Maize Farms specializes in corn-related products. After a bumper April harvest, the farm has 50,000 bushels of corn in their silos. Corn prices have risen dramatically in recent months, from $4.00 a bushel in November to $5.80 a bushel as of April 30, 2021. The farm's inventory is currently recorded at a price of $5.65 a bushel. The owners of Maize Farms are concerned that the price momentum will reverse, and corn prices will drop, by the time they need to sell their corn in September 2021.

You are hired by Maize Farms to help manage their exposure to corn prices. Specifically, they are inquiring about the ability to use corn futures to hedge the value of their inventory, a practice some of their competitors have started using.

The relevant spot and future prices are summarized in the table below.

Date	Spot Price per Bushel	September Future Price per Bushel
1-May-21	$5.80	$5.76
30-Jun-21	$5.50	$5.45
15-Sep-21	$5.60	$5.60

1. How can Maize Farms use corn futures to hedge the value of their corn (inventory)?
2. Assume the futures contract is recorded as a standalone derivative. Record the entries related to the futures contract for:
   1. Initiation of the futures contract
   2. End of quarter financial statements produced on June 30, 2021
   3. Settlement of the future contract and sale of the corn in the open market on September 15, 2021
3. Assume the futures contract is recorded using hedge accounting. In this scenario, Maize Farms is hedging the exposure of their inventory to corn spot prices. Repeat parts 1 and 2 and record the entries related to the futures contract for:
   1. Initiation of the futures contract
   2. End of quarter financial statements produced on June 30, 2021
   3. Settlement of the future contract and sale of the corn in the open market on September 15, 2021
   4. Which of the two accounting methods used results in a higher amount of (total) net profit from the sale of corn and the futures contract? Show any supporting calculations.

Answer rating: 100% (QA)

Part 1 Recording the Futures Contract Maize Farms can use corn futures to hedge the value of their corn inventory They can buy corn futures contracts ... View the full answer