Exercise 17B-28 Kingbird Co. uses titanium in the production of its specialty dr
ID: 2598780 • Letter: E
Question
Exercise 17B-28 Kingbird Co. uses titanium in the production of its specialty drivers. Kingbird anticipates that it will need to purchase 320 ounces of titanium in November 2017, for clubs that will be sold in advance of the spring and summer of 2018. However, if the price of titanium increases, this will increase the cost to produce the clubs, which will result in lower profit margins To hedge the risk of increased titanium prices, on May 1, 2017, Kingbird enters into a titanium futures contract and designates this futures contract as a cash flow hedge of the anticipated titanium purchase. The notional amount of the contract is 320 ounces, and the terms of the contract give Kingbird the option to purchase titanium at a price of $800 per ounce. The price will be good until the contract expires on November 30, 2017 Assume the following data with respect to the price of the call options and the titanium inventory purchase. Spot Price for November Delivery Date May 1, 2017 June 30, 2017 September 30, 2017 $800 per ounce 832 per ounce 840 per ounce Present the journal entries for the following dates/transactions. (a) May 1, 2017-Inception of futures contract, no premium paid. (b) June 30, 2017-Kingbird prepares financial statements. (c) September 30, 2017-Kingbird prepares financial statements (d) October 5, 2017-Kingbird purchases 320 ounces of titanium at $840 per ounce and settles the futures contract. (e) December 15, 2017-Kingbird sells clubs containing titanium purchased in October 2017 for $275,000. The cost of the finished goods inventory is $143,000 (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter for the amounts.)Explanation / Answer
Date Account titles Debit Credit (a) 2017 May 1. No entry-Memo entry is enough (b) June 30. Futures contract 10240 Unrealized holding gain/loss 10240 [320*(832-800)] (Recognize gain on futures) c) Sept. 30 Futures contract 2560 Unrealized holding gain/loss 2560 [320*(840-832)] (Recognize gain on futures) (d) Oct. 5 Inventory 268800 Cash (320*840) 268800 (To record purchase) Cash 12800 Futures contract (840-800)*320 12800 (To record settlement of futures contract) (e) Dec. 15 Cash 275000 Sales revenue 275000 (To record sales) Cost of goods sold 143000 Inventory 143000 (To record cost of goods sold) Unrealized holding gain/loss 12800 Cost of goods sold 12800 (To record change in earnings) (f) Partial income statement Sales revenue 275000 Cost of goods sold (143000-12800) 130200 Gross profit 144800
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