Warren Oil Company owns a refinery in Louisiana. The refinery needs to place a special order for
Question:
Warren Oil Company owns a refinery in Louisiana. The refinery needs to place a special order for platinum on December 1, 2020 for use in operating the refinery. Because platinum is expensive and the market price for platinum has proven to be erratic, management decides to hedge the price of the platinum. It enters into a hedging contract with Counterparty Investment Company. The contract provides that if Warren pays more than $2,000 per ounce for platinum, Counterparty will pay Warren in cash the amount it pays in excess of $2,000 per ounce. The Contract is for 10,000 ounces. The contract is signed on October 1, 2020 and Warren pays Counterparty $2,000 on that date.
Warren's accountant must prepare adjusting entries on October 31, 2020 - the end of the accounting period. The market price of the platinum is $2,200 per ounce on that date. On December 1, 2020, Warren purchases 10,000 ounces of platinum from Zero Resources for $2,200 per ounce.
On that date it also settles the hedging agreement with Counterparty and is paid by Counterparty.
What are the necessary accounting entries for October 1, October 31, and December 1.
Quantitative Methods for Business
ISBN: 978-0840062345
12th edition
Authors: David Anderson, Dennis Sweeney, Thomas Williams, Jeffrey Cam