NGW, a consumer gas provider, estimates a rather cold winter. As a result it decides to enter into a futures

contract on the NYMEX for natural gas on November 2, 2016. The trading unit is 10,000 million British thermal

units (MMBtu). The three-month futures contract rate is $7.00 per MMBtu, so each contract will cost NGW

$70,000. In addition, the exchange requires a $5,000 deposit on each contract. NGW enters into 20 such contracts.

Required:

1. Why is this futures contract likely to be considered an effective hedge and therefore qualified for hedge accounting?

2. Why would this transaction be accounted for as a cash-flow hedge?

3. Assume that the December 31, 2016, futures contract rate is $6.75 for delivery on February 2, 2017, and

the spot rate on February 2, 2017, is $6.85. Assume that NGW sells all of the gas on February 3, 2017, for $8.00 per

MMBtu. Prepare all the necessary journal entries from November 2, 2016, through February 3, 2017, to account

for this hedge situation

Please be very detailed!