On March 17, Kennedy Baking, Inc., committed to buy 1,000 tons of commodity A for delivery in May at a cost of $118 per ton. Concerned that the price of commodity A might decrease, on March 29 the company purchased a May put option for 1,000 tons of commodity A at a strike price of $119 per ton. The change in the time value of the option is excluded from the assessment of hedge effectiveness, and the option was settled on May 18. After processing all 1,000 tons of commodity A at a cost of $25 per ton, one-half of the resulting inventories was sold for $180 per ton on June 16. Relevant values are as follows:
1. Prepare all applicable entries for the months of March through June regarding the inventory and the hedging instrument assuming qualification as a fair value hedge. Record the changes in the intrinsic value and time value of the option with separate entries.
2. For the entire 1,000 tons of processed commodity A, prepare a schedule regarding the cost of the processed commodity available for sale in terms of the desired cost, the cost without the hedge, and the cost with the hedge.

  • CreatedApril 13, 2015
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