On Nov. 1 2015 Wildcat owns 1,000 Barrels of oil that it wants to sell in March

Question

On Nov. 1 2015 Wildcat owns 1,000 Barrels of oil that it wants to sell in March 2015 for $50 per barrel. Wildcat acquired the oil for $47 per barrel in September from a local competitor that was going out of business. Wildcat management would like to hedge against a change in the price of oil so they can remove the risk that future cash flows will be different from the $50,000,000 expected amount. On November 1, 2015 the company enters into a forward contract to sell 1,000,000 barrels of oil in March 2015 for price of $50 per barrel ( the right and obligation to deliver). Assume the forward contract has no value at inception. The company’s managers designate this as a cash flow hedge and it is expected to be highly effective.

A) Assume that on December 31, 2015 the forward price for March 2016 Delivery of oil has decreased to $46.50 per barrel. Since Wildcat is a calendar year-end firm, how would Wildcat reflect the change in value of the forward contract in their financial statements?

B) Assume that Wildcat sells the oil in March 2016 for $51 per barrel. Show the Journal entries required to record both the sale of the oil and the settlement of the forward position (net settlement) in March 2016. Assume the net settlement on the forward contract.

Explanation / Answer

a. even the price of oil declines to $46.50 barrels they wont consider it for accounts. the contract value of $50 only they should consider.

b. when they sold oil for $51 per barrel, then their income will be increase and the entries are

sales account $51,000,000 Debtor

to cash account $51,000,000

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.