On November 1, 2020, ABC Products forecasts that it will purchase 1,000,000 bushels of oats in...

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On November 1, 2020, ABC Products forecasts that it will purchase 1,000,000 bushels of oats in 4 months for use in the manufacture of its cereal products. To hedge against rising costs, ABC Products buys 1,000,000 March 2021 call options for oats, with a strike price of $2.75/bushel. The options cost $0.10/bushel, and the spot price on November 1 is $2.72/bushel. Management designates the intrinsic value of the options as the hedge, and the options qualify as a cash flow hedge of the forecasted purchase. On December 31, 2020, ABC Products' year-end, the spot price for oats is $2.77/bushel and the options are selling for $0.13/bushel. On March 1, 2021, the spot price for oats is $2.80/bushel and ABC Products sells the options for their intrinsic value of $0.05/bushel. On March 3, 2021, ABC Products purchases 1,000,000 bushels of oats at the spot price of $2.81/bushel. It sells products containing the oats on June 5, 2021 at $2.90/bushel. Required Prepare entries to record the above events, including the December 31, 2020 adjusting entry. On November 1, 2020, ABC Products forecasts that it will purchase 1,000,000 bushels of oats in 4 months for use in the manufacture of its cereal products. To hedge against rising costs, ABC Products buys 1,000,000 March 2021 call options for oats, with a strike price of $2.75/bushel. The options cost $0.10/bushel, and the spot price on November 1 is $2.72/bushel. Management designates the intrinsic value of the options as the hedge, and the options qualify as a cash flow hedge of the forecasted purchase. On December 31, 2020, ABC Products' year-end, the spot price for oats is $2.77/bushel and the options are selling for $0.13/bushel. On March 1, 2021, the spot price for oats is $2.80/bushel and ABC Products sells the options for their intrinsic value of $0.05/bushel. On March 3, 2021, ABC Products purchases 1,000,000 bushels of oats at the spot price of $2.81/bushel. It sells products containing the oats on June 5, 2021 at $2.90/bushel. Required Prepare entries to record the above events, including the December 31, 2020 adjusting entry.

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Entries to Record Oats Hedge with Call Options November 1 2020 Hedge Initiation Debit Oats Inventory ... View the full answer