Reference no: EM132418829

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

Question 1: Construct 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.

Question 2: Assume the commodity is sold at the spot rate on August 28. Record the sale and cost of goods sold.