Recall the Rombaurer Metals example in the chapter: On October 1, 2017, Rombaurer has 10 million pounds
Question:
On February 26, 2018, Rombaurer sells its copper on the spot market for $0.94 a pound and cancels the futures contracts.
The chapter described how "hedge accounting" rules are used when Rombaurer hedges its entire 10 million pounds of copper inventory.
Required:
1. Suppose that Rombaurer sells futures contracts for only 5 million pounds of copper. (Management had decided that it is prudent to hedge only half of the company's economic exposure.) Because the futures contracts are now "ineffective" in hedging the company's entire fair value exposure to copper price fluctuations, Rombaurer cannot use hedge accounting. Prepare all journal entries needed to account for the futures contracts and sale of copper from October 1, 2017, through February 26, 2018.
2. Now assume that Rombaurer designates these futures contracts as a "fully effective" hedge of its risk exposure for 5 million pounds of copper inventory. (The remaining 5 million pounds of inventory is not being hedged.) Rombaurer can now use hedge accounting for the futures contracts. Prepare all journal entries needed to account for the futures contracts and sale of copper from October 1, 2017, through February 26, 2018.
3. What impact does changing the definition of the hedged item (10 million pounds of copper inventory versus 5 million pounds) have on the company's financial statements for 2017 and 2018?
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Step by Step Answer:
Financial Reporting and Analysis
ISBN: 978-1259722653
7th edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer