Question

Hedge of Firm Commitment: Short in Commodity Futures

On May 1, 2021, Keister, Inc., sells 100,000 units of commodity futures at $5/unit for delivery in 120 days and makes an initial margin deposit of $10,000. Spot and futures prices move in tandem. Keister will buy the commodity from a supplier in 90 days and, pursuant to a firm sale commitment, will sell it 30 days later at the prevailing spot price. Keister designates the futures contracts to protect the proceeds to be received when the sale commitment is fulfilled and has a May 30 fiscal year-end.

Required

a. Prepare the journal entries made on May 1, on May 30 when the futures are selling at $4.80 per unit, on July 29 when the futures are selling for $4.75 per unit and the commodity is purchased at a total cost of $460,000, and on August 28 when the short position is closed out at $4.77 per unit. The futures position qualifies for hedge accounting. Keister records income effects of the hedge in sales revenue.

Date	Description		Debit	Credit
5/1/21	Answer

		Answer	Answer
	Answer

		Answer	Answer
	To record the initial margin deposit paid.
5/30/21	Answer

		Answer	Answer
	Answer

		Answer	Answer
	To mark the short futures position to market.
	Answer

		Answer	Answer
	Answer

		Answer	Answer
	To recognize the gain or loss on the firm sale commitment.
7/29/21	Answer

		Answer	Answer
	Answer

		Answer	Answer
	To mark the short futures position to market.
	Answer

		Answer	Answer
	Answer

		Answer	Answer
	To recognize the gain or loss on the firm sale commitment.
	Answer

		Answer	Answer
	Answer

		Answer	Answer
	To record purchase of the commodities.
8/28/21	Answer

		Answer	Answer
	Answer

		Answer	Answer
	To mark the futures contract to market.
	Answer

		Answer	Answer
	Answer

		Answer	Answer
	To recognize the gain or loss on the firm sale commitment.
	Answer

		Answer	Answer
	Answer

		Answer	Answer
	To close out the short futures position.

b. Assume the commodity is sold at the spot rate on August 28. Record the sale and cost of goods sold.

Description		Debit	Credit
Cash		Answer	Answer
Answer

		Answer	Answer
Answer

		Answer	Answer
To record the sale and close the firm commitment.
Answer

		Answer	Answer
Answer

		Answer	Answer
To record the cost of sales.

Answer 1

Dear Student,

if you have any doubts then feel free to ask

Part A

Date	Description	Debit	Credit
5/1/21	Investment in futures	10000
	Cash		10000
	To record the initial margin deposit paid.
5/30/21	Investment in futures ((5-4.80)*100000)	20000
	Gain on hedging		20000
	To mark the short futures position to market.
	Loss on hedging	20000
	Firm commitment		20000
	To recognize the gain or loss on the firm sale commitment.
7/29/21	Investment in futures ((4.80-4.75)*100000)	5000
	Gain on hedging		5000
	To mark the short futures position to market
	Loss on hedging	5000
	Firm commitment		5000
	To recognize the gain or loss on the firm sale commitment.
	Commodity inventory	460000
	Cash		460000
	To record purchase of the commodities.
8/28/21	Loss on hedging	2000
	Investment in futures (((4.75-4.77)*100000)		2000
	To mark the futures contract to market.
	Firm commitment	2000
	Gain on hedging		2000
	To recognize the gain or loss on the firm sale commitment.
	Cash	33000
	Investment in futures (10000+20000+5000-2000)		33000
	To close out the short futures position.

Part B

Date	Description	Debit	Credit
8/28/21	Firm commitment	523000
	Sales revenue (1000000*5)+23000		523000
	To record the sale and close the firm commitment.
8/28/21	Cost of goods sold	460000
	inventory		460000
	To record the cost of sales.