BCC Golf Co. uses titanium in the production of its specialty drivers. BCC antic

Question

BCC Golf Co. uses titanium in the production of its specialty drivers.
BCC anticipates that it will need to purchase 200 ounces of titanium
in November 2014, for clubs that will be shipped in the spring and
summer of 2015. 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, 2014, BCC 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 200 ounces, and the
terms of the contract give BCC the option to purchase titanium at a
price of $500 per ounce. The price will be good until the contract
expires on November 30, 2014. Assume the following data with respect
to the price of the call options and the titanium inventory purchase.
Date Spot Price for November Delivery (Per Oz.) May 1, 2014 $500 June
30, 2014 $520 September 30, 2014 $525 Present the journal entries for
the following dates/transactions.

(a) May 1, 2014-Inception of futures contract, no premium paid.

(b) June 30, 2014-BCC prepares financial statements.

(c) September 30, 201-4BCC prepares financial statements.

(d) October 5, 2014-BCC purchases 200 ounces of titanium at $525 per
ounce and settles the futures contract.

(e) December 15, 2014-BCC sells clubs containing titanium purchased in
October 2014 for $250,000. The cost of the finished goods inventory is
$140,000.

Explanation / Answer

Sl No Account head Debit Credit a No entry b-Jun-30 Future Contract -Derivative          4,000.00 Other Comprehensive income              4,000.00 Mark to Market of Future contracts To record the effective portion of caash flow hedge in Other comprehensive income c-Sep 30 Future Contract -Derivative          1,000.00 Other Comprehensive income              1,000.00 Mark to Market of Future contracts d-Oct 5 Cash          5,000.00 Future Contract -Dervitive              5,000.00 Net Settlement of Future contracts Inventory    1,05,000.00 Accounts Payable        1,05,000.00 Actual Purchase of inventory Other Comprehensive income          5,000.00 Inventory              5,000.00 Reclasification unralized gain parked in other comprehensive income to Inventory e-Dec 15 Accounts receivable    2,50,000.00 Sales        2,50,000.00 Cost of Goods Sold    1,40,000.00 Inventory        1,40,000.00

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