Haig Simmons operates an anthracite coal home heating and delivery service in Baltimore and Anne Arundel counties. She must have a supply of anthracite coal on hand so that customers may get the coal they need to heat their homes. As a convenience to her customers (and to prevent high bills over the winter and low bills in the summer), she allows them to buy coal in advance at set prices and to pay for the coal ratably over a calendar year. To ensure herself a steady, reliable, and affordable supply of coal and to protect against price fluctuations, Haig Simmons enters into certain futures contracts to buy coal at a future date and at a set price. Haig Simmons clearly indicates beforehand that the futures contract in which she enters to buy coal is simply to secure a supply of coal and to protect her from losses on her futures contracts with her customers to sell coal, and that she does not intend to profit from the contract itself.

Assume that Haig Simmons realizes a loss on the futures contract in which she entered to buy coal. That is, the price per her contract to buy coal is higher than the actual spot market price of coal the day she acquires a new supply of coal. How should Haig Simmons classify the loss; as ordinary or as capital?

Answer rating: 100% (QA)

Usually a business person suffers an ordinary loss when the amount of revenues received from the sal... View the full answer