Arlington Steel Company is a producer of raw steel and steel-related products. On January 3, 2022, Arlington enters into a firm commitment to purchase 10,000 tons of iron ore pellets from a supplier to satisfy spring production demands. The purchase is to be at a fixed price of $56 per ton on April 30, 2022. To protect against the risk of changes in the fair value of the commitment contract, Arlington enters into a futures contract to sell 10,000 tons of iron ore on April 30 for $56/ton (the current price). The contract calls for net cash settlement, and the company must report changes in the fair values of its hedging instruments each quarter. Required: On March 31, the price of iron ore fell to $53/ton, and then to $51/ton on April 30. 1. Calculate the net cash settlement at April 30, 2022. 2. Prepare the journal entries for the period January 3 to April 30, 2022, to record the firm commitment, necessary adjustments for changes in fair value, and settlement of the futures contract.
Arlington Steel Company is a producer of raw steel and steel-related products. On January 3, 2022, Arlington enters into a firm commitment to purchase 10,000 tons of iron ore pellets from a supplier to satisfy spring production demands. The purchase is to be at a fixed price of $56 per ton on April 30, 2022. To protect against the risk of changes in the fair value of the commitment contract, Arlington enters into a futures contract to sell 10,000 tons of iron ore on April 30 for $56/ton (the current price). The contract calls for net cash settlement, and the company must report changes in the fair values of its hedging instruments each quarter. Required: On March 31, the price of iron ore fell to $53/ton, and then to $51/ton on April 30. 1. Calculate the net cash settlement at April 30, 2022. 2. Prepare the journal entries for the period January 3 to April 30, 2022, to record the firm commitment, necessary adjustments for changes in fair value, and settlement of the futures contract.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Arlington Steel Company is a producer of raw steel and steel-related products. On January 3, 2022, Arlington enters into a firm commitment to purchase 10,000 tons of iron ore pellets from a supplier to satisfy spring production demands. The purchase is to be at a fixed price of $56 per ton on April 30, 2022. To protect against the risk of changes in the fair value of the commitment contract, Arlington enters into a futures contract to sell 10,000 tons of iron ore on April 30 for $56/ton (the current price). The contract calls for net cash settlement, and the company must report changes in the fair values of its hedging instruments each quarter.
Required:
On March 31, the price of iron ore fell to $53/ton, and then to $51/ton on April 30.
1. Calculate the net cash settlement at April 30, 2022.
2. Prepare the journal entries for the period January 3 to April 30, 2022, to record the firm commitment, necessary adjustments for changes in fair value, and settlement of the futures contract.
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