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 millioin 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.

1. Why is the 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 the Dec 31, 2016, futures contract is $6.75 for delivery on Feb 2, 2017, and the spot rate on Feb 2, 2017, is $6.85. Assume that NGW sells all of the gas on Feb 3, 2017, for $8.00 per MMBtu. Prepare all the necessary journal entries from Nov 2, 2016, through Feb 3, 2017, to account for this hedge situation.