Question

Choi Golf Co. uses titanium in the production of its specialty drivers. Choi anticipates that it will need to purchase 200 ounces of titanium in October 2010, for clubs that will be shipped in the holiday shopping season. However, if the price of titanium increases, this will increase the cost to produce the clubs, which will result in lower profit margins. To hedge the risk of increased titanium prices, on May 1, 2010, Choi enters into a titanium futures contract and designates this futures contract as cash flow hedge of the anticipated titanium purchase. The notional amount of the contract is 200 ounces, and the terms of the contract give Choi the right and the obligation to purchase titanium at a price of ¥50,000 per ounce. The price will be good until the contract expires on November 30, 2010.
Assume the following data with respect to the price of the call options and the titanium inventory purchase.

Spot Price for
Date November Delivery
May 1, 2010 ............................¥50,000 per ounce
June 30, 2010 ............................52,000 per ounce
September 30, 2011 ...................52,500 per ounce
Instructions
Present the journal entries for the following dates/transactions.
(a) May 1, 2010—Inception of futures contract, no premium paid.
(b) June 30, 2010—Choi prepares financial statements.
(c) September 30, 2010—Choi prepares financial statements.
(d) October 5, 2010—Choi purchases 200 ounces of titanium at ¥52,500 per ounce and settles the futures contract.
(e) December 15, 2010—Choi sells clubs containing titanium purchased in October 2010 for ¥25,000,000. The cost of the finished goods inventory is ¥14,000,000.
(f) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2010.



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  • CreatedJune 17, 2013
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