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NGW, a consumer gas provider, estimates a rather cold winter. As a result it decides to enter into a futures contract on the NYMEX for natural gas on November 2, 2016. The trading unit is 10,000 million British thermal units

NGW, a consumer gas provider, estimates a rather cold winter. As a result it decides to enter into a futures contract on the NYMEX for natural gas on November 2, 2016. The trading unit is 10,000 million British thermal units (MMBtu). The three-month futures contract rate is $7.00 per MMBtu, so each contract will cost NGW $70,000. In addition, the exchange requires a $5,000 deposit on each contract. NGW enters into 20 such contracts.
REQUIRED
1. Why is this futures contract likely to be considered an effective hedge and therefore qualified for hedge accounting?
2. Why would this transaction be accounted for as a cash-flow hedge?
3. Assume that the December 31, 2016, futures contract rate is $6.75 for delivery on February 2, 2017, and the spot rate on February 2, 2017, is $6.85. Assume that NGW sells all of the gas on February 3, 2017, for $8.00 per MMBtu. Prepare all the necessary journal entries from November 2, 2016, through February 3, 2017, to account for this hedge situation.

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1 This hedge is designed to mitigate the impact of price changes on natural gas Since one would expe…View the full answer


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Related Book For  answer-question
Advanced Accounting

Advanced Accounting

ISBN: 978-0134472140

13th edition

Authors: Floyd A. Beams, Joseph H. Anthony, Bruce Bettinghaus, Kenneth Smith

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Question Details
Chapter # 13
Section: Problems
Problem: 1
Posted Date: February 28, 2017 12:12:23
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