Question

The Davis Company grows soybeans and processes them into soybean meal for eventual sale to food companies. Davis currently owns 10,000 tons of soybean meal, carried in their inventory at a cost of $3,400,000. Soybean meal trades on the spot markets for $350 per ton; three-month futures are selling for $363 per ton. Davis expects to sell the 10,000 tons for 90 days. On August 1, 2017, Davis sells 10,000 tons of soybean meal futures to be delivered on October 30, 2017, at the $363 price. The price of Davis’ futures contracts has advanced to $367 and the spot price is $354 on September 30, when the books are closed for interim reporting purposes. Davis closes out its short position on October 28, 2017, when the future price is $361 per ton and the spot price is $348.

Required (evaluate each separately):

3. Suppose instead that Davis purchased the 10,000 tons of soybean futures on August 1, 2017, closing the long position on October 28, 2017. Calculate the net cash gain or loss on the long futures position and compare its accounting treatment with the gain or loss on the short futures position in number 1 above at October 28, 2017

Answer 1

Davis Company owns 10000 tons of soyabean meal at a cost of $3400000.

The Company sold 3-month futures at $363 per ton on August 1, 2017 for October 30, 2017.

The price of Davis futures contracts got advanced to $367 on 30th september, 2017.

So, for interim reporting purose the company will have to record the futures loss on short futures contract on 30th september, 2017 recording the loss on futures at $(367-363)=$4 per ton.

After that the company closes off its position 2 days earier on 28th october, 2017 at $361 futures price so the company will purchase futures on 28th october to cancel the short futures position leading to a gain of $(367-361)=$6 per ton.

Accounting treatment:

August 1- Accounts receivable a/c dr 3630000

To Futures contract a/c 3630000

(Being futures sold for $363 per ton)

September 30- Loss on futures contract a/c Dr 40000

To Accounts receivable a/c 40000

( Being futures value got increased to $367 leading to a loss of $4)

October 28- Accounts receivable a/c Dr 60000

To Profit on futures a/c 60000

( Being profit on futures due to reduction in futures value from $367 to $361)

October 28- Futures contract a/c Dr. 3630000

Bank a/c Dr. 20000

To Accounts receivable a/c 3650000

( Being cancellation of futures contract and profit)

3. Suppose if Davis purchases 10000 tons of soyabeans meal on August 1, 2017 then in that case all the above transactions will be reversed and Davis would suffer a loss of $20000 since the price of futures would have come down to $361 on Oct 28, 2017 from $363 on Aug 1, 2017 in case of long position.

Accounting treatment:

August 1- Futures Contract a/c dr 3630000

To Accounts Payable a/c 3630000

(Being futures sold for $363 per ton)

September 30- Accounts Payable a/c Dr 40000

To Profit on futures a/c 40000

( Being futures value got increased to $367 leading to a profit of $4)

October 28- Loss on futures a/c Dr 60000

To Accounts Payable a/c 60000

( Being profit on futures due to reduction in futures value from $367 to $361)

October 28- Accounts Payable a/c Dr. 3630000

Profit and loss a/c Dr. 20000

To Futures contract a/c 3630000

To Bank a/c 20000

( Being cancellation of futures contract and Loss)