A Midwest food processor forecasts purchasing 300,000 pounds of soybean oil in May. On February 20, the
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The company settled the option on April 20 and purchased 300,000 pounds of soybean oil on May 3 at a spot price of $1.63 per pound. During May, the soybean oil was used to produce food. One-half of the resulting food was sold in June. The change in the options time value is excluded from the assessment of hedge effectiveness.
Required
1. Prepare all necessary journal entries through June to reflect the above activity.
2. What would the effect on earnings have been had the forecasted purchase not been hedged?
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
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Related Book For
Advanced Accounting
ISBN: 978-0538480284
11th edition
Authors: Paul M. Fischer, William J. Tayler, Rita H. Cheng
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