Locket Jewelery Co. uses gold in the production of its products. Locket anticipates that it will need to purchase 100 ounces of gold in November 2014, for jewelery that will be shipped prior to Valentine’s Day. However, if the price of gold increases, this will increase the cost to produce the jewelry, which will result in lower profit margins.

To hedge the risk of increased gold prices, on June 1, 2014, Locket enters into a gold futures contract and designates this futures contract as cash flow hedge of the anticipated gold purchase. The notional amount of the contract is 100 ounces, and the terms of the contract give Lockert the option to purchase gold at a price of $700 per ounce. The price will be good until the contract expires on November 30, 2014. Assume the following data with respect to the price of the call options and the gold inventory purchase.

Spot Price for

DateNovember Delivery

June 1, 2014 .......$700 per ounce

June 30, 2014 ........ 750 per ounce

September 30, 2014...... 825 per ounce

Instructions

Present the journal entries for the following dates/transactions.

(a) June 1, 2014––Inception of futures contract, no premium paid.

(b) June 30, 2014––Lockert prepares financial statements.

(c) September 30, 2014––Lockert purchases 100 ounces of gold at $825 per ounce and settles the futures contract.

(e) December 15, 2014––Lockert sells jewelery containing the gold purchased in November 2014 for $710,000. The cost of the finished goods inventory is $318,000.

(f) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2014.