 1, 20X6. Entity A does not designate the forward contract as a hedging instrument.
At the end of 20X6, the fair value of the forward contract has increased to $400,000. At the end of 20X7, the fair value of the forward contract has declined to $350,000.
Required
Prepare the appropriate journal entries on January 1, 20X6, December 31, 20X6, and December 31, 20X7.