Assume that Husky sells the oil in March 2018 for $70.00 per barrel. Show the jo

Question

Assume that Husky sells the oil in March 2018 for $70.00 per barrel. Show the journal ent ries required to record both the sale of the oil and the settlement of the forward position (net settlement) in March 2018. Assume net settlement on the forward contract. 5 Accounting for Derivative Securities- Fair Value Hedge (20 points) On 1 October 20X4 Smiths Company, which produces aluminum had 1,000 tons of aluminum that cost $1,200,000 to produce. Management chooses to hedge the aluminum position against a decline in aluminum prices (a fair value hedge) OR against the exposure to variability in cash flows (cash flow hedge) by selling aluminum, futures contracts to sell ,000 tons of aluminum at $2.010 per ton. The futures contracts mature in March 20X5 which coincides with the date management expects to sell the aluminum. Assume that Smiths made a margin deposit with the commodities broker of $25,000 on 1 October 20X4 related to the futures contract. A summary of the aluminum spot and futures prices on relevant dates is as follows: Aluminum Prices per ton in SUS Date 0/1/X4 2/31/X4 Spot Price $2,000 $1,965 $1,990 Futures prices for delivery on 3/20XS $2,010 $1,970 $1,990 3/20/X5 ntract has no value at inception and no margin deposit was required. Assume that Smiths management designates the derivative as a fair value hedge. Hint: you can use an record required transactions on the following dates: o reflect the position Smiths has on the derivative. Please a) Deposit with broker on 10/1/X4. (2 pts) b) Adjusting journal entries on 12/31/X4. (4 pts) c) Adjusting journal entries on 3/20/X5 to update accounts. (6 pts) d) Net settlement of the futures contracts on 3/20/X5. (3 pts) e) Sale of the aluminum on 3/20/X5. (5 pts)

Explanation / Answer

b) Dr.Amount due from the broker 5*1000/Cr.Aluminium assest value 5000

c) similar to above , but there is no difference between future and spot , so in place of 5000, it is zero

d) Dr.cash 1990*1000/ Cr. Aluminium Inventory 1990*1000

e) Dr. Al. Expense(Cost of goods sold) 1990*1000 Cr. Revenue 1990*1000

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