Exercise A-7 (Algo) Derivatives; fair value hedge-futures contract [LOA-2] 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 $77 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 $77/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 $75/ton, and then to $74/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.
Exercise A-7 (Algo) Derivatives; fair value hedge-futures contract [LOA-2] 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 $77 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 $77/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 $75/ton, and then to $74/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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![Exercise A-7 (Algo) Derivatives; fair value hedge-futures contract [LOA-2]
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 $77 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 $77/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 $75/ton, and then to $74/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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa8cfc449-e30d-4ca6-8641-c23bfa6bd4cc%2Ff5488224-b5bc-4f2e-8bc4-6fe6c3e0bb5f%2F6f0yp0d_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Exercise A-7 (Algo) Derivatives; fair value hedge-futures contract [LOA-2]
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 $77 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 $77/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 $75/ton, and then to $74/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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