Cash Flow Hedge: Long in Commodity Futures The Hershey Company uses futures to lock in the cost of cocoa products it needs to produce its products. Hershey forecasts that it will need 500 tons of cocoa beans in 90 days to manufacture its products. On February 10, 2020, it purchases 500 tons of cocoa bean futures at $2,000/ton for delivery on May 10, 2020, and makes a $5,000 margin deposit. The long futures position qualifies as a cash flow hedge of the forecasted purchase of cocoa beans, and is considered highly effective. On May 10, the spot price of cocoa beans is $2,050/ton, Hershey closes the contract and purchases 500 tons of cocoa beans on the spot market. Later in the year, products containing the cocoa are sold to retailers. Required Prepare the entries necessary to record the above events, including the cost of cocoa reported in cost of goods sold when products containing the cocoa are sold. Hershey is a calendar-year company.
Cash Flow Hedge: Long in Commodity Futures The Hershey Company uses futures to lock in the cost of cocoa products it needs to produce its products. Hershey forecasts that it will need 500 tons of cocoa beans in 90 days to manufacture its products. On February 10, 2020, it purchases 500 tons of cocoa bean futures at $2,000/ton for delivery on May 10, 2020, and makes a $5,000 margin deposit. The long futures position qualifies as a cash flow hedge of the forecasted purchase of cocoa beans, and is considered highly effective. On May 10, the spot price of cocoa beans is $2,050/ton, Hershey closes the contract and purchases 500 tons of cocoa beans on the spot market. Later in the year, products containing the cocoa are sold to retailers. Required Prepare the entries necessary to record the above events, including the cost of cocoa reported in cost of goods sold when products containing the cocoa are sold. Hershey is a calendar-year company.
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:Cash Flow Hedge: Long in Commodity Futures
The Hershey Company uses futures to lock in the cost of cocoa products it needs to produce its products. Hershey forecasts that it will need 500 tons of cocoa beans in 90 days to manufacture its products. On February
10, 2020, it purchases 500 tons of cocoa bean futures at $2,000/ton for delivery on May 10, 2020, and makes a $5,000 margin deposit. The long futures position qualifies as a cash flow hedge of the forecasted purchase of
cocoa beans, and is considered highly effective. On May 10, the spot price of cocoa beans is $2,050/ton, Hershey closes the contract and purchases 500 tons of cocoa beans on the spot market. Later in the year, products
containing the cocoa are sold to retailers.
Required
Prepare the entries necessary to record the above events, including the cost of cocoa reported in cost of goods sold when products containing the cocoa are sold. Hershey is a calendar-year company.
General Journal
Date
Description
Credit
Debit
Feb, 10, 2020 Investment in futures
1,000,000 x
0 v 1,000,000 x
Cash
To record the margin deposit.
May 10, 2020 Investment in futures
5,000 x
Other comprehensive income
5,000 x
To record the gain on the long term position.
Cash
5,000 x
Investment in futures
5,000 x
To close the futures contract
Commodity inventories
1,025,000 v
Cash
1,025,000 v
To record the purchase of cocoa in the spot market.
At the time products containing cocoa are sold:
Cost of goods sold
1,025,000 x
Cash
0 x
1,000,000 x
Commodity inventories
25,000 x
To record the cost of the cocoa in products sold.
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