Metal Fabricators uses stainless steel as an input to its manufacturing processes. Stainless steel is approximately 10% chromium and 90% iron and other alloys. The price of stainless steel varies month by month based on the price of the inputs and the price of energy and Metal Fabricators expects an adjustment to the future price based on the price of chromium. Metal Fabricators expects to purchase 100 tons of stainless steel in May of 20X2 for the construction season. To protect against price fluctuations, Metal Fabricators enters into a derivative on November 1, 20X1 to buy 10 tons of chromium for delivery May 1, 20X2. Metal Fabricators enters into a contract to purchase stainless steel on March 31, 20X2 (the forecasted purchase) for delivery May 1, 20X2. The contract specifies that the price will be adjusted by the price of chromium on the delivery date and delivery costs. The hedge is 100% effective to that component. The price of stainless steel is 2,500 per ton on March 31^st and $2,800 per ton at delivery. Using the following fair values, prepare journal entries for the derivative, including net settlement.

Chromium futures               Expected future cash flows

12/31/X1            $6,000                               ($6,000)

3/31/X2              $4,000                               ($4,000)

5/1/X2                $9,000    

Answer rating: 100% (QA)

Answer Step 1 Metal fabricators On 011120X1 Entered into a derivative to buy ... View the full answer