Question

Axcell Commodities, Inc. represents a group of FarmWest wheat growers. The organization enters into sales agreements on the behalf of its members. A grain sale was negotiated on February 1 with a food manufacturer to deliver 375,000 bushels of grain on September 1 for $3.50 per bushel. Axcell Commodities has a policy of hedging all such transactions because of the unknown risk due to fluctuations in commodity prices. Accordingly, Axcell Commodities pays $500 to purchase a call option on February 1 with delivery on September 1 and a strike price of $3.50. The following spot prices for grain and option fair values are available. Hedge effectiveness and the firm commitment are measured using intrinsic values.

Date	Spot Price		Option Fair Value
Feb. 1	$3.50		$500
Mar. 31	$3.56		$22,980
Jun . 30	$3.59		$34,000
Sept. 1	$3.568		$25,500

Required:

Prepare all necessary journal entries for Axcell Commodities related to the option, the firm commitment, and the sale of the grain. Assume that Axcell Commodities prepares statements quarterly.

Answer 1

we will prepare the journal as per IFRS 9 (financial instruments)

on 1st Feb buying a call for 500$

Financial Asset (Call) DR 500

bank CR 500

(Call purchased for 500$)

31 march reporting date --marking the call to the market.

financial Asset(Call) Dr 22480

Fair value gain account Cr. 22480

(call brought to fair value increasing its value by 22980-500=22480)

30 June reporting date ----marking the call to market.

Financial Asset (Call) Dr 11020

Fair value Gain Account Cr 11020

( call value increased by 34000-22980 =11020)

1st September settlement date of the contract

bank Dr 25500

fair value gain Account Dr 8500

Financial asset (Call) Cr 34000

( call pay off $(3.568-3.5)*375000 =25500 received and loss was set off with fair value gain Account)

wheat bought at spot

wheat Dr 1313000 (fair value for which wheat was bought)

Fair value gain Account Dr. 25000 (balance available in this Account)

To bank (3.568*375000) 1338000   

(wheat bought spot at 3.568 per bushel )

now let us find out how much profit we made

method 1 profit = amount paid for the commodity - the recorded value of the commodity

=1338000-1313000 =25000

method 2 profit = net amount recieved on financial asset =25500-500(premium)= 25000