Accounting 4022_Fall 2017 Homework 13 Due Date: October 16, 2017 On December 1,...
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Accounting
Accounting 4022_Fall 2017
Homework 13
Due Date: October 16, 2017
On December 1, 2016, Joey Corporation forecasts that it will need 100,000 pounds of metal in 90 days to manufacture its products. To lock in the current price of metal, it purchases the 100,000 pounds of metal for delivery in 90 days [this is called taking long position] at $16 per 100 pounds using a futures contract. The long futures position qualifies as a cash flow hedge of the forecasted purchase of metal and is considered highly effective. To acquire the futures contract, Joey Co has to pay $500 on December 1. Spot rates for the metal per 100 pounds are as follows
December 31, 2016
$16.45
March 1, 2017
$16.65
On April 1, 2017, Joey Corporation sold its product for $60,000.
Required:
Assume that the futures contract is designated as a CASH FLOW hedge to manage the companys forecasted purchase. Prepare journal entries for Joey Corporation to record the this forecasted transaction to purchase metal and all entries associated with the futures contract, including the adjusting entries required on December 31, 2016; March 1, 2017, and April 1, 2017
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