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A is corrent. The cancellation of a firm purchase commitment to purchase goods results in an ineffective hedge and requires recognition of the total liability when the contract is canceled. Because LTTI purchased 80,000 units during year 1, it is liable for purchasing an additional 120,000 units in year 1, as well as 200,000 units in each of the next two years {[120,000 (for year 1) + 400,000 (for years 2 and 3)] x $0.10 per unit = $52,000}.
B is incorrect because ineffective portions of hedges should be reported as gains and losses in the current year.
C is incorrect because it considers the effective (purchased) items, not the ineffective items (80,000 units × $0.10 = $8,000).
D is incorrect because the entire ineffective portion of the contract should be recognized, not only the current year ineffective portion of the contract (200,000 units less 80,000 units = 120,000 units. 120,000 units × $0.10 = $12,000).