Question

On January 1, 2020 Beaver Inc. determines that it wants to purchase 2,000 tons of wheat in January 2021. Thus, Beaver Inc. enters into a futures contract that gives Beaver Inc. the right and obligation to purchase 2,000 tons of wheat for $75 per ton. The contract is classified as a cash flow hedge and expires in January 2021.

Required:

1. On January 1, 2020 the market price for a ton of wheat is $75. What journal entry does Beaver Inc. record associated with this hedge on this date?

2. On June 30, 2020 the market price for a ton of wheat is $90. What journal entry does Beaver Inc. record associated with this hedge on this date?

3. On December 31, 2020 the market price for a ton of wheat is $70. What journal entry does Beaver Inc. record associated with this hedge on this date?

4. On January 1, 2021 Beaver Inc. purchases 2,000 tons of wheat at the market price of $70 and settles the hedge. What journal entries does Beaver Inc. record associated with its purchased of wheat and its hedge on this date?

Answer 1

The cash flow hedge accounting is done through Cash flow hedge reserve in other comprehensive income. And upon execution this reserve is transferred from OCI to P&L

1. On jan 1 2020 since the current price and the future contract price is same so this does not require any journal entry. So no journal entry is recorderd in books

2 On jun 30 the market price of the per ton wheet increased to 90$ and we can buy through future contract at 75$ per ton. so the 15$per ton *2000=30000$ the benifit is treated as asset

Journal Entry as follows

Date	Particulars	Debit	Credit
jun 30	Future contract (Asset)A/c	30000$
	Cash flow hedger reserve (OCI)A/c		30000$
	Being future contract revalued

3. on Dec 30 the market price of the per ton wheet decreased to 70$ and in books we have revalued future contract at 90$ per ton. so the (90-70) =20$per ton *2000=40000$ the loss need to be recorded.

Date	Particulars	Debit	Credit
Dec 30	Cash flow hedger reserve (OCI)A/c	40000$
	Future contract (Asset)A/c		40000$
	Being future contract revalued

4 on Jan1 2021 the market price of the per ton is  70$ and we have purchased at 70$ i.e 70$ per ton *2000=140000$

Date	Particulars	Debit	Credit
Jan 1,2021	Wheet /inventory (asset) A/c	140000$
	Cash or bank account A/c		140000$
	Being wheet purchased

On hedge settlement since agree to purchase the wheet at 75$ but we are not taking the delivery so we need to settle the contrct by paying in cash. And transfer the Cash flow hedger reserve (OCI) to Profit and loss Account

Date	Particulars	Debit	Credit
Jan1,2021	Future contract (Asset)A/c	10000$
	Cash or bank account A/c		10000$
	Being future contract settled

transferring the Cash flow hedger reserve (OCI) to Profit and loss Account

Date	Particulars	Debit	Credit
Dec 30,2021	Profit and Loss A/c	10000$
	Cash flow hedger reserve (OCI)A/c		10000$
	Being Recycled from OCI to P&L