On December 1, 2018, a cotton wholesaler purchases 10 million pounds of cotton inventory at an...

  

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On December 1, 2018, a cotton wholesaler purchases 10 million pounds of cotton inventory at an average cost of 95 cents per pound. To protect the inventory from a possible decline in cotton prices, the company sells cotton futures contracts for 10 million pounds at 86 cents a pound for delivery on June 1, 2019, to coincide with its expected physical sale of its cotton inventory. The company designates the hedge as a fair value hedge (i.e., the company is hedging changes in the inventory's fair value, not changes in cash flows from anticipated sales). The cotton spot price on December 1 is 94 cents per pound. On December 31, 2018, the company's fiscal year-end, the June 1 cotton futures price has fallen to 76 cents a pound, and the spot price has fallen to 85 cents a pound. On June 1, 2019, the company closes out its futures contracts. Following are futures and spot prices for the relevant dates: On December 31, 2018, the company's fiscal year-end, the June 1 cotton futures price has fallen to 76 cents a pound, and the spot price has fallen to 85 cents a pound. On June 1, 2019, the company closes out its futures contracts. Following are futures and spot prices for the relevant dates: Date Spot Futures December 1, 2018 $0.94 $0.86 December 31, 2018 $0.85 $0.76 June 1, 2019 $0.67 n/a Required Prepare the journal entries to record the following: a. Purchase of cotton b. Sale of cotton futures contract c. Adjusting entry at December 31 d. Sale of cotton on June As of January, our company plans to purchase 300,000 lb. of copper on May 31 at the prevailing spot rate. To hedge this forecasted transaction, we purchase May futures contracts in January for 300,000 lb. of copper at the futures price of $2.68/lb. On May 31, we close out our futures contracts. We also purchase 300,000 lb. of copper at $2.94/lb. on that date. Finally, we sell the inventory in June for $3.16/lb. Our company operates on a calendar year and issues financial statements quarterly. Following are futures and spot prices for the relevant dates: Date Spot Futures January $2.54 2.68 March 31 $2.62 $2.77 May 31 $2.94 n/a Required Prepare the journal entries to record the following: a. Purchase of copper futures contract in January b. Adjusting entry at March 31 c. Purchase of copper on May 31 d. Sale of copper on June 1 On December 1, 2018, a cotton wholesaler purchases 10 million pounds of cotton inventory at an average cost of 95 cents per pound. To protect the inventory from a possible decline in cotton prices, the company sells cotton futures contracts for 10 million pounds at 86 cents a pound for delivery on June 1, 2019, to coincide with its expected physical sale of its cotton inventory. The company designates the hedge as a fair value hedge (i.e., the company is hedging changes in the inventory's fair value, not changes in cash flows from anticipated sales). The cotton spot price on December 1 is 94 cents per pound. On December 31, 2018, the company's fiscal year-end, the June 1 cotton futures price has fallen to 76 cents a pound, and the spot price has fallen to 85 cents a pound. On June 1, 2019, the company closes out its futures contracts. Following are futures and spot prices for the relevant dates: On December 31, 2018, the company's fiscal year-end, the June 1 cotton futures price has fallen to 76 cents a pound, and the spot price has fallen to 85 cents a pound. On June 1, 2019, the company closes out its futures contracts. Following are futures and spot prices for the relevant dates: Date Spot Futures December 1, 2018 $0.94 $0.86 December 31, 2018 $0.85 $0.76 June 1, 2019 $0.67 n/a Required Prepare the journal entries to record the following: a. Purchase of cotton b. Sale of cotton futures contract c. Adjusting entry at December 31 d. Sale of cotton on June As of January, our company plans to purchase 300,000 lb. of copper on May 31 at the prevailing spot rate. To hedge this forecasted transaction, we purchase May futures contracts in January for 300,000 lb. of copper at the futures price of $2.68/lb. On May 31, we close out our futures contracts. We also purchase 300,000 lb. of copper at $2.94/lb. on that date. Finally, we sell the inventory in June for $3.16/lb. Our company operates on a calendar year and issues financial statements quarterly. Following are futures and spot prices for the relevant dates: Date Spot Futures January $2.54 2.68 March 31 $2.62 $2.77 May 31 $2.94 n/a Required Prepare the journal entries to record the following: a. Purchase of copper futures contract in January b. Adjusting entry at March 31 c. Purchase of copper on May 31 d. Sale of copper on June 1

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QUESTION 1 a Purchase of Cotton Date December 1 2018 Inventory Cotton 10000000 pounds 095 per pound ... View the full answer