9 *P17-17 (Cash Flow Hedge) LEW Jewelry Co. uses gold in the manufacture of its products. LEW antici pates that it will need to purchase 500 ounces of gold in October 2014, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, LEW\'s cost to produce its jewelry will increase, which would reduce its profit margins. To hedge the risk of increased gold prices, on April 1, 2014, LEW enters into a gold futures contract and designates this futures contract as a cash flow hedge of the anticipated gold purchase. The notional amount of the contract is 500 ounces, and the terms of the contract give LEW the right and the obligation to purchase gold at a price of $300 per ounce. The price will be good until the contract expires on October 31, 2014. Assume the following data with respect to the price of the futures contract and the gold inventory Spot Price for October Delivery 3 Prepare the journal entries for the following transactions. 1 (a) April 1, 2014-Inception of the futures contract, no premium paid. (b) June 30, 2014 LEW Co. prepares financial statements. (c) September 30, 2014-LEW Co. prepares financial statements (d) October 10, 2014-LEW Co. purchases 500 ounces of gold at $315 per ounce and settles the futures (e) December 20, 2014-LEW sells jewelry containing gold purchased in October 2014 for $350,000. The cost of the finished goods inventory is S2UUU00 contract on June 30, 2014 ventory transactions on December 31, 2014 (f) Indicate the amount(s) reported on the balance sheet and income statement related to the futures (g) Indicate the amount(s) reported in the income statement related to the futures contract and the in
Deposit with Futures Broker A/c Dr $150,000 (300*500)
To Cash A/c Cr $150,000
[This is to record the initial margin deposit when the contract is executed].
At the end of Year 2009
Receivable from Future Broker Dr $5,000 (310-300)*500
Profit on Futures Contracts Cr $5,000
[This is to recognize Profit on futures contracts of $10 per ounce ($310 – $300) on 500 ounce (500 x 10)].
Receivable from Future BrokerDr $2,500 (315-310)*500
Profit on Futures ContractsCr $2,500
[This is to recognize Profit on futures contracts of $5 per ounce ($315 – $310) on 500 ounce (500 x 5)].
Cash A/c Dr$7500
Receivable from Future BrokerCr$7500
[This is to record the settlement, which results in no profit and loss upon settlement and the $7,500 receipt from the broker]
Cash A/c Dr$150,000
Deposit with Futures BrokerCr$150,000
[This is to record the return of the margin deposit by the broker]
Homework Sourse
