Global Products Inc. (GPI) uses pork bellies in the processing of its bacon products. GPI anticipates that
Question:
Global Products Inc. (GPI) uses pork bellies in the processing of its bacon products. GPI anticipates that it will need to purchase 200 tons of pork bellies in September 2016 for its
regular orders. However, if the price of this commodity increases, GPI’s cost to produce the bacon products will increase, which could cut into its profit margins.
To hedge the risk of increased pork belly prices, on July 1, 2016, GPI enters into a forward contract and designates this contract as a cash flow hedge of the anticipated purchase. The notional amount of the contract is 200 tons, and the terms of the contract require GPI to purchase each ton at a price of $2,400 per ton on September 30, 2016 (or settle the contract net on the basis of the difference between the $2,400 and the price of pork bellies at September 30).
Assume the following data with respect to the price of pork bellies.
Date Price per ton
July 1, 2016 $2,400
July 31, 2016 $2,100
August 31, 2016 $2,900
September 30, 2016 $2,950
REQUIRED:
Prepare any necessary journal entries related to the hedging activity on the following dates:
- July 1, 2016: Inception of the forward contract.
- July 31, 2016: GPI prepares financial statements.
- August 31, 2016: GPI prepares financial statements.
- September 30, 2016: GPI settles the forward contract and purchases 200 tons of pork bellies on the open market for $2,950
- October 15, 2016: GPI sells its bacon products made from the pork bellies purchased on September 30, 2016 for $1,200,000. The cost to convert the raw material goods into finished goods is $150,000.
Operations Management Processes and Supply Chains
ISBN: 978-0133872132
11th edition
Authors: Lee J. Krajewski, Manoj K. Malhotra, Larry P. Ritzman