Questionderivatives accounting for forward contracts candra

Reference no: EM13348779

Question:

Derivatives: Accounting for Forward Contracts Candra Christensen Cuisine operates a chain of fine seafood restaurants. The company makes very detailed long-term plans. On 1^st October, 2013, Candra Christensen determined that it would require to purchase 800,000 pounds of New England lobster on January 1, 2015. Due to the fluctuations in the price of New England lobster, on October 1 the company negotiated a particular forward contract with Lisa Investment Bank for Candra Christensen to purchase 800,000 pounds of New England lobster on January 1, 2015, at a price of $9,600,000. The price of New England lobster was $12 per pound on October 1. Lisa Investment Bank has a staff of financial analysts who specialize in forecasting lobster prices. These analysts are predicting a drop in worldwide lobster prices between 1^st October, 2013, and January 1, 2015.

On December 31, 2013, the price of a pound of New England lobster is $15. On December 31, 2014, the price of a pound of New England lobster is $9. The suitable discount rate throughout this period is 10%.

Instructions: Prepare all journal entries necessary on Candra Christensen's books in 2013, 2014, and 2015 to record the forward contract and the purchase of the lobster. For purpose of estimating future settlement payments under the forward contract, suppose that the current price of lobster is the best forecast of the future price.

Reference no: EM13348779

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