Answered: Spot Price for November Delivery Date…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Question

100%

Setia Maju Bhd uses titanium in the production of its specialty drivers. Setia Maju Bhd anticipates that it will need to purchase 20,000 kilograms of titanium in October 2020, for clubs that will be shipped in the holiday shopping season. However, if the price of titanium increases, this will increase the cost to produce the clubs, which will result in lower profit margins.

To hedge the risk of increased titanium prices, on May l, 2020, Setia Maju Bhd enters into a titanium futures contract and designates this futures contract as a cash flow hedge of the anticipated titanium purchase. The notional amount of the contract is 20,000 kilograms, and the terms of the contract give Setia Maju Bhd the right and the obligation to purchase titanium at a price of RM50 per kilogram. The price will be good until the contract expires on November 30, 2020.

Assume the following data with respect to the price of the titanium inventory purchase.

Spot Price for
November Delivery
Date
May 1, 2020
June 30, 2020
September 30, 2020
RM50 per kilogram
RM52 per kilogram
RM53 per kilogram
REQUIRED:
(Ignore time value of money)
Present the journal entries for the following dates/transactions.
a. May 1, 2020–1nception of futures contract, no premium paid.
b. June 30, 2020-Setia Maju Bhd prepares financial statements.
c. September 30, 2020-Setia Maju Bhd prepares financial statements.
d. October 5, 2020-Setia Maju Bhd. purchases 20,000 kilograms of titanium at RM53
per kilogram and settles the futures contract.
e. December 15, 2020–Setia Maju Bhd sells clubs containing titanium purchased in
October 5, 2020 for RM250,000. The cost of the finished goods inventory is
RM140,000.
f. Indicate the amount(s) reported in the income statement related to the futures
contract and the inventory transactions on December 31, 2020.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions