# On December 1, 2016, Jol Company enters into a 90-day forward contract with a rice speculator to purchase 500 tons of rice at \$1,000 per ton. Jol enters into this contract in order to hedge an anticipated rice purchase. The

On December 1, 2016, Jol Company enters into a 90-day forward contract with a rice speculator to purchase 500 tons of rice at \$1,000 per ton. Jol enters into this contract in order to hedge an anticipated rice purchase. The contract is to be settled net. The spot price of rice at December 1, 2016, is \$950.

On December 31, 2016, the forward rate on the contract is \$980 per ton. The contract is settled and rice is purchased on February 28, 2017. The spot and forward rates when the contract is settled are \$1,005. Assume that Jol purchases 500 tons of rice on the date of the forward contract's expiration. Assume that this contract has been documented to be an effective hedge. Also assume an appropriate interest rate is 6 percent.

1. Prepare the required journal entries to account for this hedge situation and the subsequent rice purchase on:

a December 1, 2016

b December 31, 2016

c The settlement date

2. Assume that the rice is subsequently sold by Jol on June 1, 2017, for \$1,200 per ton. What journal entries will Jol make on that date?

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