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Hedge of Firm Commitment: Short in CommodityFutures

On May 1, 2021, Keister, Inc., sells 100,000 units of commodityfutures at $5/unit for delivery in 120 days and makes an initialmargin deposit of $10,000. Spot and futures prices move in tandem.Keister will buy the commodity from a supplier in 90 days and,pursuant to a firm sale commitment, will sell it 30 days later atthe prevailing spot price. Keister designates the futures contractsto protect the proceeds to be received when the sale commitment isfulfilled and has a May 30 fiscal year-end.

Required

a. Prepare the journal entries made on May 1, on May 30 when thefutures are selling at $4.80 per unit, on July 29 when the futuresare selling for $4.75 per unit and the commodity is purchased at atotal cost of $460,000, and on August 28 when the short position isclosed out at $4.77 per unit. The futures position qualifies forhedge accounting. Keister records income effects of the hedge insales revenue.

Date	Description		Debit	Credit
5/1/21	Answer

		Answer	Answer
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	To record the initial margin depositpaid.
5/30/21	Answer

		Answer	Answer
	Answer

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	To mark the short futures position tomarket.
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	To recognize the gain or loss on thefirm sale commitment.
7/29/21	Answer

		Answer	Answer
	Answer

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	To mark the short futures position tomarket.
	Answer

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	To recognize the gain or loss on thefirm sale commitment.
	Answer

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	To record purchase of thecommodities.
8/28/21	Answer

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	To mark the futures contract tomarket.
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	To recognize the gain or loss on thefirm sale commitment.
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	To close out the short futuresposition.

b. Assume the commodity is sold at the spot rate on August 28.Record the sale and cost of goods sold.

Description		Debit	Credit
Cash		Answer	Answer
Answer

		Answer	Answer
Answer

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To record the sale and close the firmcommitment.
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To record the cost of sales.